Cambodia - Agenda for rehabilitation and reconstruction

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'K 'YJ ' 9 , ' > - _ ,,QA * , lb dw ,A W Agenda for Rehabilitation and Reconstruction The World Bank East Asia and Pacific Region Country Department I June 1992  Cambnodia Agenda for Rehabilitation and Reconstruction The World Bank East As.a and Pacific Region Country Department I June 1992  Uff OF ABBREVIA ADB - Asian Development Bank AOTC - Australian and Overseas Telecommunications Corporation BCEC - Banque pour le Commerce Extdrieur du Cambodge CDAI - Chamcar Daung Agricultural Institute CMEA - Council for Mutual Economic Assistance COCMA - Central Company of Agricultural Materials DCA - Department of Civil Aviation DOA - Department of Agronomy DOF - Department of Forestry DOH - Department of Hydrology DOL - Department of Livestock DPI - Department of Posts and Telecommunications DRP - Directorate of Rubber Plantations EPP - Electricity of Phnom Penh FAO - Food and Agricultural Organization of the United Nations FD - Fisheries Department GEF - Global Environment Facility (UNDP/UNEP/World Bank) ICAO - International Civil Aviation Organization DIF - International Monetary Fund Um - International Rice Research Insdtute IUCN - International Union for Conservation of Nature and Natural Resources LTD - Land Titling Department MA - Ministry of Agriculture MTCP - Ministry of Transport, Communications, and Posts NBC - National Bank of Cambodia ODA - Office for Development Assistance (United Kingdom) OTCI - Overseas Telecommunications Corporation International RBD - Roads and Bridges Department RTC - River Transport Company SEMA - Socidte des Engins Mdcaniques Agricoles (Mechanization Company) UNDP - United Nations Development Programme UNEP - United Nations Environment Programme UNCHR - United Nations High Commissioner for Refugees UNICEF - United Nations Children's Fund UNTAC - United Nations Transitional Authority in Cambodia WFP - World Food Programme  TABLE OF CONTENTS EXECUTrIVESUMfARY ............................................. i PART ONE: RECENT DEVELOPMENTS .......... ........................ I 1. COUNTRY' PROFDLE .............................................. 3 A. Introduction .................. . 3 B. Topography ........ ... 3 C. Souls ............ 4 D. Climate and Hydrology ................. 4 E. NaturalResources ................. 5 Foresty ............ ..... Fisheries ........ ... S Minerals ................. 6 F. HumanResour.es ........ ... 7 Demography . ...............;. 7 Social Indicators ........ ... 9 G. Production ................. 10 Farming Sysrs .......... 10 ProductionPanerns . . .1............ 11 Growth Potential and Constraints ..... ........ ... 14 U. MARKET REFORMS ............ 16 A. Iroduction .. ............... 16 B. Background ....... .......... 16 C. Reforms inAgriculture ....... .......... 17 Changes at the Farm Level ......... ........ I8 Reforms in Pricing, Taxation, and Markedng ................. 18 The Role of the Public Sector and State Enterprises ............ 19 D. Financial Autonomy of State Enterprises .... .. ...... 20 Policy .. ............... 20 Limitatons to Operational Autonomy ................. 21 E. Private Sector Development ................. 26 Privadzation of State Enterprises ........ ......... 26 Privaization of Real Assets .... .............. 31 Private Exploitation of Natural Resources ............... ....... 32 Banking Refonr ..................................... 32 Private Activities in Services and Manuacmrng ....... .......... 33 Constrants on Private Sector Development ......... ............ 33 m. MACROECONOMIC DEVELOPMENTS ......... ...................... 35 A. Introduction . . ........................................ 35 B. Production and Trade .............. ...................... 35 Production . . ....................................... 35 Extenal Trade ...................................... 37 C. Fiscal Stuation ................................ . 38 Fiscal Deficit ...... ................................. 38 Sources of the Unfded Deficit . ........................... 40  - ii - D. Money andInflation .............................. 43 Money and Credit ............................... 43 Inflation ............................. 45 Exchange Rates and Net Foreign Assets .....48............... 48 E. Conclusions ............................. 49 PART TWO: SECTOR SlTUATION AND NEEDS ............................ 51 IV. AFRAMEWORK FOR ACTION ......................... 53 V. AGRICULTURE ........................................ 55 A. Introduction .......................................... 55 B. Sector Situation and Recent Developments ....................... 55 The Performance of Agriculture. ........... 55 Institutional Arrangements ............................... 66 C. Impact of Fiscal Pressures ................................. 68 D. Critical Constraints ..................................... 69 Human Resources for Agriculture ........................... 69 Security and Resource Use . 70 E. Agenda for Agriculture ................................... 70 F. Potential Agricultural Rehabilitation Program ....... ........... 72 Rice Production and Food S3curity .......................... 72 Industrial Crop Production ............................... 75 Livestock .......................................... 76 Fisheries .............. ............................ 76 Forestry . ......................................... 77 Reintegration of Displaced Populations ....................... 78 Human Resources .................................... 79 Rehabilitation Summary and Conclusion ....................... 79 'W. TRANSPORT ............................................ 81 A. Introduction ........ 81 B. Recent Developments and Present Situation .82 Overview of the Various Transport Modes .......... ....... 82 Institutional Arrangements .88 Recent Policy Developments .89 C. Impact of Fiscal Pressures .90 Delivery of Services .90 Resource Mobilization ......... 92 D. CriticalConstraints ..93 E. Agenda for the Transport Sector .94 Needs and Priorities ............ 94 Policy Aspects ............ 95 F. Potential Transport Rehabilitation Program .96 Roads and Bridges .................. 97 Ferries .......... 98 Ports .......... 98 Inland Waterways .......... 99 Railways .......... 99 Civil Aviation ..................0...........0.......... , Implementation Arrangements .................. 100  - iii - VI. UT LTN UNE S 1A D URBAN SERV0CES ................................ 00 A. Introduction .. 100 B. Sector Situation 100 Power. 109 Water and Sewerage .104 Telecommunications .107 C. Critical Constraints .112 D. Agenda for Urban Utilities .112 .................................................................................. 112 E. Potential Urban Utilities Rehabilitation Program ................... 114 Water and Sewerage ................................... 114 Power ............................................ 115 Telecommunications ................................... 118 VII. SOCLAL SECTORS ..................... ....................... 120 A. Introduction .......................................... 120 B. Sector Situation and Recent Developments ....................... 121 General Education .................................... 121 Vocational Training and Technical Education ................... 127 Health ............................................ 127 C. Critical Constraints ...... ........ ....................... 131 D. An Agenda for the Social Sectors .......................... 132 Expenditure Programming ........................... 132 Strategy Definition .......... ................. 132 Staff Management and Training .......................... 133 Equity and Financial Sustainability .......................... 133 E. Potential Social Sectors Rehabilitation Program .................... 134 Education .......................................... 134 Vocational Training and Technical Education ................... 135 Health ............................................ 135 The Role of Women ................................... 139 Summary of Priorities .................................. 141 PART THREE: POLICIES FOR RECOVERY ............................... 143 IX. MACROECONOMICFRAMEWORK .................................. 145 A. Introduction ......................... 145 B. TheRehabilitationProgram .: .............................. 145 Rehabilitation and Stabilization ............................ 145 The Rehabilitaton Scenario .............................. 146 Financing the Rehabilitation Program ........................ 149 Required Level and Composition of External Assistance .... ......... 151 Inpact on Growth .................................... 152 C. The Alternative ............. ........................... 152 X. PUBLIC ADMINISTRATION AND CIVIL SERVICE ........................ 154 A. Introduction ........................ 154 B. Public Administration ................. ................... 155 Size of the Administration ............ .. ................. 155 Central Government ................................... 155 Local Administration ................. .................. 158  - iv - C. The Civil Service ....................................... 163 Size of the Civil Service .......... ...................... 163 Conditions of Employment .......... ..................... 166 Remuneration . ...................................... 171 Management of the Civil Service ....... .................... 177 D. Summary and Recommendations ........ ..................... 178 Xi. DOMESTIC RESOURCE MOBILIZATION ............................. . 182 A. Introductior .......................................... 182 B. Background .......................................... 182 Evolution of the Revenue System ............ ............... 182 Revenue Performance ................ .................. 183 C. Tax Revenues ......................................... 185 Customs Duties ....... ..................... ...... 186 Taxes on Enterprise Turnover and Profits ...................... 189 Other Tax Revenues ........................... 193 Tax Structures ........................... 193 I). Nontax Revenues ........................... 195 Revenues from State-Owned Enterprises ....................... 195 Sales and Leases of Assets .......................... 196 Revenues from Natural Resources .......................... 197 Fees and Charges ............. .............. 198 E. Revenue Sharing between National and Provincial Administrations .... .... 199 F. Summary and Recommendations ............. ................ 200 Summary of Key Revenue Recommendations ....... .. ........... 200 Implications for Revenue Performance ......... .. ............. 202 Revenues in the Rehabilitation Scenario ........ .. ............. 203 X1I. PUBLIC FINANCE MANAGEMENT ................................. 205 A. Budget Management .................................... 205 Introduction ..................................... 205 Budget Structure .................................... 206 Budget Preparation .................................... 209 Budget Execution ................................... 211 Improving Budget Management ............. ............... 214 B. State Properties Management . .............................. 216 Introduction .................................... 216 Tr.ansactions on State Properties ...................... 216 Strengthening the Management of State Properties .............. 217 STATISTICAL APPENDIX. ............................ 221  FOREWORD This report develops the findings of a United Nations mission on Economics and Finance, conducted under the authority of the Special Representative of the Secretary General of the United Nations for Cambodia and led by his Economic Adviser, Mr. Roger Lawrence (UNCTAD). The mission visited Cambodia from March 16 to April 4, 1992. Preparation of the report was coordinated by Bernard Funck, assisted by Thang Long Ton, based on contributions by: Philippe Auffret (state enterprises), Moncef Belhadjamor (budget), Kenan Bulutoglu (fiscal revenues), Chhim Nanasamudd (national accounts), Chung Choeng-Hoy (agriculture), Michel Delattre (UNCTAD, customs), Guido De Weerd (civil service and administration), Arnaud Guinard (transport), John King (IMF, fiscal revenues), Klaus Lorch (state enterprises and othet properties), Carlos Mena (public utilities), Randy Merris (IMF, money and banking), Bernard Salome (social s"-tors), and Michael Ward (production). Oscar Echeverri contributed a paper on population, health and nutrition. The manuscript was edited by Emily Evershed and typed and formatted by Lily Tsang and Mercedes Pendleton. A financial contribution of the Swedish International Development Authority (SIDA) helped fund the preparation of this report. This docursent has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  EXECUTIVE SUMMARY Introduction 1. With the long awaited return to peace, Cambodia can devote its resources once again to the peaceful goal of development. But the agenda before the country cannot be regarded as simply a case of picking up where the 1960s left off. Too much has been changed by two decades of war and civil strife. Assets have been demolished, population groups dispersed, human resources destroyed, institutions debilitated, and incentives distorted. 2. And yet the economy and the people have shown a surprising resilience. After having dropped to famine levels at the end of the 1970s, paddy production had by 1990 been restored to the level of the late 1960s, and in 1987 the bovine population overtook the 1968 level. Life expectancy also exceeds the level achieved before the war. Ibis comeback was due first to the massive international effort that rescued Cambodia in the late 1970s and early 1980s, then to the dedication that the authorities mustered to put the country back on its feet. 3. Nevertheless, with insu.ficient resources to generate productive income, and isolated from the mainstream of world trade, Cambodia has run its physical capital down and has severely stretched its meager human resources. While considerable headway was made in putting the country back to work after the turmoil of the late 1970s, these efforts are now running out of steam. Jv. the country presently cut off from international aid, nothing is being set aside for the maintenance of social overhead capital, and no surplus resources are available with which to begin the process of restoration and rehabilitation. 4. The agenda before the country must reflect the new realities. First and foremost, Cambodia must absorb the returning refugees and settle the internally displaced persons and demobilized troops. Beyond that, the main task must be to stabilize the economy, to strengthen institutions, and to prevent a further degradation of basic public services and gradually improve their operations. These measures, together with policies that will continue liberalizing the economy, should lay the basis for an upsurge of resources and energy directed to activities that take advantage of Cambodia's potential. A realistic strategy for implementing this agenda must take into account the assets that have been extinguished, the recuperative ability that the country has shown, and the amount and nature of the support that extWnal donors are likely to provide. The present report attempts (i) to delineate the contours of a feasible strategy; (ii) to discuss in some detail the main macroeconomic, sectoral, institutional, and policy issues that this would involve; and (iii) to estimate what such a program would cost. Market Reforms 5. Deprived of financial resources with the loss of foreign assistance from the now defunct Council for Mutual Economic Assistance (CMEA), the authorities have in recent years relied primarily on improved policies to keep the economy afloat. These reforms, however, were undertaken more as a partial and ad hoc response to emerging difficulties than as a comprehensive and consistent plan. They have consequently yialded uneven results. On the positive side, starting in 1989, agricultural land has been returned to the tiller, which has greatly facilitated the recovery in food production. On the other hand, the process of enterprise reform has been more uneven. In late 1989, the authorities launched a  * L~~~~~~~~~~~~ii new system of financial autonony for state enturprises, under which enterprises were supposed to operate without administrative interference. In practice, however, operational autonomy is still curtailed by the necessity for the budget to extract as much revenue as it can out of the enterprises. More recently, privatizatiun has become another important strategy of the Cambodian authorities for reforming the state enterprise sector. In many cases the process has, unfortunately, been akin to the "spontaneous privatization' of Russia and Eastern Europe; hence it has generated little divestituns revenues for the budget. 6. Nevertheless, the foundation for a new oattern of development resting firmly in private hands is being established. Informal sector industrial activity and supporting services sectors of distribution and transport have been growing rapidly over ihe past three years. Small private firms which have resorted to unofficial channels and parallel markets have been multiplying and expanding at a rapid rate. Market reforms have thus brought about a positive, but uneven, supply response, as the economy remains subject to the vagaries of the weather and to unreliable access to imported raw materials and spare parts. GDP in real terms (constant 1989 prices) has experienced uneven growth in recent years, advancing by 16.2 percent in 1988 and 2.4 percent in 1989, falling by 0.1 percent in 1990, and growing by 13.5 percent in 1991. While output of state enterprises was in relative decline, private activities :ook the lead in fostering economic growth. This expansion of private activities, however, is being increasingly threatened by a braakdown in the supply of basic infrastructure services and by growing macroeconomic imbalances. The resettlement of populations will place new demands on public services that are already tightly stretched and could bring these services to the brink of collapse. Macroeconomic Developments 7. The country's present macroeconomic imbalances are due to the rapid deterioration in the financial position of the budget. Even after public investment and maintenance expenditures have been curtailed to negligible levels, the budget shows a huge financing gap, representing about 40 percent of total expenditure in 1991. In the 1992 budget, over 45 percent of total expenditures are unfunded. The origins of these developments emerge most clearly from an examination of the trends of expenditures, total receipts (including commodity aid), and the residual deficit in relation to GDP. Budgetary expendi- tures are estimated as roughly constant relative to GDP, at around 8.5 percent, in the period 1989-91; the figure projected for 1992 on the basis of unchanged policies is 8.4 percent. Total receipts, however, declined from 7.7 percent of GDP in 1989 to 5.0 percent in 1991, and 4.2 percent is projected for 1992. The unfunded deficit thus rose steadily from 1.2 percent of GDP in 1989 to 3.5 percent in 1991, and a further increase to 4.2 percent is projected for 1992. 8. Two series of factors have contributed to this situation. First, the liberalization of the economy starting in 1989 ';as acted to hinder revenue mobilization and inflate expenditures. On the revenue side, Cambodia is facing a situation which is similar to the one experienced by many other formerly planned economies. Enterprise reform combined with price and trade liberalization has slashed the economic rents formerly captured by public sector enterprises through price distortions and budget subsidies, inevitably impairing their capacity to contribute to fiscal revenues. Owing to lack of appropriate instruments and administration, this loss of revenues has not been made up by revenues from the emerging private sector. The contribution made by public enterprises to budget revenues (including enterprises leased to the private sector) fell from 36.0 percent of total expenditure in 1989 to 22.0 percent in :991, and the budget anticipates a further decline in 1992. In an attempt to deal with this problem, several new taxes were introduced by the authorities in a major tax reform in 1991, but these have made  Iliit only a small cortribution to the budget. User charges and other nontax revenue sources were even !ess buoyant than taxes in the period under review, falling from 5.5 percent of budgetary expenditures in 1989 to less than 1.0 percent in the 1992 budget to date. Fortunately, the elimination of customs duties exemptions that benefited state enterprises and imports from the nonconvertib!e zone hzs permitted this categorv of revenues to increase its contribution, from 8.5 percent of expenditures in 1989 to 37.0 perceat in 1991. 9. On the expenditure side, the grauual e'inination of forced procurement from the productive sector at belo.v market prices has considerably increased the unit cost of the goods and services that the state procures for operations and L.-.-estment. The attempt to protect the real value of large categories of expenditure, particularly civil servants' wages and defense, has put immense pressures on the total expenditure bill, despite a concomitant reduction in public employment of from 213,000 persons in 1989 to 151,000 in 1991, Dractically crowding out categories of expenditure such as public investmnent and operations and maintenance; the latter saw their share in the budgm r6uced from 41.0 percent in 1989 to 16.0 percent in 1991. 10. The second factoi contributing to the current fiscal situation has been the elimination of Cambodia's credit facility under the 1986-90 trade and payments agreement with the Soviet Union. Commodity aid received under this agreement still financed 15.0 percent of budgetary expend,.-ires in 1989, but the agreement was not renewed after 1990. Western and international donors have been unable, to date, to resume their programs. T hus, with the important exception of humanitarian aid, which was at about UiSS2O-30 million a year in 1991-92, foreign assistance has all but disappeared. 11. Monetary financing of the residual deficit has inflicted high inflation on the country, running at average rates of 70.0 percent in 1989, 157.0 percent in 1990, and 121.0 percent in 1991. An unfunded deficit of only a few percentage points of GDP can give rise to such high levels of inflation in Cambodia because the demand for monetary assets is as low as 6.0 percent of GDP. A lingering mistrust of banks and local currency, resulting from the demonetization of the economy under the Democratic Kampuchea regime, is obviously at play here, but the fact that official policy maintains nominal interest rates at unrealistically low levels does not help the situation. Currently, Riel-denominated savings deposits pay 12.0 percent per annum, and one-year time deposits 28.8 percent, well below past, present, and expected future inflation. 12. As high as it was, the available monetary financing became insufficient in 1991 to cover more than half the budgetary gap; the budget went in arrears for the remaining 20.0 percent of expenditres. Wage payments to the civil service, as well as to military persennel, have become sporadic. In brief, owing to the growing fiscal crisis, key infrastructures, already crumbling under the weight of years, are no longer being maintained, civil servants are walking out of essential services, and obviously no exoarsion activities are being undertaken, or even planned, by the administration to accommodate t; e new demands placed on these infrastructures and services by the United Nations operation and the resettlement of displaced populations. If this macroeconomic situation is not addressed as a chief priority, an inflow of project assistance in the country is likely to remain ineffective, for want of a framework at the receiving end to use it productively.  iv Sector Situation 13. The deterioration is nowhere more visible than at the sectorm level, where services and infrastructures are already verginz on the brink of collapse. Across sectors, fiscal pressures have exacerbated prevaiiing structural deficiencies in all the public services. If this continues, the possible disintegradon of the public adminstration may render prospects for rehabilitation moot. The following discussion reviews this situation sector by sector. 14. fransnor infrastructure is in a state of great disrepair. After 10 years of neglect and destruction during the 1970s, transport services resumed in 1980 and managed to operat.- with a minimal degree of efficiency despite severe shortages of material, human, and financial resources. This has indeed been a remarkable achievement. Many roads and bridges have been patched temporarily to allow movement of goods and people. Major ferry crossings of the Mekong and the Tonle Sap Rivers have been kept open. Ports have continued to function and river ships and barges have managed to move the freight. DespitA a severely deteriorated roadbed, rotted sleepers, mangled tracks, and an old rolling stock, the railways have managed to operate. At present, it is estimated that transportation infrastructure is functioning &t about 40 to 50 percent of prewar capacity. Since 1990, the rapie. deteiioration of the fiscal situation following the drying up of Soviet aid has put additional pressures on transport services already subject to considerable strain. Budget appropriations have shrunk and arrears have accumulated to such an extent that road and bridge maintenance has come to a virtual standstill, the existing equipment of transport companies is being annibalized or rapidly runduwn, and the finances of the railways company have deteriorated to a poL where interruptions of services are a e-stinct prospect. 15. ItJilities and urban services, which were generally able to meet the country's requirements in the i960s, are now woefully inadequate to accommodate present and future demands. Only about 20 percent of the population in Phnom Penh is served by piped water. Drains are silted and clogged since refuse collection is almost nonexistent. As a result, sanitation problems and major health risks are serious. Power shortages are so acute that economic activities and the provision of essential power- dependent services (water treatment and pumping, telecommunications, hospitals, etc.) are severely curtailed. Obsolete equipment accounts for only part of th- situation. The primary factor common to all utilities ie that the largest consumers of these services (the administration and other public entities) are increasingly unable to meet their bills, leaving the utilities with no resources with which to purchase fuel, spare parts, and other inputs. Moreover, the prevailing scarcity of supply gives rise to widespread pilferage of water and electricity, further depressing the finances of the utilities. 16. Social sco, after their near-destruction at the hands of the Democratic Kampuchea regime, jave shown considerable progress in antitativ terms in resurrecting social services. Official efforts, supported by the local communities, have created an extensive eduction system in which an estimated 82 percent of the population of school age is enrolled. Similar efforts, although more unevenly successfil, have been deployed in the rehabilitation and staffing of basic health suctures, providing one physician per 12,800 population, one nurse per 6,300 population, and one hospital bed per ;,440 population. This is certainly much lower than Asian standards; still, on this score, Cambodia fares better than some Asian countries which have not experienced any of the devastation that Cambodia has suffered. Acnievements in quaitati terms, while impressive under the circumstances, are uneven by comparison. The wastage rate in education is high, especially among girls, with only about 40 percent of children enrolled in the first grade completing education within five years. The literacy rate is officially reported at 93 percent, but a more conservative estimate placea it at about 70 percent. Also, while on paper rural health facilities are in place in most districts, it is estimated that fewer than 53 percent of the population  V has access to health services and only 12 percent of the rural and 20 percent of the urban population have access tu, a safe and reliable source of water. All health indicators show the mark of the still insufficient level of services. 17. At present, however, the delivery of services is deteriorating rapidly under fiscal pressures: social infrastructure maintenance and rehabilitation have almost ceased; production and distribution of textbooks have virtually come to a standstill; suppliers of pharmaceuticals to the public sectors are stopping their deliveries. Salary payments have become sporadic, the more so in the primary social systems. While they are sti ' fficially illegal, all types of fees are now charged in education and health. They iave permitted the maintenance of a degree of services, but inequitably so for large segments of the population. 18. Agriculture, which employs 84 percent of the population, has been comparatively less affected than other sectors by the current pressures. Crop production, being now largely in private hands, has been able to progress in spite of the administration's problems. Major constraints still face the sector, including the mining of large tracts of arable land, the security situation, which hinders both planting and marketing; the dilapidated state of transport infrastructure; and the inability, since the cessation of aid from the ex-CMEA, to import the level of fertilizers needed. Fiscal pressures have affected those areas in which the role of public services is irreplaceable - or as yet unreplaced - such as fisheries and forestry management, where the day-to-day operation of services relies on the capacity of the administration to charge and revain fees and other payments outside the public finance framework. Administrative Framework 19. The situation of public administration in the State of CambodiaU is better than might be expected after the hardships that the country endured, but it suffers from a number of organizational features inherited from a socialist conception of the role of the state and from the need to respond to security problems. These features are not consistent with the institutional requirements of rehabilitation and reconstruction. The size of the administration is much larger than public management norms would recommend. This creates problems of duplication and conflict of assigments within the administration and is the root cause of current overstaffing. The excessively large number of structures is a legacy of the past. It arises from (i) the former interventionist role of the state, (ii) persistent centralism, and (iii) the absence of a clear delineation between the public administration, as an instrument of the executive branch, and the other institutions of the state. Furthemore, local administrations have considerable de facto autonomy but do not carry any of the corresponding civil, administrative, and financial responsibilities. This autonomy is not counterbalanced by a central supervisory mechanism. As a result, government action is poorly organized at the local level and is inadequately divided between central and local administrations. The limited authority of the state at the local level would stand in the way of the 1/ Pursuant to the Paris Agreements, during an interim period leading to elections the Supreme National Council (SNC) is the unique legitimate body and source of authority in which, throughout the transitional period, the sovereignty, independence, and unity of Cambodia are enshrined (Article 3). The Paris Agreements also provide for existing administrative structures to remain in place and to operate, during this interim period, under the control and supervision of the United Nations I ransitional Authority in Cambodia (UNTAC). This report focuses on the institutions of the State of Cambodia.  vi required mobilization of all public energies toward common national goals of rehabilitation and reconstruction. 20. Excessively developed administrative structures have led to a plethora of personnel - over 145,000 civil servants for the whole country. International comparison would suggest that in a country like Cambodia the size of the civil service should not exceed 1 percent of the population (in this case, 90,000 civil servants). Furthermore, this personnel congregates in provincial capitals rather than being deployed in direct contact with the population, indicating that the latter benefit little in terms of actual services from this large civil service. Finally, civil servants' remunerations are not sufficiently motivating. While the level of real salaries is obviously low, it is not much lower than in neighboring countries. Furthermore, the introduction of a new wage scale as of April 1992 should considerably improve the purchasing power of civil servants' wages. The problem lies elsewhere. First, the overall wage bill cannot be carried by the budget, particularly with the existing indexation mechanism, and this creates endemic problems with wage payments. Second, the structure of the wage scale, the civil service staff rules, and the career perspectives that are offered are not conducive to dedication. Toward Recovery Strategy 21. Given the present fiscal and institutional environment in Cambodia, preventing a futher deterioration of basic public services and gradually imnproving their operations within the next two o t-hree years would in itself constitute a major achievement. In the course of this undertaking, care will need to be taken so that the long-term perspective of sustainable development is not sacrificed to shert-term expediency. In the absence of such a framework, there is a high risk of dissipating the potential influx of donor resources in the coming 24 months while rendering the necessary adjustments even more complicated after the coming to power of a newly elected government. This has several implications. First, the most important consideration is that the rehabilitation and reconstruction of Cambodia will be first of all a Cambodian operation. It will succeed or fail depending on the capacity of the country to set the appropriate policies and provide the institutional environment for mobilizing domestic financial and human resources. In order to sustain this effort, it is essential that the rehabilitation program be implemented within the present structure of the central and provincial administrations without a proliferation of ad hoc project units, which typically weaken public administrations, and with appropriate technical assistance and well-targeted training. 22. Second, rehabilitation and reconstruction in Cambodia can be successful only within a stable macroeconomic framework. This means that rehabilitation, growth, and reduction of price inflation need to be sought simultaneously. Success in this will depend on three factors: (a) The efforts that the administration will undertake to address the public finance problems on the domestic front, primarily by way of revenue mobilization, and to strengthen the cost- effectiveness of the administration and the civil service. (b) The selectivity of rehabilitation and reconstruction activities and their complementarity with private sector endeavors. First, it would be neither necessary nor possible to repair/ rehabilitate everything that was damaged; unproductive infrastructure or assets should not be included in the program. Second, the proposed solutions should take into account the  vii present critical budgetary situation in Cambodia and the impact of the infusion of funds on the recurrent budget in future years. Third, reconstruction expenditures should help harness and not crowd out the private sector. (c) The nature and magnitude of the resources that the donor community will be able to provide to Cambodia. It will be important for external assistance (i) to provide the key inputs that will break existing bottlenecks and ensure that essential complementarities are being met to ensure an early supply response, and (ii) to design programs that strengthen and ccmplement, rather than displace, existing capabilities and financial resources. 23. Finally, at the same time that urgent and obvious rehabilitation needs begin to be addressed, in-depth and longer-term studies must be initiated to parallel these efforts, in order to provide the future elected government with the necessary information and the range of options needed to make strategic decisions in a timely fashion. 24. This is an overwhelming agenda, and there are real risks that donors and local authorities may not live up to it. Fiscal efforts may weaken in the presence of foreign assistance; the policy resolve may suffer when confronted with unpopular decisions regarding state enterprises; and credit policy may waste precious resources in an attempt to bail out those enterprises that are not viable. The present international concern for Cambodia may be directed elsewhere before the country is able to sustain its own growth and stability. But the chance is worth taking. After all, the reemergence of the country in the 1980s was accomplished against more formidable odds. Cambodia has many endowments which can, if properly used and nurtured, sustain it through the period of rehabilitation and growth - the most consequential endowment being the indomitable spirit and the flexibility that the Cambodian people have shown in their recent history. This report sets out a rehabilitation scenario in which policies and financial resources would be harnessed to the twin goals of recovery and stabilization. It also explores the negative consequences of insufficient policy resolve and of foreign assistance that has not materialized. Macroeconomic Framework 25. Addressing the present macroeconomic imbalances is a prerequisite to any meaningfil and effective rehabilitation program. Such macroeconomic strategy should involve establishing a fiscal situation in which the delivery of public services can resume and expand as well restoring the economic stability and supply conditions in which private activities can flourish. The rehabilitation scenario presented in this report allows the most immediate and critical rehabilitation activities to get under way and aims at a deceleration of inflation from 70.0 percent in 1992 to 20.0 percent in 1993 and 10.0 percent in 1994. The main thrust of the growth strategy is to permit a foreign-financed recovery in public investment from negligible levels at present to 3.1 percent of GDP in 1994 and to provide essential services with adequate operational resources by redirecting current expenditures to civilian uses, as allowed for by the peace process. Therefore, with overall current expenditures remaining stable in relation to GDP, outlays for the operation and maintenance of public services could rise from their inadequate level of 5.7 percent of GDP in 1991 to 7.1 percent in 1994. The public deficit, taken overall, would, inevitably rise from 3.7 percent of GDP to 6.0 percent. Combinine a growing public deficit with rapid deceleration of inflation will be a balancing act. It will require the careful use of all domestic policy instruments, in particular strict constraints on credit to state enterprises. Timely disbursement of the conservatively estimated required foreign assistance will be essential to maintaining this delicate balance.  viiL 26. 'he implementation of the rehabilitation scenario would bring about a steady improvement in the living standards and per capita income of the Cambodian people, ensuring that the initial boost to the economy provided by the United Nations' presence is sustained over the medium term. The alleviation of import constraints through program aid, the pacification of the country under the Paris Agreements, and the removal of some of the most critical infrastructure bottlenecks under the rehabilitation program will help establish conditions under which returning refugees and demobilized soldiers can put their resources and skills to productive uses. An expanding marketable surplus, the resumption of private and public investment, a recovery in public services, the integration of the economy into world markets, and the continued development of an active private sector will be the main fuel for the engine of growth. In such a scenario, it appears reasonable to project an average GDP growth rate of about 9 percent during the initial years of recovery. Sectoral Priorities 27. Priorities in expenditures are being assessed following five criteria: Q) number of beneficiaries; (i) absorptive capacity; (iii) intersectoral linalges; (iv) delivery of essential services for the resettlement of displaced populations; and (v) the evolving role of the state in the transition to a market economy. Broken down by sector, priorities would be as follows. 28. Agd.tu. 'Te priority program and measures to exploit some of the potential in agriculture would call for: (i) expanding production of (a) rice, by regaining previous levels of input use (importing and distributing 50,000 tons of fertilizer), reclaiming paddy land, and repairing small to medium irrigation works (including irrigation and land development) and (b) rubber, through yield stmlation; (i) developing fisheries through river dredging and improved breeding techniques; (iii) developing livestock production by maintaining health standards for the export market through vaccination programs; and Qiv) establishing minimum agriculftu support for resettling the dislocated. For other subsectors (e.g., annual cash cropping), policy incentives in place should elicit the necessary supply response. 29. Trasor. Priorities would include: (i) the provision of essential spare parts, materials, and fuel; (i) repairs of the most dilapidated sections of the primary network including temporary structures Cm particular RN5 and RN) and key provincial roads (e.g., RP69); and (iin) regular payment of salaries. Tools, spare parts, and materials are also needed urgeady for civil works and rolling stock of the railways and main ferries. New cargo handling equipment together with technical assistance in management and operations must be provided for railways and ports (Phnom Penh and Kompong Som). Some navigational aids and basic communications for civil aviation are expected to be provided under UNTAC. 30. Water and Sanitation. immediate action must be carried out (i) to improve the utilities' finances through more effective collection of user charges and the implementation of a water loss control program; (-d) to replace the generators to ensure continuous pumping at the Phum Prek treatment plants; (-dd) to increase water supply and complement existing facilities by building and operating deep wells which would sell water in bulk and retail, and serve as a free supply for fire-fighting equipment; iv) to undertake the detailed mapping and examination of the underground network to plan its rehabilitation and expansion; and (v) to upgrade sewage collection to minimum standards. 31. Telecom nications. A limited but effective domestc telecommunications sytem, based on a satellite network, should be made operational.  ix 32. Pow. In order to prevent the collapse of the public electricity services, immediate action must be carried out (i) to improve the utilities' finances through more effective collection of user charges and the implementation of an electricity loss control program; (ii) to acquire at least two new 2,100 kW diesel generator sets and put into operation a 3.S MW plant left uncommissioned; (ii) to undertake critical repairs to the distribution system on a test and repair field approach; and (iv) to overhaul and replace, when justifiable, all existing generating equipment in provincial capitals. 33. Edut. In the short term, top priorities are: (i) direct financing of the production and distribution of textbooks; (ii) selective rehabilitation and construction of primary school classrooms to accommodate the expected surge in population in the next 12 months; and (iii) payment of staff salaries (it is reported that primary school teachers have not been paid for over five months in some provinces and have started to walk out of the system). 34. Healh. Short-term priorities are: (i) to restore the supply of drugs to the public health system; (ii) to supply critically needed equipment, medical and surgical supplies, and a bare minimum of either spare parts for existing equipment or new equipment; (ill) to provide selective equipment for and construction of primary health care centers, in particular in potential resettlement areas; and (iv) to ensure payment of salaries to public health personnel. 35. While substantial growth in private Investment is also expected, this will not become the driving force of development until basic infrastructure makes such investments profitable. Still, in their endeavor to build such an infrastructure base, the authorities will need to restrain their recourse to domestic financing so as not to compete with the private sector for scarce investable funds, within a financial envelope defined by the stabilization and growth objectives. Managing Rehabilitaton 36. Key to the successful implementation of the rehabilitation program is a tightening of all aspects of public management, starting with strengthening of planning, and programming/budgeting, and control of central and provincial finances, both recurrent and investment, along the following lines. o Planning. The rehabilitation program will focus on addressing 'obvious needs' covering a period of about 18 months. It is necessary, however, to begin the preparation of detailed technical work and the creation of sound bases for key information - as input for the rehabilitation program as well as for the post-1993 reconstruction effort. O Prouramming ad Budgeting. Translating these priorities into operational programs will require the development of sound technical norms and a review of delivery mechanisms. The operational programs of the rehabilitation program would be incorporated in the 1993 budget. To that effect, priorities would concentrate on: (i) ensuring the efficient and effective deployment of budget resources consistent with the core rehabilitation priorities; (ii) establishing a consolidated budget framework at the national level (to achieve the desired impact, local government activities would need to be harnessed to the rehabilitadon objectives); and (di) overhauling the budget nomenclature to make it an effective instrument of resource allocation and a fim basis for expenditure monitoring and control.  x o Monitoring and Control. Budget execution could be strengthened in three ways: (i) a system could be introduced for line-item a priori control over budgetary commitments by the Ministry of Finance to ensure their conformity with budget appropriations; (ii) all financial operations should be brought under the purview of the National Treasuiy, requiring the introduction of an improved public accounting system; and (iii) procurement regulations should be formulated, enacted, and implemented to guarantee competitiveness and transparency in public procurement. 37. Decisive action is also required to ensure that state property management is organized to further transparency and efficiency. First, all state properties should be registered and all transactions on state properties that are not explicitly covered by a written authorization from a designated authority declared void. Second, the privatization policy needs strengthening and subsequent broadening. Important to this enlarged privatization program would be the strengthening of methods as well as closer central control. On this basis, many of these remaining state enterprises could easily be privatized, and certain enterprises that are no longer viable could be liquidated, thus leaving the field to the private competitors that have emerged. Only in a few of these cases is the regulatory framework so important that it needs reform before privatization. Finally, return on these assets of the state should be bolstered by (i) upgrading the financial supervision to which they are subject; (ii) removing restrictions on their day-to-day operations; and (ii) alleviating the liquidity crunch that they currently face, among other ways through the settlement of cross-debts wihin the public sector. 38. Also decisive for the success of the program is to put the civil service and the administration on a proper footing. Rapid improvement in cost-effectiveness could be achieved by: (i) delineating the boundaries of public administration from other bodies of the state and applying specific and adequate managerial systems to the administration; (ii) reducing the cost of the public administration through reduction of the size of the administrative structure and redeployment of personnel, accompanied by selective civil service retrenchment; (iii) making the civil service better motivated, more attractive, and more professional through the introduction of better career and salary structures defined in minimal staff rules (it would be useful in the framework of the latter rules to idendfy key posidons that have a priority role to play in the reconstruction and rehabilitation of the country and to devise special incentives attached to these positions, and criteria for fitling them); and (iv) restoring the authority of the state and reinforcing its capacity to implement the rehabilitation and reconstruction program through a better division of responsibilities between central and local administrations. Fnancing Rehabilitation 39. To finance this rehabilitation program while adhering to the inflation target, the budget will need to restrain its recourse to monetary financing and mobilize new resources, both domestic and foreign. The authorities need, first of all, to set themselves the objectives of arresting the deterioration of revenue performance in 1992-93 and initiating the gradual restoration of revenues to their previous level in relation to GDP in 1994. Measures identified in the report include the introduction of new tax instrument, but also a much needed strengthening in revenue collection procedures and control mechanisms. Ihe latter improvements involve tax systems and, equally important, receipts from state properties and dghts. Further supported by deep cuts in defense expenditures and firm restraint on credit to state enterprises, these fiscal measures would be effective at considerably reducing the pace of monetary expansion. Provision will also need to be made for the replenishment of the currently depleted  xi foreign exchange reserves - replenishment which is absolutely necessary for the foreign exchange market to operate with a minimum of smoothness. 40. Making up the remaining balance, disbursements of external assistance, (other than technical assistance and humanitarian aid) totaling a minimum of US$350 million over the period 1992-94 would be needed. The composition of this financing, however, should evolve between 1992 and 1994. While quick disbursing program aid should represent more than two thirds of the aid mix initially, this proportion is projected at less than 50 percent in 1994. These figures take into account the normal lag between project aid pledges at the Tokyo Conference, in response to the Appeal of the Secretary General of the United Nations for Cambodia's Immediate Needs and National Rehabilitation, and actual disbursements.  PART ONE: RECENT DEVELOPMENTS  I. COUNTRY PROFILE A. Introduction 1.1 With the end of two decades of war, Cambodia will again be able to dedicate its resources and energy toward sustained and equitable development. The country's achievements, first after Independence (1953) and then during the first decade of reconstruction that began in 1979, indicate just how much the Cambodian people should be able to accomplish when their talents and industry are harnessed to this peacetime goal. While external support will be needed for some time, much will also depend on Cambodia's capacity to mobilize and develop its own resources. When looking toward the challenges of the future and seeking to define a feasible approach to rehabilitation and reconstruction, policymakers will need first to take stock of available human and natural resources. With the ravages of war and the country's international isolation over a long period, living standards and social indicators have declined, sensitive ecological balances have been destroyed, former forests are now wastelands, and arable lands have been turned into minefields. The Paris Agreements have opened the way for a new beginning for the country, but development will not begin at the point at which it earlier ceased. 1.2 As a prelude to the assessment of rehabilitation and reconstruction requirements, which will occupy the major part of this report, Chapter I provides an overview of the country's physical features (Section B, Topography; Section C, Soils; and Section D, Climate and Hydrology); its natural resources (Section E); its population and human resources (Section F); and its production patterns and potentials (Section G). This overview sets the stage for a discussion of the extensive market reforms undertaken by the authorities, in Chapter II, and their impact on the main macroeconomic aggregates in Chapter m. B. Topography 1.3 Cambodia can be viewed as a 181,000 km2 tilted saucer with its central three quarters covered by the Central Plains. Surrounding the Central Plains on three sides are the more densely forested and sparsely populated higand, comprising: the Elephant Mountains and Cardamom Mountains of the southwest and western regions; the Dangrek Mountains of the north adjoining the Korat Plateau of Thailand; and the Ratanakiri Plateau and Chhlong Highlands on the east merging with the Central Highlands of Viet Nam. The saucer is "cracked" by the Mekong River, flowing in from the north to Phnom Penh at the lower central part of the basin and with its alternative arm, the Basak River, further southward and continuing southeastward to its lower delta in Viet Nam and to the South China Sea. Another "crack" joining Phnom Penh and the Mekong River from the northwest is the Tonle Sap River linked with the 'Great Lake" itself - Tonle Sap. 1.4 The Tonle Sap Basin and Mekong Lowland areas of the Central Plain consist of four main agro-ecological systems: (a) The ivyer banlks or Io=e (mouat tonl*), which are primarily devoted to vegetables, fruit trees, and, in the lower areas, to corn, sesame, and beans - grown instead of rice. The soil is relatively rich and water supply is rarely a problem owing to the high water table. The fields (chamc are usually narrow and elongated and lie perpendicular to the river bank. These areas (totaling about 500,000 ha) are usually the most densely  -4- populated and often the most valuable, especially if they are close to markets for their produce. Provinces with large areas of this type of agro-ecological system include Kandal, Kompong Cham, and Battambang. (b) The lowland floodplains (bng), which lie between the levees and the terraces. They flood easily, depending on the height of the rivers during the rains. The lower parts of the lowlands are planted with floating rice, while the higher elevations are planted with rice varieties that flourish in receding waters. The soil can be fertile. These areas (estimated at 1.5 million ha) are less densely populated but normally produce much of the rice that is consumed by the settlements on the levees. They car be found mainly in east Kandal, Kompong Chhnang, Prey Veng, west Svay Rieng, and south Takeo provinces. (c) The Wu2er terraces, where mainly rain-fed agriculture is practiced (up to 200,000 ha). The soils are often poor, apart from the rich alkaline clays of Battambang, where rice is the main crop. In addition to Battambang, most of Kompong Speu province, north Takeo, west Kandal, west Kompong Chhnang, and Pursat have this type of ecosystem. (d) The Great Lake .plin surrounding Tonle Sap, which consists of flooded forest and plain. The area has rich soils in which a considerable quantity of floating and deep water rice was grown in the period prior to the 1970s. It formerly covered up to 600,000 ha but now accounts for less than 100,000 ha. C. Soils 1.5 Agronomically, the soils in Cambodia are generally poor, with clayey hydromorphic soils (generally low in phosphates) in the low-lying, floodplain areas, sandy acid soils in the upland terrace areas (especially in the north and center), and acid sulphate soils in the southeast delta provinces. The low-lying floodplain soils can, however, be enriched by siltation left by receding floodwaters - an important characteristic of the fertile b=g. 1.6 At the village/farm level, differences in local landforms also reflect the levee, lowland floodplain and upland terrace agro-ecological conditions that require the farmer to adopt different strategies in cultivation, especially in conjunction with differences in the climatic regime. D. Climate and Hydrology 1.7 The climate in Cambodia is tropical monsoonal, caused by annual alternating high pressure and low pressure over the Central Asian landmass. In summer, the southwest monsoon is drawn landward from the Indian Ocean, and, during the winter, the northeast monsoon sends back dry air. The southwest monsoon brings the rainy season from mid-May to early October, and the northeast monsoon flow of drier and cooler air lasts from early November to March. The average annual rainfall is between 1,000 and 1,500 mm, with the heaviest in the southwest and southeast coastal areas (over 3,000 mm annually). Rainfall from April to September in the Tonle Sap Basin- Mekong lowlands area averages 1,300 to 1,900 mm annually, with the lowest rainfall found in the rain shadow region of the Elephant and Cardamom Mountains. Marked variability exists both by year and from one zone to another.  - 5 - 1.8 Temperatures are fairly uniform tliroughout the Central Basin area, with small variations from the average annual mean of about 250C. The maximum mean is about 28