Cambodia - Technical Assistance Credit

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H~~~~~~~~~~~~~~~~~~~~~~~~~ E  CURRENCY EOUIVALENT (October 1994, official rate) Riel 2,630 = 1 US dollar WEIGHTS AND MEASURES Metric System ABBREVIATIONS ADB Asian Development Bank CDC Carnbodian Development Council CIB Cambodian Investment Board CJ Council of Jurists CMEA Council of Mutual Economic Assistance CRDB Cambodian Rehabilitation and Development Board EMT Economic Management Team ESAF Enhanced Structural Adjustment Facility FCBD Financial Cooperation and Public Debt ICB International Competitive Bidding ICORC International Conunittee for the Reconstruction of Cambodia ICSID International Centre for Settlement of Investment Disputes IDA International Development Association IDF Institutional Development Fund IMF International Monetary Fund ITC Interministerial Technical Committee on Administrative Reform LCB Local Competitive Bidding MEF Ministry of Economy and Finance MIGA Multilateral Investment Guarantee Agency MoP Ministry of Planning NBC National Bank of Cambodia PHRD Policy and Human Resources Development Fund of the Japanese Govermnent PIB Public Investment Budget PIP Public Investment Program PMU Project Management Unit SDR Special Drawing Right SSCS Secretariat of State for Civil Service STF Systemic Transformation Facility UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme USAID United States Agency for International Development FISCAL YEAR January 1- December 31  FOR OFFICIAL USE ONLY KINGDOM OF CAMBODIA TECHNICAL ASSISTANCE PROJECT Credit and Proiect Summary Borrower: Kingdom of Cambodia. Beneficiary: Not applicable. Poverty: Not applicable. Amount: SDR 11.6 million (US$17 million equivalent). Terms: Standard IDA terms with a 40-year maturity, including 10 years of grace. Commitmnt 0.50% on undisbursed credit balances, beginning 60 days after signing, Fee: less any waiver. Finang Government US$1.7 million equivalent. Plan: IDA US$17 million equivalent. Total US$18.7 million equivalent. Net Present Not applicable. Value: Technical No. T-6424KH. Annex: bit documet has a restricted dsirbon and may be used by recipiets only it thp i@me ofthir officla dudes UIs contents maY nt othise be disclosed without Wodrd Bank autd  MEMORANDUM AND RECOMMENDATION OF THE PRESIDED? OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO T KINEIGDOM OF CAMBODIA FOR A TECHNICAL ASSISTANCE PROJECT 1. I submit for your approval the following memorandum and recounendation on a proposed development credit to Cambodia for SDR 11.6 million, the equivalent of US$17 million, on standard IDA tenns, with maturity of 40 years, to help fnance a technical assistance project. 2. Background. After numerous years of war and internal conflict, the Government has undertaken the task of rebuilding Cambodia. This requires implementing a series of reforms to effect the transition from a command economy to a market-based system and provide the proper macroeconomic framework for economic recovery and growth, as well as the development of private sector activity. From 1989 onwards, the Government carried out a series of initial reforms in the following areas: (i) economic liberalization (restoration of private property and liberalization of prices); (ii) public enterprise reform, privatization, and private sector development; and (iii) trade reform and exchange rate adjustment. Although the results of the initial market-oriented reforms were globally positive, these reforms have yet to yield their full benefits, mainly because of the country's extremely weak institutional setting, human resource base and overall implementation capacity. 3. In late 1992, the Government called on the World Bank and the IMF to help develop a program of economic reforms and correct the flaws of the initial train of reforms. The IMF responded by providing technical supervision to the Government program anJ the World Bank provided technical assistance through an Institutional Development Fund ("IDF") grant. In October 1993, once the newly elected Government was in place, the Fund approved a Systemic Transformation Facility ("STP") in support of the program. All quantitative benchmarks under the STF-supported program were met by wide margins and structural benchmarks were also satisfied. Encouraged by the success under the STF, in May 1994 the IMF moved from the SDR 6.25 million STF arrangement to a three (3)-year ESAF arrangement of SDR 84 million. 4. Although the deficiencies of the Government's initial program have been corrected, most institutional weaknesses persist. As a result, implementation of the measures remains shallow. IrNcremental measures are beginning to yield diminishing returns and the supply response in the p, xductive sectors remains marginal. To correct this situation, the institutional weaknesses must be addressed. At the same time, there is a need to deepen the adjustment process by preparing and carrying out more fundamental reforms. This second generation of measures would necessitate a stronger administrative and institutional capacity. 5. Given that the reduction of the budget deficit is at the center of the Government's efforts, the Govermment intends to first reorganize and strengthen the fiscal administration to raise revenue substantialy over time. Second, appropriate institutional and organizational measures will be implemented to control current expenditures. Third, the Government plans to restructure the civil service to improve the efficiency of public administration and to reduce the burden on the budget. Also, steps will be taken to reduce subsidies from the budget through public enterprise reform and  -2 - privatization. Fourth, to ensure that external funds are directed to areas of high priority and economic return and with due attention to problems of the absorptive capacity of the economy, the Government will develop capacity to manage the substantial increase in public investtnent spending (resulting from a surge in foreign aid) efficiently. Fifth, the Government intends to develop capacity to manage its foreign debt. Finally, an environment conducive to private sector development will be put in place. 6. Rationale for IDA Involvement. This project is consistent with the limited Country Assistance Strategy that was presented to the Board of Directors on October 26, 1993. The World Bank supports the Government's recovery needs and priorities, as reflected in the economic report on Cambodial prepared by the Bank at the request of the donor community. This report serves as the basis for Government and donor coordination in Cambodia. The World Bank is expected to continue to play a major role, providing further economic analysis and policy advice. The delivery of the World Bank's assistance will be enhanced by the combination of an Economic Recovery Credit operation (currently under preparation) and the present Technical Assistance Project ("Project"), both in support of the reform process. This type of assistance will complement the support that Cambodia is receiving from other donors. In particular, the Project will focus the Government's attention on the set of fundamental reforms needed to effect the transition from a command economy to a market- based system. 7. Project Objectives. The overall objective of the Project is to assist Cambodia's transition to a market economy by helping to implement the Government's economic reform program (summarized above in para. 5). The Project will assist Cambodia's transition to a market economy by helping to implement the Government's economic reform program. This will be done, first, by strengthening the economic management team ("EMT") and, second, by helping put in place the foundations for an environment conducive to private sector development. Strengthening the EMT will involve: (i) reinforcing the EMT units which have already been set up under the initial phase of the Government's reform program (e.g., the Budget Department in the Ministry of Economy and Finance ("MEF")); (ii) assisting those units which have been established only very recently (e.g., the Cambodian Development Council, ("CDC")); (iii) setting up those units which have yet to be established (e.g., the Debt Unit in MEF); and (iv) reorganizing and strengthening those units which were not considered a priority so far but will play a critical role in the implementation of the economic recovery program (e.g., budget and project monitoring units in key line ministries.) In turn, assisting in building the foundations of an enabling environment for private sector development will involve: (i) establishing a legal reform unit and providing legal advisory services for key Government institutions; (ii) putting in place an Official Journal for regular publications of laws and regulations; and (iii) establishing a system for publishing judicial decisions. 8. Project Description. To achieve those objectives, IDA Credit fmancing will be made available to mobilize consultants' services, prepare and implement training programs, and provide equipment and works in support of the Government's policies to be carried out in the following areas: (i) public expenditure control; (ii) public investment management; (iii) foreign debt management; (iv) public sector personnel management; and (v) private sector development. The proceeds of the Credit will also finance sector studies to improve policy design in other sectors. More specifically, the following activities will be carried out: ' Cambodia: From Rehabilitation To Reconstruction, February 1994.  -3 - i. Public Expenditure Control. While the IDF operation -- to be closed by the end of 1994 -- provided support for the conception and delivery of new systems of budget management and Treasury management, the Project will provide support for the implementation of these new systems. Project activities will aim at: (i) strengthening the budget preparation capacity of MEF, technical ministries, and provinces; (ii) strengthening budget monitoring and control mechanisms; (iii) strengthening Treasury cash management functions, including cash forecast capacity; and (iv) training administrators of technical ministries and provinces to understand and apply the new procedures, and training treasurers to understand the new expenditure and accounting system. ii. Public Investment Management. The Project will address the following needs in the areas directly related to public investment (i.e., planning, programming, budgeting, and monitoring): (i) development and delivery of a computerized public investment management system in MEF, CDC, and selected lines ministries; (ii) establishmnent of the Public Investment Budget unit in MEF; (iii) strengthening of project monitoring units in selected line ministries; (iv) development of strategic planning and aid coordination capacity in CDC; and (v) strengthening of macroeconomic analysis capacity in MEF. iii. Foreign Debt Management. The Project will assist in: (i) developing the institutional and legal framework for the management of Cambodia's public external debt, and (ii) establishing the new debt office in MEF. This program will include building capacity for debt reporting to the World Bank. iv. Public Sector Personnel Management. The Government and the World Bank have worked closely with UNDP and other donors in defining an agenda for comprehensive administrative reform. Through this Project, the World Bank will participate in the reform program by defining a series of options for the reduction of public sector employment via various departure schemes. The studies will cover military demobilization as well as reduction of personnel in the civil service and the SOE sector. v. Private Sector Development. The Project will focus on assisting in re-establishing and strengthening certain key legal institutional capacities and procedures required fnr developing the economic and financial legal framework necessary for private sector development in Cambodia. It will provide the Government (particularly the Council of Jurists and the ITC) with the assistance of qualified legal advisers, training, and related equipment for implementing the following activities: (i) preparing a diagnostic study to determine the process and status of development to date of Cambodia's economic and financial laws; (ii) carrying out a comprehensive legal training needs assessment; (iii) formulating a time-based master plan that sets out the specific economic and financial legal priority drafting and training measures *.o be implemented under the Project; (iv) re-enforcing the Government's institutional capacities and official procedures for publishing, on a regular basis, the Official Journal in the Khmer, French, and English languages; and (v) establishing an automated system for the systematic reporting, codification, and publication of the decisions of Cambodia's higher.courts, and for the development of a system of jurisprudence and doctrinal writings.  -4 - vi. Trainng. The Government is determined to move from central planning to a market- based economy and to create suitable institutions and instruments for macroeconomic management. However, some of the related tasks are unfamiliar to those in the administration who have to execute them. There is therefore a need to mount a major effort to help build capacity, which requires a large and sustained investment of resources in technical assistance and training. The Government intends to recruit high caliber expertise with a commitmeni to training nationals and the ability to transfer economic management skills. The Project will help the Government implement this strategy (see paras. 11-14 on Stiategy for Training and Sustainability.) vii. Other Sectors. In addition, the Project will also finance studies deemed to be of primary importance to the Government's rehabilitation program and intended to improve policy design in sectors other than those falling directly within the scope of the Project. These studies will include studies in Agriculture, Education, Energy, Environment, Health, Transport, Statistics, and the feasibility of electronic cash transfers to provinces. Further details are provided in the Technical Annex. 9. Cost Estimates and Financing Arrangements. The total cost of the Project is estimated at US$18.7 million equivalent, net of taxes and di-ties. IDA would provide a Credit in the amount of US$17 million equivalent which would cover 100 percent of foreign expenditures and 90 percent of total cost. The Government will finance salaries and local incremental operating costs amounting to US$1.7 million equivalent. (Schedules A and B). 10. Cofinancin2. During Project preparation, very close coordination has taken place between the World Bank and UNDP, the IMF, France, USAID, and other donors. As a result, the Project will complement - or be complemented by - activities already underway or planned by other donors. In particular, it will complement: an IMF-executed, UNDP-funded Technical Assistance Project that became effective in October 1994 and focuses on tax administration and monetary management; and a UNDP project that focuses on administrative reform. 11. Strategy for Training and Sustainability. An important constraint on capacity building is the basic weakness of govenunent staff. Staff weaknesses originate from a collapse of higher education in the mid-1970s and the low staff salary levels, among other factors. Thus, the challenge is to achieve a quantum jump in staff capacity to match the requirements of the new economic management system. For this reason, the Project supports a major training effort to strengthen basic staff capacity as well as to provide focused knowledge transfer to enable local staff to absorb quickly the specific features of the new management system. 12. The strategy for upgrading local skills and capacity consists of four complementary programs: (i) basic preparatory training in essential generic skills; (ii) specialized short or medium courses in topics relevant to public finance management; (iii) on-the-job training of counterpart staff and of other staff employed in units which are being created or strengthened with the assistance of the Project; and (iv) in exceptional cases, training abroad. In the category of on-the-job training, two types of programs are envisaged: (a) training of counterparts who will be assigned to the Project- financed experts before their arrval in their duty stations and (b) an on-site outreach program in the financial complex through a training and visit (T&V) scheme. Both programs will focus on the specific financial management systems being introduced through the Project. The experts will prepare an annual training program concerning counterpart and T&V activities as part of their annual performance programs.  - 5 - 13. The Project will help the Government implement this strategy through measures which guarantee the best possible quality control of the training being carried out by international experts. All training will be conditioned upon preparatory steps that are crucial to ensuring that the various functional units supported under the Project are ready to receive and profit from the training activities: (a) potential candidates for the various positions will have been identified and several counterparts selected for each external advisor; (b) the units will have been reorganized, staffing plans prepared and, when required, the necessary facilities and equipment installed; and (c) a training plan, based on a thorough assessment of the needs of the local staff, will have been prepared. 14. To provide an adequate infrastructure in support of the massive upgrading of public finance management staff, the Project will help finance the construction and equipping of a small training facility (the School of Finance). A Training Coordinator will be attached to the School of Finance and will ensure that an effective training program is carried out throughout the f...ancial complex during the life of the Project. As the Project evolves and exteral advisors are withdrawn, the School of Finance will become the main instrument available to address continued training needs and ensure sustainability. 15. Actions Agreed. During Project negotiations, agreement has been reached with the Government on the following principal actions: (i) the PMU will be established and staffed satisfactorily as a condition for presenting the Project to the Board of Executive Directors; (il) a satisfactory annual work program for the first year of the Project will be adopted; (iii) all the necessary counterpart personnel responsible for implementing the Public Sector Management component will be officially appointed; (iv) a Legal Advisory Unit, attached to the Council of Jurists, will be officially established; (v) throughout Project implementation, the PMU will be maintained with satisfactory staff, resources and terms of reference; (vi) the Project will be implemented on the basis of a Project Inplementation Plan and annual work programs to be reviewed and updated annually; (vii) not later than June 30, 1997, a mid-term review of the progress achieved in implemnenting the Project will be carried out, and thereafter the necessary remedial actions will be taken by the Government; (viii) under the Public Sector Management component, separate action plans, prepared on the basis of terms of reference specified in the corresponding Project annual work program, will be carried out, not later than June 30, 1995, for expenditure control, investment management, debt management and personnel management, and these plans will be reviewed and updated annually; (ix) the Private Sector Development component of the Project will be implemented on the basis of an action plan to be reviewed and updated annually; (x) the Legal Advisory Unit will be maintained throughout Project implementation with satisfactory membership and resources; (xi) not later than December 31, 1995, a medium-term agenda for the enactment of priority economic and financial laws and regulations will be officially adopted by the Government; and (xii) all studies and training activities financed by the Credit will be subject to satisfactory eligibility, selection and supervision criteria. 16. Environmental Aspects. The Project is expected to have no direct effect on the environment (Category C). 17. Benefits. The main benefits expected to result from the operation are to: (i) assist in lifting the institutional constraints which inhibit the Kingdom's economic recovery; (ii) help provide a common agenda for reform to the key government agencies, thereby promoting the program coordination that was lacking in the initial phase of Cambodia's reforms; and (iii) help establish the capacity needed to fully internalize and implement the government reform program and prepare for more fundamental changes in the future.  -6- 18. Risks. The principal risk involves Cambodia's limited absorptive capacity and scarce counterpart staff possessing the required minimal skills. Several steps have been taken to minimize this risk. First, the Project has been designed to deliver activities gradually and in a sequential manner, and to finance incremental actions conditional upon the implementation of key preceding activities. The Project Implementation Plan, and accompanying work programs to be reviewed annually, will provide the appropriate framework for this approach. Second, the Project will make a special effort to identify and recruit suitable expatriate Khmers as consultants/teachers. Expatriate Khmers have often had successful careers in the U.S., France, Australia, and other countries since they left Cambodia in the mid-seventies. Many became accomplished professionals in accounting, computer services, and other skills in high demand under the Project. In increasing numbers, they are now willing to return to Cambodia and contribute to rebuilding the country, either as consultants on term contracts, or with a view to relocating there permanently. Non-profit Khmer associations such as the Cambodian Network Council in the U.S., as well as leading universities, will help reach potential candidates for consultancy positions to be filled under the Projecs. 19. Another risk is the Government's relative unfamiliarity with World Bank disbursement and procurement procedures. The Project Management Unit ("PMU") will therefore be strengthened accordingly. Towards that goal, a Project Adviidr will be recruited and a seminar in relevant World Bank procedures and practices will be organized in Phnom Penh as part of Project start-up activities. The seminar will address the needs of the PMU staff (especially the Project Administrator and Project Accountant) and Project component directors. It will focus, among other things, on Project management objectives and techniques and on agreed methods for recruitment and periodic evaluation of technical assistance. 20. A third risk stems from uncertainties surrounding the political situation. Although the situation has markedly improved since the UN-sponsored elections in May 1993, tensions remain as a result of the continuing, but yet subsiding, armed conflict in the northwestern part of the country between the Khmer Rouge dissidents and the Royal Anned Forces. Also, the Government comprises a fragile coalition between the royalist party (FUNCINPEC), the former communist party (CPP), and a smaller religious party. However, although there have been periodic tensions and complications, cooperation between the coalition partners remains workable and in fact is gradually improving. Furthermore, commitment to the reform program seems strong among all members of the coalition Government. A case in point is the recent cabinet reshuffle which led to the replacement of the FUNCINPEC Finance Minister ny a CPP Minister less than a week before negotiations of this Project, without in any way affecting negotiations. 21. Recommendation. I am satisfied that the proposed development credit would comply with the Articles of Agreement of IDA and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. November 10, 1994  -7- Scbedule A Project Costs and Financing Plan al Foreign Local Total Percent of Project Costs - (USS millon)- Project Costs Public Expenditure Control 3.3 0.3 3.6 19% Public Investment Management 4.2 0.4 4.6 25% Foreign Debt Management 0.7 0.2 0.9 5% Personnel Management 1.3 0.3 1.6 9% Legal Assistance for PSD 1.3 0.3 1.6 90/0 Training 1.9 1.5 3.4 180/. Study Fund 1.2 0.0 1.2 6% Project Management & Implementation 1.3 0.5 1.8 10% Total Project Costs 15.2 3.5 18.7 100% Foreign L4cal Total Financing Plan - (US$million Govemment 0.0 1.7 1.7 IDA 15.2 1.8 17.0 Total 15.2 3.5 18.7 a/ Net of duties and taxes.  -8- ScheduLe B Summary of Proposed Procurement Arrangements (an USS millon equivalent) Procurement Method ProectEleaets ICR LCB Other a! N.B.F. bl TOTAL Advisers, Consultants, Studies 13.4 13.4 (13.4) (13.4) Equipment, Materials, Vehicles 0.6 0.3 0.4 1.3 (0.6) (0.3) (0.4) (1.3) Civil Works 0.6 0.2 0.8 (0.6) (0.2) (0.8) Taining cl 1.5 1.5 (1.5) (1.5) Salaries and incremental Opeting Costs 1.7 1.7 . .". ... ....... o-. .... .. . .. S...... -..w.. .... ... - .O)0 ..- TOTAL 0.6 0.9 15.5 1.7 18.7 (0.6) (0.9) (15.5) (0.0) (17.0) a/Includes sopping atd consultancy services. b/ Non-Bank Financed (Government and cofinacing contnbution). ct Retiects cost of logistical support to training. Other training expenditures are included under IDA financing of consultants. Note: Figures in parentheses are the respecive amounts to be financed by IDA MDA Disbursement Categories (in USS mion equivalent) Amount Category of the Credit Percentage of Expenditures To Be Financed Allocated (1) Civil Works 0.8 90% (2) Goods, including computers and software equipme 1.2 100 % of foreign expenditres, 100 % of local expenditures (ex-factory cost), and 90 % of local expenditues for other items procued locally. (3) Consultants' Services 11.7 100%o/ (4) Trang 1.4 100% (5) Studies 1.1 100% (6) Unallocabndlld. . TOTAL 17.0 Estimated IDA Disbursement Schedule (in USS miflion equivalent) FY95 FY96 FY97 FY98 FY99 FY01 Annual 1.4 4.1 4.8 3.7 1.5 1.5 Cumulative 1.4 5.5 10.3 14.0 15.5 17.0  -9- Key Procas Evets (a) Time Taken to Prepare the Project: 8 months (b) Prepared by: ,overent, with IDA assstance (c) First IDA Mission: Januaiy 1994 (d) Appraisal: June/July 1994 (e) Negotiations: October 28, 1994 (f) Planned date of Efetveness: January 31, 1995 (g) List of Relevant PCRs and PPARs: n.a  - 10 - Scbedule D Status of Bank Group Operations in Cambodia A. Statement of Bank Loans and IDA Credits a/ (As of September 30 1994) Amount (US$ milion) bh Credit Fiscal (less cancellations) Number Year Borrower Purpose MA Undisbursed 2550 1994 Cambodia Emergency Rehabilitation 62.70 29.43 Total 62.70 of which has been repaid 0.00 Total now held by Bank and IDA 62.70 Amount sold 0.00 of which repaid 0.00 Total undisbursed 29.43 29.43 at The status of the projects listed in ParLA is described in a separate report on all IBD IDA-financed projects in which is updated twice yearly and circulated to the Executive Directors on Apri 30 and October 31. bi Princpal amounts in US$ equivalent at date of negotiations, and undisbursed amounts in equivalent are valued at exchange rate applicable on the date of this statement. B. Statement of IFC Investments None