CONSULTATIVE GROUP MEETING PARIS, JULY 1-2, 1997 Public Disclosure Authorized Tableof Content


LIST OF ANNEXES Annex 1: List of Participants...... 14

OpeningSession Annex 2: Agenda.23 Annex 3: Opening Remarksby Mr. Javad Khalilzadeh-Shirazi,World Bank .. 24 by H.E. Keat Chhon, Sr. Minister in charge Public Disclosure Authorized Annex 4: Opening Remarks of Rehabilitationand Development,Minister of Economy and Finance, Cambodia.27

Macro-EconomicIssues Annex 5: Statement by H.E. Keat Chhon, Cambodia.30 Annex 6: Statement by Mr. Hubert Neiss, IMF.33 Annex 7: Statementby Mr. Kyle Peters, WorldBank .38 Annex 8: Statement by the Delegatefor Japan.41 Annex 9: Statementby the Delegatefor Australia.47 Annex 10: Statementby the Delegate for the United States...... 54 Annex 11: Statementby the Delegate for ADB...... 57 Annex 12: Statementby the Delegatefor the EuropeanCommission ...... 59 Annex 13: Statement by the Delegate for the United NationsAgencies ...... 61 Public Disclosure Authorized Annex 14: Statement by the Delegatefor Norway...... 64 Annex 14A: Statement by the Delegatefor Denmark ...... 66 Annex 15: Statement by the Delegatefor Sweden...... 68 Annex 16: Statement by the Delegatefor Germany...... 71 Annex 17: Statement by the Delegatefor the United Kingdom...... 73 Annex 18: Statementby Delegatefor the NGO Community...... 76

Public InvestmentProgram Annex 19: Statement by H.E. Keat Chhon,Cambodia ...... 77 Annex 20: Statementby Mr. RajatNag, ADB...... 80 Annex 21: Statement by Mr. Guy Darlan, World Bank...... 84 Annex 22: Statementby Mr. Kip Thompson,IFC ...... 3 5 Annex 23: Statement by the Delegatefor Australia...... 39 Annex 24: Statementby the Delegate for Japan...... 95 Annex 25: Statement by the Delegatefor Germany...... 98 Public Disclosure Authorized

mi I V'' Aid Coordination Annex 26: Statement by H.E. Keat Chhon,Cambodia ...... 99 Annex 27: Statementby Mr. Paul Matthews,UNDP ...... 102 Annex 28: Statementby Mr. Natarajan,World Bank...... 110 Annex 29: Statementby the Delegatefor Japan...... 112

Financing Requirements and Indications of Assistance Annex 30: Statementby H.E. Keat Chhon,Cambodia ...... 116 Annex 31: Statement by Mr. Kyle Peters, World Bank...... 118 Annex 32: Statementby the Delegatefor Japan...... 120 Annex 33: Statementby the Delegatefor Australia...... 125 Annex 34: Statement by the Delegatefor the United States...... 130 Annex 35: Statementby the Delegatefor ADB...... 131 Annex 36: Statementby the Delegate for Germany...... 1 32 Annex 37: Statement by the Delegatefor Denmark...... 134 Annex 38: Statementby the Delegatefor Belgium...... 136 Annex 39: Statementby the Delegatefor Sweden...... 138 Annex 40: Statementby the Delegatefor IFC...... 140

Closing Session Annex 41: Closing Statementby Mr. Javad Khalilzadeh-Shirazi,World Bank...... 142 Annex 42: Press Release...... 146 Annex 43: Letter from the Chairmanto the PrimeMinisters ...... 148


Summary Report of the Proceedings

1. The Second ConsultativeGroup meetingfor Cambodiawas held on July 1-2, 1997 in Paris under the chairmanshipof the World Bank. The Cambodiandelegation was led by His ExcellencyKeat Chhon, SeniorMinister in charge of Rehabilitationand Development,and Minister of Economyand Finance. The meetingwas chairedby Mr. Javad Khalilzadeh-Shirazi,Regional Manager, East Asia and Pacific Region.

2. The meeting was attendedby delegationsfrom Australia,Belgium, Cambodia, Canada, China, Denmark,France, Germany,Japan, the Netherlands,Norway, the Republic of Korea, the Russian Federation,Sweden, the United Kingdom,and the United States. The internationalorganizations participating in the meeting includedthe Asian DevelopmentBank, the EuropeanUnion, the InternationalFinance Corporation,the InternationalMonetary Fund, the United NationsDevelopment Prograrn, and the World Bank. Representativesfrom the ASEAN (representedby Malaysia),NGOs, and the Organizationfor Economic Cooperationand Developmentparticipated as observers. The list of participants is shown in Annex 1.

3. This report summarizesthe proceedingsof the meetingbased on the Agendathat is shown in Annex 2. The main statementsdelivered at the meeting are in Annexes 3 to 41 and the Press Releasein Annex 42. The documentationprepared by the Government of Cambodia for the meeting included the Socio-economic Development Requirements and Proposals, the 1996/97 Development Cooperation Report, and briefs on "special programs." The World Bank prepared an economicreport (Cambodia:Progress in Recovery and Reform) for discussion at the meeting.

Opening Statements

4. In his opening statement(Annex 3), Mr. Khalilzadeh-Shiraziwelcomed all the delegates to the meeting, extendinga specialgreeting to H.E. Keat Chhonand H.E. , Cambodia's Minister of ForeignAffairs. He also expressedhis appreciationto the Governmentsof France and Japan for the roles they played in the organizationof this meeting.

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5. 'Mr. Khalilzadeh-Shirazithen briefly reviewedthe developmentsin the Cambodianeconomy since the last CG Meetingheld in Tokyo on July 11-12, 1996. Cambodia,he said, has passed through anotheryear of intense challenge. Events on the political front had seized the world's attentionand compoundedthe difficultiesthat Cambodiafaces in meeting its developmentobjectives. Whilethe primary focus of the CG Meeting will be on issues related to economicdevelopment, Mr. Khalilzadeh-Shirazi suggestedthat participantsbear in mind the complexpolitical issues facing the CambodianGovernment.

6. Under difficult conditions,there has been progress,he said. However, along with the accomplishments,there have been disappointments.On the positive side, the Governmenthad maintainedmacroeconomic stability and fostered economicgrowth. The economy grew by almost 7 percentin 1996, the inflationrate was containedwithin single digits, and the current account deficit of 16 percentof GDP was financedwithout jeopardizing Cambodia's future creditworthiness.On the fiscal side, an ambitious 1997 Budget and the Law on Taxationwere enacted into law. In the forestrysector, the Governmentformed the NationalCommittee on Forest Policy Reform,improved controls on illegal logging,and signedthree of the four contractswith internationalfirms that will help carry out activities recommendedin the Forestry Policy Assessment.

7. On the negative side, Mr. Khalilzadeh-Shirazimentioned several issues for which progress had fallen short of the expectationsgenerated at the Tokyo meeting:(i) the long- awaited implementingregulations of the InvestmentLaw were not put in place; (ii) there has been slow implementationof steps to improve fiscal management,as revenueshave again been below target; (iii) managementof Cambodia's forestresources has not yet exerted the necessaryimpact on the ground;and (iv) there has been a lack of concrete progress on both civil service reform and militarydemobilization. He added that a fundamentalissue that underlinesthese disappointmentsis that much more needs to be done to improve transparencyand accountabilityin fiscal and economicmanagement.

8. With this background,the Chairmanset the followingobjectives for the meeting: (a) to hear the Government's views on Cambodia'scurrent situation,its development prospects and financingrequirements; (b) to share donor experienceson assistance programs for Cambodia;and (c) to hear the internationalcommunity's plans for financial support to Cambodiafor the coming year. He then turned over the floor to MinisterKeat Chhon.

9. In his opening remarks (Annex 4), Minister Keat Chhonhighlighted the fact that this was the first "regular" CG Meeting,and thankedthe Bank for organizingthis event and agreeingto do so in the future. He then mentionedthe difficult politicalsituation that the Governmentwas facing and the violentincidents that had occurred in recent months. The Minister asked the internationalcommunity not to rush to harsh conclusionson Cambodiabased on isolatedincidents but, instead, to judge the Royal Governnent by the progress made since it took office, four years ago, both in politicsand in economic

-v..-- V -r managemnent. He concluded by calling on the donor community to continue supporting the Royal Government's efforts.

Macro-economic Issues

10. Statement by the Royal Government of Carnbodia. Minister Keat Chhon opened the session on macro-economic issues with a report on economic developments in the last 12 months and the achievements of the Royal Government in the areas of GDP growth and financial stability in particular (Annex 5). Notwithstanding the achievements so far, he acknowledged that many areas of weakness remain and need to be addressed in the months and years ahead. In the first months of 1997, domestic revenues have fallen short of budget targets, particularly as a percentage of nominal GDP. Defense, security, and wages still represent half of total expenditures, leaving very little for operating expenditures. Until now, current revenues have not been fully adequate to meet current expenditures, and in the years ahead, this gap is likely to widen due to the implementation of programs such as the organization of national elections, military demobilization, and civil service reform.

11. In his statement the Minister stressed the importance for Cambodia of attracting foreign direct investment, not only to compensate for the weak domestic resource mobilization capacity, but also as a matter of national policy. In this context, he said, government efforts focus on building the enabling environment for FDI and preparing for entry into the WTO. He also reminded the audience that the Government had privatized or commercialized most of the State Owned Enterprises. In conclusion, Mr. Keat Chhon said that the Royal Government will continue to need external budget and investment support to stay the course.

12. Intemational Monetary Fund. The IMF representative, Mr. Hubert Neiss, first congratulated the Government for its achievements in the area of macroeconomic management (Annex 6). He then explained that Cambodia's problems of govemance threatens the economic future of the country. He mentioned in particular the rapid depletion of forest resources and the diversion of revenues from the national budget. He flagged the most important sources of revenue diversions as follows: concessions, such as monopoly rights and land leases given to foreign investors without payments to the budget; tax and tariff exemptions granted to domestic and foreign companies, including those that arise from improper exemptions granted under the overly generous Investment Law; non-collection of taxes by tax officials; and nonpayment of taxes on commercial activities by the military, including leases of government land.

13. As a result of the non-observance of the safeguards built in the ESAF program supported by the IMF, the program has been delayed and disbursements disrupted, Mr. Neiss said. The program for 1997 is still on hold and will not resume until there are clear indications that determined efforts are made by the Government to reverse the deterioration in governance and take remedial actions, he added. A significant

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strengfhening of policies to combat corruption is feasible, provided that there is cooperation and strong political support for such policies by both Prime Ministers, the IMF delegate said. He cautioned that while there are crucial political problems to be addressed in the immediate future, there is also a vital economic objective: that Cambodia steer through the pre-election period without a breakdown of macroeconomic stability, and without a further serious erosion of its economic resource base. The IMF is ready to do its utmost to support the Government's efforts toward achieving this objectives, Mr. Neiss concluded.

14. World Bank. In the statement that he presented on behalf of the World Bank (Annex 7), Mr. Kyle Peters confirmed the Government's encouraging assessment of the Cambodian economy. He stressed in particular the very favorable macroeconomic performance and steady growth. But he added that there are concerns that the current economic growth will be difficult to sustain over the medium tern, as it has been very narrowly based. Similarly, there are concerns regarding macroeconomic stabilization, as it has been sustained through methods that are likely to harm long-term growth. An inadequate revenue effort, resulting from overly generous tax exemptions and lax tax administration, has necessitated severe compression of current expenditures. This compression, Mr. Peters explained, has fallen disproportionally on economic infrastructure and the social sectors, because of continued high defense and security expenditures. The Government must therefore face the difficult challenges ahead, of which the following are the most important: enhancing public resource mobilization; improving the efficiency of public expenditure; strengthening the institutional capacity to implement economic reforms and development programs; and ensuring the sustainability of development through responsible forest management. He concluded that the Royal Government had made remarkable achievements in restoring economic growth and stabilizing the economy, but that continued growth at these levels, and lifting the people of Cambodia out of poverty, would require a new round of reforms.

15. Statements by Participants and Discussion. During the discussion, there was broad consensus among the delegations on their assessment of the economy, the remaining agenda for reform, and the importance of political stability. Delegates congratulated the Government for the progress so far. They exhorted the Government to stay the course, follow the recommendations outlined in the World Bank economic report, and carry out the remedial actions needed to resurne the prograrn with the IMF. [n the words of one delegate, Cambodia could not afford to take time off from its important task of reconstruction. First and foremost in the minds of many donors was the need to continue expanding the revenue base and reverse the unfortunate trend of the last six months. In that context, delegates pointed out the urgent need to improve transparency in the management of public resources, particularly in relation with the logging and log export issue. Several delegates expressed disappointment that the Government did not fully follow through on its pledge at the 1996 CG meeting regarding forest management issues. Many delegates concluded their statements by saying that their country was looking forward to the Cambodian Government to, first, continue its efforts with regard to sound macroeconomic management and, second, strengthen its resolve in relation to

ml - K -- -5- good governance and revenue collection, so that the assistance provided by donors can continue and be effective. Should taxpayers in donor countries feel that the Royal Government is not taking measures to ensure that all possible domestic sources of revenue are appropriately tapped, some delegates cautioned, it may be increasingly difficult to safeguard the current level of aid to Cambodia.

16. Donors also forcefully stressed the need for political stability and the organization of free and fair elections now scheduled for May 1998. In the words of one delegate, the willingness of aid donors and foreign investors to work in Cambodia will weaken unless the coalition partners are able to resolve tensions between them, ensure stability and security, and maintain an apolitical public sector during the period leading to the national elections. The NGO representative who had been invited as observer to the meeting by the Royal Government stressed that the development of Cambodia could only take place in a climate of security. Many delegates expressed the view that full cooperation by both Prime Ministers was needed for the political climate to improve.

17. In his response, Mr. Keat Chhon assured donors that the Government shared their views and that many of the recommendations were either already in place or very high in the Government's list of priorities. He reiterated the Government's commitment to redress the situation in the forestry sector. He mentioned the signing of three of the four consultant contracts related to the forest policy studies as evidence that the Government is following up on its pledge to the donor community. In conclusion, he said that he will convey to the two Prime Ministers the concerns of the donor community regarding the political climate in Cambodia.

Priority Program and Investment Needs

18. Statement by the Royal Government of Cambodia. Referring to the government documents tabled at this meeting, Minister Keat Chhon walked the participants through some aspects of the Government's three-year public investment program (Annex 19). He stressed that the Government's overarching goal is to reduce poverty. To achieve this goal, the Government is aiming to spend at least 65 percent of the PIP in rural areas where 85 percent of the population live. The Minister also mentioned the important role expected of the private sector in helping to sustain growth in Cambodia.

19. He stated that the PIP calls for a total investment of US$1.5 billion during 1997- 99, including capital investment, technical assistance, and budget support. In presenting the PIP he singled out "special programs" which the Government considers essential: namely, public administration reform, military demobilization, demining, the Social Fund, and the organization of the 1998 elections.

20. Asian Development Bank. Mr. Rajat Nag, ADB Programs Manager, was the Lead Discussant for this session (Annex 20). He presented the key public investment programming issues that will need to be addressed by the Government and its development partners. On the size and composition of the three-year program (1997-99), -6 - he said that the proposed level of investment (US$1.2 billion) is consistent with the economic priorities of the Government and within the range of available external resources. He emphasized, however, that the pace and success of PIP implementation will depend critically on further government efforts to increase domestic budget resources and strengthen the technical capacity in implementing ministries. The critical constraint to PIP implementation, he said, is the scarcity of resources in the national budget. In addition to counterpart capital requirements for externally assisted projects, the PIP has major operating and maintenance cost implications for all projects. Another constraint is the ability of the spending ministries to implement projects on time, as the development of such capacity has not kept pace with the expansion of external assistance. There is therefore a need to ensure that implementation schedules are realistic, so that expenditure profiles can be better planned.

21. The second issue presented by Mr. Nag was the focus on rural development. The Government had set a target of 65/35 ratio between rural and urban projects to be achieved by the year 2000. This emphasis is appropriate, he said, because 85 percent of the population reside in rural communities, and because of the poor state of social and physical infrastructure in rural areas. However, only 45 percent of planned investments can be considered "rural", with many of the projects in that group straddling the urban/rural divide. Subsequent PIPs should therefore be framed so that the rural distribution of benefits would be made more transparent in order to serve as a useful tool to help the Government achieve the 65/3 5 target. Mr. Nag noted that agriculture, including forestry, irrigation, fisheries, and livestock, receive only about 4.7 percent of the total PIP. This is obviously a group of sub-sectors that should receive higher allocations, he said.

22. Third, Mr. Nag discussed PIP implementation and monitoring. In view of its importance for sound macroeconomic management, and effective management of the development process in general, it is essential that the PIP process be maintained and expanded to include regular analyses of PIP outcomes and their costs. Current procedures for implementation and monitoring of public investment in Cambodia are not adequate and should be strengthened as a matter of priority. To remedy this situation, he recommended the establishment, with donor assistance, of a fornal PIP monitoring and evaluation system that would assess both investment and policy impact.

23. World Bank. Focusing his presentation on the "special programs" (Annex 21), the World Bank speaker, Mr. Guy Darlan, highlighted the fact that those were fairly large, high priority programs for which immediate and full funding was sought by the Royal Government. He explained, however, that before donor support could be fully mobilized, the Government needed to take preliminary actions. Concerning administrative reform, he said, the Government needs to clarify the concrete steps it intends to take to carry out the reform. In particular, the Government needs to put in place the operational plan and capacity to implement the reform over the period 1997- 1998 during which local and national elections will be contested. Regarding military demobilization, a detailed program has been prepared and has received the support of

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three donors so far. However, more resources will be necessary to carry the program to completion. In order to help secure those resources, the Government needs to commit to full implementation of the demobilization program. Finally, the Government is asking for additional resources to continue the Social Fund's assistance to rural communities. The implementation of the program has proceeded ahead of schedule, Social Fund management of its finances have received favorable reviews, and community demand for Social Fund assistance far exceeds its current resources. Thus, the Social Fund deserves immediate additional donor support, without which it will cease operations in the first half of next year, Mr. Darlan concluded.

24. Statements by Participants and Discussion. A large number of participants congratulated the Royal Government on the quality of its documents for this meeting. They also agreed that many constraints remain that must be addressed to improve the chances of sustaining growth in rural areas. Lifting many of these constraints does not necessarily require large sums of money, but it does require strong government commitment and action, followed by well focused and coordinated donor support.

25. Reflecting on the private investment climate in Cambodia, the 1EC representative, Mr. Kip Thompson, said that Cambodia presents a paradox to potential investors: it offers both an attractive and a challenging environment to do business (Annex 22). Focusing on the challenges, he mentioned political instability, the uncertain legal and regulatory enviromnent and lack of transparency, and the limited physical infrastructure. He warned that until such time as the country properly addresses these significant impediments to long-term private sector investment, Cambodia will not be able to attract the kind of investment that it needs for sustainable private sector-led growth.

26. Regarding public investmnent,speakers generally supported the Government's view that poverty will be reduced first through strong economic growth, particularly in rural areas. In that respect, the emphasis placed on rural development in the Government's program is appropriate. The general feeling was that if Cambodia is to achieve its stated objective of a just and peaceful society through accelerated economic growth, it will have to resolve serious trade-offs between investments in urban and industrial areas and economic and social investments in rural areas where 85 percent of the population live and where most of the poverty exists. In particular, increased resources will need to be allocated to agriculture.

27. Several delegates also emphasized the role of education and health. Raising education levels is obviously necessary to improve living standards and reduce poverty, one delegate said. Donors welcomed the allocation of higher levels of funding by the Government for education and health in the next three years, but regretted that defense expenditures--with three times the level funding of the social sectors--were still crowding out much needed social expenditures. Some donor representatives also stressed the importance of fully and effectively implementing the proposed strategies.

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28. In his response to questions, Minister Keat Chhon reminded participants that the Government intended to organize follow-up sectoral meetings in to discuss some of the special concerns in greater detail. He also acknowledged that the climate for private investment in Cambodia is not yet conducive to long-term FDI, but said that the Royal Government is addressing the main impediments to private sector growth.

Aid Coordination

29. Statement by the Royal Government of Cambodia. Minister Keat Chhon reminded participants (Annex 26) that government capacity for preparing and implementing development programs is still extremely weak but that a series of actions have been and will continue to be taken by the Government to overcome the government's capacity constraints. He reported a perceptible improvement in skill absorption by the governrmentstaff in the past year. The shift, he said, is more pronounced in the Ministry of Economy and Finance (MEF) where an explicit strategy of gradual withdrawal of foreign advisers is being carried out. The number of expatriate experts in MEF has been significantly reduced, and the setting up of the new School of Finance will continuously provide training to government officials. The Government's goal is to gradually reduce Cambodia's dependence on external experts in all branches of government, as it is being done in the MEF.

30. With regard to aid coordination, Minister Keat Chhon said that the need for a well orchestrated effort is evident, given the large volume of ODA that has been flowing to Cambodia, including through NGOs, and the amount of private investment already pledged and expected to come. Only through such coordination can the Government ensure the optimal and effective use of resources and be fully accountable both within the country and to the aid-providing agencies. For this purpose, a single and high level Council for the Development of Cambodia has been set up, he said. The CDC's first responsibility is to identify priority investments and assistance needed from external resources and coordinate internally in the context of the Public Investment Management System (PIMS). He concluded his remarks by urging all external partners to assist the Government by directing assistance to Cambodia through the CDC.

31. UJNDP. The presentation (Annex 27) of the Lead Discussant for this session, Mr. Paul Matthews, UNDP Resident Representative and UN Resident Coordinator, can be summarized as follows. The Consultative Group and the in-country coordination system- -in conjunction with the PIMS of the Royal Government--are at present the two principal instruments for aid coordination with respect to Cambodia. Their establishment is reflective of the need for more comprehensive and in-depth analysis and prioritization of aid requirements, relative to emerging national policy framework. These inter-active and mutually supported mechanisms constitute a move away from general needs assessments and open-ended resource mobilization that prevailed during the earlier emergency phase. The effectiveness of these aid coordination mechanisms is critically reliant on the further straightening of the national policy and management framework that is being put in place.

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The longer-termsustainability of these mechanismsalso clearly dependson staffingthem appropriately and providingadequate salariesand other incentivesto motivatethe personnel assignedto them.

32. On behalf of the World B Mr. R. Natarajanreminded the audience that the subject of aid coordinationhas been at the forefrontof developmentissues in Cambodia because of the destructionof institutionsand traditionsand large scale loss of educated, trained and skilled people during a traumaticperiod in the country's history. He called on all donors to thereforepay special attentionto this issue in their efforts to assist Cambodia's socio-economicdevelopment (Annex 28).

33. Statementsby Participantsand Discussion. The frameworkof aid coordination was judged to be developingwell in Cambodia,due to the Government's creationof coordinatingbodies at the national and sectorallevel. Delegatessupported the strengtheningof Cambodia's aid coordinationcapacities, reaching down to the local level so that, ultimately, the Governmentwould assumefull responsibilityfor this crucial function.

34. Nevertheless,several participantscautioned that the "aid fatigue"of donor countries is increasingand aid budgetsare being reduced. Under such circumstances,it will be necessaryto utilize limitedfinancial assistancemore efficientlyand without overlapping. Therefore,aid coordinationis likely to becomeeven more importantin the years ahead.

35. In his response, Mr. Keat Chhon announcedthe Governnent's plan to improve the effectivenessof aid through better monitoringand auditingof foreignassisted projects.

Financing Requirementsand Indicationsof Assistance

36. Word Bank, The World Bank speaker,Mr. Kyle Peters, presentedan estimate of Cambodia's requirementsfor externalassistance based on an economic scenarioprepared jointly by the Bank and the IMF and broadly in line with the Government's own developmentstrategy. Mr. Peter's presentation(Annex 31) can be summarizedas follows.

37. This scenario, and the associatedfinancial support,is predicated on the implementationof the reform program outlinedin the Government's Policy Framework Paper for 1997-99. It would require continuedprogress in consolidatingmacroeconomic stability, combinedwith an accelerationof economicreforms and significant improvementsin the transparencyand accountabilityof economicmanagement, particularlyin the fiscal accounts. Therefore,external financing requirements remain substantial. With the maintenanceof political and economicstability and a re-invigorated reform program, an increasingproportion of Cambodia'sexternal financing requirements

_ - 10- could be met by inflows of foreign direct investment. However,even with this increase in private capital flows and an increase in domesticresource mobilization, disbursements of official assistance in the form of grants and concessionalloans at about the same level as in 1996 would still be needed in the next few years. This means an average commitmentlevel of official assistanceof about US$455per year during 1997-99. Even if the Governnent makes a concertedeffort to increasedomestic resource mobilization, domestic savings and budgetary revenue are likely to rise only slowly. As a result, official assistance would still need to cover somerecurrent expenditures, domestic counterpart funds, and the foreign exchangecosts of the public investmentprogram. Therefore,in the near term, there would remain a need for some of the official assistance (about $60 million) to be given in the form of balance of payments and budgetary support. This budget support would be justified only if Cambodia'sown efforts at domesticresource mobilizationare strengthened. These projectedrequirements of official assistance excludethe financial supportthat would be required for the electionsin 1998.

38. Statementsof Participants. The various donors outlinedtheir respectiveprograms of support to Cambodia,covering financial assistancefor investmentprojects and budget support, commodity aid, and technicalassistance. They indicatedthe primary sectors and areas of special interest to their countriesand institutions. Collectively,they pledged a total of US$450 million for 1997/98,with one donor indicatingthat it did not wish to provide a precise figure at this time. Also, this amount of official developmentassistance does not include NGOs commitments. The total of US$450million is consistentwith Cambodia's estimatedexternal financingrequirements.

39. Many donors announcedthat they intend to implementthe programof assistance that they announced,but added that whether or not these programscan actually be carried out will depend on a numberof factors openlydiscussed duringthe meeting. These factors include: how seriouslyCambodia will work on improvingits domesticsituation towardthe 1998 elections;whether good governanceis instated;and whether Cambodia's own resource mobilizationefforts are significantlystrengthened.

Conclusion and Closing Statements

40. Statement by the Royal Govemmentof Cambodia. In his closing statement, Minister Keat Chhon said that the Cambodiandelegation deeply appreciatedthe spirit of complete candor in the deliberationsand the constructivecomments received. He echoed the donors' support for the annual CG format. While thanking the donor communityfor the pledges made, he said that he fully realized that these pledgeswere mere intentionsof support that would only materializeif the Governmentfulfilled its commitrnentsto the donor community. On the key issues,he summarizedthe governmentposition he had expressed in earlier sessions and addedthat he had taken full and careful note of the delegates' remarks and suggestions,promising that he would share them with the two Prime Ministers and that the Royal Governmentwould do its utmost to addressthem. - I1 -

41. Chairnan. Mr. Khalilzadeh-Shiraziexpressed his appreciationfor the frank and fruitful discussionsheld during the meeting. He summarizedthe main messagesthat arose from the discussionsas follows. On one hand, delegateswere uniformlyimpressed with macroeconomicmanagement and the economy's growthperfornance, considering the difficult conditionsin Cambodiaover the last year, includingfloods and many pressures to expand expenditures. On the other hand, delegatesfound the Government's achievementsin several areas disappointingwhen comparedto the expectationsgenerated in Tokyo at the 1996 CG meeting. His statement(Annex 41) can be summarizedas follows.

42. The constancy and disciplineof fiscal management,among other factors, contained inflationarypressures in 1996and reduced inflation in 1997. The exchange rate remained stable, and the current accountdeficit was financedwithout jeopardizing Cambodia's future creditworthiness.In this stabilizedenvironment the economy continuedto grow rapidly, reachingnearly 7% last year.

43. Recalling the discussionsof last year's CG meeting,delegates stressedthe shortfalls in the governmentperformance for the followingareas:

* effective steps to improve fiscal management,specifically measures to improve revenue performance,have not been forthcoming,with adverse implicationsfor social sector programs; * managementof Cambodia'sforestry resources have not yet producedtangible results in the control of logging activities; * civil service reform and militarydemobilization have not progressedbeyond initial planning and conceptualization;and * and the expectedimprovements in transparencyand accountabilityin economicmanagement have not materializedand in some respects governancehas deteriorated.

44. These shortfalls,delegates observed,threaten to dilutethe gains from successful stabilizationand growth, erode the chancesfor sustainedlong term development,and underminethe goodwill of the internationalcommunity toward Cambodia. In this context, several donors highlightedthe reformsin tax policy and forestrymanagement which the Governmenthad committedto undertake,but so far not carried out, as prior actions for the third-yearIMF program underthe ESAF. Donors urgedthe Government to implementthese reforns speedily to pave the way for a resumptionof the ESAF process.

45. Althoughit was not the custom at these meetingsto address politicalissues, delegateswidely expresseddisquiet over rising politicaltensions and episodesof conflict that threatened to underminepolitical and economicstability. Delegatesacknowledged that political factors and security considerationswill continueto play a pivotal role in Cambodia's economic and social performance,and in the ability of the donor community

ml,,.' I , - 12 - to carry out its program of assistancein the country. In the same vein, delegates acknowledgedthat sustainingmacroeconomic and political stabilitywill be highly challengingtasks in the year leadingto elections,and that this will place heavy but unavoidable demands on Cambodia's leadership. The stakes are high, but Cambodia's leadershipcannot afford to take time off from the task of nationalreconstruction and economic management.

46. Delegateswere unanimousin their call for a revitalizationof the reform process. In that regard, an issue of strong interestto delegateswas fiscal management,specifically the deterioratingperformance in revenue mobilization.Delegates noted that declining revenue performancewould raise donor concernsthat their resourceswould only substitute for Cambodia's own revenues, and entrenchits dependenceon increasingly scarce donor assistance. At the same time decliningrevenues would raise doubtsamong investors about growth prospects,and compelthe contractionof vital expendituresin the economic and social sectors, an alreadyvisible result.

47. One of the main areas of concernis the managementof naturalresources, in particular the unsustainableexploitation of Cambodia'sforestry resources. The Governmentnoted that some progress had been achieved since the last CG meeting in Tokyo and more was planned. While welcomingthe intentionsof the Government, delegates viewed the actions that have been taken as delayedand short of the high expectations generatedat the Tokyo CG meeting. They called for more effectivecontrols over illegal logging and for full marketpricing in logging concessions. In addition, closer monitoringof logging practices and the strict enforcementof more sustainable harvesting practices would be practicalnear-term steps to bring uncontrolledand illegal logging into a sustainablefrarnework. The Governmentindicated its intentionto address these tasks and to transmitthe urgencyof donor concernsto higher authorities.

48. As in 1996, delegatesagain expressedtheir interestin the accelerationof agriculturalproductivity, improved rural social and economicservices, and better maintenanceof the growing rural transportnetwork. The Governmenthas articulatedthe high priority of rural developmentand poverty reduction,which delegateswere eager to support in their assistanceprograms. However,delegates registered the need to translate these developmentpriorities into concrete programsand expenditures.

49. Regarding financial support for Cambodia'sreconstruction and development efforts, donors pledged about US$450million, with one donor indicatingthat it did not wish to provide a precise magnitudeat this time. Many delegates indicatedthat political and economic developmentsin Cambodiain the coming year will have a bearing on the extent to which these indicationsof aid flows would be realized.

50. In regard to the CG process, delegates stronglysupported the continuationof the annual meetings. They offered their complimentsto the CambodianGovernment for its professionalapproach to the CG meeting. - 13 -

51. In his conclusion, Mr. Khalilzadeh-Shirazisaid how he had been struck by the two different messagesfrom delegates: one of hope and continuedsupport; and the other of disappointmentover slow, or lack of, progress in several key policy areas and unease about rising political tensions. This message,although divided, is complementary,he explained. It reinforces the suggestionthat Cambodiastands at a crossroads,not only in charting its future but also in maintainingstrong internationalsupport for its efforts. This forthcomingCG cycle will be a decisiveone in that regard, as it unfolds over the eventful year before us, Mr. Khalilzadeh-Shirazisaid.

52. The delegatesrequested the Chairmanto communicatein a letter to the two Prime Ministers the main messagesfrom the Meeting. The Chairmanundertook to do so immediately(see Annex 43).

53. The Chairmanofficially closed the meeting at 12:20p.m. on July 2, 1997.

i1lL.'''. Annex 1 JSAN7M 71? - 14 - Page 1 of 9 MEETING OF THE CONSULTATIVEGROUP FOR CAMBODIA Paris,1-2 July, 1997

Chairman: Mr.Javad Khalilzadeb-Shirazl Director, Country Department1, East Asia & PacificRegion The World Bank

List of ParticipAnt


Dr. Peter McCawley Headof Delegation DeputyDirector General Asia, Africaand CommunityPrograms Division AustralianAgency for InternationalDevelopment (AusAID)

HE. AnthonyKevin Ambassadorto Cambodia

Mr. John Wilson First Secretuy DevelopmentCooperation

Mr. C. Moraits Counsellor AustralianEmbassy, Paris


Mrs. Marl*neThomas Headof Deleption Asian Departnent, GovernmentalCooperation Division BelgianAdministration for DevelopmentCooperation

Mrs.Veronique Petit Secretaryfor EconomicAffairs BelgianEmbassy, Paris


Mr. Eric P. Yendall Headof Delegation DirectorGeneral, Indochina, Thailand, Malaysia Asia Branch CanadianInternational Development Agency (CIDA)

H.E. D. GordonLongmuir Ambassadorto Cambodia

1-' Consultative Group Meeting for Cambodia - 15 - Annex 1 Parls,1-2 July, 1997 Page 2 of 9


Mr. Li Li Second Secretary Chinese Embassy, Paris


Ms. Christine Norgaard-Larsen Head of Section Danish International Development Agency (DANIDA) Royal Danish Ministry of Foreign Affairs


Mr. Michel Mollard Head of Delegation Chef du Bureau Asic, Afrique du Nord, Moyen-Orient. Protocoles Financiers Direction du Tresor Ministere de l'Economie, des Finances et de l'lndustrie

Mr. Herve de Villeroch6 Adjoint au Chef du Bureau Asie, Afrique du Nord, Moyen-Orient, Protocoles Financiers Direction du Tresor Ministere de l'Economie, des Finances et de l'Industrie

Mr. Patrick Pillon Attache Financier pour l'Asie du Sud-Est Ministere de l'Economie, des Finances et de l'lndustrie

SE. Gildas Le Lidec Ambassadeur de France, Phnom Penh

Mr. Dominique Causse Conseiller Commercial Ambassade de France, Phnom Penh

Mr. Jacques Pellet Charge Camnbodge Direction d'Asie Ministere des Affaires Etrangeres

Mr. Gerard Larose Conseiller Geographique Cambodge, Laos et Bangladesh Caisse Fran9aise de Developpement

Ms. Celine Bougot Chargee de Mission Laos-Cambodge Caisse Frangaise de Developpement

1v ... CosuaftIe GroupMeeting for Cambodia - 16 - Annex 1 Palitm,1-2July, 1997 Page 3 of 9

Fl=ce (cont'd) Mr. NicolasTissot Inspectiondes Finances

Mr. Jean-LucLe Bras Chargdde MissionG6ographique pour le Cambodge Secretariatd'Etat i la Cooperation

Mr. BertraudBadre InspectionGinerale des Finances

GERMANY Ms. GiselaHanmmechmidt Headof Delegation SeniorOfficer SouthEast AsiaDivision Bundesministeriumfbr WirtschaflicheZusammenarbeit und Entwicklung (BMZ)

Mr. BernhardZander DeputyDirector East Asiaand Pacific2 Kreditanstaltf1r Wiederaufbau(KfW)

Dr. Klaus-DieterLunau Headof Section East AsiaDivision DeutscheGesellschafi fir TechnischeZusammenarbeit (GTZ)

Dr. HcssameddinTabatabai SeniorAdvisor Emergency& RefugeePrograms GTZ

JAPAN Mr. KumihikoMakita Headof Delegation DeputyDirector General Asian AffairsBureau Ministryof ForcignAffairs

H.E. ShoheiNaito Ambassadorto Cambodia

Mr.Masashi Mizukami Director,Development Cooperation Division EconomicCooperation Bureau Ministryof ForeignAffairs

El, - CoasuIltiveGroup Meeting for Cambodia Annex I Part, 14 July. 1997 - 17 - Page 4 of 9

Japao (coat'd)

Mr. Kaysuhito Shinoham Regional Coordinator, Ihe First Southat Asia Division Asian Affairs Bureau Ministry of Foreign Affairs

Mr. Tadayuki Miyashita Official, The FirSt Southeast Asia Division Asian Affairs Bureau Ministry of Foreign Affairs

Mr. Tsuyoshi Kato Researcher, Aid Policy Division Economic Cooperation Bureau Ministry of Foreign Affairs

Mr. Takeshi Osug First Secretary Japanese Embassy, Paris

Mr. Daisuke Yabuki Special Assistant Japanese Embassy, Paris

Mr. Sciichi Kanai Observer Resident Representative Japan International Cooperation Agency (JICA), Paris

Mr. Hitoshi Hirata Observer Resident Representative Overseas Economic Cooperation Fund (OECF), Paris


Mr. Bu-Guamn Jeon Head of Delegation Minister Plenipotentary Embassy of the Republic of Korea, Paris

Mr. Kyong Yul Lot First Secretry Embassy of the Republic of Korea, Paris

Mr. Sungsoo Choi Deputy Director Economic Cooperation Division II Ministry of Foreign Affairs CS.s.Iativ@Gr*vp Mestla for Cambodia Annex 1 Park,,1-i, IM - 18- Page 5 of 9


H.E. Ms. MLA.C. VanDen Assum Headof Delegation Ambassadorto Thabnd RoyalNetherlands Embassy, Bangkok

Mr. Rienk W. Wiersma First Saetazy DevelopnentCooperation Secion RoyalNetherlands Embasy, Bangkok

Ms. Asitridde Vries Desk Officer South-EastAsia and Ocenia Division Ministryof ForeignAffar


H.E. LarsA. Wensell Headof Delegation Ambassador RoyalNorwegian Embassy, Bangkok

M.LSidscl Bicken SeniorExecutive Officr NorwegianAgency for DevelopmentCooperation (NORAD)


Mr. VladimirPlotnikov Headof Delegation DeputyDirector 2nd AsiaDeparment Ministryof ForeignAffairs

Mr. VictorKatachov SecondSecetary EconomicCooperation Deparment Ministryof Foeign Affain


Mr. LwsIErikWingren Headof Delption Headof Divisionfor Asia nd die Pacific Ministryfor ForeignAffa

Mr. Sven-AkeSvensson ResidentReprsentative SwedishInternational Development Cooperation Agency (Sida), Phnom Penh

1|T'11* CesuvlbdveGroup Meding for Cambodis Annex 1 Porls,12July, 197 - 19 - Page 6 0f 9

Sweden (cont'd) Mr. MagnusCedergren ProgramOfficer Asia Department,Sida

Ms.Maria Tengroth FirstSecretary Divisionfor Asiaand thePacific Ministryfor ForeignAffairs

UNfTED KINGDOM Mr. AdamWood Headof Delegation Head, SouthEast AsiaDevelopment Division

Mr. Paul Ackroyd Head,Asia, LatinAmerica and Oceans Economics Departnent Departnentfor InternationalDevelopment (DFID)

UNITEDSTATES Mr. KellyKammerer Headof Delegation ActingAssistant Administrator for Asiaand Near East UnitedStates Agency for InternationalDevelopmnent (USAID)

Mr.Gordon H. West MissionDirector USAID,Phnom Penh

Ms.Marie T. Huhtala Director,Office for Burma,Cambodia, Laos, Thailand and VietnamAffais USAID Department of State

Ms. DeborahKingsland DeskOfficer for Cambodia USAID Departnent of State

Mr.Clinton Doggett Desk Officerfor Cambodia USAID Departnentof State

ElT'C -- _,, Annex 1 - 20 - ~~~~~Page7 of 9 Consulttive GroupMeeting for Cambodia - 20 - Paris, 1-2July, 1997


Mr. Rajat M. Nag Head of Delegation Programs Manager Division 3 (Cambodia, Lao PDR, Myanmar, Thailand,Viet Nmn) Programs Department (West)

Mr. Someth Suos Resident Representative in Canbodia


Mr. Gwyn Morgan Head of Delegation Head of Unit South East Asia

Mr. Mario Ferrucci Principal Administrator Asean, Indochine, Myanamar


Mr. Kip Thompson Acting Division Manager, Southeast Asia


Mr. Hubert Neiss Director, Asia and Pacific Department


Ms. Sachiko Imoto Aid Policies Review Division Development Cooperation Directorate


Mr. Paul Matthews Head of Delegation Resident Representative and UN Resident Coordinator Phnom Penh

Mr. Philippe Boreo Regional Manager, World Food Programme South East Asia RegionalOffice

1, , . l- C.multtivoGroup Minag br Cambodia Annex 1 Parls,1-2July,1997 - 21 - Page 8 of 9 4


Dr. Luise Ahrens RoyalUniversity of PbnomPenh

ASEAN Ms. NurAshikin Mohd. Taib SecondSecretary MalaysianEmbassy, Paris

CAMBODIA H.E.Keat Chhon Headof Delegation Sr. Ministerin Chargeof Rehabilitationand Developmentt Ministerof Economyand FinanceNiceChainnan of the Councilfor the Developmentof Cambodia

H.E.Ung Huot Ministerof ForeignAffairs and IntemationalCooperation

Mr.Chhieng Yarn Secretary-Generalof the CambodianRehabilitation and DevelopmentBoard Councilfor the Developmentof Cambodia(CDC)

H.E.Aun PomMoniroth PolicyPlanner, Senior Economic Official Ministryof Economyand Finance CDC

Mr. ChouKim Leng Directorof ExternalFinance Departnent Ministryof Economyand Finance

Mr. VongseyVissoth DeputyDirector of ExternalFinance Depanment Ministryof Economyand Finance

Mr. HeanSahib Directorof InformationDivison CambodianRehabilitation and DevelopmentBoard CDC

Mr. Rith Vuthy OfficeChief, Bilateral Division CambodianRehabilitation and DevelopmentBoard CDC

Mr. HamadiHamdi ChiefTechnieal Adviser to CDC

UT~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ConsultathieGroup Meeing for Cambodi Annex 1 Pari, 1-2 July, 1997 - 22 - Page 9 of 9

Cambodia (cont'd) Mr.Manuel Carranceja SeniorAdviser to CDC

Mr. HierkMeng Huor CabinetDirector Ministryof ForeignAffairs

Mr. SokMathoeung Adviserto Ministryof ForeignAffairs

Mr. SamEmmara Director,Europe Department Ministryof ForeignAffairs

Ms. RosSimara

Mr. Suon Salin Counsellor CambodianEmbassy, Paris

EXECUTIVEDIRECTOR Mr. YoungHoi Lee ExecutiveDirector The WorldBank


Mr. JavadKhalilzadeh-Shirazi Chairman Director,Country Depatment I East Asia & PacificRegion

Mr. R. Natarajan Chief,Liaison Office, Cambodia

Mr. R. KylePeters PrincipalEconomist, EAICO

Mr. Guy Darlan Senior Economist/CountryOfTicer, EAICO

Mr. ChristopherChamberlin SeniorEconomist, EAIHR

. . ,. ... I Annex 2 - 23- Page 1 of 1 CAMBODIA CONSULTATIVE GROUP Paris, France - July 1-2, 1997

Tuesdav. Julv 1

9:00 am. - 9:30 a.m. Registration

9:30 a.m. - 10:00 a.m. Opening Session Chairman Statement Government (RGC) Statement

10:00 a.m. - 1:00 p.m. Session 1: Macro-Economic Issues - Lead Discussants: World Bank, IMF - Discussion & RGC response

1:00 p.m. - 2:30 p.m. Luncheon

2:30 a.m. - 3:45 p.m. Session Il: Priority Programs and Investment Needs - RGC Presentation

- Lead Discussants: ADB, World Bank

-Discussion & RGC response

3:45 p.m. - 5:30 p.m. Session III: Aid Coordination Issues - RGC Presentation - Lead Discussant: UNDP - Discussion & RGC response

WednesdaX. July 2

9:00 a.m. - 11:00 a.m. Session IV: Financing Requirements and Pledeing Session - RGC Presentation - Lead Discussant: World Bank - Discussion and pledging

11:00 a.m. - 11:30 a.m. Coffee break

11:30 p.m. - 12:30 p.m. Closing Session - Concluding remarks by RGC - Summation by Chairman - Distribution of Press Release

2-30 p.m. - 3:00 p.m. Press Conference

0'1-'- '''''''-- ' r Annex 3 -24 - Page 1 of 3


Opening remarks by the Chairman Mr. Javad K. Shirazi The World Bank

Your Excellencies,Delegates, Ladies and Gentlemen.

It is my pleasure to welcomewarmly all the delegatesto this ConsultativeGroup Meeting for Cambodia. Let me also extend a specialwelcome to the Cambodian delegation,headed by His ExcellencyKeat Chhon,the SeniorMinister in charge of Rehabilitationand Development,and includingHis ExcellencyUng Huot, the Minister of Foreign Affairs,and other senior governmentofficials. To our close partners in this consultativeprocess, the Governmentsof France and Japan, we express our sincere appreciation.I would also like to thank the Governmentof France for organizingthe informalmeeting yesterday in whichwe receivedsome hopeful political news.

Since our last meeting, Cambodiahas passed throughanother year of intense challenge and rapid change. Even as we convenetoday, events on the political front have seized the world's attentionand, in an alreadycharged atmosphere, have compoundedthe difficultiesthat Cambodiafaces in meeting its development objectives. Thus, while the primaryfocus of this meetingwill be on issues related to economic development,we must bear in mind that the Royal Governmentfaces political issues of considerablecomplexity and significance. Let me say it is a tribute to the resolve and determinationof the Governmentand its internationalpartners that we are here today, carryingout our work as we have over the past four years, and that we are well preparedto engage in a frank dialogueon Cambodia'sdevelopment progress and its challenges.

To facilitate our discussions,the Royal Governmenthas articulatedits development program in the documententitled Cambodia'sSocio-Economic Development Reqirents and osals. which was distributedto all participants. A second Public Investmentprogram has also been preparedand is summaized in an Annex of the Govenment's report.

At our last meeting in Tokyo,we identifiedsix central issuesthat would measure the Government's successin meetingits developmentchallenges:

First, maintainingmacroeconomic stabilization with emphasison improvingfiscal management,especially through a wideningand deepeningof the revenuebase; * Second,accelerating rural and agriculturaldevelopment; Annex 3 - 25 - Page 2 of 3

* Third, enhancingthe enablingenviromnent for long-termgrowth; * Fourth,ensuring the sustainabilityof developmentthrough, in particular, improvedmanagement of Cambodia'sforestry resources; * Fifth, buildingthe institutionalcapacity necessary to meet these challenges;and * Finally,achieving better governance,transparency and accountabilityin economicmanagement.

Under difficult conditions,there has indeedbeen progress. The Governmenthas maintainedmacroeconomic stability and fosteredeconomic growth. The economy grew by almostseven percentin 1996 despite floodsthat reducedagricultural growth and that put upward pressureon food prices. Nevertheless,the inflationrate was containedwithin single digits, and has begunto deceleratein 1997. A current account deficit of ! 6% of GDP was financedwithout jeopardizing Cambodia's future creditworthiness. On the fiscal side, an ambitious1997 budget and the Law on Taxation, which includes new measuresto enhancerevenues and to strengthentax enforcementlaws and procedures,were enactedinto law.

In the forestry sector,the Governmentformed the NationalCommittee on Forest Policy Reform and has improvedcontrols on illegal logging. The technicalassistance recommendedin the ForestryPolicy Assessmenthas been selected,and three of the four contractshave been signed. We understandthat the fourth contractfor monitoringservices is being negotiatedfor signature.

Along with these accomplishments,however, there have been important disappointments. The progresson some issues has fallen short of the expectations generated at this same forum last year, and this is cause for concem:

* First, the long-awaitedimplementing regulations of the InvestmentLaw, which are necessaryto limit the exemptionscurrently eroding the tax base, were not put in place. * Second,there has been slow implementationof steps to improve fiscal management. Revenueshave again been belowtarget; and the brunt of fiscal adjustmenthas been on non-defense,non-wage expenditures. This continuingbias in expenditureswill slow growth overthe mediumterm and impededevelopment. * Third, managementof Cambodia'sforest resourceshas not yet exerted the necessaryimpact on the ground:illegal log exportsare not yet controlled; new forest concessionshave been signed;and export tax exemptionshave been granted. The unsustainableand uncontrolledexploitation of this valued resource continuesapace, with disturbingimplications for the environmentand public revenues; * Fourth, there has been a lack of concreteprogress on both civil service reform and militarydemobilization, with adverseeffects on institutional developmentand fiscal management. * Finally,a fundamentalissue that underliesthese disappointmentsis that much more needsto be done to improvetransparency and accountability in fiscal and economicmanagement Annex 3 Page 3 of 3

Thus, this last year providesevidence of concrete progressand disappointing shortfalls in performance. Others may wish to amplifyon this record and raise additional topics for what I am sure will be two days of fruitful, substantive discussions. In these deliberations,we very much look forward to hearing from Minister Keat Chhonand his delegationas to the Government'sviews on Cambodia's current situationand its developmentprospects. This meetingalso providesan ideal opportunityfor the donor communityto indicatetheir plans for financial support to Cambodiafor the comingyear.

Before I conclude,it may not be an exaggerationto observethat Cambodiastands at a crossroads. With admittanceto ASEAN,stable macroeconomicindicators, continuingflows of foreigninvestment, and strong GDP growth, there is a valid basis for confidencein the country's future. The other path at the crossroads,however, points toward a differentdestination. Issues relatingto policy reform, economic goverance and corruptionthreaten to diminishthe carefullyconstructed intemational goodwill that Cambodiahas enjoyed in recentyears. Thus, at this criticaljuncture, the Governmentcan sustainthe country's progress,but only with timely, decisive actions and sustained followthrough. With such a demonstrationof its renewed resolve, Cambodiawill surelyreceive fromits internationalpartners the essential support for its developmentprograms.

Ladies and Gentlemen,our agenda is a full one and our time is short. With those brief remarks, it is now a pleasure for me to invite His ExcellencyKeat Chhon,the Senior Minister in charge of Rehabilitationand Developmentto address this meeting.

Thank you. -27 - Annex 4 Page I of 3 CAMBODIACONSULTATIVE GROUP MEETiNG Paris,1-2 July 1997

OpeningRemarks of MR.KEAT CHHON Sr.Minister in-charge ofRehabilitation and Development Ministerof Economy and Finance RoyalGovermment ofCambodia

Mr.Chairmnan Excellencies Ladiesand Gentlemen

1. I havegreat pleasure injoining the Chairman inwelcoming allof you to this meeting. I also bring toyou greetings from the Royal Govemment and the people of Cambodia.

2. Wemet last year in Tokyoin a ConsultativeGroup-type (CG-type) meeting. It was a transition fromthe earlierthree ICORC meetings, which were intended to provideboth political and econoric supportto theRoyal Government formed after prolonged conflicts and tragedies. The ICORC process wasto end with a lastmeeting this year but this has been postponed. The CG process continues and will be theforum for dialoguewith our extemal partners for aidmobilization and allocation for our development

3. Thisis thefirst regular CG meeting for Cambodia. We thank the World Bank for organizing this eventand for agreeing to doso inthe future. This is animportant meeting for us. Today and tomorrow wewill collectively look at the Cambodian macro-economic situation, status, progress made so farand theneeds and prospects for the future. We therefore see our exercise here in terms of ournormality arnongthe intemationalcommunity. We regardthis as a recognitionof our abilityto manageour economyand to set our targets and our capacity towork towards achieving them.

4. ThisCG meeting will consider the macro-economic dimensions ofCambodia from a professional andtechnical perspective. It will particularly focus on our problems and progress inthe lastone year. However,before we commence such an analysis, it is goodto bear in mindcertain historic perspectives andgeneral developments.

5. Sincewe met in Tokyoin Julylast Cambodiahas repeatedly come under the spotight of world mediaMany events in the country,which might have passed for partof day-todayoccurrences in othercountries, have attracted politcally tainted coverage by a mediaever eager to sensationalize. Thesehave colored the perceptions about Cambodia. Let us look at the srtuation more objectively and inthe right context

6. Afterlong yearsof war, genocide,internal strife and intemationalisolation and neglect Cambodiawas infused with fresh lease of lifethrough the Peace Accords here in Parisin 1991.Wth thegeneral elections organized and conducted bythe United Nations, a new constitution was adopted anda coalitionRoyal Government was formed in 1993,as a measureof nationalreconciliation and solidarity.Since then the coalitionpartners, who had been adversaries wth mutualmistrust and suspicioninthe past have been steering the ship of state for the progress of ourpeople. Democracy is takingroots as amply demonstrated by,a flourishingand unfettered media, both electronic and print by formationand energetic activities of civil societyorganizations representing various groups; and,

M Kee Chhon'sQui Rmw*s.CG M.*tg P., 1-2J*4 1. PopI1 Annex 4 -28 - Page 2 of 3 generalfreedom of movementand activity.We havea veryactive and a largegroup of NGOsand otherswho keep a vigilantwatch over what happens in Cambodia.We have attained a levelof political and socialfreedom in the countryin a fractonof thetime many countries took in the pastin reaching thesame stage during normal evolution.

7. In the past year,political differences in the countryhave accentuated in the normalcourse of adjustments.In democracieselsewhere, it is not uncommonto witnesssirmilar shifts in politcal affiliationsand loyaltieswithin a party,as groupstry to enhancetheir influence and holdwithin the party.And, betweenparties, constant elbowing goes on to gainmore voter following even by using recriminatDryutterances. I submit that Cambodia's situation is nodifferent

8. Inspite of thesetum of events,the leaders of themain coalition have repeatedly reaffirmed their full and unequivocalcommitment to adherenceto democraticprocesses and means.They have reassuredtheir strong intention to holdthe elections next year for whichpreparations have commenced in earnest.They have reiteratedthat political, economic and socialstability will be pursued.Every politicalripple need not be seen as atitanic wave.

9. Therehave been some violent incidents in the lastfew months.One has drawna lot attention everywhere.But like just as in any gDodgovemrnents elsewhere, all sectionsof the Cambodian leadershipwere quick and unsparingin condemningthe incidentin strongterms. Furthemnore, in the interestof justice, and in anextraordinary step for a sovereigncountry, we also sought and secured the help of an outsidereputed investigating agency. Sketches of the likely culpritshave been widely publishedin orderto bringthem to justice.I believeit is importantto understandthat in a suddenly liberalizedsociety such as ours, whichalso has many disparateelements left over from earlier prolongedunrest some criminal elemnents can and do exploit such freedom in orderto destabilizelaw and orderor to discreditone leadershipor another.Regrettably, certain self-serving and politically motivatedsections use suchevents to malignthe countryand vilify the leadership.Unfair utterances and propaganda,intended to gainpolitical sympathy and advantage,rnostly outside, can onlyincite peopleand tarnishthe country'sreputation. All rightthinking people should condemn such ulterior actions.

10. Meanwhile,everyday life for theordinary citizen in Cambodiacontinues to be quitenormal and peacefulby anystandards. Day to daywork progresses without any hindrance. The state machinery is functioningnormally, although highly politically charged decisions sometimes do suffer from delays due to differenceswithin the coalition, which again is somethingnot out of theordinary, elsewhere.

11. A majordevelopment in the pastyear has beenthe largescale defections from the outlawed KhmerRouge bringing into the govemrnmentfold importantprovincial areas and theirpopulations and elirminating;in one stroke, the risk of insurgencieshitherto practiced by the defecting forces.

12. Ourprogress in the pastfew years and the overallstability in the countryhave also brought recognifionand acceptanceby our neighbors.As you knowwe will soonjoin the ASEANas a full- ledgedrnember with all the opportunitiesand challenged it entails. We are trulyexcited and prepared to availof theopportunities and meet the challenges.

13. I would like to thereforeurge you and the intemationalcommunity not to rush to harsh conclusionson Cambodiabased on motivatedpropaganda of individualsor on isolatedincidents. Judgeus notby a snap-shotlook at wherewe are andhow far westill haveto go,but ratherby the progresswe have madestarting from wherewe did onlyfour years ago, both in politicsand in

Ar Kat Chhon'sCntg RwnkasCcG MtV P**, 1-2A 1997Pigs 2 29 - Annex 4: Page 3 of 3 econorn*rnanagement and the promisesuch speed of progressholds for the future.Also compare wherewe arein relationto manyother countries similaly situated and those in ourregion.

14. In thisCG meetingwe will present to youour caseand needs in severalspheres. We ae here to reaflirn our grafitudeto you all andothers in the intemationalcommunity for yourvery generous adviceand assistancein the past few years,without which we couldnot haveprogressed. We do confnueto needgenerous extemal assistance as we move forward and become self-eliant

15. As wemove ahead to considervanous aspects of economicmanagement in moredepth, I ask thatall of us bearin rnindour history,and our step-by-solid step progress in spiteof serioushandic's andshortomings in manyways. I alsoask that our discussions be very open and flank in thetrue spirit of partnership.My colleaguesand I will do our bestto takecareful note of yourconcers, comments andadvice, and to clarifyyour queries.

Onceagain, I thankyou all for beinghere to supportCambodia.

Thankyou for yourattention.

I*.Kaa CMon' qw*nyRW*&CG Auig P, 142.6*lot:? p 3 30 Annex 5 Page 1 of 3


AgendaIbrm 1: Macro-EconowIcIssues

Statementof MR.KEAT CHHON Sr.Minister in-charge of Rehabilitationand Developmnent Ministerof Economyand Finance RoyalGovermment ofCarnbodia

Mr.Chairman, Excellencies, Ladiesand Gentiemen

1. In my openingremarks earlier, I stressedthe needtD keepall our discussionswithin the ( perspectveof ouroverall progress since the Royal Government tDok office neady four years ago. K is importantto doso, parffcularly in the context of our macro-economic performance.

2. Soonafter the RoyalGovernment took office in 1993,one of its first actionswas to reach agreementon the long-term vision of developmentforthe country's future. This vision was articulated in our NationalProgramme to Rehabilitateand DevelopCambodia (NPRD) prepared in 1994and updatedin 1995.These were presented tothe ICORC meetings in 1994and 1995.

3. Ourlong-term vision envisages that the private sector wiN be the main engine for oureconomic growthwith individuals creatively using their imagination, innovation, skills and opportunities to realize theirfull potential and contribute to steadyprogress. The roleof thegovernment is strictly as the 'strategistmanager and facilitator'. This role not passive but pro-actve for establishing, nurtuRng and managinga conducivecimate for privatesector growth through the use of the rule of law and appropriateinstitutional support I entailsthe provisionof infrastructureand promnotionof human developmentthrough social services, education, training and skills developrment The State will steer througha changingextemal environment and ensure that Cambodia's comparative advantages and naturalresources are exploited in a sustainablemanner. It wiN ensure the rule of law and wil beopen, transparent,accountable, predictable and increasingly efficient and effective in all itsactions. All of usin Cambodiaare comnittedto this visionand are determinedto ensurethat pervasivepoverty is eradicatedquickly and a steadyprosperity is ensuredfor all our people,with equality of accessto opportunibesand state services.

4. Withthis strong vision, determination, hard work and stict discipline,we have brought macro- economicstability to ourcountry for thefirst time in severaldecades, in spiteof all the historically- imposedhandicaps brought on us bylong years of tragedies and conflicts. The Wodd Bank notes in its paperthat Cambodia's achievements are 'remarkablewhen compared with the experiences of similar post-conflictcounties....¶. The large-scaleexternal funding in the pastfour yearshave helped us immensely.We are forever grateful.

5. Thelast four years have shown tremendous macro-economic progress. Real GDP growth, a mere1.2% in 1991has become a healthy6-7% in thepast few years. Per capita GDP, although still verylow, has zoomed from US$ 130 in 1991to $ 291in 1996,despite of a 21%increase in population dunngthat penod. Inflation is downfrom over 150% to sinoledigits. Our national curency is virtually

MrIr ChhMnw'Slwef Maaloms:h CGtrMA'2, PPus, 1-2 J* 1997Pap I

11 , . ._,F Annex 5 -31 - Page 2 of 3

stablevis-a-vis the USdollar under market conditions. Our official reserves are growing steadily, and todaystands at over 2 monthsof our needs.

6. Ourmonetary and financial sectors have witnessed many reforms. Our national bank has been divestedof itscommercial functions and is nowfunctoning rnore as a centralbank, for supervision and regulationof financialinstitutions, mosty banks that have grown in number.

7. Onthe budget side, we have revamped our philosophy and procedures. Today, the budget is a transparenttool to captureand monitor all ourpublic revenues and is usedfor resource alocation for all publicexpenditure. In orderto enhancetransparency and the checksand balances' in budget administration,we are soonsetting up a NationalAudifing Authority and a Tribunalfor Budgetary Discipline.We invite also our extemalpartners to undertake,from their side, audits of projectsand programmesforwhich they bring their financial support

8. Thedomestic public revenue base has been widened and deepened. With tigher controls and vigilance,our revenuecollections have increased both in norminalterms and as a percentageof a growingGDP. The increase is from4.3% in 1991to 9.1%in 1996.In nominalterms, it wasfrom 108 billionriels to 746billion riels, or a seven-foldincrease in just five years. Still, we are consciousthat eventhis is stbllvery low compared tomost other countries. Along with an increase in ourtax revenues, theshare of domestic taxes is goingup. Expenditure is under very tight control and no bank financing is resortedto.

9. To furtherboost revenue collection, we haveintroduced far-reaching measures and reforms throughour 1997 budget law. New measures such as the turnover tax, withholding tax and lowering of thelimit for personalincome tax, have been introduced and a limitedscale value added tax will come intoforce in 1998.Taxes, per se, or increases inthem are popular nowhere in the world; Nevertheless with gritand determination, our nationalassembly and the executive branch have resorted to these wide-rangingmeasures tostrengthen the country's economic base.

10. A predictablemacro-economic stability and growth, together with political stability, security and socialorder and rule of law are essental for investments in the private sector. That we have been able to attracta steadyflow of increasinginvestments into the country, which helps create employment and instillnew skills, is atestimony to oursuccess in attracting,promoftng and fostering private investment In 1996,total investments are estmated at over $500 million.

11. Thebackground document distributed to you for this meeting contains details of ourproposals for the future.Our challengesahead, in the macro-economicsphere, focus on increasedpublic resourcemobilizabton, more rational resource allocation, and on improvingthe climatefor private investmentAll thesematters are integratedin our PolicyFramework Paper (PFP). Let rme address themone by one.

12. As I statedearlier, our revenues have increased enormously in norminal termns in the past few years,an imbalance exists as a largeportion comes from trade related receipts. In theshort-term, as we becomea memberof ASEAN/AFTA,wehave to adjustand lower our tariff regirmen to correspond tothat of other countries. Our customs revenues wigl register a declinebut the shorifall may be made up by anincrease in volumes.Meanwhile, our domestic revenue base will broaden. Increased vigilance and enhancedcapacity of the tax administrationwill net in morerevenues. Likewise, we have implementedmeasures to bringin all publicrevenues into the budget Of particular importance are the stepsin placein theforestry sector where we are engagingintemab'onally reputed firms to lookinto

Allr.K.e C#m's SW~ U.mZm"k sas. CGUs.t, P, 1-2Ady 1997 Pop 2 1Vn., Annex 5 -32 - Page 3 of 3 variousaspects as recomrnendedby the joint World Bank, FAO, UNDP study. These steps will help drasticallyreduce illegal logging and export, and increase revenues from concessions.

13. Therehas beensome concern that, in the firstfive months of 1997for whichfigures are available,our domestic revenues, in pro-rataterms, have fallen short of budgetedproposals. We have realized37%h of the budgettarget, but this amountrepresents more than a 10%/increase of the correspondingfigures for 1996.Since our taxabion mneasures arejust now getfing into full effect - we haveissued clear and strict instrucions for fullimplernentation - we think that we should be able to makeup mostof theshortfalls in thecorning months. However, as a percentageof norminal GDP we maynot meet our targets for the year.

14. Inrespect of currentpublic expenditures, we spent in 1996,43% on wages alone even when theseare relatively low. A totalof 51%,including 28% on wages,goes to defenseand security. We haveonly minimal operating expenditures. Although we havesecured peace In mostparts of the previouslyrebel held areas through defectons from the KhmerRouge, the peace dividend will take sometime to becomea reality,as we have to adjustour armed forces and gradually reduce our military expenditures.Let us not forget that similar peace dividends including those anffcipated from the break upof thecold war are still to materialize, in other parts of the world.

15. Wehave not touched the essential social sectors like health and education in applyingausterity measures.Most of ourcapital expenditure is for essentalinfrastructure and construction. In addition, manycapital works are directly undertaken byour extemal partners.

16. Untilnow, our current revenues have not been fully adequate to rmeetour current expenditures and we have hadto dependon extemalfinancing to rneetthe gap.Although the 1997budget envisagesa small surplus, the situation may not continue in thefuture years unless we receive specific externalfunds to mneetadditional expenditure relatng to the conductof elections,rilitary demobilization,and civil service reforms. To meetsuch shortfalls in currentrevenues and to meet budgetfinanced capital works, we will therefore continue to needexternal support We are already in negotiationswith the World Bank in this regard.

17. Promotionofprivate sector investrnent and growth is onthe top of ouragenda. We have taken severalmeasures including the establishment ofa 'one-stopservice' at the CDC with proper monitoring andare offering attractive incentives. Together with the MFN and GSP status we haveobtained from manyof ourtrading partners, these measures have brought in considerableprivate investment inthe countrycreating jobs and instlling more skills. We have formulated a series of legislation to providethe necessarylegal predictability and stability for the private sector to operate in confidence and we hope to havethem adopted by the NationalAssembly very soon. In addition,we will also be joining WrO to giveus the scope and advantage to make use of ourcomparative strengths. We have commercialized and/orpnvatized most of our SOEs,For the future,we are alsousing BOT terms and IPPsfor infrastructurerelated work.

18. Ladiesand Gentlemen, I will conclude here by stressingthat we have the collective political will anddetermination to continue our macro-economic stability although some tenporary ups and downs areunavoidable, We will also continue to need generous external support to keep us on this course.

Thankyou for your kind attention.

Ar KMtChn's StMmentMWmEWct Issun CGhf"f, Pam,1.2 MJY 1997 POP 3

- , , . r Annex 6 - 33 - Page 1 of 5

INTERNATIONAL MONETARY FUND CAMBODIA ConsultativeGroup Meeting, Paris, July 1-2, 1997 Statementby Hubert Neiss, IMFRepresentative

Mr. Chairman, Excellencies, DistinguishedDelegates:

Over the past four years, the goverment of Cambodiahas made remarkable progress in economic and social recovery under its medium-termreform program. Most significantly, the macroeconomicsituation has been kept stable, thanks to responsible budgetary and monetary policy efforts -- Minister Keat Chhon deserves special commendation- as well as large-scale financial support from the internationalcommunity. Growth has been robust, inflation has fallen into single digits, and the external position has improved significantly. Progress has also been made in advancingthe wide-ranging agenda of structural reform, though with delays and some backtracking,particularly in civil service and tax reform. But we should not ask for ideal economicperformance, especially not in a country in as difficult a situationas Cambodia.

As true friends of Cambodia, we should, however, insist that Cambodia's well known problems of governancenot be allowed progressivelyto mount to an extent that seriously threatens the economicfuture of the country. This, unfortunately, is now a reality in Cambodia. The rapid depletion of the natural resource base and the massive diversion of revenues from the national budget are clear writings on the wall.

....' Annex 6 - 34 - Page 2 of 5

Uncontrolled and illegal logging activities in recent years have resulted in rapid depletion of the country's valuable forestry resources with little benefit to the government budget. While there are of course no precise data, our rough estimates suggest that losses to the budget arising from illegal activities in forestry were well over $ 100 million in 1996, more than one third of total budgetary revenue collectedin that year.

Forestry is not the only area of illegal activity. Corruption is spread over a wide area, which includes: (1) concessions, such as monopoly rights and land leases, given to foreign investors without payments to the budget; (2) tax and tariff exemptionsgranted to domestic and foreign companies, including those that arise from improper exemptions granted under the overly generous InvestmentLaw ; (3) noncollectionof taxes by tax officials ; and (4) nonpaymentof taxes on conmercial activitiesby the military, including leases of goverment land. This list is, by no means, exhausting. The amount of resources diverted from the budget by these activities could be even larger than the losses from the activities in forestry.

Estimnatesof the total impact of corrupt activitiesare, by necessity, difficult and to some extent conjectural, and we wanted to be deliberately conservativeso as not to exaggerate things. Our results are, nevertherless, alarming. Overall, the diversion of public resources has probably reached the sarne amount as actual budget revenue collections, or nearly 10 percent of GDP. Obviously, this trend has to be reversed to save the country's economy from serious damage. Such damage simply cannot be ignored by IFIs and donors who must take a longer-term view on economic viability. The IMF has clearly distanced itself from these practices in several messagesfrom the ManagingDirector of the two Primne Ministers, and our programs have consistentlybuilt in safeguards.

T. . Annex 6 -35- Page 3 of 5

At various stages Cambodia's ESAF program has been delayed and disbursement disrupted because of the non-observanceof these safeguards. In particular, the mid-term review under the second annual ESAF arrangement could not be completed as schedule in December 1996, and the associateddisbursement of some $ 20 million lapsed. The program for 1997, to be supportedby the third-year ESAF, is still on hold since agreed prior actions to safeguard against illegal activity in forestry have so far not been implemented,and there is evidence of backsliding in other areas, notably tax administration.

In the meantime, we are discussingremedial actions with the authorities. First and foremost, these actions include measures to improve forestry management. Despite the re- impositionof the ban on log exports late last year, the depletion of the country's most valuable natural resource continues at a rapid pace, with the direct involvementof the highest levels of goverment. This remains the single most critical issue in Cambodia. Credible government steps to implementits longstandingcommitments to stop illegal logging and log exports, establishan effective minotoring and control system, and to bring the full benefits from the exploitationof forestry resources into the budget remain a precondition for a resumptionof IMF financial support. We should not overlook the efforts that have already been made and as a result, a structure for managing forestry is gradually being put in place. However the challenge is to make this administrativestructure effective, by keeping it free from improper and counter productiveinterference. The emphasis in IMF management's in the messages to the two Prime Ministers has been exactly on this point.

The IMF has endorsed governmentpolicies to ensure effective implementationof the export ban, includingdestruction of all equipmentand materials used in illegal logging activities and seizure of illegal logs, but these procedures have been only sporadically

11*' ' K Annex 6 -36 - Page 4 of 5

enforced. Further, the governmenthas not yet been able to follow through with its plan to secure the services of an internationalfirm to assist its efforts to put in place an effective monitoring and control system for logging activities. To ensure the timely transfer to the budget of all proceeds from forestry, we have advised that the Ministry of Economy and Finance be given full responsibilityfor the financial managementof forestry contracts, but this has so far not been done and forestry continues to provide little revenue to the budget.

Second, and equally important, are measures to contain corruption in non-forestry areas where, as mentionedearlier, serious governanceissues have arisen. Following through with policy commitrnentsby the govermentin these areas is also a precondition of further IMF financial support. While we must understandthat Cambodia's weak institutional capacity limits the government's effectivenessin public resource management,the main problem has, again, been improper interference. A significant strengtheningof policies to combat corruption is, therefore, feasible, provided there is cooperationand strong political support for such policies by both Prime Ministers. In this respect, our proposal to give the Ministry of Economy and Finance full financialcontrol over all contracts involvingstate assets is of critical importance.

In addition to strengtheninggovernance, fiscal measures are urgently needed to put the budget on a sound footing over the medium term. The much needed increases in social spending can only be financedthrough a significant further improvementin revenue mobilization (the revenue ratio of 9 percent of GDP is still among the lowest in the world).The 1997 budget is to achieve a major revenue collectioneffort through enactment of new tax reform legislationand a strengtheningof tax administration,combined with the implementationof measures to bring extrabudgetaryrevenue into the budgetary process. Full implementationof the correspondingprovisions of the Law on Taxation and approval

11, . [.~ Annex 6 -37 - Page 5 of 5

of strict implementigregulations for the law on Investmentwould be an esseil patt of a new Fund program.The revenueeffort willhave to be combinedwith measures to restrain expenditures,in particularon the militaryand the civilianwage bill, andto reorient expenditurestoward education and health,and basic infrastructure.Civil service reform, whichhas suffereda setbackstemming from large-scale new hiring for politicalpurposes, will have to be revitalized.

I have spokencandidly this morning,because there is so muchat stake. The internationalcommunity has so far spentwell over $ 3 billionto supportCambodia's emergenceas an economicallyviable and democraticstate. It is essentialthat the governmentcomplement the effortsof donorswith determined and sustainedactions to containthe massivediversion of publicresources in forestryand other areas, whicherode the productivebase of the countryand jeopardize its economicfuture. As I have already pointedout, as longas there are no clearindications that determinedefforts are being made by the governmentto reversethe seriousdeterioration in governance,the RMFwill not resumeits financialsupport.

NVhilethere are crucialpolitical problems to be addressedin the immediatefuture, there is also a vitaleconomic objective, which, I am sure, everybodypresent here shares: that Cambodiasteers through the pre-electionperiod without a breakdownof macroeconomicstability, and withouta fiutherserious erosion of its economicresource base. The IMF is ready to do its utmostto supportthe government'sefforts toward achievingthis objective.For this purpose,we are maintainingour dialoguewith the authorities,at all levels.It is my sincerehope that wayswill be foundin the comingmonths that will makeit possibleto continuethe IMPprogram with Cambodiaand to work together withthe govermentfor lastingprogress.

n r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Annex 7 -38 - Page 1 of 3 CAMBODIA CONSULTATIVE GROUP MEETING Paris, July 1-2, 1997

Statement on Recent Economic Developments Kyle Peters, The World Bank

Mr. Chairman,His Excellencies,Distinguished Delegates;

Looking at broad economicindicators, Cambodia's economy has performed strongly. GDP has grown at over 6% per year since 1992. Trade and foreign investmenthave surged, illustratingthat measuresto open the economy and to encourageprivate activity have had a very positiveeffect. Inflationhas been sharply reduced. Despite turbulence in political and security matters,years of neglect and the loss of entrepreneurialskills and manpower,Cambodia's post civil war recovery has been remarkable.

Macroeconomicperforrnance was very favorableagain in 1996. Economic growth reached 6.5%. Inflationwas containedat single digits. The exchangerate remained stable. And, cautious fiscal managementcontinued to anchor macroeconomicstability.

Cambodia's recent economicachievements are indeedsignificant. But, there are concems that the current pace of economicgrowth will be difficult to sustainover the medium term, as it has been very narrowlybased. These concems arise from several aspects of the recent pattern of economicgrowth. First, constructionand services in the major urban areas have providedthe primary impetusto growth. Second, growth has also been supportedby the unsustainableexploitation of Cambodia's natural resources,particularly its forests. Third, in the five years since 1991,agriculture has grown by less than three percent per year, virtually the same as the population growth rate, which does not bode well for the bulk of the population and the poor who live in rural areas. Fourth, foreign investment,while expanding rapidly from a small base, has been limitedand selective. And fifth, much of Cambodia's recent growth has been spurredby the initial liberalizationof markets and foreign trade.

Similarly,there are concernsregarding macroeconomic stabilization. It has been sustained throughmethods that are likely to harm long-termgrowth. An inadequate revenue effort, resultingfrom too generoustax exemptionsand lax tax administration,has necessitateda severe compressionof current expenditures. This compressionhas fallen disproportionatelyon the social sectors and economic infrastructure,because of high defense and security outlays, which have consistently exceeded budget targets. -39 - Annex 7 Page 2 of 3 Recent economic developments,therefore, show the fragilityof Cambodia's economic achievementsand demonstratethe importanceof implementingvigorously and without further delay the Government'sreform program,as outlinedin the recently completed Policy FrameworkPaper for 1997-99. I will add what others have identified as an underlying foundationfor sustainedeconomic growth: the importance of transparencyand accountabilityin economicmanagement and good governance.

Mr. Chairman, let me focus on what most observersof Cambodia's economy tend to select as the four basic reforrnchallenges. Thefirst is enhancingpublic resource mobilization. This is essentialto fund priority developmentexpenditures and to signal to the donor comrnunitythat its efforts to assist Cambodiaare being met by an equal effort on the part of the Canbodian Govenmment. Despite significantimprovement from a very low base, Cambodia'sbudget revenuesare very low by intemationalstandards. The current tax effort is roughly half of the average for low-incomecountries. The revenue shortfall in 1997 is especially disturbing. Two steps must be taken with urgencyor the Government's stabilization effort could easily and quickly unravel. First, the Law on Taxationmust be vigorouslyenforced. Second,the generoustax and duty exemptionsgranted under the Law on Investment,as well as other ad hoc exemptions,must be eliminated. Such ad hoc exemptionsnot only erode the tax base, but also raise concems about transparencyand accountabilityin economicmanagement. To provide the legal basis to remove these exemptions,the long-delayedimplementing regulations for the Law on Investment must be approved soon.

The second challengeis improvingthe efficiencyofpublic expenditure.The Govemment's success in macroeconomicstabilization, in the face of revenue shortfalls,has been largelyachieved through compressingnon-defense, non-wage expenditures. Already in 1997, spendingin non-defensecurrent expenditureis half the target. Thus, while continuingfiscal discipline,the compositionof spending needs to be changed to support developmentpriorities, shifting away from defense towards the social sectors and economicinfrastructure, and away from salaries towards materials and supplies. In addition,public investmentmust shift sharply and quickly toward rural developmentand the reductionof poverty, a foundationof East Asia's growth miracle.

The third challenge is strengtheningthe institutionalcapacity to implement economic reforms and developmentprograms. There are three aspectsto strengtheningCambodia's institutionsand capacity for managingits own developmentprograms:

* First, the civil service reform effort must be invigoratedand strict controlsplaced on the growth of the civil service. The Bank's just releasedWorld Development Report notes that a well-functioningand efficientgovernnent is essential to sustained economicdevelopment.

1-T - - -- 40 Annex 7 Page 3 of 3 * Second,since the high levels of defense expendituresare crowdingout essential govermnentexpenditures in the productiveand social sectors,the Govemment needs to implementits comprehensivemilitary downsizing and rehabilitation program.

* Finally, the enabling environmentfor the private sector needsto be improved. Many critical business, economic,and financial laws are still absent, and those that have been recently enacted have yet to be adequatelyenforced.

Thefourth challenge is ensuring the sustainabiliy of development. The key aspect of this is the sustainableexploitation of Cambodia'sforestry resources, as forests are Cambodia'smost significantnatural resource. The current mismanagementof forestry resources is causing grave concerns. Cambodia'sforests can no longer be allowed to be exploited unsustainablyat below-marketprices. Even with the finalizationof the technical assistance studies, there remains a substantialagenda. The three key elements are curbing illegal logging, obtainingadequate rent capture and channeling these resources transparentlyinto the budget, and ensuringthat concession managementyields sustainableharvesting practices.

Mr. Chairman,in conclusion,Cambodia has made remarkableachievements in restoring economicgrowth and stabilizingthe economy. However,continued growth at these levels is not automaticor ordained. A modem, competitiveeconomy will require a new round of reforms to enableCambodia to grow, and to lift its people out of poverty.

Thank you.

1~~~~~~~~~~~~~'~~~~~~~~~~~~ - r [~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Annex 8 -41 - Page 1 of 6 Statement by His Excellency, Mr. Shohei NAITO Ambassador of Japan to Cambodia, given at the Consultative Group Meeting Paris, I July 1997

Mr. Chairman, Your Excellency Mr. Keat Chhon, Minister of Economics and Finance, Distinguished Delegates,

It is indeed a great pleasure to see you, Mr. Shirazi, as the chairman of the Second Consultative Group for Cambodia. I have fond memories of working with you last year in Tokyo. Your summation at the concluding session of the Tokyo Consultative Group has become an important historical guideline for dealing with economic cooperation with Cambodia.

On behalf of the Delegation of Japan, I would like to reiterate our readiness to cooperate throughout this Consultative Group session so as to contribute to the success of this meeting. I would also like to express my delegation's appreciation to His Excellency, Minister Keat Chhon, for his statement on the macro-economic management of the Royal Government of Cambodia. We highly commend his Excellency for his dedication to the macro-economic stability of his country.

The Cambodian economy is still in a period of rehabilitation. Support from the international community is indispensable in order to compensate for the weakness during this period of convalescence. It is also a time of transition, with the conversion of the system of economic management from one based on a centrally planned economy to one founded on market principles.

The policy paper presented to us at this second Consultative Group of Cambodia has as its sub-title "Progress in Recovery and Reform". Recovery refers to the physical rebuilding of Cambodia's national

L1 ' Annex 8 - 42 - Page 2 of 6 economywhich was derailedduring the civil war. Reform refers to the change in the method of dealingwith economicmanagement. Neither of these two challengeswill be easy for the people of Cambodia. Nor wil these be simpletasks for the Royal Governmentof Cambodia,which is expectedto play a leadingrole in mobilisingthe capacityof the people.

In order to encouragerecovery, the governmentmust reconstruct an infrastructureto encourageprivate investment. Creationof this investmentenvironment is relativelysimple as it consistsof physicaland visiblebenchmarks. Reform, on the other hand, not only calls for the modernisationof governmentinstitutions, but also entails a much more radical shift in approach. We can witnessthis phenomenonin many countriesundergoing transition. One of the most salientexamples of this transformationis seen in the realm of taxation.

Governmentbudgets cannot exist withoutpublic revenue, and in socialisteconomies, the major sourcesof revenuecome from custom tariffs and profits from nationalcompanies. There is no uniformsystem for the collectionof taxes from domesticactivities or other public revenue for the nationaltreasury. This impliesthat a changein the systemcannot be done simply by transformingthe institutions. It also requiresthe transformationof the mind-setof the people.

This difficultprocess cannot be accomplishedby applyingtextbook prescriptions. Wisdomcomes from learningthrough the day-to-day implementationof public financing. Strongpolitical will by the leaders is imperativethroughout this process. This politicaldetermination should be based upon a clear vision by the leadersof the nation's future, and must be backed by solid and true statesmanship.This politicalwill needsto be clearly conveyedto all governmentofficials so that they might work together towardscommon goals. The currentsituation in Cambodia seems to require much reflectionand deliberationon the part of those leaders who shoulderthis great responsibility.

1V.... . K Annex 8 -43_ Page 3 of 6 Lookingback over recent years, a remarkableimprovement in the macro-economyof Cambodiaoccurred up to the end of 1996. However, a slow growth in public revenuefor the first half of 1997 gives us a preliminaryalert. In an environmentof politicaltension and violence, messagesfrom the leadersare apt to becomeblurred. Cambodiacannot afford to take time-offfrom its importanttask of reconstruction.

This matter is also the sourceof concernfor the international communitywhich shoulders40% of Cambodia'spublic expenditure. We donors are fully aware of the difficultiesthat Cambodiafaces and it is for this reasonthat we have been extendingsuch generoussupport. Where obstaclesare high, a solid determinationto overcomethem is required. It is the government'srole to inspire the nation to move forwardand to instill in the people a strong determinationto meet the challengebefore them.

The uniquenessof a two-headgovernment creates its own particulardifficulties. But past achievementsshow that these obstacles can be overcome. Yesterday,at the informalmeeting, Minister of Foreign Affairs, Mr. Ung Huot, demonstratedthe firm resolutionof the Royal Governmentof Cambodia. We hope that this is a fresh commitmentto redress the situationand that by the end of the year we may witness an upward trend.

I have dwelt some time on the basicsof economicmanagement becausemy remarksunder AgendaItem I are based on these considerations.

Mr. Chairman, let me now touchupon the revenueside of the public financing.

The first preoccupationin Cambodiais politicalstability. Now that the date for the generalelection is fixed, the governmentcan focus on the administrationof a free and fair election. During the period preceding the election, it is the responsibilityof the governmentto securesound Annex 8 - 44 - Page 4 of 6 economicmanagement. This is the anchor for politicalstability. To this end, the Royal Governmentof Cambodiamust expandpublic revenueby consolidatingits resourcesand channellingthem in an effectiveand transparentmanner.

First and foremostis the expansionof the tax base. The Royal Governmentof Cambodiainitiated a programmeof tax reform this February with the introductionof a modem tax systemand a strengthened tax collectingcapacity. Despite these measures,the actual growth of revenue derived from taxes from Januaryto May of this year was inferior to GDP growth. The budget-revenue-to-GDPratio decreasedcompared to that of the same period of last year. This is a matter of much concern as it could indicatethe malfunctioningof the tax collectionsystem. We urge the Royal Governmentof Cambodiato demonstratea strong political commitmentto redress the tax collectionsystem.

With regard to the controlof public resources,it is often pointed out that transparencymust be improved,particularly in relationto the logging issue. The forests of Cambodiaare among the most valuable natural resourcesof the country and a primaryelement for sustainable economicdevelopment. The governmentadopted a vigorousforest control policy at the beginningof this year. We expectthat these measureswill be implementedso that the control mechanismsof public resourceswill becomemore transparent. There has been a recent proposalby the Minister of Economyand Financeto reevaluatethe royalties from this sector. This initiativedeserve encouragement,since it is clearly time for the so-called"hidden costs" to be given their due weight. Improvedtransparency will increasethe chancesfor fair competitionand lead to better market-basedprocedures.

Public expenditureis expectedto increasedue to Cambodia's recent accessionto ASEANand the 1998 elections. In order to cope with these requirementsand to enhancethe level of self-sufficiencyin public financing,the politicaldetermination at the highestgovernment level is needed to expandpublic revenue.

I, ' [ Annex 8 -45 - Page 5 of 6 With regard to private investment,the InvestmentLaw established in 1994 sets out a series of incentivesfor foreign investment. But these incentivesmust not deviatefrom the principleof fair taxation. In this respect, long-awaitedimplementing regulations for the applicationof the InvestmentLaw need to be adoptedand strictly enforced.

Many things need to be done to improvethe investment enviromment:the constructionof economicand social infrastructure,the assuranceof securityand politicalstability, transparency in the governmentdecision-making process, and improvedadministrative efficiency. In the financialsector, continuedefforts shouldbe encouraged to put private financialinstitutions under the effectivecontrol of the NationalBank of Cambodiathrough the enforcementof the Central Bank Law. The Governmentalso needsto completethe establishmentof the two-tierbanking system.

Mr. Chairman, I wouldbe remiss if I concludedmy statement without mentioningthe expenditureside of the budget. But since I have alreadybeen speakingfor some time now, I would like to say only a few words. The Delegationof Japan wishesto pay tribute to the leadershipof Minister Keat Chhonand to his effortsto ensuretight fiscal expenditure. It is true that the requirementsare multitude:poverty alleviation, administrativereform, military demobilisation,etc. Nevertheless,the motto of the Minister of Finance, "Live within thy means" must be upheld. This will be all the more importantin view of the upcoming elections. We must entrust Minister Keat Chhonwith the job of being the guardianangel of fiscal discipline.

Mr. Chairman, I have focusedmy remarkson a few fundamental issues concerningthe rehabilitationof Cambodia. We shouldnot be discouragedby what may appear to be overwhelmingtasks. Cambodiais full of potential. The country is rich in natural resourcesand is now a memberof ASEAN, which consistsof some of the world's most dynamic economies. If the people of Cambodiaare wise enoughto make use of

11'T '- Annex 8 -46 - Page 6 of 6 these gifts, the future will be extremelypromising. To that end, the Royal Governmentof Cambodiahas an importantresponsibility in orchestratingthe determinationand capacityof the people of Cambodia. The Govermmentof Japan will stand besideCambodia in supportingits efforts toward good governance.

Thank you.



Mr Chairman

On behalf of the Government of Australia, I would like to thank the

World Bank and the Government of France for convening this

Consultative Group Meeting on Cambodia.

The fact that we have now moved towards a regular CG process for

Cambodia is an indication of the commitmentof all parties to the

establishment of a rigorous, outcome focused economic development

forum. We are looking forward to participating fully in what promises to

be informative and constructive discussions.

The plight of the Cambodian people during the Khmer Rouge years

moved the Australianpeople deeply. Australia has played a vital role in

the Cambodian Peace Accords and in the United Nations force, UNTAC,

s:\camlaos\cam\cgmeet\sp-overv.doc 26/6/976:14 PM xT''''. Annex 9 -48 - Page 2 of 7 which gave Cambodia the chance to make a new start after more than 20

years of conflict.

Next month, along with Laos and Burma, Cambodiawill join ASEAN.

Membership of the expanded ASEAN is Cambodia's best opportunity for the economic take-off that so many of its neighbours have enjoyed in the

past two decades. As a good friend and neighbour of Cambodia, we are

anxious to see Cambodia make the most of this chance.

Cambodia has the natural resources and the strategic location to be a

prosperous and forward-lookingcommunity. What is lacking is a stable

political framework, administrativecapability, modem infrastructureand

skilled human resources to attract private investmentto achieve its

demanding development goals. Cambodia will clearly require help from the intemational community,including Australia, to create an enabling

environment for Cambodiato succeed in attracting its share of the highly

competitive Asian market.

Mr Chairman, Australia has been strongly committed to assisting

Cambodia to emerge from this testing time in a strong position to play its

important role in the further developmentof the Mekong Basin.

s:\canilaos\cam\cgmeet\sp-overv.doc 26/6/97 6:14 PM

K 1 Annex 9 -49 Page 3 of 7

The Australian Government acknowledgesthe progress made to date in stabilising the economy, in restoring economicgrowth, and also in undertaking policy reforms to transform the economy into a market- oriented one.

New financial policies have played a role in the elimination of deficit financing and fiscal discipline has been maintained. The 1997 budget and the Financial Law, including tax reform measures passed on 9

January, are important steps in extending the Government's domestic revenue base and ensuring that all possible sources of revenue are appropriatelytapped.

But fiscal revenues are still very low at only 7% of GDP and planned program expenditures in important developmentareas are not being met.

For example, expenditures on health and education are running at only

32% of budget. Considerableeffort will be required to raise fiscal revenues to the Govermment'starget of 14% by the year 2000.

s:\camlaos\cam\cgmeet\sp-overv.doc 26/6/976:14 PM Annex 9 50- Page 4 of 7 The forestry sector deserves specific mention as a source of domestic

revenue. Forests are one of Cambodia's most valuable resource. The

Government's managementof forests is therefore a critical factor not

only in determiningthe sustainabilityof Cambodia's economic

development,but also in intemationalperceptions of the effectiveness of

the Government. Actions taken by the Government of Cambodia during

1996 with regard to the granting of export tax exemptions and forest

concessionshave raised concems about the Government's commitment

to transparent managementand sustainable exploitationof forestry

resources. We therefore urge the Government to accord due priority to

reinforcing its efforts to regain control over logging activities. It is

important that the efforts of the Finance Ministry to implement licensing

agreementsbe expedited and fully supported at the highest level of


We are also concernedto clarify the Cambodian Government's continued

commitment to fostering a climate that will see further foreign private

investmentplaying a greater role.

s:\camilaos\cam\cgmeet\sp-overv.doc 26/6/97 6:14 PM

L- r~~~ Annex 9 -51 - Page 5 of 7 In this context,downsizing the public serviceremains an important

objective as it impacts on the capacityof the Governmentof Cambodia

to address broader issuesrelating to upgradingthe performanceof

govemrnmentagencies including raising salaries of public servants, and

addressing bureaucraticinefficiencies.

Cambodia's economicprospects are also closely linked to political

stability. The willingnessof aid donorsand foreign investorsto work in

Cambodiawill weaken unlessthe coalitionpartners are able to resolve

tension between them, ensure stability,and maintainan apoliticalpublic

sector during the period leadingup to the national elections. Clearly,the

reopening of the National Assembly,the passageof laws for the holding

of national elections,and the conductof a free election,open to all

parties, with full acceptanceof the results by all will be importantin

maintaininginvestor confidencein Cambodia.

A stable political frameworkand commitmentto good governanceare

important in terns of the intemational donor community'sperception of

the value of ongoing developmentassistance to Cambodia. In this

context, we welcomethe 24 June announcementof electionsnext May.

s:\camlaos\cam\cgmeet\sp-averv.doc 2616/976:14 PM

U., V...... -I -52 - Annex 9 Page 6 of 7 We also look forward to an early re-opening of the National Assembly to

pass vital election legislation.

We believe that specific action to alleviate poverty must remain a high

priority. In this context, Australia supports the emphasis in the PIP on

human resource development, especially improving health and education

services and rural development. Australia has a particular commitment

to these sectors and we are expanding our programs of support.

We would also like to see the Cambodian Government increase the share

of its budget that goes to health and education. In this regard, we

strongly support Cambodia's plans to reduce defence and security

spending from the curent 5 percent of GDP in 1996 to 3.5 percent of

GDP in 1999 so as to allow for a substantial increase in outlays in

priority social areas.

The planned review of public expenditure to be conducted in 1997 is

welcomed by Australia as an important planning mechanism for ensuring

that capital spending is directed to human resource and rural sectors

where the economic rates of return of projects are generally too low, and

s:camlaos\cam\cgmeet\sp-overv.doc 26/6/976:14 PM

X., . Annex 9 -53 - Page?7 of 7 the risks too high, to attract commercialinvestment. We are confident

that the review process will assist the Governmentof Cambodiato take

responsibilityfor priority setting and ensuringthat donor programs in

large infrastructureactivities are not monopolisingfunds at the expense

of rural developmentactivities.

In conclusion,Mr Chairman,let me reiteratethat Australiais lookingto

the Cambodian Governmentto continue its efforts in relation to good

governance,revenue collection, election preparations, fimctioning of the

National Assemblyand maintainingthe Cambodianpeople's sense of

security and confidencein their govemmentso that an economically

strong and well-governedCambodia can be built, and so that the

assistance providedby Australia and other donors can be effective.

Thank you.

s:\camlaos\cam\cgmect\sp-overv.doc 26/6/97 6:14 PM

11 .,F .... Annex 10 - 54 - Page i of 3

U.S. Statement Cambodia Consultative Group Meeting Paris, July 1-2, 1997

On behalf of the U.S. Government, I would like to thank the World Bank and the Government of France for hosting the second Consultative Group meeting on Cambodia. It is a pleasure to meet with our Cambodian and intemational friends and colleagues in this most beautiful city.

For the past 17 years, in concert with other members of the intemational donor community, the United States has strived to help Cambodia regain its former tranquility and resume the process of economic development. The United States was greatly encouraged by the progress made in the immediate aftermath of the UN-supervised elections. Since then the United States has joined Cambodia's many friends to provide substantial amounts of assistance and to include Cambodia in important bilateral programs.

We acknowledge that progress has been made since the last CG meeting held in Tokyo about a year ago. The economy has continued its robust growth as a result of sound economic policies and a commitment to free market economics. This progress enabled the U.S. to extend Most Favored Nation (MFN) status and make Cambodia eligible for our system of generalized trade preferences (GSP). Similarly, recent economic progress has put Cambodia into a position to join ASEAN later this year. We hope that participation in international agreements such as these will have a positive long term impact on current political trends in Cambodia.

Improvements have been made in other areas as well. In basic health, the Government has taken important steps to address the growing need for essential primary health services and a strengthened role for the private sector. We are committed to working with our partners in the Ministry of Health and the Cambodian private sector to build on this progress and help decrease current rates of infant, child, and maternal mortality significantly by the year 2000. We are also encouraged by recent steps the Government has taken to address the HIV/AIDS epidemic, including establishment of a national AIDS program in the Ministry of Health and the promulgation of national policies for HIV testing and counselling.

11' - -I Annex 1 0 -55 - Page 2 of 3

In natural resources, we are encouragedthat the voice of the newly-established Ministry of Environmentis increasinglyheard in current debates over natural resources, balancing current uses against the need to conserve and plan for future generations. In this connection we applaud recent progress in halting the illegal cutting and export of logs, though much remains to be done.

In education, we strongly support Governmentefforts to upgrade the quality of primary school teaching and establish mechanismsto increase participationby local communities. We view our contributionsin the sector as second in importance only to democracy and governancein terms of investmentin Cambodia's long-term future.

In civil society, democracy and human rights organizationshave brought increased popular participation and heightened attention to human rights. Active participationby these groups in the 1998 communal and parliamentaryelections will be critical to a smooth process and national acceptanceof the election results.

Notwithstandingthis progress, serious issues remain in a number of sectors. For example, we note that the Government has not followed through on its pledge at last year's CG meeting to increase the amount of resources going to the education and health sectors. Without a sustainedand increased flow of public resources to these two critically important sectors, we are not optimisticthat the ambitious targets we have set with the Government for Cambodia for raising the country's human developmentindicators can be realized.

Illegal logging persists, with negative consequencesboth for the environment and for government accountabilityand transparency. Not only are natural resources being used in an unsustainablemanner, very little if any of the public revenues from this industry are being used for urgent social needs such as basic health and primary education. For the near term we urge the Governmentto end unsustainablelogging and increase the transparencywith which it accounts for the revenues generated. For the longer term, we urge the Government to improve its monitoring of the natural resource base and expand the coverage of protected forests.

The HIV/AIDS epidemic continues to threaten dire economicand social consequences if prevention and awareness activitiesare not reinforced and accelerated. We encourage Cambodia's leaders from all sectors to help in the fight to combat the spread of this deadly disease. Annex 10 - 56 - Page 3 of 3

The United States and other intemationaldonors have invested large sums in portions of Cambodia's road network, only to see these roads deteriorate from lack of maintenance. In some cases donors are rehabilitatingsections of road for the second or third time. The return on investment for road maintenanceis three to four dollars saved for every dollar spent, highlightingthe need for greater Government attention and investment.

Most importantly,the lack of recent progress on elections preparations, combinedwith violence, threats, and continuedhuman rights abuses, threaten to reverse the hard work and success that has been achieved. It is heartbreaking that, as hopes rise that the decades-longbattle with the Khmer Rouge appears finally to be ending, talk of civil war and violence again clouds the thoughts of all Cambodians. We are encouragedby the Ministryof Interior's efforts to date developing an elections framework, and we are prepared to help finance a reasonably priced and transparentprocess that leads to free, fair, and peaceful elections. We cannot move forward with effective assistanceprograms, however--eitherfor elections or in other areas--in the face of political polarization,fears of a return to violence, and the reduction in government effectivenessthat results. We call upon the political leaders in the country to set aside partisan politics and reaffirm their commitmentto the principlesof the Paris Agreemnentinc!uding peace, democracy, and the rule of law for the benefit of all Cambodians.

Thank you.

m1'I- - r' '-' Annex 11 -57 - Page 1 of 2


Mr. Chairman,Excellencies, Distinguished Delegates.

1. On behalf of the Asian DevelopmentBank, we would like to thank the Govemmentof France, the World Bank, and the Royal Govemmentof Cambodiafor organizing this ConsultativeGroup Meeting.We also wish to congratulatethe Royal Governmentof Cambodiaand the WorldBank for the reportswhich they haveprepared.

2. Cambodia's macroeconomic Performance during 1996 has been creditable. GDP grew by 6.5 percentdespite damage to crop productioncaused by large scalefloods, thereby maintaininga trend growthrate of over 6 percentfor the 1990s.Prices have been relativelystable with consumerprice inflation contained at 9 percenton final quarterbasis. This is a vastimprovement compared to annualprice increases of well over 100percent in the early 1990s.The exchangerate has also remainedstable while official foreign exchange reserves are now equivalentto abouttwo monthsof imports.However, despite these positive indicators of macroeconomicperformance, there are several concemswhich need to be urgently addressed.

3. In the fiscal area,total revenuesare still below10 percentof GDP.At the same time, there are continuingpressures for excessiveexpenditures on defence,security and civil service. This has constrainedthe ability of the Govemmentto undertake spending on necessarypublic investmentsor the provisionof public goods and servicesexcept where extemalassistance is forthcoming.

4. Onthe revenueside, the Ministryof Economyand Financehas madestrenuous effortsto improvetax revenues.To this end, a comprehensivetax reformpackage has been adoptedwith the enactmentof the TaxationLaw in Februaryearlier this year.The Ministryhas also tried to ensure that all nontax revenues,particularly receipts from forestry and other natural resources,are broughtwithin the purviewof the budget.A systemis also being developedfor inter-departmentalexchange of taxpayerinformation. Despite these efforts,off budget revenuecollection by variousgovemment agencies has persisted.Particularly, it is unfortunatethat receiptsfrom the forestrysector are still not accruingentirely to the budget. There is also continuingrevenue loss becauseof exemptions.As a consequence,there are largeshortfalls in revenuecompared to budgettargets.

5. The Ministryof Economyand Financehas also attemptedto exercisegreater controlover the managementof publicresources, including all existingcommercial contracts, and public spendingwith the help of financialcontrollers who have now been assignedto various line ministries.The processof PublicInvestment Programming has also now been integratedwith the budget process.These measuresand close monitoringhave helpedto controlthe growthof publicexpenditure. The fiscal deficithas accordinglybeen containedat about 6.5 percentof GDP. However,the pattemof expenditureremains skewed in favor of defenceand securityspending. The 1997budget is to be commendedfor attemptingto reduce the share of defence and securityspending so that more resourcesare madeavailable for

-I I'-I 58- - Annex 1 1 Page 2 of 2

social spendingand publicinvestments. However, the resultsof such effortswill be limited without comprehensivecivil serviceand militaryreform, including enforcement of a cap on publicservice recruitment for politicalreasons.

6. In the area of monetarypolic , the main challenge is the high level of dollarizationin the economy.Financial intermediation based on the Riel is still very limited.The high level of dollarzationimplies a free foreignexchange market and this probablyaccounts for the stabilityof the Riel.At the sametime, however, dollarization has impairedthe abilityof the CentralBank to deployindirect instruments in the conductof monetarypolicy. Reducing dollarizationwill requirea determinedeffort to reformthe financialsector, starting with reliable on-sitebanking supervision, and promotionof publicconfidence in financialinstitutions. The Bank is exploringpossible areas of assistanceto Cambodiain reformingthe financialsector.

7. In the extemalsector, the stabilityof the exchangerate, a reserveposition adequateto covertwo monthsof importsand a debtservice ratio of only5.3 percentindicate a promisingbalance of paymentsoutlook. However, it is importantto note that underlyingthis stabilityis a very largeinflow of extemalassistance, both grants as well as concessionalloans. This financesa huge currentaccount deficit of about15.6 percent of GDP,which reflectsthe large resourcegap betweenan investmentrate of 20.7 percentand a nationalsavings rate of only 5.1 percent.In otherwords Cambodia's investment, and the high growthwhich has been led by this investment,is largelyfinanced by foreignsavings. The continuedflow of extemal fundswill inevitablydepend upon internalpolitical stability and confidenceof the intemational communityand the privateinvestors.

8. It will be evidentfrom this brief overviewof macroeconomicperformance that Cambodia'smajor economicchallenges are all ultimatelytraceable to politicalconcems. Thoughthe importanceof soundmacroeconomic management should not be underplayed,the most urgent issuesconfronting Cambodia today are political,not economic.The citizensof Cambodiaand their well wishersin the intemationalaid communityand the privateinvestors need the confidenceto look forwardto a stablepolitical environment as the countrymoves towardselections. They need the assurancethat good govemance,accountability, and the rule of law will prevailso that the urgenttasks of developmentand povertyreduction can continuewithout interruption.


EY K :3s AM 7197 JH Annex 12

.rc _ Page 1 cf 2 CONSULTATIVEGROUP MEETING FOR CAMBODIA Paris, July 1-2, 1997

Statementby Mr. Gwyn Morgan, Headof Delegationfor the EuropeanCommission

Mr. Chairman,Excellencies, Ladies and Gentlemen,

On behalf of the EuropeanCommission, I wishto thank the WorldBank as organizers of this ConsultativeGroup Meetingand also the Governmentof France for its hospitable "accueil".

The goodwilland long-termcommitment of the EC to Cambodiais not in question. This is best exemplifiedby the EuropeanCommunity-Cambodian Cooperation Agreement signedin Luxembourgon 29 April, 1997by H.E. Kheat Chhonon behalf of Cambodiaand by H.E. Hans Van Mierlo (NetherlandsMinister of Foreign Affairs and EU Council of MinistersPresident in Office)and Vice-PresidentMarin (European Commission).

This CooperationAgreement provides the frameworkfor EC-Cambodiancooperation in a wide array of sectors. The EuropeanCommunity-Cambodia Cooperation Agreement containsa humanrights clause and the EC welcomesCambodia's commitment to it.

The EC applaudsthe successfulimplementation on the ground in Cambodiaof its major programmesespecially in the field of rural developmentand primaryeducation. The positiveattitude of our Cambodianpartners in the Govemrnmentboth in PhnomPenh and at provinciallevel has been muchappreciated and has contributedgreatly to the successof these prograrunes.

In additionthe willingpartnership of the Cambodianauthorities in investigatingand movingto eliminatefraud and false certificationin the field of textileexports to the European Union is highly commended. There are many such positiveelements in our mutualpartnership. However,there are areas of serious concern to the EC. Primaryconcerns are the inadequacyof measuresto eradicate illegal logging and to preserve Cambodia's forest heritage; the loopholes and excessiveconcessions in tax collectionwhich deprive Cambodiaof revenuewhich is much needed;the grantingto State Institutionslike the militaryof privilegedaccess to commercial activities:

In essence the overall accountabilityof the CambodianGovernment has to be enhanced.

The announcementof the date of 23 May, 1998 for the holding of elections is sincerelywelcomed. The EC and all donor partners would welcome a loud and clear declarationby Cambodia'spolitical leaders that intemationalobservers would be invitedto be in attendanceat the electionprocess. Thiswould alsobe an unmistakableindication of the CambodianGovernment's commitment to free and fair elections. m1'1 - H Annex 12 - 60 - Page 2 of 2

The courseof EC-Cambodiancooperation would be furtherstrengthened by actionin the above areasof concern.

The European Commission between 1991-97 has provided more than 200 millionECUs of assistance to Cambodia. The EC will in 1997 consolidate its developmentassistance in rural development,primary education, institution building, health, demining,human rights, the civil societyand good governance.Additional commitments of some60 mnillionECUs in grant aid may be envisaged.

The EC is also committedin 1997/98to the successfulestablishment of the electoral processleading up to the 23 may, 1998polling day. In this regardthe EuropeanCommission, with the full encouragementof the EU Member States, is currently e*amining the mechanismsfor granting 7 million ECUs to establishan electoralregister to ensure proper participation in the elections by all Cambodian citizens. In addition, the European Commissionin orderto showits frTmcommitment to the presenceof internationalobservers at the May 1998elections has set asidea further2 millionECUs for this purpose.

Between 1993 and 1996 the EC via the European HumnanitarianOffice (ECHO), contributedemergency and humanitarianassistance (mainly in demining,medical prostheses, food aid and help to displacedpersons) of some 12 millionECUs. This humanitarianaid will continueto be an importantfeature as in the past.

Finally,Mr. Chainnan,let me expressmy beliefthat at this momentthe creationof a peacefuland stable society in Cambodiacalls for strong nerves on the part of donors and Wongand sensitiveleadership by the CambodianGovernment.

liE r Annex 13 -61 - Page 1 of 3 Joint Statement of United Nations Representatives to Cambodia' on the occasion of the second Consultative Group Meeting.

Mr Chairman, Excellencies, Ladies and Gentlemen,

The United Nations continues to play a prominent role in Cambodia, following its unusually large contributions to the welfare of the country through the 1979-81 humanitarian relief effort, UNBRO and UNTAC. The current challenges are first, to support Cambodia in its tansition from rehabilitation and dependency to capacity-development and self-reliance; and second, to help the country respond to the global calls to action, emananting from the international conferences of the 1990s. In 1996, collectively, we delivered some $88 million in grant cooperation to Cambodia, which includes S 60 million from associated donors.

In our statement last year in Tokyo, we emphasised our principal focus on the alleviation of poverty and for placing development on a basis which is sustainable - in terms of both use of natural resources and indigenous capacity. We also expressed our support for Cambodia's own efforts to establish the Rule of Law, respect for human rights and a free market economy. Our focus and our support remain the same.

While noting that poverty alleviation is the prime objective of the Royal Government in its Socio-economic Development Plan 1996-2000, and while recognizing that the defection of most of the Khmer Rouge has placed unexpected demands on the National Budget, we nonetheless regret that it does not appear to have been possible to shift the allocation of expenditure from non-productive military and police expenditures to development needs, such as education, vocational training, health and agriculture. We certainly trust that this will be given a high priority in future and become visible in actual public expenditures. We very much share the concern of others that the collection of revenue by the Treasury is falling short of targets. We are concerned at the negative impact on operational expenditure for socio-economic activities. The percentage of GDP going to the national budget is very low, even when compared with countries with similar per capita income. It is neither realistic nor reasonable to expect the intemational community to substitute with its taxes for revenue which should be collected within Cambodia itself.

We were strongly reminded in Tokyo last year, that Cambodia is predominantly rural and agricultural and likely to remain so for some time to come. Yet much of the development of recent years has been in the cities - and especially in Phnom Penh. This imbalance has been recognized by the Royal Govemment and future outlays are designed to reverse this trend.

We endorse this position and urge that investments in and support to education, vocational training, health and other services as well as physical infrastructure be extended to all parts of the country, to improve the lives of the people and to reduce the pressures of urban migration. In particular, we draw attention to the need to pursue the ongoing efforts at rural development and to share experiences and "best practices."


111 ADre,: 1I -62 - Page -2 of 3 There is considerablescope for increasedand diversifiedagricultural production. The small surplus achieved in rice productionin the past two seasons- despite extensiveflooding in 1996 - is a positive indicationof what the countrymay hope to achieve.However, this does not translateautomatically into food securityfor all Cambodians.Access to food is dependent not only on overall availablitybut also on markets, roads and purchasingpower. Nutrition rates are low, a recent survey showing that half the childrenunder five are malnourished. Similarly, recent poverty mapping revealed 165 communes as severely food insecure, representingsome 850,000persons.

The United Nations in Cambodiahas worked closely together,as well as in collaboration with the World Bank and other national and intemational agencies, to support the establishment of a national poverty monitoring and analysis system in the Ministry of Planning. Throughannual householdsurveys, it will becomeprogressively more clear where poverty is located both geographicallyand socially. The Census, planned for March 1998, will also provide much needed data to further inform this process. This will in turn permit better targeting of poverty alleviationprogrammes. This must be matched by a determined effort to mobilize resourcesto fund and implementsuch programmes.Economic growth and enhancedrevenue collection will be key to achievethese goals.

We reiterateour deep concern,expressed last year - and sharedby many others- at the largely unmanagedand unplannedexploitation of Cambodia'srich endowmentof forests and water. We note the progress made since last year, but we also note and sharethe continuedconcems listed in the report (availableto this Meeting) of the recent WB/UNDP/FAOmission to review the forest sector. In addition to assistanceto forest resources assessment,we are supportingefforts to ensure the sustainableuse of the unique Tonle Sap lake/riversystem, which is threatened by a combinationof siltation caused by deforestation,overfishing, and potentiallyby water pollution. We look to a concertednational programmeto preserve this resource, while harvesting its renewable bounty for present and future generations. Its imminentrecognition as a BiosphereReserve should encourage this.

People are both the agents and the beneficiariesof development.As Cambodiaprepares for its formal entry into membership of ASEAN, greater attention must be paid to the developmentof its human resources,especially its womenand young girls. The 1997 Human Development Report lists Cambodia as the poorest of the ten actual and prospective members. Improvedand universalbasic education,adult literacy campaignsand demand-led skills and farmer trainingare needed to enable the upgradingof the labour force for a more competitive environment.Half the population remains without access to health services, while access to safe drinkingwater and sanitationis even more limited.The rate of increase in HIV/AIDS infectionis estimatedto be among the highest in the world and will soon be reflected in higher mortality rates. Awarenessof risk is now widespread,but special and urgent programmes are needed to reach vulnerable groups and to change behaviour. The trfficking of women and childrenfor prostitutionis particularlytragic in this context and we urge the Governmentto step up action to combat it, based on the findings of the National Assembly's Commissionon HumanRights and Receptionof Complaints.

The United Nations stands ready to supportthe Royal Governmentwith the extensionof its socioeconomic porgrammesinto those areas until recentlyunder the control of the Khmer Anrex: 1] -63 - Page 3 of 3 Rouge. This will, however,require supplementary resources to consolidatethe peace-building process.

We look forward to the elections,to be fully organizedand managedby Cambodians,with support from extemal sources. Time is now of the essence and we urge that the necessary legislation be passed so that the process may begin. In this respect, we look forward to the resumption of the functioningof the NationalAssembly. We supportall national efforts to establish the rule of law with an independentjudiciary and administration.Apart from their intrinsic benefits to the people, we believe that they are essential to attract and retain responsible long-term investors. We are directly concemed by the slow progress in administrativereform and civil service salaries, without which much of the public sector capacity developmentwe supportwill be lost.

The promotionof democraticinstitutions which can play an effectiverole in the social and economic development of the country, internationallytecognized free and fair elections, effective public administrationreform, a clear move from militaryto human development outlays, enhanced domestic revenue generation, and sustainable managementof natural resources- all of these are Cambodianimperatives in themselves:they will also reassurethe intemational conmmunitythat Cambodiais well on the way to achieving self-relianceand assumingits full role in the region as well as in the world.

.. ~~~~ ~ ~~~~~ . . * Annex 14 - 64 - Page 1 of 2 CONSULTATIVEGROUP MEETING FOR CAMBODIA 1 - 2 JULY 1997



Norway welcomesthe opportunityto participatein the ConsultativeGroup Meeting and I would like to commendthe CambodianGovernment and the World Bankfor their presentationsand the excellentdocumentation prepared for this meeting.

Development co-operation In its report no. 19 (1995/96)to the Storting(the Norwegian national assembly) A ChangingWorld, the Governmentoutlined the main elementsof the Norwegian policy towards developingcountries.

The main objectivesof Norwegiandevelopment policy are to combatpoverty and contributeto lastingimprovement in living conditionsand qualityof life for people in developingcountries. We thus want to promotesocial and economicjustice on national. regionaland global levels. The WhitePaper also stressesthe importanceof human developmentand institutionalstrengthening and capacitybuilding. In additionit is an aim in our developmentco-operation policy to contributeto a sound managementof the environrment.

Norwegiandevelopment co-operation supports the recipientcountries' own developmentefforts towards economic growth, sustainable development, environmentalprotection, democratisation and respect of humanrights. We therefore welcomethe initiativestaken by the CambodianGovernment in the National Programmeto Rehabilitateand DevelopmentCambodia, where the over-riding objective is "to achievea fair, just and peacefulsociety through acceleration in the rate of economicgrowth in order to raise the livingstandards of all Cambodians". We also agree with the CambodianGovernment that environmentalconsiderations shouldbe integratedinto the developmentand implementationof social and economic polices.

Norwegiansupport to Cambodiaoriginates from severalbudget lines, chnnelled through variousco-operation mechanisms. These budgetlines are Cambodia'sshare of the Norwegianregional allocation for Asia, the global allocationsfor environment and other global allocationslike commercialsupport arrangements and fmancial schemesfor investmentand privatesector developmentas well as the special allocationfor non-govermmentalorganisations.

The objectivesfor Norwegiandevelopment co-operation with Cambodiais to contributeto strengtheningthe democraticdevelopment and improvingthe human rights situation;institution building, including competence building in governmental institutions;and combatingpoverty through rural development,mainly focusing on health and educationalaspects. Other possibleareas for supportare mine clearance, education,environmental protection and culturalactivities. in' Annex 1A -65 - Page 2 of

Norwegiandevelopment co-operation with Cambodianin 1996 amountedto approx. NOK 37,6 mill kroner, about USD 5,2 mill, of whichNOK 10.2mill (USD 1,4 mill) was from the Regionalallocation for Asia. For 1997,NOK 10 mill (USD. 1.4) of this allocationis earmarkedfor Cambodia.

Norway is in the processof developingan aid programmein Cambodia,based on the objectivesreferred to. As both the Norwegianand Cambodianadministrative capacity is limitedin this initialphase, multilateralorganisation and Norwegianand local non-governmentalorganisations represent important channels and implementationmechanisms for the Norwegiandevelopment assistance.

As of today, Norwegiannon-governmental organisations working in Cambodiaare focusingmainly on rural developmentand primaryeducation. The contactwith multilateralorganisations was strengthenedduring 1996. ThroughWHO supportis given to strengthenthe provincialhealth services, through Unicef Norway supports a communitybased rural developmentprogram, and throughUNDP support is given to educationaleducation as well as to a projectaiming at strengtheningthe competence and capacityin the judicial system.

The NorwegianGovemment, Mr. Chairmanis lookingforward to a continuedfruitful co-operationwith other donorsin assistingthe CambodianGovernment in its developmentefforts. However,as alreadypointed out by Norway,aid programmes could be jeopardizedby continuedpolitical instability. In our view, it is of outmost importancethat internal stabilitybe restoredand the democraticinstitutions strengthendin Cambodia. It is also vital that free and fair electionstake placeas soon as possible.

Thank you, Mr. Chairman

|11' - Amne-x14A -66 Page 1.of 2

Consultative Group Meeting for Cambodia Paris, July 1-2 1997 Session I Statement by the Danish delegation Mr. Chairman Excellencies Dear Colleagues

On behalf of the Danish Government, I would like to join the pre- vious speakers in expressing our sincere thanks to the World Bank for chairing and hosting this meeting. The meeting confirms the transition of Cambodia from a state of recovery to a search for long-term development. During the last four to five years rapid changes in Cambodia have indicated an unmatched commitment by the Cambodian people to focus on future stability, development and prosperity, and regional coo- peration in an open market atmosphere. Changes toward economic, social and political stability and deve- lopment have been strongly rewarded by the international donor community. External assistance to Cambodia has doubled over the last five years to a level of almost two billion US Dollars in 1996 and the scope of assistance has now largely changed from hu- manitarian to developuent oriented activities. Sadly, incidents over the latest months have shaken the newly gai- ned stability of the country. It is strongly hoped that the latest troubles will not jepardize the overall development of the country and that Cambodia shortly will proceed along the established path of sustainable development. Also, it has been noted that Cambodia's economic performance in the first part of 1997 has not reached the set goals. In this re- gard, I would like to join those who have pointed out that it will be of crucial importance that appropriate measures are taken to increase state revenue through measures such as increased special taxes, customs revenue collections, revenues from log exports etc. For Cambodia to experience sustainable economic development a num- ber of important reforms are seen to be necessary. Denmark fully supports efforts to establish "Good Governance" in Cambodia. Good Governance - in its wider perspective - will contribute to increa- sed transparancy in government decision making, improvement in the human rights situation, as well as improved freedom of the press and security of politicians, civil groups and journalists. Since 1991, Denmark has contributed to the reconstruction of the Cambodian society within the frame of a transitional assistance programme. The programme which focuses on democratization; judici- ary reforms; human rights and free press initiatives will be ter- minated by the end of 1998. In this last phase, the programme is mainly focused on election support. However Danish grant assistan-

T tnnex. 7.4A -6 - Page 2 of 2

ce to Cambodia is expected to continue in the years to come within the frame of the special Danish Environmental and Disaster Relief Fund. Grants allocated through this fund will be allocated to im- prove sustainable use of natural ressources, environmental protec- tion and poverty alleviation for local communities. Mr. Chairman, It is a pleasure today to reconfirm the commitment of The Govern- ment of Denmark to support the efforts made by the Cambodian Go- vernment and its people towards the reconstruction and long-term development of Cambodia.

-Il 1F.' Ainriex 15 -68 - Page 1 .)f 3



Mr Chairman,Exellencies, Distinguished Delegates,

It is a great pleasure for Sweden to take part in this meeting and to see H.E. Keat Chhon heading the delegation of the Royal Government of Cambodia I would also like to express my appreciationto the World Bank for arrangingthis second Consultative Group meeting for Cambodiaand for the excellent documentation prepared for this meeting.

The World Bank Report makes clear that Cambodiahas made significantprogress in stabilizingthe economy, in restoring economic growth, and also in undertaling policy reforms to transform the economyinto a market-oriented one. Sweden can concur with that view but also with the view expressed in the report that many challengesare still confronting Cambodia, such as a weak revenue effort, inefficientexpenditure allocation, and weak institutional capacity.

It is evident that political tensions may jeopardize future developments.A constructive and successfiulcooperation between Cambodia and the donor conmunity assembled here requires clearly more stable and secure politicalconditions.

In this perspectivethe national elections, as was announced yesterday, on 23 May 1998 are of crucial importance. It is encouragingto note that the coalitionpartners agree that national elections shall be held and that a date has been set. It is now vital that the necessary legislationis adopted expeditiouslyand that practical steps are taken to prepare the elections. We were encouraged by the statement of the RGC on this matter yesterday, The Swedish Govermmentis ready to support the election process while expecting the RGC budget to sustain a substantialpart of the costs, which should be contained at a reasonablelevel. Elections are a national concern although certainly meriting international support. Sweden expects the UN systemto have a coordinating role in the international support of the elections, includingobservers.

I would also like to emphasizethat reinforcing and sustainingan orderly civil sociey that guarantees a minimumof respect and safety to the individuadis a prerequisite for long tcrm social and economic development. In his report to the UN Commissionfor Human Rights of April 2, the Special Representativeof the Secretary General for Human Rights refers to the clear need of reform and strengthening of the legal and judiciary system. He stresses a number of serious shortcomingsin the functioningof the legal system and emphasizesthe importance of conveningthe Supreme Council of Magistracy. We are also concerned about Article 51 in the Civil Service Act which, as it stands now, in practice seems to grant inpunity to civil service staff and military personnel, and would appreciate clarificationon developmentwith regard to the proposed amendment of Article 51.

-Il , ...... - ... Annex 15 - 69 - Page 2 of 3 Let me againrefer to the statementof the SpecialRepresentative of the Secretary Generalfor HumanRights and stressthat in these andother fields,further efforts must be made to promoteand securehuman rights in Cambodia.We wouldlike to urge the RoyalGovernment of Cambodiato payparticular attention to theseaspects, drawingalso on adviceand experienceof internationalorganizations.

As referredto above,the WorldBank Report highlightsboth achievements made and challengesfacing Cambodia and we can subscribeto muchof the analysisin the Report. Remarkswill here thereforebe limitedto a few aspectsthat the Swedish delegationfind to be of particularimportance.

New fiscal measures for increasedresource mobilization have been introducedand should,if properlyimplemented, improve the financialsituation. Present budgetary difficultieshave had negativeimplications for resourcesavailable for social sectors. Thisis regrettable,as the socialsectors are of vitalimportance for the long-term developmentprospects of Cambodia.There needs to be an increasedemphasis on the socialsectors in the governmentbudget and a considerabledecrease in military expenditure, cashingin on the peacedividends" as suggestedby the Royal Governmentof Cambodia.The majorpart of the armedforces, themselves occasionallya threat to stability,should be demobilized.Preparations, such as cost estimatesand work plansfor demobiizations,should be initiatedso that they can be put into actionat the propermoment after the electionsin 1998.

Membershipin ASEANwili leadto decreasedincome from customs duties and trade taxes. Thesesources must be substitutedand it willtherefore be evenmore imperative to collectall publicincome through the Ministryof Economyand Finance, as emphasizedby the WorldBank. Exemptions from stipulated fees andtaxes should thereforebe carefullyscrutinized.

Reforms are also neededwhen it comesto administration.The institutionalcapacity must obviouslybe strengthened.The publicadministration reform must be givena renewedimpetus, aiming at a streamlinedand moretransparent administration.

At the ConsultativeGroup meetingin Tokyolast yearthe RoyalGovernment of Cambodiapledged itself to bringthe forest sector undercontrol. Some positive measureshave also been taken sincethen. It is encouragingthat exportof logsand large size beamshave been banned,that a SteeringCommitte for the Organizationand Implementationof ForestPolicy has been establishedand that reviewsof various aspectsof the forestpolicy will be carriedout by internationalconsultants. These and other measuresmust be pursuedin orderto ensurethat the actualharvesting is limited to a sustainablelevel. Regrettably the fellingseems to continueat a non sustainable level,apparently sometimes with the activeparticipation or protectionof militaryunits.

The necessityand the benefitsof a soundforestry policy is evident.Both financial and environmentalreasons speak in favourof furthermeasures by the RoyalGovernment of Cambodiato gain firmercontrol of the forestryand to ensurea sustainableforestry policy. Annex 15 -7 0 - Page 3 of 3 Sweden is in broad agreementwith the orientation of the development policy of the Royal Govermment of Cambodia as it has been presented. Particularlywe would like to stress the importance of rural developmentin order to redress present urban/rural imbalances.Health and education need, as already stressed, increased support from the government budget.

Cambodia is since 1995 one of Sweden'slong term co-operation partners and a two year development co-operation agreement is in force since January 1997. The Cambodia-Swedishcooperation focuses on rural development,basic education,mine clearing and promotion of human rights. In will be reviewed at the end of 1998 in light of political developments.

A general observation on our part is that gender equity consideration should be given more attention and should be integrated into developmentprogrammes and projects. Particular emphasis should be givento gender equalityaspects of programmeswithin education and rural development.

Finally, Mr Chairman,we note that Cambodiawill soon be a member of ASEAN. Cambodia may face some transitionalproblems as a new member, adjustingto the demands that membershipwill entail. We are, however, confident that a longer term participation in regional cooperation will be to the benefitof Cambodia. This, in combination with lessened politicaltensions, well-preparednational electionsand continued support from the internationalcommunity, will certainlyenhance the development prospects of Cambodia.

Thank you, Mr. Chairman.

n1~ F.- Annex 16 -71- Page 1 of 2 Cambodia Consultative Group Meeting Paris. 1st - 2nd July 1997

GermanStatement on session 1:Macro-Economic Issues

Mr.Chairman, Ladies and Gentlemen,

Firstof all, I wishto join the previousspeakers in thankingthe WorldBank for organizing this conference,and the World Bankand the Cambodiandelegation for preparationof usefuldocuments serving as basisfor our discussions.

This conferenceoffers the opportunityto look back to achievementsduring nearly four years of rule under the first freely elected CambodianGovernment and to discussthe mainchallenges and tasks to be solvedmainly by the newgovemment to be formedafter electionsnext year. Duringthe past four years certainlymuch has been accomplished, with substantialsupport from many donors, in restoringthe civil societyand the economic basis, in building-upan institutionalframe-work and in improvingthe livingconditions of fortner refugees and the population in general. The remarkableaccomplishments reached in certain areas and the future prospectsare, however,over-shadowed by persistingpolitical tension and instabilityalthough the menacefrom the KhmerRouge seemsto be vanishing.I wishto expressthe deepconcern of my govemmentabout the political crisis which became apparent in the recent past, and the wish that the parliamentaryelections in May 1998are carriedthrough in a fair andtransparent manner.

Comingto the economicsituation and prospects,I sharethe viewof the recentWorld Bank CountryMemorandum that Cambodiais nowat the cross-roadsand that the main task is to menageproperly the transitionto a more self-sustaineddevelopment. In this regard, intensified efforts to mobilize internal budgetaryresources are of utmost importance.The modern tax system introducedwith the new Law on Taxation in February1997, is now decisivelyto be implemented,for which i.a. improvementsof the tax administrationare needed.Furthermore, we stronglysupport the WorldBank report in its demandto strictly limitthe extensivegranting of ad hoc exemptions,as it happened last yeareven for luxuryautomobile imports. Also, we urgethe Cambodiangovemment to bring extrabudgetaryrevenues under the controlof the competentMinistry of Economy and Finance,to improvethe transparencyand the parliamentarycontrol of the budget processand the managementof publicassets, and to adhereto strictdiscipline in public spendingwhile shiftingthe expendituresto civilianpurposes, to the extentpossible.

Or - I' Annex 16 -72- Page 2 of 2 A matterof deep concemfor my govemmentis the reportedlyongoing mismanagement of the forestryresources, mainly in the formof uncontrolledlogging and log exports,over- exploitation,under-valuation of royalties and extra-budgetaryuse of the revenues. Withoutdecisive improvements in this regardin the nearfuture, my govemmentwill find it difficultto justify furthersupport of Cambodiawith German taxpayer's money vis-a-vis the increasinglycritical german parliament and public opinion.

As in the case of forestry policy, in the area of administrativereforms previous expectationsand promiseswere disappointed until now.My governmentsincerely hopes that serious actions are undertakenin the near future to build a consensuson the objectives and concrete targets of this importantreform and to accelerate its implementationl.As regardsthe militarydemobilization, it seemsthat the preparatory workshave made substantial progress in the recentpast. My governmentis preparedto supportthis programmewith technicalaid.

In conclusion,one can notethat duringthe pastfour yearssubstantial progress has been madeunder difficult conditions in the recoveryand the reformof the Cambodianeconomy and society.Serious down-side risks, stemmingmainly from politicalinstability, intemal insecurily,weak Institutionsand other deficienciesin the frame-workconditions are threateningthe achievementsreached and the prospectsfor further improvements.It is, therefore,of utmostsignificance to better observethe rule of law and the principlesof democracy and of good governancein order to bring about internal peace and confidenceof the populationin a brighterfuture.

Thankyou for your attention.


*~ ~ f _. _ I Annex 17 -- 73 - Page 1 of 3 CAMBODIA CONSULTATIVEGROUP PARIS. 1-2 JULY 1997


Mr Chairman

It is a great pleasurefor me to representthe United Kingdomat this important meeting. I would like to express my thanks to both the FrenchGovemment and to the World Bank for their hard work in ensuringthat the arrangements for the meetinghave gone so smoothly.

The UK is proud to have been closely involvedin the UN processwhich helped to restore multi-partydemocracy to Cambodiain 1993. Since then, much progress has been made towards stabilisingCambodia's economy, generating real economicgrowth and controllinginflation. Cambodia's accessionto ASEAN will present new opportunitiesand challenges. These significant achievementsneed to be nurturedcarefully, in an environmentof political stability and co-operation. Only then will they be able to deliver durable benefits for the Cambodianpeople.

But Cambodiaalso faces a number of seriousproblems which the Royal Govemment must tackle urgently if the countryis to take advantageof the opportunitiesthis favourablesituation affords.

First, social and economicprogress risks being underminedby political instability. This not only affects security and the effective govemmentof the country in the short term, but jeopardises progresstowards the next round of electionswhich we and most of Cambodia'sdevelopment partners see as a crucial test of the country's adherence to democracy. It is particularly important in a democraticcountry that the NationalAssembly should function properly.

Second, further progress is needed on the promotion and protectionof the rule of law and human rights. We welcomethe announcementthat national elections will be held on 23 May 1997. We urge the CambodianGovemment to finalise the preparation of the necessarylegislative framework as soon as possible. It will be importantto ensure that these elections are demonstrably free and fair.

Third, we recognisethe progresswhich has been made to improve transparencyin the forestry sector, and particularlyto curb illegal logging. However, there are still abuses in some areas which need to be tackled seriously by further measures. Failure to do so will deny the govemment important revenuesthat could be spent on improvedservices critical for human development,and it will lead to environmentaldegradation threatening the livelihoodsnot only of poor Cambodiansdependent on forest products, but farmers who need reliable stream flows. We support the

n !~~~~~~~f Annex 17 -74 - Page 2 of 3

rcomrmmdations of the WorldBank , UNDPand FAO that an actionplan for sectoraldevelopment and reform should be drawnup, granting of conoessionsshould end untila satisfactorypolicy and regulatory framework is in place,export tax exemptionsshould be reconsidered,and the Department of Forestryand Wildlife given full authorityto implementits regulatoryand administrativework. We call on the co - PrimeMinisters to demonstratetheir politicalsupport for thesemeasures.

Finally,there area numberof economicchallenges. The Royal Govemrnment needsto Intensifyits effortsto broadenthe baseof economicgrowth and reducerural poverty.Development which excludes the vastmajority of the populationis likelyto proveunsustainable and could lead to furtherpolitical instability.

Whilethe outlookfor economicgrowth is generallygood, Cambodia remains overlydependent on officialextemal assistance to financethe fiscaldeficit. To breakthis dependence,Cambodia urgently needs to makebetter use of its owndomestic resources. Further strengthening of taxadministration, the eliminationof inequitabletax exemptions,and determined action to bring extra revenuesinto the budgetare crucial.Strong growth in GDPshould be matchedby sustainedincreases in revenue;failure to achievethis couldbe perceivedas weaknessor evencorruption in government.

The compositionof Governmentexpenditure in Cambodiais alsoa concem. Fiscaldiscipline has been maintained, despite shortfalls in revenueand higherthan budgetedexpendfture on securityand defence, by compressing expenditurein healthand education and other social sectors vital for human development.Delays in publicadministrative reform and recent recruitment of morecivil servantssuggest that improvedand affordable public services remainyears away.

Considerablymore progress in all theseareas be neededbefore the nextCG if the confidenceof Cambodia'sdevelopment partners is to be maintained andcurrent levels of investment,including of developmentassistance, are to continue.

I shouldlike nowto tum to the UKdevelopment assistance programme. As mostof you will know,as of I Maywe havea newGovernment in the UK. Its policieson intemationaldevelopment are still underdiscussion, but i is clear that it will wish UK developmentassistance to focusmore sharply on reducing poverty. For the present,however, we do not expectany rapidchange in the sizeor natureof our programmein Cambodia.

At the 1992Ministerial Conference on the Reconstructionand Rehabilitation on Cambodiain Tokyo,the UK pledgeda totalof $30million in supportof Cambodia'sdevelopment. I am delightedto reportthat we havenow exceededthat pledgein termsof actualspending - up to March1997, some $36 millionhas beenspent.

X1 K Annex 17 -75 - Page 3 of 3

Since the last CG in July 1996, we have committedand spent some $6 million in bilateral development assistancein our main priority areas of health, education and urban povertyas well as mine clearance and supportfor NGO programmes. The UK also providessubstantial support for Cambodia through multilateralchannels includingthe European Union,the Intemational DevelopmentAssociation and the Asian DevelopmentBank.

For the future, we expectto spend at least $5 millionin 1997/98from bilateral souroes including supportfor NGO assistance. All of this will be new money not committed at last year's CG. As before, our bilateralaid will be in grant form. No debt burden will accrue.

The main focus of our aid will continueto be human development; health, education and urban poverty:

a) in health, our support to strengthenhealth systemsis committeduntil the end of this year and a further phase of support is under consideration. We will continue our support for malaria controluntil the new EuropeanUnion project is well established. We have just committedthree years of funding to a major UNFPA reproductivehealth project,and we are consideringfurther support to social marketingof condoms

b) in education, we have just signed a formal agreementwith the Royal Govemmentto continue our efforts to enhance CambodianEnglish teaching capacity in secondary schoolsfor three moreyears

c) we will continue to addressurban poverty by co-financinga projectwith UNDP in Phnom Penh.

Given our interest in the democratic processin Cambodia,we are also consideringways in which to support the forthcomingelections, in close co- ordinationwith other donors.

More generally,we shall continue to support efforts by donors to improveco- ordinationto ensure that official assistance is focused on key prioritiesand that the various programmescomplement each other. Indeed, many of our projects are managed in partnershipwith UN agencies.

Mr Chairman,let me say in conclusionthat the future for Cambodiawill not be easy. But there is a great opportunityfor the countryto develop providingthe main challengesto which I have referredare urgentlyaddressed. The main responsibilityfor this rests with the Royal Govemment. But the UK will continue to play its part as a partner in helping to build a more stable and prosperousCambodia in the future.

]fl''' -V''' [ I FLI Annex 18 - 76 - Page 1 CooperotionCommiiese for Combodio br Cmboda L' Embuirt:,dunhil(-Ad ndIulI July 19971 omile de Coopirataon Consultative Group Meeting pour le Cambodge Paris - July 1, 1997

Opening Remarks from the NGO Community Delivered by Mr. Thun Saray

The NGO community in Cambodia, represented here by the Cooperation Committee for Cambodia, welcomes this opportunity to contribute to the second Consultative Group Meeting on Cambodia here in Paris. I am Thun Saray, the director of ADHOC, a human rights NGO. But I am here today as the elected representative of the NGO community in Cambodia, as well as the only Cambodian citizen at this meeting not affiliated with the Royal Government.

In the prepared statement distributed in advance of this meeting, NGOs identified four priority themes as necessary to the long term, sustainable, and equitable development of Cambodia. These themes are relevant to many of the specific issues that confront the Royal Government and about which the international donor community is concerned at this meeting, and include:

I1. Human resource development as the priority strategy towards development. 2. Political stability as a precondition to development. 3. Focus on the countryside. 4 Improve coordination between and among Government, donors and NGOs so that funds, energy and absorption are not lost.

In the NGO statement, we have also offered two case studies from the health and education sectors, which are illustrative of some of the challenges facing the Royal Government and the donor community in the effective use of humanitarian aid.

NGOs are committed to continuing to support the Royal Government's development objectives, and believe that the Government's framework for development is essential to the success of our own efforts to improve the lives of Cambodians. Therefore, the NGO community calls on the Roy4 Government to provide strong and unified leadership, without which we cannot hope for the just and sustainable development of Cambodia.

NGOs havc experienced the political tension that has further divided Cambodians in recent weeks. We are concerned about increased violence, the uncertainty of the Cambodian public facing this instability, and the undoing of development work already underway. NGOs support a spirit of compromise that will allow Cambodians to live and work together peacefully to rebuild the country; and we believe it must extend from villagers to political leaders.

NGOs have a long history of assistance to the Cambodian people. This assistance has been continuous, whatever the political circumstances of Cambodia. NGOs wish to take this opportunity to affirrm that as has been the case in the past and present, NGOs will continue to assist the Cambodian people in the spirit of humanitarian aid and solidarity. This commitment to the people of Cambodia remains firm, as does our belief that Cambodians can and must find solutions to the challenges that presently face the country.

..U1- ' '' f'-V' Annex 19 -77- Page 1 of 3 CAMBODIACONSULTATNE GROUP MEETING Paris,1-2 July 1997

ADendaItnn 2: Priort Prowammsand Invesbment Neds

Statementby Mr.KEAT CHHON Sr.Minister in-charge of Rehabilitationand Devebpment Ministerof Economyand Finance RoyalGovernment ofCambodia

Mr.Chairman, Excellencies Ladiesand Gentlemen,

1. Wehave crculated to you the Royal Governrents background paper for thismeeting. It ouflines ourpast progress, and future programmes, proposals and strategies for thedevebpment of Carnbodia in theshort-term. It also provides a bstof py investmentsand finanal needsfor the threyear period,1997-99. I will elaborate on these.

2. As I mnentonedearier, our overallvision long-term vision aived at by completeagreement amongall politicalparties is containedin our NabonalProgramme to Rehabilitateand Develop Cambodia(NPRD) prepared in 1994and updated in 1995.The rapid progress we have made since its preparationhas given us the confidence that we have now moved quickly forward on the recovery- rehabilitation-developmenrcontinuum. Accordingly, we prepared a Socio-Econoric Development Plan, 1996-2000 to setand achieve measurable and meaningful targets towards realizing the NPRD vision. To reachthese targets, we have also adopted the process of a rolling,three-year Public Investment Programme(PIP), which is nowin its secondyear (1997-99). Both the SEDPand PIP have been preparedthrough an intense and highly participatory process of consultationsand agreement between andamong rministries and other government agencies. The PIP has been adopted by the Councilof Ministers,while the SEDPhas beenapproved by the NationalAssembly. Both documents set Cambodianperceptions and prorities and are based on our confidence in our abilites and absorptive capacitiestocarry them through.

3. OurSEPD aims at rapdelirination and eradication of poverty through the four-pronged effts of increasingeconomic progress with opportunity for all,of humandevelopment of providing a social safetynet andtargeted programmes to uplift the vulnerable sections into he mainstream,and of environmentalsustainability, meaning the sustainable management of our naturalresources. Given thatthe quickest retums in broad-basedgrowth in a highlyrural and agruian society such as ours, lies in ruraldevelopmenl it places emphasis on this aspect and allots 65% of resources o the rural sector. RuralDeveopment receives high priority in our efforts.The emphasisis on ensuringNigh level participationby the peopletmelves in identifying,contibuting to andcarrying out development activitiesand their future upkeep. I is intendedto providethe nurturingand enabling undedying stuctureand environmentfor privateinitative and efot, includingthose of individualfarmers in agricultue.

4. A well-establishedand maintained physical infrastructure is essential for Incmasing equitable accessto goods,services and markets, for stimulatinginvestment and increasesin productionand trade.We are therefore placing importance on upgradingand maintaining the mainroad arteries as wellas prvincialand rural roads. Furthemnore, we areupgrading and enhancing the availabilityof

1* KM Chin's S5au ApibsI 2. FP CGAIMV, F -1-24A* 19a:. 1

1uv11 ------Annex 19 - 78 - Page 2 of 3 powerin PhnomPenh and provincial towns, also through the use of IPPs. Water supply in themain citiesis alsobeing upgraded.

5. Agricultureis the mainstayof 85%our population.Our efforts include enhanced access to improvedinputs like seeds, fertlizers, as well as, credit and extension services. Rural credit, which is nowlargely provided through the pilot efforts of manyNGOs will soon be extended and will be brought undera mnoreorderly regulatory framework to ensuresustainability. On Forestry,which is partof our heritageand sustainable future source of wealth,we are alreadyundertaking the preparationof a detailedinventory. We have set in motionseveral studies to develop a proper forest policy, to reviewall theconcessions already granted, and to monitorlogging activites and log exports. We also intend to modemizeour rubber plantabons and to open rnore areas for private invesbrent

6. Educationand Health receive top priority in ourplans and efforts, for together these provide the basicsfor sound human development Inboth sectors, the accent is onincreasing equitable access and availabilityto all sectionsof thepeople and in enhancingthe quality of services.Several projects are alreadyunder way for this purpose. Many primary schools have been rehabilitated including with private sectorconbibutions and through the Social Fund. Likewise, many outreach health centres and referral hospitalsare being upgraded, both physically and with staff and equipment

7. Thereare severalcross-sectoral efforts, ongoing and planned.Chief among these are: enhancedparticipabon of wornenin the developmentprocess and in sharingin the benefits; environmentmanagement de-mining operatons, which is so crucialto reducingthe high incidence of lifeand limbs from ant-personnel mines and unexploded ordnance; improving social services; and the like.

B. ThePIP for 1997-99,which is theannex to the government docurment before you, also includes whatwe categorize as specialprogrammes because they need special menton and attention. These are necessaryprogrammes to placethe countryon a soundand acceleratedsustainable developmentaltrack. We need substantal funds for theseprogrammes which, if cardedout only from ourown revenues, would lead to significantdisrupton of economicstability. Demobilizaton and Public AdministrationReform, on bothof whichwe have circulated separate briefs for yourconsideraton, likewiserequire critical support. We consider that the demining programme has reached its nomentum andmust be continued.

9. In demobilization,our maor effort in theimmediate term, for which we alreadyhave assured donorsupport, is to startand complete the process of full registration ofall the serving personnel. From thedatabase to beestablished, a pilot demobilizaton scheme will commence totest out principles and strategiesfor movingveterans into usefui vocations and occupatons in civilsociety. A morecomplete demobilizationwill commencethereafter and will be completed in the course of 2-3years. Such work involvesseparation payments and creating conditions for proper reintegration at a costof neadyS 72 rrillion.

10. In publicadministration reform, we recognize that meaningful progress can be made only after theelections. Still, there are some politically neutral aspects, which can be carried out now, including preparationof a technically sound reform programme.

11. Inaddition to these two programmes, wealso have a largeexpenditure looming ahead of usto conductfree and fair elections. A brief on tis is alsobefore you.

r K.t Chhon'sSlabm.nt Ape hbm2 PIP CG Ati, Pls: 1.2.y 1997:Pap 2 Annex 19 -79 - Page 3 of 3

12. We havealso circulated a briefon theachievements made to daleby the SocialFund, as ini0allysupported forn WoddBank resources. This scheme has been successful and has been conmendedfor its quality,efficiency and cost-effeciveness by independent internationally reputed auditors.

13. The annexto our documentenvisages investments on the orderof USS1.313 billion for sectraland special programmes over 1997-99. Of this amount, we estimate that USS 620 rrillion has alreadybeen committed and will soon be commiftedfor ongoingprojects or thoseunder advanced stageof nego0ations.This amount includes financing from the national budget that has to comeas budgetsupport In total,for theperiod 1997-99, we needabout USS 1.352 billion dollars including budgetsupport, and USS 1.472 billion, with balance of payments included.

14. BeforeI close, I wouldIke tothank the Asian Development Bank for helping us inpreparing the SEPDand PIP.

I nowlook forward to providingyou any clarifications you may need.


M' t4t Ct o's SWt A9b Ilfm2: tP CGUwIQt, Pat 1-2Jie 1997t'P 3 Annex 20 - 80 - Page 1 of 4


Mr. Chairman,Excellencies, Distinguished Delegates:

1. The Asian DevelopmentBank would like to complimentthe RoyalGovemment of Cambodia on successfully completing the preparation of the second rolling Public InvestmentProgram (PIP) covering the period 1997-1999.It buildson earlieradvances made in reformingthe Govemment'sdevelopment planning and resourceallocation processes. The PIP is one of the most important tools availableto the Govemmentin the managementof developmentin a marketbased economy.It is the instrumentthrough which the Govemment allocatescapital investmentsin the publicsector to compensatefor areas of marketfailure and also create a moreconducive environment for the growthof privateinvestment.

2. The Bankis also pleasedto note that the PIP preparationprocess is now better integratedwith other aspectsof macroeconomicpolicy making in Cambodia,in particularthe budgetaryprocess. This integrationis no less importantthan the size and structureof the PIP for effective utilization of this tool. We hope this integrationof the PIP process with the budgetaryprocess can be further consolidatedin future. It will also be importantto strengthen the PIP monioring and implementationprocess. These will have to be the main prioritiesin the next phase of developmentof the PIP exercise.The Bankhas assistedthe Govemmentin the preparationof the first two PIPs, and we would be happy to continue our assistancein this importantarea of policymaking.

3. The key objectivesof this discussionpaper are to reviewthe secondrolling PIP for the period 1997-1999and to define prioritiesfor sustainedimprovement to the PIP process.

Sizeand Composition of the PIP: 1997-99

4. The size of the new PIP is $1.28 billionwhich is allocatedto specific ongoing, committedand pipelinehigh priorityprojects across and withinsectors. This level of investment is consistentwith the economicpriorities of the Govemmentand within the range of available domesticand extemal resources.However, the pace and successof PIP implementationwill depend criticallyon the successof further efforts to strengthendomestic budget capacityand the technicalcapacity in implementingministries.

5. The compositionof the PIP is as importantas Is size; perhaps even more so becauseof the need to ensurethat the allocationis consistentwith the objectivesof achieving a 65:35 rural to urban investmentratio and the role of Govemmentin a marketeconomy. An effective PIP should addressmarket failure and create an enablingenvironment for promoting privateinvestment through complementary public investments.In otherwords, It should be a public investmentprogram that 'crowdsin' privateinvestment instead of ucrowding out".

6. The PIP allocates 44 percent of planned public investment to economic infrastructure,which includestransport, communications, energy, water supplyand sanitation. Annex 20 - 81 - Page 2 of 4 About 17.5 percent is allocated to transport including 14 percent for roads. The Bank welcomesthis emphasison the road sub-sector,as road developmentIs criticalto Cambodia's economy.It will allow the countryto take advantageof growingopportunities in regionaltrade and agricultureand rural development.About 9.5 percent is allocatedto water supply and sanitation.The availabilityof potablewater is moreurgent in rural areaswhere the bulk of the population live, and it is thereforeimportant to ensure that resourcesin this sub-sectorare equitablyallocated to the ruralareas.

7. The energy sectorIs allocated12.7 percentof the total PIP allocation.This is in line with the objective of improvingthe quantity and reliability of power supply. However, greaterefforts in attractingmore private investment in this sectorare needed.

8. Only 4.7 percentof the total PIP is allocatedto communications,which reflects the increasing role of private participationand the focus of the Govemment on further improvementsin the legal and regulatoryframework for communications.

9. Social infrastructure,covering education and training, health and social and communityservices, has been allotted 44.1 percent of the PIP. Educationand training Is allocatedabout 13.5 percentof the total PIP. About 60 percentof this is designatedfor basic educationwhere the social and economicretums are the highest.This Is appropriate.The Bank is pleased that health has the largest allocationfor any single subsector in the PIP, amountingto about 19.5 per cent of the total PIP. However,about 40 percentof this allocation is for strengthening health services. It will be important to ensure that the bulk of this componentis utilizedto strengthenbasic health servicesin rural areas rather than expensive curativeservices or simplyhealth departmentadministrative services.

10. On the whole, the PIP sector and sub-sectorallocations reveal an improved focus on investing in those goods or serviceswhich the private sector will not provide or provide inadequately. The Bank welcomesthis emphasisbecause experienceshows that a key factor in sustaining growth and reducing poverty is exploitation of the comparative advantagesof the public and private sectors and maximizationof the synergy betweenthe two. Developmentof the privatesector will also expandthe tax base for govemrnmentrevenue and facilitate expansionof the provisionof public goods and developmentof physical and social infrastructure,even without further increasesin extemal assistance.This in tum will facilitate the further growth of the private sector. This virtuous cycle of positive feedback effects between the public and private sectors should be explicit in the rationalefor public investments.


11. The compositionof PIP expendituresmust also be assessedfrom the point of view of the need to focus on rural development The First Socio-economicDevelopment Plan 1996-2000set a target of a 65/35ratio betweenrural and urbanprojects to be achievedby the year 2000. This emphasisis appropriatebecause 85 to 90 percentof the populationreside in rural communities,and becauseof the poor state of socialand physicalinfrastructure in rural areas. The second PIP marksan improvementin this regardover the earlierurban dominance of public expenditures. However, only about one-third of the current PIP projects are exclusivelyfor rural investments.Another 45 percent of planned investmentsstraddle the urbantruraldivide but the distributionof the benefits of this large group of projectsbetween

T C _ Annex 20 - 82 - Page 3 of 4

rural and urbanareas remainssomewhat unclear. SubsequentPIPs shouldbe framed so that the rural/urbandistribution of benefitswill be made moretransparent in order to achievethe 65:35 target.

12. It is noted that agriculture,including irrigation, extension, forestry, fisheries and livestocktogether receive only about 4.7% of the total PIP. This Is about the same as the allocationfor communications.This is evidentlya groupof sub-sectorswhere suitableprojects may be availablefor higherallocations. In particular,developing integrated water management projectsas distinctfrom the presentset of stand alone irrigationprojects may be importantin view of Cambodia'schallenging topology, pronenessto floods and the fragile Tonle Sap ecosystem.

PIP Process

13. The PIP process has been further strengthenedduring the past year in the course of preparingthe second rolling PIP for 1997-1999through technicalassistance linked to in-countrytraining, both formaland on the job. PIP Workshopshave been held and selected Interventionsin line ministrieshave assisted in the developmentof capacity in identifying, costing,screening and appraisinginvestment proposals.

14. At the same time, co-ordinationhas been considerablyenhanced between the Ministry of Planning (MOP), Ministry of Economy and Finance (MEF), Council for the Developmentof Cambodia(CDC), and NationalBank of Cambodia(NBC) as well as between these centraleconomic agencies and the line ministriesthrough the PIP SteeringCommittee. This Committeesets the overalllevel of public investmentfor the next three years, reviewsthe draft PIP and agrees on the final version to be submittedto the Council of Ministersfor approval. In additionto its co-ordinatingrole, the PIP SteeringCommittee provides a vehicle for strengthening institutionaland technical linkages between macro and sectoral policy formulations, investment programming, budgeting and resource mobiliation. It is also noteworthy that except for defense and security spending,no program or project can be financed from the national budget unless it has been formally processedin accordancewith PIP proceduresand is included in the PIP. This process is obviously very important for effective overall economic management. The Bank is pleased with the significant achievementsin the PIP processso far; and urges that the commitmentto and the integrityof the processshould continue.

PIP Implementationand Monitoring

15. In view of its importancefor sound macroeconomic management, and effective managementof the developmentprocess in general,It is essential that the PIP process be maintained and expanded to include regular analyses of PIP outcomes and their costs. Proceduresfor implementationand monitoringof public investmentsin Cambodiaare not adequate.At a minimum,project monitoring should record the financialand physicalprogress of the project. When financial disbursementsare not monitored in relation to project implementation,an incompletepicture of expenditureresults and there is a risk of projects being approvedwithout a clear understandingof the level of availablefunds and the status of competingdemand for budgetresources.

M.Iiiv.. .. , -. Annex 20 - 83 - Page 4 of 4

16. To remedy this situation,the establishmentof a formal and structured PIP monitoring and evaluation system which assesses both investrnentand policy impact is required. In designingsuch a system,procedures should be as simple as possibleso as to facilitate their implementaton,operation and maintenance.The Bank is ready to assist the Govemmentwith design and implementationof such a system.

Absorptive Capacity

17. The abilityof spendingministries to implementprojects on time also needs to be strengthenedas the developmentof such capacityhas not kept pace with the expansionof extemal assistance. With the increase,in particular,of projects involvingcivil construction, there is a need to ensure that implementationschedules are realistic,so that expenditure profilescan be better planned.

Financing the PIP

18. Finally, there is the question of resourceavailability. The critical constraintto PIP implementationis the scarcity of resources in the national budget. In addition to counterpartcapital requirementsfor extemallyassisted projects, the PIP has major operating and maintenancecost implicationsfor all projects.To achievemaximum effectiveness, the PIP process needs to better identify these recurrentcosts and how they might be financed. Otherwise,domestic budget obligations will tend to be underestimatedand thus under-funded. This underscoresthe need for continuedimprovement in the administrationof budgetrevenue collectionand for further reformof the tax base to supportessential expenditure obligations of the Govemment.

19. The projected demandson the budget for PIP implementationincreases the urgency of further rationalizing current expenditures and simultaneouslyincreasing the productivity of the public sector. In the absence of administrativereforms, current wage expenditures will continue to crowd out essential non-wage operating and maintenance expenditures.

20. Regardingthe current PIP, the Govemmentdocument points out that a major componentof it remainsunfunded. Largesums of additionalassistance wAll be requiredfrom the aid communityfor the period 1997-1999to enable implementationof unfunded and partiallyfunded priorityinvestments of the PIP. Extemalfinancing of publicsector investment is envisagedonly by grants and/orsoft loans since the GovemmenVseconomic reform program precludescommercial borrowing. However,the availabilityof such additionalassistance will largely depend on progress towards greater political stability and good govemance in the country. Progress on these issues is thus critical to provide comfort and confidence to Cambodia's friends in the internationaldonor communitywho wish to mobilize the much neededfinancial assistance for the country.



-r Annex 21 - 84 - Page 1


Agenda Item 2: Special Programs

World Bank Statement Guy Darlan

Mr. Chairman, Ladies and Gentlemen,

We have just heard two presentations on the main features of Cambodia's Public Investment Program. In my statement, I will focus on what the Royal Government calls the "Special Programs". These are fairly large, high priority programs for which immediate and full funding is necessary. And because of the considerable amounts involved, donor financing is sought. These programs are: public administration reform, military demobilization, and the Social Fund. Demining remains a high priority special program, but its funding needs for the coming year have already been secured.

Concerning administrative reform, the ultimate objectives sought by the Royal Government have been well articulated. However, before the donor community can efficiently lend its support to the many sub-programs that the reform entails, the Government needs to clarify the concrete operational steps it intends to take to carry out the reform. In particular, the Government needs to put in place the operational plan and capacity to implement the reform over the period 1997-1998 during which local and national elections will be contested. Therefore, donor assistance can be provided only for a minimal program of preparatory activities--some of them ongoing--which includes: strengthening of the Government's capacity to manage the reform on a day-to-day basis; carrying out a census of civil servants; and preparing the computerized management information system necessary to implement the program.

Regarding military demobilization, a detailed program, the Cambodian Veterans Assistance Program (CVAP), has already been prepared. The CVAP has received the support of three donors so far, but more resources will be necessary to carry the program to completion. In order to help secure those resources, the Government needs to commit to full implementation of the demobilization program, in phases, but without delay.

Finally, the Govermnent is asking for additional resources to continue the Social Fund's assistance to rural communities. The implementation of the program has proceeded ahead of schedule. Social Fund management of its finances and its rural activities have received favorable reviews. Comnmunitydemand for Social Fund assistance far exceeds its current resources. Thus, unless additional donor financing is secured, the Social Fund will cease operations in the first half of next year.

Thank you.

,1 .F K Annex 22 -85 - Page 1 of 4


Statement by International Finance Cgrmoration OveninR Remarks

Kip Thompson Acting Manager Asia Department Internadonal Finance Corporation (IFC)

Mr. Chairman and Distinguished Delegates:

This is the first Consultative Group Meeting with the Royal Government of Cambodia in which the IFC is participating in an official capacity and on behalf of the Corporation, I would like to express our gratitude to the Government for having mvited us. We are very pleased to take our seat at this table as the private sector arm of the World Bank Group and we take this invitation as a strong indication of the Government's commitment to developing Cambodia's private sector and of the donors' interest in supporting the country's rapid transition to a market economy.

For IFC in Cambodia, this past year has been a watershed. After a number of years discussing the prospect of Cambodia becoming a member of IFC, I am now pleased to report that on March 26, 1997, His Excellency Keat Chbon, on behalf of the Royal Government of Cambodia, signed IFC's Articles of Agreement, making Cambodia the 171st country to join IFC. We are extremely pleaed to have Cambodia as our newest member and shareholder, and we look forward to working closely with the Government to help develop the private sector in Cambodia. In addition, we would like to extend our sincere thanks to the Government of Australia for its assistance in funding Cambodia's membership in IFC.

Today, I am also pleased to report that IFC has already approved its first investment in Cambodia. This investment will support the redevelopment of Cambodia's tourism industry by financing the S15 milion, 150-room, Angkor Novotel Hotel located in Siem Reap and catering to tourists visiting the nearby Angkor Wat monumenats. IFC will provide $7.5 million of whicb $5.25 million will be for its own account and S2.25 million will be for the account of a participant bank. We hope that out support for this project and for other private sector project will help to catalyze other mucb needed private sector investment in Cambodia.

While IEC is attending this Meeting as a member of the donor community, I would like to emphasize that EFC is basically not a donor agency. Instead, we are primarily investors in private sector projects with the dual objectives of promoting ustuanable economic development and eamning a commercial rate of return. In this

m1 , Annex 22 -86 - Page 2 of 4

role, we work closely with the private sector on a day-to-day basis, and experience which gives IFC a unique perspective among multilateral and bilateral aid agencies. It is in IFC's capacity as an investor that I will be making my comments today.

IFC is relatively new to Cambodia and thus we cannot clairn to be an expert on private sector activity in the country. However, in the course of analyzing and preparing several investment and advisory projects to date, we have developed some experience and insights related to the investment environment in Cambodia It is with this background, and from the perspective of a development-oriented but commercially-minded investor which is committed to assisting Cambodia, that I would like to address a single topic today - the current climate for private investment in Cambodia.

Climate for Private Investment

In 1997, Cambodia presents a paradox to potential private investors-offering at the same time both an attractive and a challenging environment in which to do business. I will first consider some of the key attractions for private investors in Cambodia and then I will review some of the major challenges.


Cambodia has a number of advantages whicb help to make it a potentially attractive destination for international and domestic investors. At the top of this list is the Government's free-market philosophy and strong support for the private sector. This is reflected in the very liberal investment enviroment providing a level playing field for foreign and domestic investors, a very competitive package of investment incentives and an effective one-stop service, in the Cambodian Investment Board, for approving investments.

In addition to an investor friendly environment, the country offers investors: (i) a plentiful supply of low-cost labor; (ii) substantial untapped natural resources; (iii) numerous historical and natural tourist attractions; (iv) reasonably priced land with a relatively simple acquisition process when compared to the neighboring countries; (v) its strategic location in the center of S.E. Asia, one of the world's most dynamic economnicregions; and (vi) its preferential trading relationships including Most Favored Nation status with the U.S.A., Generalized System of Preferences eligibility with the European Union, Japan, Australia and Scandinavia, and its upcoming membership of ASEAN later this month. These relationships offer lucrative export markets for Cambodian products and attract additional investment into the country.

Tbese fisctors help to make Cambodia a potentially attractive site for both foreign investors and for the country's own nascent private sector. Given the right environment, it is quite likely that a number of sectors of the economy will experience strong growth in the years to come, including export-oriented light manufacturing, agricultural processing and the service sector, including tourism, among others. In fact, such growth is already evident in the garment sector.

|~~~ r Annex 22 -87 - Page 3 of 4

However, to the internationaland domestic investor what is probably more apparent are the reasons L21to invest in Cambodiarather than the reasons to investin Cambodia. In this regard we must admitthat, in spite of Cambodia'smany attractions as an investmentdestination, until such time that the country properly addressesthe significantimpediments to long-termpnvate sector investmentwhich exist today, the country willnot be able to attract the kind of investmentwhich it needsfor sustainable private sector led growth. Someof the major constraints,in our opinion,are identified as follows:

I. Political Instability:Unfortunately, the primary impedimentto increasedlong- term private sector investmentactivity in Cambodiatoday is difficultfor anyonein this audienceto address;the perceivedpolitical risk of investingin Cambodiais among the highestin the world. Recent press reports of civilunrest in Cambodiahave highlighted this fact. While there is no need to go into the details of this situation,suffice it to say that until this perceived politicalrisk diminishes,Cambodia is unlikey to see major increases in long-term, private sector investmentfrom the long term investors the countrywould like to, and needs to, attract. One major step in addressingthis risk will of course be the timelyholding of free and fair nationalelections to elect a new, more stable goverrnent to replacethe presentlyperceived shaky coalition Government. While this particularissue is difficultto resolve in the near term, there are a number of other issues which the Government could address, and indeed should address, so as to: (i) support the private investment which is currently being implementedin spite of the perceivedpolitical risk; and (ii) prepare the groundwork for heightenedprivate investmentactivity over the mediumterm as politicalinstability decreases.

2. MacroeconomicStabilitv and Growth:Foreign investment is stronglyattracted by a stable and growing economy. Althoughthe Governmenthas made significant progress in stabilizingthe economyand restoringeconomic growth over the last four years, these achievementswere only possiblebecause of the high level of foreign aid support. In the future, to achieve a more sustainablemacroeconomic stability and growththe Governmentmrust improve its fiscal positionsignificantly. Specifically, the Govemmentneeds to improve its tax collectionfrom wealthy individualsand large, profitable companies, as well as its natural resources, particularlytimber. Without these revenuesthe Governmentwould not be able to make the necessaryinvestments in human resources and infrastructure. I am sure that our colleaguesfrom the World Bank and the IMF will have muchmore to say on this topic.

3. UncertainLegal and Regulatorv Environment/L.ckof 7lansparencvGiven the country's recent past, it is no surprisethat Cambodia'slegal and regulatory ystem is less that perfect. However, if the Governmenttruly wants to attract long-term investmentinto the country,it must create and enforce a transparentlegal framework with clear rules of the game for private investors and lenders. This must include a proper framework for the enforceabilityof contracts and the taking of collateral security by lenders. Approvingand implementingseveral of the draft laws which are cuTently pending as well as the ImplementingGuidelines for the Foreign Investment

11--1 Annex 22 -88- Page 4 of 4

Law would go a long way in this regard and we suggest that this bouldbe a top priorityfor the Government.

4. Limited Physical Infrastructure:Many investors have noted that the cost of doing business in Cambodiais high. To a large extent, this is true because of the limited physicalinfrastructure which exists in the country. For private investmentto flourishin Cambodia,the Govermnmetmust find innovativeways with which to lower the cost of doing businessand to improvethe quality and reliabilityof public services. Wc at IFC feel that the Governmentshould, as fur as possible, look to the private sector for help in this regard, and we are availableto belp as appropriatewith policy advice and financingfor viableprojects.

In closing,I would like to state that Iam sure that the Govenment is aware of the issues identifiedabove and, in many cases, is aredy consideringchnges which could improve the general investmentclimate. For its part, IFC looks fotward to assistingthe Governmentin any way we canto address these issues,including informal discussions,formal technical assistance advisoryactivities, and project financingand advice on a case-by-casebasis. Through our investment activities, we hope to demonstrate that Cambodiacan attract good, long-termprivate investmentand that such investmentcan transate into real economicbenefits for the people of Cambodia. While cognizantof the challenges,we are excitedabout the potentialfor private sector investmentin Cambodiaand look forward to working with the Governmentand the donor communityto contributeto the long-termsustinable growth of the Cambodian economy.



Mr Chairman

Cambodia'seconomy has grownquite stronglysince 1991and the standardof livingfor manyurban people,especially the elite and business sector, has risen considerably.However, low wage earners,petty traders and streetvendors have facedhigher prices for basic commodities. Povertyremains endemic in rural areas where85% of the country's populationlives.

Withoutstrong, more diversified,and sustainableeconomic growth, which is so dependenton a stablepolitical framework and a focussed administration,the other key objectiveswhich we all support- such as the abolitionof poverty,human resource development and so on - will be quite impossibleto achieve.

At present,more than two-thirdsof nationalproduction is dependenton an unstableagricultural sector and on two economicactivities - constructionand commercefrom which,contributions to developmentare m.1....7 - 90 - Annex 23 Palge 2 of 6 still limited. Growth inindustry, commerce and services has occurre6 largelyin urban areas due to better availabilityof infrastructurein these areas,particularly in PhnomPenh.

Clearly,if Cambodiais to achieveits statedobjective of a just and peacefulsociety through accelerated economic growth, it will haveto resolveserious trade-offs between infrastructure demand in urban and industrialareas and economicand social investmentsin rural areas where most of the country'spoverty exists. It is of utmostimportance to avoida wideningof the gap betweenthe predominantlyrural poor and urban rich.

It is thereforeencouraging that the PIP processhas been establishedto assist the governmentin planningand prioritisationof development activities. It will help to strengthencoordination between ministries. It will also help to ensure that resourceallocation is in harmonywith the Government'sSocial and EconomicDevelopment Program.

We urge the Governmentto continueto refine this process. In particular, we urge that PIP prioritiesshould be reflectedwidtin the nationalbudget formulationprocess.

There are a few key elementsof the proposedPublic Investnent Program for 1997-1999that I would like to highlightnow. Theseare:

(a) PovertyReduction: We applaudthe RGC's stated goal of eradicatingCambodia's widespread poverty as its centraldevelopment task. As indicatedin the World Bank's report on povertyundertaken in 1996,39% of Cambodia'stotal populationlive belowthe povrtyline with

111 V~~~~~~I Annex 23 - 91 - e--f6 the highest number being in the rural sector. The PIP states some of t ee 0o RCG's strategiesin this regard includingits aim to generatenew employmentopportunities. However, with proposedmeasures for cutbacksin the public serviceand the demobilisationof soldiers,added pressurewill inevitablybe placed on the RGC in addressingthose in poverty; we believethe PIP needs to go furtherin addressingspecific programsand measureswhich can be undertakenas aprt of a long term strategyto reducepoverty. Two key areaswhere this must occurare (i) in improvingagriculture; and (ii) addressinghealth and education.

(b) Agriculture: The agriculturesector, which contributes about 45% of GDP and employssome 80% of Cambodia'sworkforce, must be nurturedto achievemore equitabledevelopment across the countrywhile maintainingvigorous long-term growth of 8%. With 85% of the populationliving in rural areas and 75% of the poor beingfarmer headed households,we supportthe PIP's statedview that the key to sustained economicgrowth, poverty reduction and developmentof the rural economyis agiWculture; in this regard,we welcomethe increasedallocation in the PIP for agricultureand rural development.This havingbeen said, we believe there is scope withinthe PIP to expandthe role of nuraldevelopment througha more detaileddevelopment of approporiateprojects, together with a greater focus on areas such as agriculturaltraining and rural credit; with Australia'sdirect involvementin two major projectsinvolving researchand extensionrespectively, we wouldlike to see the developmentof more specificprojects targetting the rural sectorwhich are complementaryto these activities.

-11< ''''V - Annex 23 - 92 - Page 4 of 6 ODA can diminishthe strainon the governmentwith regardto these rural/urbaninvestment trade-offs by directlyfunding projects in the rural sector such as roads, schoolsand health facilitieswhich are unableto attract private investment.Moreover, carefully targeted ODA investmentsin the mral sector,for example,in infrastructurethat improvesaccess to markets,and projectsto improveagricultural productivitycan lay the groundworkfor futurecommercial investment in rural parts of the country.

(c) Healthand Education:We note that the PIP has allocatedhigher levels of fundingfor both healthand educationfor the next three year period. Whilewe welcomethis increasedemphasis on these sectors,it is importantthat the proposedstrategies are fully and effectively implemented.

Cambodiais currentlyspending about 2% of GDP on healthand education,compared with an averageof 5% of GDP for low income countries. In contrast,Cambodia's level of expendituresfor defenceand securityis two to three times higher. Over the longerterm, this imbalancewill be detrimentalto balancedeconomic growth and poverty reduction.

ODAcan also be used to stimulateeconomic growth by supporting investmentin humancapital at all levels. It is necessaryto build a core of highly trainedindividuals who are responsiveto the needs of both the generalpopulation and the businesscommunity, and who possessthe skills necessaryfor the smoothworking of a free marketeconomy.

'ivn Annex 23 -93 - Page 5 of 6

The World Bank report on povertyalso indicatedthat Cambodians living in householdswith uneducatedheads are more likey to be poor, with a povertyrate of 47%. Raisingeducation levels is obviously necessaryto imporoveliving standardsand reducepoverty. It is important,therefore, that the allocationsfor educationindicated in the PIP are given substance.

Other issues: We stronglysupport Cambodia's plans to reducedefence and security spendingfrom the current 5% of GDPto 3.5% of GDPin 1999 so as to allowfor a substantialincrease in outlaysin prioritysocial areas. In this context,we welcomereports of the imminentdemise of the KhmerRouge as a militaryforce in Cambodiaand the opportunitiesthat this will bring to renewedstability and the reconstructionof Cambodia.

Australiawelcomes the plannedreview of public expenditureto be conductedin 1997. It will be an importantplanning mechanism for ensuringthat capitalspending is directedto humanresource and rural sectorswhere economicrates of returnof projectsdo not attract commercialinvestment. It will also providea firmerbasis for establishinga more adequatebalance between salaries and operational and maintenanceallocations in the budget. We hope and expectthat the reviewprocess will assistthe Governmentof Cambodiato take greater responsibilityfor priority settingand povertyalleviation. We believeit will also help ensurethat the infrastructuresector is not monopolising funds.

nV -- Annex 23 - 94 - Page 6 of 6

Mr Chairman,in conclusionwe wouldlike to urge the Governmentof Cambodiato continueits effortsto mobilisedomestic revenues, reform its public institutions,and build confidencein the managementof public resources. The sustainabilityof the reformprocess will ultimatelydepend on the country's capacityto attract increasingflows of private capitaland reduce relianceon extemalfinancing from officialsources. In this context, the sustainabilityof the reformprocess will hingecritically on determinedefforts to promotepolitical stability, a consistentand fair administration,good govemanceand the rule of law in Cambodia.


11-v K Annex 24 -95 - Page 1 of 3

Second session :Japanese Statement on "The Priority Programs and Investment Needs"

1. Remarks The Royal Government of Cambodia has prepared a social economic development plan that reflects clear development policies and strategies specifying priority areas, and has clarified the socio- economic development needs in accordance with this plan, and has planned official development assistance and investment needs over the next three years period. This demonstrates the Cambodian government's self-help efforts. Japan keenly appreciates this plan in that it carefully reviews and well reflects the latest priorities.

2. Comments (1) Regional Development This plan aims at expanding development efforts from urban areas into outlying regions and at realizing a 65% to 35% regional-to-urban development split. However, a stable status of public security, including removal of land mines, is necessary in order to utilize overseas assistance and private investment in regional areas. The Government of Japan expects that the Royal Government of Cambodia will continue efforts to maintain public peace and security, including in the regional areas, and to remove land mines. CMAC's steady activities for the removal of these mines are especially important, and the Government of Japan will continue its support for CMAC in the future.

(2) Maintenance of Economic Infrastructure and the Social Sector Cambodia should work toward a well- balanced maintenance of its economic infrastructure and the social sector, and should thus accomplish economic growth as a result. However, the people themselves should be considered the focal point in the development process. Economic growth is the means to eradicate poverty, aiming at improving the nation's standard of living as a whole.

Achieving economic growth is required for Cambodia to make effective use of donors' assistance and private sector investments over and above Cambodia's own self- help efforts. The total economic product, which has been enlarged through economic growth, should be distributed to

11' . .. Annex 24 - 96 - Page 2 of 3

mdividuals through increased employment and income generation among the general population. This social development process should proceed while keeping an overall balance by properly addressing problems that crop up in the process of economic growth, including appropriate social safety measures for marginalized people and environmental protection measures.

In this sense, the Government of Japan appreciates that the Royal Government of Cambodia has identified practical development goals, including education and health, which are emphasized in DAC's new development strategy. The Government of Japan also anticipates that the Royal Government of Cambodia will identify its own targets in decreasing the number of people living in poverty.

(3) Private Sector Utilization Proper utilization of not only ODA but also private sector funds is essential for Cambodia's socio-economic development. Improvement of the overall enabling environment is needed in order to increase the flow of private investment. Soft approaches such as public security, macroeconomic stability, establishment of a suitable legal framework, proper investment laws and rules, and human resources development are equally as important as a hard approach that includes maintaining the economic and social infrastructure. The Government of Japan hopes that the Royal Government of Cambodia utilizes donors' assistance including Japanese ODA to bolster Cambodian's efforts to improve the enabling environment for private sector investments.

The maintenance of economic infrastructure undertaken by the private sector, such as the BOT scheme, is now under way in Cambodia The Government of Japan is ready to support private sector initiatives in infrastructure development through the following schemes:(a) holding policy consultations needed for improving the overall environment, including the formulation of frameworks, such as development plans and the legal system;(b) utilizing ODA resources, including the implementation of feasibility studies and the dispatch of experts in order to support the project, ;and, (c) other schemes including the provision of trade insurance.

3. Conclusion The Government of Japan expects that the Royal Government of Cambodia

|EV - Annex 24 -97 - Page 3 of 3 will utilize international assistance efficiently, and that the Royal Government of Cambodia will thus be able to achieve the established goal by the year 2000 with some adjustments and improvement of this planL In order for this to happen, the Government of Japan proposes to monitor the degree of achievement in Cambodia's plan every year on the occasion of this CG, during which representatives from Cambodia and the international community gather.


n , ...... r ..,1.~~~~~~~- - Annex 25 -98 - Page I Cambodia - ConsultativeGrouD Meetina Paris. 1st - 2nd Julv 1997

German Statement on Session II: Priority Programs and Investment Needs

Mr. Chairman, Excellencies, Ladies and Gentlemen,

The German Government welcomes very much the continued effort of the Cambodian Government to cast its prospective public investment activities into an ongoing rolling planning exercise. The PIP undoubtedly has the potential to develop into an important tool for the design also of bilateral cooperation programs- although improvements are still required as the World Bank's report rightly notes. We basically share the analysis and the conclusions drawn by the World Bank with regard to the investment priorities stated in the PIP. There is no need to repeat what has already been said in this regard. Therefore, I want to limit myself to highlighting a few aspects which are of specific concern from our point of view.

- In view of the limited implementationcapacity of governmental institutions we strongly support the suggestion to encourage private sector involvement in Infrastructure development, wherever possible. This would not only give relief to scarce public resources but would also mobilise much needed private management know-how.

- There is a definite need to adjust investment programs to financial and technical capabilities to maintain and operate the created facilities on a sustainable basis. Besides technical assistance, provision of adequate budgets for operation and maintenance is also essential. Donor support in this area may be justified for a transitional period. We do not, however, see, how major investment programs, for example in rural development, can be supported unless there is a clear perspective as to how the Government will cope with operation and maintenance in the medium term. The lack of progress in civil service reform and domestic resource mobilisation as discussed earlier during this meeting is not encouraging in this context.

- A related concern are the still low to negligible counterpart contributionsto foreign-assisted projects. The perception that the PIP is still to a large extent "supply- or donor-driven" simply discribes the present reality, which is not surprising in a situation, where donors contribute not only 100% of investment financing but also a substantial share of recurrent costs. The necessary actions for change in this area are described in detail in the World Bank document as well as in the Policy FrameworkPaper and have been discussed earlier.

- In conclusion, I would like to support the suggestion to base the next PIP to a larger extent on experiences with preceeding plans and to make it more consistent with what can be afforded in terms of recurrent budget requirements. We also welcome very much the intention to carry out a Public Expenditure Review. This will undoubtedly be another important input into a comprehensive planning and budgetting exercise.

Thank you for your attention.


AgendaItem 3: Aid CoordinationIssues

Statementby Mr.KEAT CHHON SeniorMinister in-charge of Rehabilittionand Development Ministerof Economy and Finance RoyalGovernment of Cambodia Mr.Chairman Excellencies Ladiesand Gentlemen,

1. Humanand Social capital is thebedrock on whichany developrnent could be sustained. The warof 1970/1975,the traumatic and tragic events of 1975-79,followed by longintemational isolation and neglecthave left Cambodiaseriously handicapped, in terms of humanskills, talent and competenceand, in termsof institutionalstructures and traditons. Capacity development, in all its dimnensionsandaspects is thereforeacontinuing paramount need.

2. Weare overcoming our capacity constraints in the short-term by a largenumber of expatriate advisorsand experts provided through technical assistance programmes of bilateral and multi-lateral partners.These persons both perform day to day functions in variousministries and agencies, and at thesame tirne, provide on-the-job training to counterparts. Inthe past few years there is a perceptible, albeitgradual, improvement in skills absorption by the governmnent staff. The shift is morepronounced in ministriessuch as the Ministry of Economy and Finance (MEF) where we have reduced the number of experts.We are now setting up a Schoolof Finance to continuouslyprovide training to bothofficials of variousdepartments ofthe ministry, as wel asfor otherministries, agencies and provincial offices in financialmatters. In addition,all the externallyassisted projects have a built-inelement of capacity buildingin thecountry as a necessarycomponent Our goal is to graduallyreduce our dependence on externalexperts in allbranches of governmentaswe have done in theMEF. This can be possible only if all the externalpartners insist that the expertsprovided by themthrough technical assistance assiduouslywork for training of their counterparts. I is notenough that visitng missions and teams give usvaluable advice, through volumes of reports and notes as to whatneeds to bedone. They should equallytell us how to doit effectivelyand what assistance we should access for thatpurpose.

3. Inthe long-term, capacity building has to focus on creating proper institutional structures and insttutingproper mechanisms in the public sector in order to equip and orient it to servethe needs of a stateapparatus in a market-orientedenvironment The overall objective is to providean efficient effctve, dynarmic,transparent predictable and accountable government apparatus. As I havesaid earlierin thermeeting, we propose to prepare a technicallysound programme of administrative reformns in thenext year and to haveit readyfor the government after the elections toconsider and act upon. A new,re-fashioned, public adrninistration set-up will also call for fitting talents to jobs and, in arrivingat an appropriatecivil service with built-in recruitment training, promotion and compensation aspects. Meanwhile,we will go ahead with politically neutral aspects of such a programmesuch as civil service census.

4. Capacitybuilding is equallynecessary in the field of extemalaid coordinationand extemal resourcemanagement Our goal is toensure that this work becomes part of and is fullyinternalized in

Ar Kuf CAhn'tSs9ntn Agandnem 3 AidCon*wfban CGUAbIing Pwis 1-2Ju 1997Page 1

11,. - . Annex 26 - 100 - Page 2 of 3 all the governmentstructures. The workwe havedone so far in relatingto andworking with aid- agencies,has increasedour understandingand appreciatonof the myriadcomplexities and requirementsfor the prioritizationof proposals,for aid mobilizationand negotiations,and for managementof externally assisted programmes and prjects. Ourexperience has enhanced our capacityand confidence over the last few years.

5. In Cambodia'scontext in particular,the needfor a well orchestratedand conducted aid- coordinationeffort is self-evident,given the considerable amount of private investment already pledged andexpected to come,and the large volume of ODAthat has been flowing and will continue to be providedto Cambodia,including through NGOs and the concessional credit provided by the multilateral financialinstitubons. Only through such coordinaton can we ensure the optimal and effectve use of scarceresources and accountability both within the country and to the aid-providing agencies.

6. Forthis purpose, a single,unified and high level Council for theDevelopment of Cambodia (CDC)has been set up with two distnct divisions. The Cambodia Investment Board (CIB) coordinates andfacilittes private investrent, while the Cambodia Reconstruction andDevelopment Board (CRDB) is chargedwith directing, coordinating and facilitatng assistance tothe public sector. While participating withthe Ministry of Economyand Finance and the Ministry of Planning inleading the implementation of the PublicInvestment Management System (PIMS), the CDC/CRDB'sfirst responsibilityis to coordinateinternally within the government in clearly identifying priority investments and assistance neededfrom external sources. This is doneon the basisof thegovernment policies and the rolling, three-yearPIP prepared annually by the Ministry of Planon the basis of submissions from, and in close coordinationwith the ministiesand agencies, including the centralministries and- the CRDB. The priorityinvestment programme contained in the government paper before you represents the results of theseefforts and has been cleared through inter-ministerial meetings and at thehighest levels in the govemmentSecondly, CRDB is the firstpoint of contactin the govemrnmentfor discussing and negotiatingwith individual external agencies and partners. It is responsiblefor draftingand arriving at standardumbrella agreements with such partners in accordancewith national needs and concem and for policydialogue with the intematonal community. ThirdNy, CRD8 agrees with each external partner onthe overall size and portfolio of assistance and in directingsuch assistance to the sectors and areas whereit is needed.This is doneby paying attention tothe unfunded elements ofthe priority investment programme(as shown in theannex to thegovemment document before you). In addition,the CRDB alsoconducts annual reviews and discussions with the respectve extemal partner. Once assistance to anyparticular area or sector is clearedand agreed upon, the technical issues of project preparabon and agreementsare the responsibility of respective ministres and agencies with the assistanceproviders. TheCRDB will sit in onfinal negotiations. Fourthly, CRDB is responsibleforthe preparations forthe CG meetingincluding the background document before you. Fifth,CRDB conducts periodic consultaons, individuallyand collectively, with different ministries and agencies tofacilitate smooth implementation of programmesand proects.Sixth, CRDB also organizes and conductsperiodic in-country donor meetingsfor sharing of informatonand addressing donor concems. The last such meeting was on 19 May.Seventh, the CRDB has created and maintains a database for allexternal assistance flowing into Cambodiaand prepares an annualDevelopment Cooperation Report (DCR). The one for 1996/1997 hasalready been circulated toall ofyou.

7. Sinceits establishmentin 1994, the CRDB has grown in itsstrength and levels of responsibility. I wouldonce again urge all ourexternal partners to assistus by directingassistance to our priority needsand to contactCRDB first before starting negotiations directly with any line ministry or agency.

Ur Y.t. CMhn'sSement AWe1 Iem 3 AdCowdtmUnCG MVet, P8 1.-2Auy 199TPog 2

XW . __ _V_ Annex 26 - 101 - Page 3 of 3 8. Inadditon to the CRDB, the aid-coordinabon rmechanism in Cambodia also consists of periodic sectoralmneetngs organized and conducted by the line ministries or agencieson programmes specific totheir functons. These sometimes include cross-sectoral efforts as well.

9. Wehave also requested the United Nabons Resident Coordinator tohelp us through organizing donorcoordination meetings within the country, so thatdonor concerns in relabonswith the Royal Govemmentand on procedural matters, could be jointly brought to ourattenton and for appropriate action.

10. Theaid-coordination machinery in Cambodia is still in itsearly stages but is gettingincreasingly andmore firmly established. The best way to speedilyinstitutionalize thisprocess is forall ourbilateral andmulti-lateral partners, including NGOs, to respectand abide by the machinery we have set up and to assistus to helpthem and ourselves better. What may seem an unnecessary bureaucrabc hurdle nowis a necessaryinstrument for us to installand sustain internal capacity to coordinateaid and therebyto builda betterCambodia. Follow our proceduresand do helpus. And,if youhave any suggestonson how to do things better, please do tell us.

11. WhatI havedescribed above is alsoin thecontext of thegovernments commitment to be fuRy transparentand accountable. Inthis regard, because of theenormous needs to bemet and the lack of internalcapacity to attendto everything neededto be done,much of the rehabilitationand developmentassistance flowing to Cambodiain thepast has been directly implerented by the aid providersoutside the scopeand scrutny of the nationalbudget or thegovernment or the national assembly.Inthe interests of improved transparency and accountability, within the country and outside, ;i is importantthat in futurewe set up joint monitoring committees consistng of the governmentand donoragency representatives to periodically review progress of implementationof such programmes includingaudit of financial expenditure and outputs arising from them.

Thankyou for your attenbon.

Ur KaalChon's SW.ment Agerd Ibm3 AidColdeion. CG Mftig, PS 1.2JMY 1997: Pop 3

11''''' ' ' r - Annex 27 -102 - Page 1 of 8

Aid Coordinationin Cambodia

DiscussionPaper 1

Summary: The ConsultativeGToup and the In-ountry Aid CoordinationSystem - in conjunctionwith the PublicInvestment Manemcnt Systm of the Royal Government- are at present the two prncipal instrumentsfor aid coordinationwith respect to Cambodia.Their establishmentis reflectiveof the need for more comprehensiveand in- depth analysis and prioritizationof aid requirements,relative to the emergingnational policy fiamework. Theinter-active and mutuallysupported mecansm constihte a move away from generalneeds usessments and open-endedrsoue mobilisationthat prealed dring the carlier emergency phase. The oef these -aid ooordinationmechanisms is criticallyreiant ont.he u.strgtheni1g of the national policy and managment fanmeworkthat is being pit -i place. The longer-term sustainability.of these mechanisms a clearlylso dependson safihem appropiately and providingadequate- laries and other incentivesto mo.tivat ticheo assigned t .them.Nevertheless,a. number of more immediate improveente presented-inthis .paperthat could b agreedpon betwen the RoyalOovanment of Cambodiaand its interational p.artners. . -::-. ... .- . - .. .- .--

This paper has been pepared by the UNDP CountiryOffice in Cambodia (June 1997) to facilitate discusions at the fortlhcomLngsecond meeting of die ConsultativeGroup on Canbodia, to be held in Paris, July 1997.

m,....111 Annex 27 - 103 - Page 2 of 8

I. Introduction

Requirements and mechanisms for Aid Coordination with respeet to Cambodia have evolved drastically within less than half a decade (see box 1). It has now become imperativeto shift the emphasis away from extemally driven processes for donor coordination towards building up a capacityfor nationalaid management.For this to be effective,at leasgthe followingelements need to be in place: * Specification of overall and sector priorities, financial and capital resource requirements and capacity developmentneeds, not only at the nationallevel but preferablyalso for provincial and local levels; * Delineationof institutionaland organizationalarrangements for performingkey macro-economic managementfunctions, in particularplanning, budgeting, and investmentand technicalassistance programming;and, * A "minimum' capabilityto perform and managethe above functions,as part of an overall system of national developmentmanagement. Selective functionsfor which no or insufficientnational capacity exists at present may warrantcontinued gap-filling or substitutionsupport, but only if a strategy for capacitydevelopment is in place.

Furthermore, a firm political commitmentto actually pursue and to further articulate the national development agenda is needed, which should be guided by a longer-termvision, not least in view of Cambodia's integrationinto ASEAN.However, for any national and donor-supporteddevelopment efforts to be successful and durable, it is a sine qua non that real progress be made in reforming administrativeand governancesystems, as part of a largerpackage of institutionalreform. This is to ensure not only effectivenessand sustainabilityin the implementationof the government's policy agenda, but also participationby other sectors of society, and structuredways for involvingextemal partners.

In the same vein, the move from coordination between donors towards aid integration and managementby national institutionsrequires willingness and disciplineby donors to comply with the national priority setting, planning and budgeting processes and procedures governing project implementationand monitoring.

In the case of Cambodia, the above specified elementary requirementsfor effective national aid management can only be met if supported by systematic and comprehensive improvements in technical and managerial capacity at all levels of developmentmanagement. Ongoing assistance to development management, mainly from multilateraldonors, and concentratedon macro-economic management (including the handling of extemal aid resources), may need to be reviewed and expanded in order to more systematicallyaddress human resource development and systemic improvements.

This discussionpaper is meantto identifya number of key issues - and to suggest possible actions for consideration between the Royal Govemment of Cambodia (RGC) and the international donor community - aimed at improving aid coordination and management,especially as this relates to coordinationwithin the RGCand the in-countryaid coordinationsystem.

II. National Policy andDevelopment Management Framework

Over the last four years, the RGC has made significant progress in achieving macro-economic stability and in initiating a process of nationalrehabilitation and longer-termdevelopment. This has been significantly facilitated by the establishmentor redesignof basic instrumentsand systems for managing the developmentprocess. Notwithstanding their proven utility, some of these instruments Annex 27 -104 - Page 3 of 8

and systems are yet to be fully intenalized within governmentand to be made fully operational. Consistency (such as between the National Budget and the PIP) is yet to be fully ensured, Consultationand decision-makingprocesses underlying the preparationand use of these instruments do not adequatelyinvolve the provincial and lower administrtive levels, while provisions for consulting with other sectors of society are lacking. Furthermore,Government is still faced with a critical shortage of capacity in operotingand managingthese managementsystems and instruments.

Nevertheless, a "holistic" and fornalised system of developmentmanagement is in the process of being establishedby the RGC, in support of achievingshort to medium term prioritiesand strategies for national rehabilitation and development,specified in several policy documents. The national policy and developmentmanagement framework is currentlycomprised of the following: * The National Programmeto Rehabilitateand Develop Cambodia,the Policy FrameworkPaper (and its operational instrument,i.e. the Memorandumof Economic and Financial Policies), the 1996-2000Socioeconomic Development Plan and its supporting sectoral strategies, and the Finance Law, which - taken together - constitute the national policy agenda. Apart from simplifying this multiplicity of policy documents, consideradon should now be given to developinga longer-ternn vision"that would reflect a nationalconsensus on futre opportunities and priorities, as well as a longer-term"compact" with donors. Such a "vision" would guide the review of progress in implementingthe curfent short to medium term national development agenda and may thus be expected to contributeto the further articulationand opertionalisation of this agenda. * The Public Investment Programme(PIP) and the NationalBudget are the principal instruments for planning short-to-mediumterm public expenditureas well as donor support. Furthereffort is needed to synchronizemore systematicallythe preparationof these instrumentsto ensuremutual consistency.It is also recommendedthat donors be involved in a more structuredmanner in the preparation of these instruments, as on average more than 90%. of the public investments continue to be funded from externalsources. In terms of priority setdng, more attention is needed to social and development expenditures,certainly at a time when security outlays should be expected to decrease. As regards funding, the RGC must effectively carry out its intention to increase the generation of public revenue from domestic sources and to improve the administrationand collectionof taxes.In order to better target public expenditureand to improve its effectiveness,it has been recommendedto the RGC to consider initiatinga PublicExpenditure Review (PER). Several multilateraldonors have alreadyexpressed interest in supportingsuch an initiative,including IMF, WB, UNDPand UNICEF.A PER would complement,and itself stands to benefit from, the PovertyMonitoring and Analysisproject that has recentlybeen initiated,and which will later this year produce the results of the 1997 house-holdsurvey. The survey results will - inter alia - be utilised for updating the povertyprofile on Cambodiaand for producingthe first National HumanDevelopment Report. * A Public Investment ManagementSystem (PIMvS)has been designed and is now being put in place at the level of central govermment.In essence the PIMS is meant to ensure fumctional linkages between planning, programming, budgeting and implementationof investment and capacity developmentprojects; to delineateresponsibilities among Governmentministries and agencies involved in performing these functions; and, to ensure proper coordinationbetween goverwmentagencies in establishinginvestmoent and technicalassistance priorities.

In order to make the PIMS mor effective,especially as it relatesto the managementof aid resouces, the following issues would need to be addressed: * Further clarification of the respective roles and responsibilitiesof governmentministries and agencies and the involvementof donors in the system,especially as regards the linkagesbetween budget, socio-economicplanning, investment programming (PIP) and aid managementfunctions. T'his should enablethe RGC not only to sharpenits priority setting,but also better to ensure the provision of requisite counterpart funds and future provision of operation and maintenance

n~~~~~ - 1 - 106 - Annex 27 Page 5 of 8 diplomatic and donor representatives,the in-county coordinationsystem offers the opportunityfor more regular review of, and dialogueon, progressor lack of it.

Boxl: Recent Aid Coordination Efforts witb respect to Cambodia

Requircmeritsand mtchanismsfor coordinatingExtemal Assistce with respectto Cambodiahave changeddrastically within a shoztperiodof tnme.

Followingthe October 1991 Paris Peace Accords, the United Nations Tranidtioal Authorit m C ia (UNTAC)was established with a $2 billionbudget for peacekeeping and adntive repoibilities. includinga mandatefor coordinatingrehabilitation support. b June1992, te Ministerl Conferenceon Rehabilitationand Reconstructionof Cambodia(MCRRC) was held in Tokyo.At this me6etng,U880 millionin pledgeswere made. Ihis exceededby far the $595million equestedby the Secreary Ganei jin bis April 1992 Appealfor Canbodia. The MCRRCalso establishedthe famework for the InternationatCommittee for the Reconstructionand Rehabilitationof Cambodia(ICORC). Annual ICORCconferences, co-chaired between France and Japan. were held in September1993, Mach 1994. and March 1995. At the last held lCORCmeeting it was decided to initiatea WB-ledConsultatiYe Group on Cambodiathe firstCG meeting took place in Tokyo,July 1996,chaired batwetn the WorldBank and Japan.

Sincethe middleof 1995,an In-countryAid CoordinationSystem (LACS) has beenput ai placeby the RDyalGovernment of Cambodia(RGC). The IACS is comprisedof severalelements (see box 2) that - if effectivelyutilised - wouldallow for substantivedialogue sad monItoringbetween the RGCand donors, as wel as amongdonors themselves. Most importantly, it would facilitate effective conversion of pledges made at extenal fora into detailedand coordinatedcomiunents, as well as joint monitoringof progmnunesbeing implemented.The IACSalso offersthe opportunityfor the RGC and donorsto identifyand rmsolveopetional constrintsencountered in programmeimplementation.

Over the period 1992-96,an estmiatedamount of USS 2.5 billionwas pledged(oxcluding UNTAC) while,accordingto the ltest availabledaa, closeto USS2billion was tualy disbrsd.

The CG and IACS - in conjunctionwith the RGC'sPublic investment Management System - are at presentthe two principalinstruments for aid coordination.Their esttblishmentis rellectiveof the need for more comprehensiveand in-depthanalysis and prioritizationof id requirtments- telativeto the nationalpolicy framework - and for monitoringof actualprogriametproject support being provided. These inter-activeand mutuallysupportive mechanisms constitute a moveaway fm jgeneralneeds assessmentsand open-endedresource mobilisation that prevailedduring the earlieremagency phase.

The effectivenessof aid coordinationis criticallyreliant on the hfiter sfthening of the overall nationalpolicy and management frmmework (especially the budget and investnentplanning instruments), includingclarificaton of rolesand responsibilities, procedures etc, on thedevelopment of tical and managerialcapabilities, and on theprovision of adequate incentives for stff mostdirectly involved.

Although experience with the IACS has generally been encouraging, there is much scope for improving its functioning. Several, more immediateimprovements can be suggested to make this system more effective.

(i) The apex committee chaired by the vice-chairmanof the CDC, exists to offer a forum for policy level dialogue and consultationbetween senior officials of the RGC and senior resident heads of diplomatic and donor missions in a spirit of partnershipand collegial responsibility.As such, this forum would periodically review and monitor progress being achieved in implementingthe national policy frameworkand agreementsreached at the CG, and determine any required measuresfor joint government-donoraction. Furthermore,this forum was to direct and oversee the functioningof the other constituentelements of the IACS.

s-r - ~~~~~r. Annex 27 - 107 - Page 6 of 8

In reality, however, few such meetings have been held, and then mostly preparatory to forthcoming external coordination meetings, and often convened at short notice. This has left donors ill prepared, or without having been able to obtain a mandate to enter into dialogue on key issues. Moreover, agendas for such meetings were usually extensive, leaving little time for dialogue; in a few instances, these meetings did yield useful exchanges on a number of issues (e.g. taxation and forestry). Undoubtedly, they have contributed to fostering better understanding of positions held by the different parties involved and of dilemmas being faced. Nevertheless, most of these meetings occurred without reaching clear conclusions or agreement on follow-up actions through other elements of the IACS, or otherwise.

This forum could, fairly easily, be made more effective if the RGC and the major ODA donors would, once more, review and agree on its rationale, as well as a more regular schedule of more specific and issues oriented meetings. Agendas and preparations should then be made with more lead time. A monitoring system, recommended to be part of the PIMS, would help in ensuring that follow-up be made and periodically reviewed.

(ii-a) Sectoral/thematicDrogrammin5! and monitor)nn between relevant governmentagencies and donors. This element of the IACS, critical for coordinated and effective programming of pledges made at the CG (or otherwise), is also sub-optimal due to lack of clarity of purpose and absence of an agreed and forward calendar. Even when a calendar was prepared (such as for the early part of 1997), it could not be respected due to imperfect processes and delays with regard to Government internal review and decision-making 2. Furthermore, there is a need to spell out more clearly the respective organisational responsibilities of government agencies and donors involved in such meetings. Nevertheless, many such mectings have taken place, in almost all cases oriented towards programming (seldom towards monitoring), some formalised and well prepared, chaired by senior representatives of the RGC or lead-support donors, others more informal and often less well prepared.

The main remedy for making this critical element of the IACS more effective lies in improving the functioning of the PIMS, especially as this relates to the budget and investment instruments. These two instruments, once fully developed and made compatible with one another, would guide the further articulation of sectoral priorities and resourc requirements, and would provide a more elaborate and operational framework for aid programming and monitoring.

Meanwhile, it is recommended that CDC/CRDB, based on consultations with its inter-ministerial network, and guided by the core PIP - as agreed upon at the CG - determine priorities and a schedule for conducting programming/monitoring meetings in respect of key sectors and cross- sectoral domains. It is, furthermore, recommended that, for each of these priority sectors/domains, lead institutions on the part of the ROC and lead-support donors be identified and agreed upon. They would then jointly be required to ensure that substantive preparations (investment or master plans etc.) are completed on time, including specification of funding and resource mobilization requirements, and measures for follow-up and subsequent monitoring. Such action plan could then be reviewed and endorsed by the apex committee of the IACS.

(ii-b) Ad hoc workinv vrous between relevant government agencies and donors concerned. These were meant to identify and resolve operational issues (e.g. incentives) and administrative, logistical, etc. bottlenecks (e.g. customs clearance, visa etc.) in programme implementation. Despite the fact that most donor-supported programmes, once these have become active, do encounter similar constraints, it is somewhat remarkable that this has not lead to any initiative as part of the IACS. Individual donors or groups of donors may, nonetheless, have resolved some of

2 Donor meetings we still pending to reviewmaster plans for which technical prepntions were concluded several months ago,including civil aviation,telecommunication and tourism.

HIl l' ' Annex 27 - 108- Page 7 of 8

these constraints,such as the UN Agencieswho amongthemselves have agreedon a harmonized policy on supplementary payments, per diem and training allowances for Government counterparts.However, it would,obviously, be of more generalbenefit if such initiativescould be embraced and expandedto cover relevant govemmentauthorities and all donor partners concerned.This wouldalso avoidad hoc arrangementsbetween individual donors and individual governmententities, which, although facilitatingdelivery in the short term, may prove to be unsustainable- or, worse, counter-productive- in terms of nationalcapacity developmentand durabilityof project outputs.

It is, therefore,recommended that the CDC/CRDBinitiates consultations with a selectedgroup of ODA providers(including an NGO representative)in order to make a systematicinventory and prioritizationof such operationalconstraints, as well as to propose ways and means to resolvethese, including- if so required- the settingup of mixed RGC/donorworking groups. In some cases proposed solutionsmay have to be reviewedat the level of the apex committee, especiallywhen a commonapproach would be warrantedor if proposedresolutions would have major financialimplications.

(iii) A forum for consultationamong donors. Several such meetings have been held, at the initiative of both the UN Resident Coordinatoras well as individualdonors. Only in a few instanceshave these cncountersfulfilled their purpose,especially meetings held preparatoryto ICORC/CG.This forumwas to ascertainand, to the extentpossible, to reach consensuson issues of policyor recurrentmatters of commoninterest or concern,and to provideviews and advice on the part of the donor communityto the RGC,either through the IACSapex committeeor through the servicesof the UN ResidentCoordinator. In most cases,however, lack of a clear agendaand the impromptunature of these meetingshave yieldedno such outcome.This would seem to be due to two main factors. First, a reservedapproach by donors,given the unpredictablecountry environment,has - especiallyduring the start-upof the IACS- often hampereda frankexchange of views. Furthermore, given the uncertaintiesand delays initially encountered in donor programmingand implementation,the resultantpressure to deliver has often led to a tendency among donors "to go it alone", with a prevailingattitude of 'getting the job done".As a result, these informal donor meetings were mostly ad-hoc and served the purpose of information gathering(not at all times even achievinginformation sharing !), with little or no effecton the functioningof the IACSas a whole.

Improvementsin the functioningof "donor-donormeetings" may inducedonors to operatewithin the emergingnational policy and managementframework - thus ensuringthat prioritiesare met, whilst avoidingoverlap and duplication- and, perhapsmost importantof all, may foster a more interactive and substantive dialogue among donors. This would, obviously,have a positive impact on the effectivenessof both the IACSand CG, and - more indirectly- the PIMS.Further thought needs to be given to the "formula"for promotingdonor-donor consultation. Infornal encounters often do prove to be useful for a more frank exchangeof views. However,more formalmeetings may also be requiredto arriveat effectivedecision-making and follow-up.

In conclusion, it may be expected that the actual functioning of the IACS will gradually improve, concurrentlywith the strengtheningof the RGC's policy and managementframework, and capacity development and adequate incentives in respect of governmentstaff most directly concerned with performingthese functions.A well functioningIACS would, in turn, benefitthe effectivenessof the CG (in terms of both its preparationsand follow-up)and strengthenthe inter-relationshipbetween the mechanismsfor externaland in-countryaid coordination.Nevertheless, a numberof more immediateand concrete actions have been suggestedin this paper on which the RGC and the internationaldonor communitycould agree right away. Theseactions, moreover, are relativelyeasy to implementand could have a direct, positiveeffect on improvingaid coordination with respectto Cambodia.

1W. .. Annex 27 - 109 - Page 8 of 8

Box 2: The Cambodia in-Country Aid Coordination System

EXTERNAL AID COORDINATION -( ICORC and Consultative Group Meeting mechanisms)


CDCwith DONORS and HeadsOf Missions (Dialogue,Implementation review, and oversight)

Programming& Moniitoring -7Operational Issues

*'CDC/ Line Ministrie Mixed Govtldonor andDonors k e i GroupsZ1 '12$sectoral programming -v -;I:T and monitoring Issues



Agenda Item 3: Aid Coordination Issues

World Bank Statement Mr. Chairman Mr. Keat Chhon Ladies and Gentlemen

The importance institutionaland individualcapacity building in Cambodiahas been stressed many times over in various fora includingthe last CG meeting held in Tokyo in July 1996. Today, the governmentstatement and the UN Resident Coordinatorhave again emphasizedthis issue. Unlike in many other countries,this subject has been on the forefrontof issues in Cambodiabecause of the destructionof institutionsand traditions and large scale loss of educated,trained and skilledpeople duringa traumaticperiod in the country's history. Lack of adequate capacityhas been an all pervasivephenomenon in the public sector in the country but most of us in the countrycan vouch to the fast improvingsituation in the past two years.

All of us need thereforeto pay specialand focusedattention to this issue in all our efforts to assist Cambodia's socio-economicdevelopment. Providing long and short-termexperts to virtually supplantand substitutethe roles of governmentfunctionaries is a rapid and immediatesolution as has been so far. However, as the head of the Cambodiandelegation has clearly pointed out time and again, externalagencies should use their experts increasinglyand specificallyfor counter-parttraining and institutionbuilding.

The Bank attachesparticular importanceto this subject in all its assistanceprograms. We provided long-termexperts from the UNTACperiod to improve the functioningof the Ministry of Economy and Finance. Today,most of such expertshave left and the improved work of budget preparationand monitoring,treasury functions, and economic managementand monitoringare continuedmostly with trained Cambodiancounterparts. The Bank is also assisting in establishinga Finance Schoolas an institutionto provide training to Cambodianofficials in variousbranches of governmentin financial aspects of managementincluding in taxation and other matters.Likewise, all other projects supportedby the Bank attend to training needsin the respectivesectors.

Given the fact that Cambodiais highly dependenttoday on external resources,aid- coordinationassumes added significanceand has to do with buildinginternal capacity. Proper aid-coordinationensures effectivenessof assistance,avoids overlaps and wasteful duplication, promotes coherenceand complementarity,and helps the recipient governmentto look at all aspects of a situationin directing,receiving and using aid in a holistic manner. Aid-coordinationcapacity should therefore be fully internalizedin and owned by the recipient government.The governmentshould be clearly able to set its growth targets, to envisionand enunciateclear policies and programsto reach these m-n - Annex 28 - 111 - Page 2 of 2

targets, to prepare focused strategiesand projectsto achievethe targets, and to mobilize and allocate resourcesfor implementingthe projects as well as monitortheir progress and perfornance. The Bank is glad to note that starting in 1995the governnent is gradually but surely building this internalcapacity as was mentionedin connectionwith the preparation of the Socio-Economic Development Plan (SEPD)and the PIP.

We would like to commendthe CambodiaReconstruction and DevelopmentBoard (CRDB) of the CIB for rapidly acquiringcapacity for aid mobilization,coordination and monitoring. The Bank was glad to be able to support this effort with a long-termadvisor till end of last year. Besides,the team providedby UNDPhas been doing a fine job on this front. Today, the CRDB is fully capableof collectingand analyzingdata and to produce the annual DCR.

The Royal Government"sstatement outlined the variouslevels and ways of aid- coordinationestablished in Cambodia.We support the plea for all of us to support these measures and follow the proceduresestablished by the governmentin the interest of long- term capacity institutionalizationin Cambodia.In-country aid-consultation and coordinationis carried out through periodicdonor consultationslike the ones organized by CRDB in January and May this year. It would be useful if these consultationsget systematizedand held once a quarter or so. Besides such overarchingmeetings, sectoral information sharingand aid-coordinationmeetings have also been organizedby the governmentfrom time to time, like the one on road infrastructure(May 97), on Tonle Sap (June 97), on water supply (March97). These shouldcontinue.

Many agencies also hold consultationmeeting with a varietyof partnersand stake- holders including NGOs in developingtheir programsof assistance.The Bank consulted such partners in developingits CountryAssistance Strategy last year and does so in respect of all its projects. The UN systemn,in which the Bank participates,holds monthly meetings for informationsharing and varioustheme groups organizedby the systemhave wide-rangingparticipation.

In terms of annual consultationsbetween donors and the governmentand for aid- discussion and mobilization,at the request of the Royal Governmentand in consultation with other stake-holdersin the internationalcommunity, the Bank is glad to organizeand conduct annual CG meetingssuch as the one now.

Aid-coordinationis a difficulttask given the differingmandates, internal procedures and time- horizons of differing partnersproviding aid. However,the work of building capacity in this field has progressedwell in Canbodia and shouldbe further strengthened. Let us all work for it.

Thank you.

117_ C Annex 29 - 112 - Page 1 of 4 Third Session: Japanese Statement on the "Aid Coordination Issues"

1. Aid Coordination by the Royal Government of Cambodia As the so- called "aid fatigue" of donor countries worsens, also the prevailing circumstances surrounding Japan's ODA have become more constrained, since it has been confirmed that the ODA budget is to be further reduced more than 10% in the next FY. It will therefore be necessary under such circumstances to utilize our limited financial assistance efficiently and effectively and without unnecessary overlapping. It is also necessary in this context to further improve the capability and capacity coordinating aid of the Council for the Development of Cambodia (CDC) as the principal assistance receiving body. The Government of Japan has, from a point of view of supporting Cambodia's self-help efforts, implemented various technical cooperation activities in order to improve Cambodia's capacity- coordinating aid. For example, long- term advisor- type specialists have been dispatched to Cambodia. and training has been provided to give guidance on the implementation procedures underlying Japan's economic and technical cooperation system. It will be increasingly important in the future to dispatch advisor- type specialists from various fields of expertise.

2. Aid coordination including that of Donor Countries The Government of Japan (GOJ) believes that aid coordination, including that of donors as well as that of Cambodia alone is important from the following two aspects. (1) Aid Coordination from the Viewpoint of the New Development Strategy First of all, aid coordination is important fromthe viewpoint of implementing the idea of partnership, which is a principle of the New Development Strategy of the OECD's Development Assistance Committee (DAC). Japan attaches priority to the implementation of the New

g~~~~ .. -... 1 Annex 29 13- Pa-ge7- ot 4. Development Strategy in Cambodia, and this has been well received in Cambodia The Government of Japan thinks that it is more effective to arrange assistance at the local level, so that the requests received from the Royal Government of Cambodia can later be taken up directly by the local entity in charge of arranging assistance there. In this context, a local donors' meeting was held in Cambodia by the UNDP in February 1997 based on a proposal by the Government of Japan. The overall consensus was reached on the importance of donors having a commonly shared development vision, working in close cooperation and speaking with one voice. This perception was again confirmed. and many participants referred to the need of expanding assistance areas in each individual field, such as, for example, health care. Meaningful discussions regarding the desirable direction of development and the problems among donors in cooperating at the local level in Cambodia were also carried on. The Government of Japan thinks that it is important for the actual arrangement of assistance to Cambodia to promote a system of discussions among the donors and Cambodia at the local level as well as to implement the idea of the New Development Strategy in the future.

(2)Aid Coordination from a viewpoint of Broader Development Secondly, it is important to arrange assistance programs covering a broader development of the greater Mekong Area The Government of Japan has supported Cambodia's national efforts of reconstruction and restoration, and, at the same time, the Government of Japan attaches importance to the broader development of the Greater Mekong area, including Cambodia Therefore there is a need to coordinate ODA programs under a broader area approach, and to share information on this kind of approach among donors. Moreover, aid coordination between Cambodia and Cambodia's neighbors is desirable. After the signing of the Cambodia Peace Agreement in Paris in 1991, the Annex 29 - 114 - Page 3 of 4 Indo- China countries began to transform their economic systems away from planned economies toward market- oriented economies. They also began to interact more actively with other countries, such as the ASEAN members. In response to these developments, the Asian Development Bank (ADB) has held Conferences on Subregional Economic Cooperation since 1992. It has started discussion on a multi-framework for well-balanced and harmonized development, which promotes the movement of people and goods within this area as a single economic subregion.

Last year, a task force of experts was established in Japan, and development scenarios for the realization of well- balanced, efficient development in this economic subregion, with the improvement of the infrastructure at its core, have been discussed. The Government of Japan regards the Indochina countries along the Mekong River as the "Great Mekong Area", as a report published in August 1996 indicates.

It is quite important to realize a harmonized and balanced development in the Greater Mekong Area The following measures are necessary in order to realize this objective: (a) improvement of infrastructure crossing international borders of countries and regions; (b) priority support for Cambodia and Laos;and, (c) environmental conservation in the areas along the Mekong River.

In order to improve the transportation networks which connect the north and south and the east and west with central Indochina, Japan will extend assistance measures to projects, such as "Project for Rehabilitation of the National Route 6 and 7"and "Project for Construction of a Bridge over the Mekong River", to connect Cambodia with Viet Namn We also will provide support for the "Project for Rehabilitation of Sihanoukville Port", which is a key point in the north- south transportation network. The development of

- f..-. Annex 29 - 115 - Page 4 of 4 the Sihanoukville port is a joint project in which Japan has implemented the master plan(M/P) and the feasibility study(F/S) of the port, France has implemented the M/P and F/S of the city, and the USA has maintained Route 4, which connects Sihanoukville with Phnom Penh. This project is a successful model of the voluntary Aid coordination that was proposed by the Government of Japan in the Forum for Comprehensive Development of Indochina

3. Conclusion Finally, public peace and order must be secured, in order to implement smoothly any assistance programs provided by donors. Japan's economic cooperation site was attacked in May 1997, as well as last year. These incidents have obstructed the smooth implementation of assistance. Hence it is strongly recommended that the Royal Government of Cambodia increases its efforts for smooth implementation of assistance programs, including maintaining public peace, order and security.

[END] Annex 30 -116- Page I of 2 CAMBODIACONSULTATIVE GROUP IEETIG Pais,1-2 Jtuy 1997 Aaendaftm 4:FRancdna Ruiruents

Statementby Mr.KEAT CHHON Sr.Minister in-charge of Rehabiltationand Deveoprment Ministerof Economyand Finance RoyalGovernment ofCambodia

Mr.Chairrnan Excellencies Ladiesand Gentlemen,

1. We had an intenseday of comprehensivediscussions yesterday on many aspectsof Cambodia'ssocio-econornic progress, programmes and needs. The Cambodiandelegation deeply i appreciatesthe spirit of comopletecandor in thedeliberations and the constructive comments received. Wehave taken full and careful note of your remarks and suggestions and will do our utmost to address them.

2. Ourneeds for extemalsupport are summarizedin the governmentpaper "Socio-Econornic Developrment,Requirements and Proposals". As wenoted yesterday, our budget revenues have been growingquite rapidly and are slated to increase further in the years to comebecause of measureswe haveundertaken recently. At thesame time, our needs have also grown. In thepast few years, our currentrevenues have not been adequate to meetour recurrent needs for staffsalaries, defense and securtyand operaffonal expenses across the board. The shorifall in the current account and almost our entrebudget needs for capitalexpenditure have been met by budgetsupport contributions from the multilateralfinancial insttubons and from some bilateral partners. We had estfmated that there would be a currentsurplus in 1997but now we feel that it maynot quite happen. Our efforts will contfnue to increaseour budgetrevenues, by increasingrevenue collections, by gettingall publicrevenues into thebudget, and by overallvigilance and pursuit. Still, because of ourtremendous and growing needs, includingour anticipatedlocal expenditures for the forthcomingelecions, the needsfor public administration,besides the other on-going programmes like demining and the SocialFund, we will continueto needexternal support for our capital investments and technical assistance requirements.

3. Asyou will note on page 8 ofthe annex to our document (the very last page), we have estimated thatwe would need a totalof USS 1.472 billion as extemal assistance for the three year period, 1997- 99.This total amount includes all capitaland technical assistance, our counterpartfunds for such assistancewhich are included in thebudget budget support balance of parmentssupport, and funds for specialprogrammes such as demobilizationand public administration reform. Funds for budget support,estimated at $ 182million include the amount needed for investmentsthat klw throughthe budgetas well as anestimated USS 42 million for the preparations for andthe conduct of elections in 1997-98.To theextent that any amount for the elections is directlycontibuted from external sources, thebudget support would come down.

4. Wealso estimate that, out of thetotal amount of USS1.472 billion, approximately $ 619 million standsalready comritted for ongoingprojects or newones for which agreements are being concluded. In addition,we estimatethat we wouldbe ableto securebudget support of $ 120miNion from multilateraland bilateral partners, although we have not reached any agreemfents so far. An amount of

W KAMfCAhon's Sttement Agenda Iten 4:Fkwncq Requtawnst CG Meet, 1-2J* 1997Pae 1

D1;1- Annex 30 - 117 - Page 2 of 2

$40n n t alsoexpected asbWance ofpaymt sWpotm to F a ie laRyeWs suce frm fle Ste yearESAF arrangement which ends ftis year. 5. I sholdaddt VAwhib alVWl ecost ofte projectrwhkch asisaiceIs shown afu My uned we agreedupon costs, those cot for projectsshomn as partly fnded or unfundedwe current rough estimates,which will need to be revised once aid agenies are idenfHied and negotiations commence.

6. Thetotal amount of USS1.472 billion for three years, 1997-99, translates into $ 490rrilion per year,wNch is wel wihinthe rangeof assistanceextended D us so far. Youwill note tomthe 199611997Development Cooperation Report (DCR) that $ 482milion was delivered as assistanceto Cambodiaby bilateral and multilateral partners in 1996;the NGOs spent an additional amount of S 36 rrillionfrom their core funds. We now project $ 490rmillion as needsper yearagainst S 519rmillion pledgedfor 1996at theCG-type meeting in Tokyolast year. The difference is marginal and arises in partfrom our sharpeningof our estimates for someof theprojects, and also in partbecause of our expectationthat our revenues will increase and cover more of our recurrent expenses.

( 7. Ladiesand Gentermen, the counties and organizations you represent and those that are not presenthere, have been very generous in giving us ready advice and assistance for Cambodia'srapid developmentand rehabilition in thepast live years. However, owing to capacity constraints imposed onus by ourtragic history, many of these prograrnmes and projects have generally been identified and implementeddirectly by the aid-providers. The time has now arTived for Cambodiato become le maitre d'ouvrage"and insure the ownership ofthe process of identification, prioritization and inplementation to be in the handsof the Cambodianauthorities. Thanks in a largemeasure to yourassistance and becauseof ourown determination and perseverance, wehave now acqured adequate knowledge and capacityin the past few years to fulfill this responsibility.

8. Weseek your continued goodwill and assistance in the true spirit of parbershipfor the orderly developmnentof Cambodia. Your help will not only be an investment for Cambodia.Indeed, because developmentis the surest antidote to, and promoter and assurer of peace, stability, security and overall prosperity,your investrnent will help prevent the re-emergence ofconflicts, and will fuel growth in trade, comrerceand interaction in the region and with the rest of the world.

9. Pleasemake pledges of yourassistance both in totalterms, including amounts that might have beenalready commrited, for thethree year period, 1997-99, and if andwhere possible, specifically for oneor allof the schemres identified as special efforts, such as public sector reforms, demobilization, the SocialFund and the elections, Once the pledges are rnade, we will start discussions individually with you onthe programmesand projects you could best support in consonancewith your own internal mandateand priorites.

10. I lookforward to your pledges totaling $ 490rrilion per year for the next three years, 1997-99. I wil behappy to provide any clarifications you need.


Af KutCMon's Stubwnnt Agnbd Item 4 FrwehqRqwunwis CG ae.g, Pws:1-2 At 1t997Pop 2 Annex 31 - 118 - Page 1 of 2 CAMBODIA CONSULTATIVE GROUP MEETING Paris,July 1-2,1997

Statement on External FinancingRequirements Kyle Peters The World Bank

Mr. Chairman,Excellencies, Ladies and Gentlemen

The World Bank--inclose collaborationwith the IMF--hasprepared a mediumterm economic scenario to illustrate the growth prospectsof the Cambodianeconomy and to estimate the requirementsfor extemal assistance.

This scenario and the associatedfinancial support are predicatedon the implementation of the reform program outlined in the Government'sPolicy FrameworkPaper for 1997-99. This scenario,therefore, would require continuedprogress in consolidatingmacroeconomic stability, combinedwith an accelerationof economicreforms and significantimprovements in the transparencyand accountabilityof economicmanagement, particularly in the fiscal accounts. The high levels of past donor support and the willingnessof the donors around this table to support Cambodiais clear, as long as such support is met by strong Governmentactions to raise domestic resourcesand channel these resourcesinto sustainabledevelopment activities.

As many speakershave noted, decisive and timely economicreform would enable Cambodiato sustain its current high rate of growth. This would require a substantialincrease in domestic savings and investment. Governmentsavings would need to improve significantlyas a result of enhancedtax efforts and increasednon-tax revenue, especiallyfrom forestry,as sustainablemanagement practices take hold. The extentof improvementin govermmentsavings, however, would be limited in the near term, as the implementationof administrativereform would require additional expendituresfor departurepackages and trainingprograms. As a result, under this high reform scenario,foreign savings would need to finance a declining,but still major, share of investmentover the next few years.

External financingrequirements, therefore, under this high reform scenarioremain substantial. With the maintenanceof politicaland economnicstability and a re-invigoratedreform program, an increasingproportion of Cambodia's externalfinancing requirements could be met by inflows of foreign direct investment.However, even with this increase in private capital flows and an increasein domesticresource mobilization, disbursements of official assistancein the formnof grants and concessionalloans at about the same level as in 1996 would still be needed in 1997-98.

During 1992-96, includingthe last CG meeting in Tokyo, the intemational community has pledged significant officialassistance (about USS2.5 billion)which has been committedand is substantiallydisbursed. Therefore,if the Goverrnment'sreform effort is consistentwith the

1'I' '''- V'' Annex 31 - 119 - Page 2 of 2 high reformscenario, maintaining the level of officialdisbursements would require commitments of officialasistAnce of about USS455 million per yeawduring 1997-99. Even if the Government makes a concertedeffort to increasedomestic resource mobilization,domestic savings and budgetary revenue are likely to rise only slowly.As a result, officialassistance would still need to cover some recurrentexpenditures, domestic counterpart funds, and the foreign exchangecosts of the public investmentprogram. Therefore,in the near term, there would remain a need for some of the official assistance(about US$ 60 million) to be given in the form of balance-of- payments and budgetary support,but I would like to stress that this budget supportwould be justified only if Cambodia's own efforts at domesticresource mobilization are strengthened.

These projected requirementsof official assistanceexclude the financial supportthat would be required for the elections in 1998. Several donors have indicatedthat they would also provide support for the elections.

Mr. Chairman,now let me turn to the World Bank'sassistance program. In our fiscal year 1997,two IDA credits were extendedto the Goverunmentof Cambodia. These were a Disease Control and Health DevelopmentProject for about US$ 30 million and an Agricultural Productivity ImprovementProject for about US$ 27 million. In February 1997,the Board discussed and approved the first full CountryAssistance Strategy (or, CAS) for Cambodia. The CAS outlined our strategyand objectivesin Cambodiafor the fiscal years, 1997-1999. The broad strategic objectives of the Bank's countryprogram are to supportCambodia's social and rural development,the reconstructionand rehabilitationof Cambodia's basic infrastructure,and to support Cambodia's reform program. This supportwill be in the form of IDA credits, economic and sector work, and technicalassistance, including the involvementof the Bank EconornicDevelopment Institute (or, ED1). In fiscal year 1998,the World Bank is preparingtwo IDA credits, totaling about US$ 50 million, for the approval of the Bank's Board of Directors. The first will be a Water Supply Rehabilitationcredit for about US$ 30 million,which will supportthe rehabilitationof water supply and distributionsystems in Phnom Penh and Sihanoukville. The second project will be a Rural DevelopmentProject for about US$ 20 million. The CAS envisages a "high case" scenario of US$ 75 million per year. The high case is predicated on the Governmentimplementing a strongpackage of reforms, in addition to maintainingmacroeconomic stability. The high case would entail a StructuralAdjustment Credit. The amountand timing of this adjustmentcredit woulddepend on the strength and timing of the Government's reform package.

Thank you.

h,- - Annex 32 - 120 - Page 1 of 5 Fourth Session : Japanese Statement on the "Financing Requirements and Pledging Session"

1. Basic Policy The Government of Japan wiII actively support reconstruction and development efforts by Cambodia mainly in the fields of economic infrastructure, agriculture, basic human needs such as medical treatment and health, and human resources development. The Government of Japan will take into account the following issues in providing assistance measures to Cambodia. First of all, the Government of Japan fully supports the NewDevelopment Strategy adopted by the OECD's Development Assistance Committee (DAC) as guidance for implementing ODA to developing countries, hence, the Government of Japan attaches high priority to the implementation of the NewDevelopment Strategy especially in Cambodia prior to the Asian developing countries. With the New Development Strategy in mind, the most high-level comprehensive mission will be dispatched in order to discuss a middle- and long- term assistance policy, including priority areas.

Secondly, in addition to assistance in the improvement of physical infrastructure, the Government of Japan will positively consider cooperation in "soft" fields , such as assistance for the legal system, as well as cooperation in "hard' fields, such as assistance for maintenance of infrastructure. In order to support the promotion of a market- oriented economy in Cambodia, a mission will be dispatched to consider cooperation programs that effectively combine acceptance of trainees, dispatch of experts, and provision of equipment in the field of legal systems. Thirdly, cooperation measures will be implemented that pay attention to the development of harmonious relations between the public and private sectors. The system of dispatch of advisor- type experts from the private

V .. .I Annex 32 -121 - Page 2 of 5 sector was established through harmonious relations between the public and private sectors, in order to respond to the diversiSed assistance needs of developing countries. As a follow- up to the mission that was dispatched by "Keidanren7 (Japan Federation of Economic Organizations) in July last year, experts recommended by Keidanren will be dispatched to take part in the Shihanoukville Industrial Park Construction Plan this year and an Trade and Investment Promotion Seminar will also be held this year. The Government of Japan hopes that the Royal Government of Cambodia will fully utilize the experts' know- how and experience for the economic management of the country. Fourthly, since the Government of Japan regards development not only in Cambodia, but also for the entire Indochina area from a broader context, as important and the Government of Japan will also implement assistance based on this viewpoint. Fifthly, the Government of Japan currently implements cooperation measures i limited areas, such as the area around Phnom Penh, the Government of Japan are deeply concerned about the recent situation that the public peace is getting worse even in Phnom Penh. In order to expand the physical scope of the areas in which cooperation measures are implemented, it will be essential to secure public peace and order, including implementing measures for land mine removal. It is strongly expected that the Royal Government of Cambodia will undertake serious efforts to this effect. The Government of Japan will be ready to consider extending yen loans, taking into account the economic situation, debt repayment capability and other related issues, in response to assistance needs that cannot be addressed properly under the grant aid scheme.

2. Substance of Assistance in FY1997/1998 In line with the above- mentioned policy, the Government of Japan

in Annex 32 122 - Page 3 of 5 pledges in FY1997/98 the total amount of no less than Y 8 billion for development assistance, and US$1 million in support of the removal of land mines. (1) Grant Aid Grant aid in FY 1997/98 will be either implemented or considered for the following projects: To improve the fundamental infrastructure of Cambodia: Rehabilitation of the National Roads Route 6 and 7, Construction of a Bridge over the Mekong River , Rehabilitation and Upgrading of Electricity Supply Facilities in Phnom Penh, Improvement of the Siem Reap Airport, and Rehabilitation of the Sihanoukville Port; As basic human needs field: the Improvement of Water Supply Facilities in Phnom Penh; As agricultural fields : Improvement of the Facilities of ColmnatageSystems, which make use of Mekong River water, and provision of Food Aid.

The implementation of grass- roots grant aid , which is directly useful to the people in Cambodia, will also be actively implemented . It is estimated that approximately no less than Y6 billion in grant aid will be provided in order to realize the above- mentioned projects.

(2) Technical Cooperation and Development Study Further cooperation in FY 1997/98 is planned in technical cooperation and development study. The total amount currently estimated is about Y2 billion. Since human resources development is most important for the economic development of Cambodia, the Government of Japan will positively implement technical cooperation as follows: Accept 123 trainees mainly in the fields of public administration, agriculture, health and medical treatment, and legal systems; Dispatch 21 individual experts mainly in the fields of aid coordination,

TF ...... - I Annex 32 -123 - Page 4 of 5 agriculture, and education; Dispatch 43 Japan Overseas Cooperation Volunteers (JOCV); Invite 30 youth, under the Japan- Cambodia friendship Program; Provide Polio vaccine and equipment, such as special equipment related to WID; and Continue implementation of a project- type technical cooperation of the Maternal and Child Health Project.

Furthermore, Japan will contribute about US$1.67 million to UNDP in order to implement a tripartite cooperation arrangement for settling refugees , and for the development of agricultural regions. This tripartite activity is conducted jointly by experts from Japan and ASEANcountries.

Eight development study projects will be implemented in FY 1997/98, including a new project for bridge Reconstruction and Improvement.

(3) WID Considering the important role that Cambodian women play in the economic and social development process, the Government of Japan has implemented cooperation activities in the field of Women in Development (WID) at a steady pace. Last year Japan supported the Indochina WID Seminar, and the national Workshop in Cambodia. As a follow- up to these meetings, the project on Micro- Enterprises Development,which is intended for women entrepreneurs in the area, is now under consideration

(4) Measures for the Removal of Land Mines The removal of land mines in Cambodia is necessary for the country's economic development and welfare improvement of the general public. The Government of Japan intends to give as much support as possible to any mine removal measures. Thus, the Government of Japan will contribute

- r~ Annex 32 -124 - Page 5 of 5 about US$1 million to the CMACin FY 1997/98.

3. Conclusion The Government of Japan intends to implement the above-mentioned assistance during this fiscal year. However, whether these projects and programs can actually be realized depends on how seriously Cambodia will work on improving its domestic situation towards the elections of the next year. The support system of the international community will be retrograded if domestic political stability cannot be secured. In particular, the recent political instability is a dangerous factor, which could reduce to nothing the progress achieved so far by the joint peace and reconstruction efforts of the Royal Government of Cambodia, the Cambodianpeople, and the support of the international community. The Government of Japan strongly desires the Cambodian government's utmost efforts in order to prevent such undesirable results. We hope that this will be reported to both Prime Ministers upon your return to Cambodia. As mentioned before, the overall environment surrounding econoniic cooperation in Japan is very severe as the budget for economic cooperation will be reduced by more than 10%next FY. It is therefore even more important than ever that Cambodia utilize the economic cooperation extended by Japan effectively and efficiently, that sufficient results be achieved, and that the public be well informed about these efforts and achievements. Hence, further endeavors on the effective utilization of assistance and public relations regarding ODAare fully expected.






Mr Chairman

Australiais now in the final year of a fouryear $A92million aid pledge to Cambodia. We are pleasedwith our successin meetingthis pledge. In the first three years of the pledgewe have expended$A70 million, fully meetingthe nominalallocation of about $23 millionper year. We anticipatethat a further$A22.3 million will be disbursedin 1997/98, completingin full our remainingpledge commitment within the agreed period endingJune. Estimatedtotal aid flowsto Cambodia(including regionaland humanitarianfunding) in 1997-98are $A32.1million. All funds are providedas grant aid.

Australiaconsiders that its aid programis the principalmeans through which it can help Cambodiareemerge as a viableregional entity. Given decadesof war and civil unrest, the reconstructionof Cambodiawill take considerabletime and effort. Australiahas alwaysacknowledged that it is "in for the long haul". But we firmlybelieve that Australianaid to Cambodiashould continue only so long as it can be deliveredeffectively to serve the obvioushumanitarian needs of the Cambodianpeople.

Within this context - and speaking as a friendof Camnbodia- it is impoTtantthat I mentionthat Australiajoins with other donorsat this Annex 33 - 126 - Page 2 of 5 meetingin havingspecial concerns about the current political and security situationin Cambodia.The AustralianGovernment takes the view that a stable politicalframework is an essentialprerequisite for economic development,and that the continuedsupport of the intemational communitycannot be takenfor grantedunless the politicaland security situationis normalised.

Australianassistance to Cambodiareflects a fum commitmentto poverty alleviation,participative development and promotinghuman rights. In responseto the needs of the majorityof the population,the Australianaid programis increasingits focuson rural areas. Assistanceis deliveredto the priority sectorsof agriculture,health, educationand training,good governance,and infrastructure.It also includessupport to the Cambodian Mines ActionCentre for mines clearanceand awarenesstraining activities.

As we have heard over the courseof this meeting,the Government's developmentstrategy accords high priorityto agriculturaland rural development,particularly as the agriculturesector contributes about half of Cambodia'sGDP, employssome 80% of the labourforce. It is for this reason that agricultureis the largestsector in Australia'sbilateral aid programto Cambodia. Australiais supportingAgricultural research and extensionto diversifyand increasecrop productionin collaborationwith the InternationalRice ResearchInstitute and througha majorproject to developa sustainablenational agricultural extension service.

Australiastrongly supports the emphasisin the PIPon humanresource development,especially improving health and educationservices. Annex 33 - 127 - Page 3 of 5

The health situationin Cambodiaremains poor, causedlargely by lack of accessto healthservices. The Cambodiangovernment has made significantprogress since 1995in developinga nationalhealth policyand programpriorities for an equitable,affordable and sustainablehealth system. Australiais supportingthe Governmentto implementits reform programthrough a $AI5 millionfive year projectto strengthen Cambodia'sinstitutional capacity to provideeffective health education and good qualitypublic health servicesdown to the villagelevel. We are also supportinga rangeof NGO activitiesfocusing on primaryhealth servicedelivery, water supplyand sanitation,HIV/AIDS education and hospitalengineering.

Australiais also supportingCambodia in its effortsto build a core of highly trainedindividuals who are responsiveto the needs of both Governmentand privatesector. In the formalsector, Australia is assistingwith the developmentof a nationalhigher education strategy, establishinga crediblehigh school examinationssystem, and providing English languagetraining to Ministiyofficials. Over 50 studentsare currentlystudying in Australiaon full scholarshipsin fields such as agricultureand fisheries,engineering, health, economics,administration and education. Australiais also supportingvocational education, adult literacyand skillstraining through a varietyof NGO activities.

We see a very close relationshipbetween the growthof prosperityand stabilityin Cambodiaand good govemanceand humanrights. Cambodia'sinstitutional structures and administrativecapacity must be re-establishedas quicklyas possible. In this context,Australia is

11. -. F Annex 33 -128- Page 4 of 5 supportingthe operationof the Councilfor theDevelopment of Cambodia as the aid and investmentcoordinating body. It is assistingin planning for the orderlydemobilisation of excesssoldiers and will provide continuingsupport for preparationsfor the next elections. Early in 1997, Australiacommenced a majornew projectto assistthe CriminalJustice Systemin Cambodia. This projectwill focuson supportfor the effective implementationof proceduresfor police,courts and prisons. All AusAID projectsprovide assistance with the reestablishmentof institutional structures. A numberof smallactivities, including human rights training are also funded.

We are contributingto muchneeded infrastructure development, Australiaby replacingand rehabilitating1 bridgesalong National Routes 5 and 6.

In addition,Australia providing significant levels of supportfor the CambodianMine Action Centre. Variousother smallactivities are implementedby the AustralianEmbassy in PhnomPenh including: a SmallActivities Scheme to supportlocal aid initiatives,particularly CambodianNGOs; and a HumanRights Fund.

Mr Chairman,in additionto the $A22.3million pledge for jointly programmedactivities in 1997/98,Australia will also providefood aid, emergencyassistance, funding for regionalprograms, and supportfor NGO activitiesin Cambodia,mainly in the area of landmineclearance. This will bringthe total aid flowsto Cambodiain 1997/98to $A32.1 million(equal to aboutSUS24. 1 millionat currentexchange rates).

1v Annex 33 - 129 - Page 5 of 5

Throughall of these variousprograms, Australia aims to promote sustainableeconomic and socialdevelopment and soundlong-term growthwith equity.

We will continueclose dialoguewith Cambodiato ensurethat our aid reaches the mostvulnerable groups and that it is built on the principlesof cooperationand partnership.

In detenniningAustralia's future aid programto Cambodia,the Australiangovernment will look at a numberof indicatorsincluding good govemance,revenue collection, election preparations, functioning of Parliamentand the Cambodianpeople's sense of confidencein their Govemment.

Thank you. Annex 34 -130 - Page 1

U.S. Pledge Statement Cambodia Consultative Group Meeting Paris, July 1-2, 1997

I am honored to represent the United States Government at this second Consultative Group meeting on Cambodia. The U.S. Government views this as an important opportunity to reiterate, in concert with other donors, our support for the establishment of a free market economy, a fully participatory democracy, and the rule of law in Cambodia.

The intemational community has a substantial stake in Cambodia, beginning with the reconstruction activities of the late 1980s and early l990s and moving into the current emphasis on long term, sustainable development. Since 1986 the U.S. Govermnent has provided more than $274 million in USAID bilateral support, $40 million in humanitarian assistance through military channels, and over $500 million through the United Nations system. Currently we support programs in democracy and governance, primary education, maternal-child health, rural economic growth, HIV/AIDS prevention, environmental protection, and assistance to war and mine victims. In view of the substantial progress that has been made in each of these areas, I am pleased to announce that we intend, subject to continued allocation of funds by the U.S. Congress, to maintain our current annual assistance level of $35-38 million. This assistance will be provided on a grant basis.

However, I must also note the growing concern with which both the current administration and the U.S. Congress view current political trends in Cambodia. This concern is based on the possibility that these trends, if continued, will disrupt and even reverse the progress that has been achieved to date on issues of cental importance to the average Cambodian citizen. These include improvements in essential health services and primary education, sustainable use of the natural resource base, and transparency in government, including concrete progress toward the holding of free and fair elections in 1998. We call upon the Royal Government of Cambodia to take all necessary steps to ensure progress in these areas in order to assure continued international support for assistance to Cambodia.

11.~~ . - Annex 35 - 131 -

ASIANDEVELOPMENT BANK Statement on Financial Requirements (Pledging Session) Consultative Group Meeting- Cambodia Paris, 1-2 July 1997

Mr. Chairman, DistinguishedDelegates, Ladies and Gentlemen

1. We have earlier noted that despite many constraints,substantial achievements on the macro-economicfront have been made. However,several critical concems cloud the economic horizon. These are political but have a major bearing on the sustainability of economic progress in the country. As a friend and partner in the country's development process, we would like to note a couple of such concerns. First, as underscored by our President in his joint meeting with the two Prime Ministers in late May this year, political stability and security are essential prerequisitesfor sustainable economic development in Cambodia. Second, we would like to emphasizethat political stability must be reinforced by good govemance and effective public resource management. Tax collection should be strengthened, specially recognizingthat the practice of ad hoc tax exemptions is a major deterrent in fostering confidencein the Govemment.Revenues from forestry resourcesneed to be fully reflected in the national budget. It is crucial for the Govemmentto demonstrateits determinationand capabilityto managethese issuesin a transparentmanner.

2. Tuming to Bank's operationsin Cambodia,our operationalstrategy focuses on four priority areas: (i) rehabilitationand reconstructionof physical infrastructure,particularly road and power sectors, (ii) capacitybuilding and policy supportto facilitate the transition and development to a market-basedeconomy, (iii) developmentof human resource base with an emphasis on primary education and basic health services, and (iv) natural resource management including sustainable forest management and coastal resources protection. Geographically,the Bank's strategycalls for a rural emphasis, security conditionspermitting. The strategy also takes into accountsubregional cooperation with neighboringcountries.

3. Since the resumptionof its operationin 1992,the Bank has provided9 loans for a total amount of $248 million. Bank support has been providedto priority sectors including inigation, road, power generationand distribution,water supply and sanitation,basic education and health. In addition, the Bank has providedtechnical assistance on a grant basis totaling some $39 million for projects with primary focus on capacity building at major Govemment institutions.

4. Subject to satisfactoryperformance on projectimplementation and progress on the policy and govemance issues discussedearlier, the Bank intends to continue Its strong support to Cambodiaand pledges an annual lendingamount of about $90 million during each of the next three years. These will be at ADF, or concessionalterms. In addition, the Bank plans to provide technical assistancegrants of about $9 million annually. Over 60% of such grants will be focused on capacity building efforts in project implementationand policy analyses.

Thank you. Annex 36 - 132 - Page 1 of 2

ConsultativeGroup for Cambodia 112July 1997 Paris

GermanPledging Statement (AGENDA ITEM IV)

Mr. Chairman, Ladiesand Gentlemen,

Since the accessionof the Germangovemment to the Paris Treaties,we have resumed developmentco-operation with Cambodiaand have committedconsiderable funds to the countrywithin the frameworkof intemationalaid efforts. We havealso taken part in all donor conferencesfor Cambodiasince then. The German govemmentand the Cambodian govemmenthave agreed to concentratetheir co-operationon the followingthree focal areas:

- supportfor economicreforms, including strengthening the privatesector,

- promotionof human resourcedevelopment, especially with regard to educationand health;

- protection and sustainable use of natural resources and promotion of rural development,including rural infrastructure.

Sincebilateral official development co-operation was resumedin 1992,the FederalRepublic of Germanyhas providedCambodia with considerablesupport, so that in this periodfunds to the tune of more than DM 125 millionhave been committed,i.e. about US S 73 million,of whichmore than DM70 millionwas for financialco-operation, DM 44 millionfor technicalco- operationand more than DM 10 millionfor food securitymeasures. We havealso beenable to provideall new commitments,including those underfinancial co-operation, in the form of grants. Moreover,in 1994 the Federal Republicof Germanycancelled debts owed by Cambodiaas a result of earlier loans underfinancial co-operation to the tune of DM 16.4 million.

The last roundof govemmentnegotiations on developmentco-operation with Cambodiatook place in Germanyin September1996. The next roundis scheduledfor Septemberof this year and will take place in Phnom Penh. Consulationsto preparethe negotitions were held in April of this year. The Germangovemment intends to makea two-yearcommitment at this year's govemmentnegotiations, pledging an amountof DM 22.0 millionto cover co-

X1 ~~~~~~~~F.. Annex 36 - 133 - Page 2 of 2

operation in 1997 and 1998. The focal areas covered by our project commitments for this period will probably be education, health and family planning, and also rural development.

In connection with our envisaged commitment for 1997 and 1998, however, we are working on the assumption that the Cambodian govemment will further intensify Ks efforts to combat illegal logging and protect natural resources. Moreover, the German government expects improvements with regard to the transparency of govemment decisions and the fight against comuption.

Finally, one last comment: our involvement in the forthcoming local and national elections in Cambodia will take the form of training measures for the electoral commissions.

Thank you.

X~ . V Annex 37 - 134 - Page 1 of 2

session IV

Statement by the Danish delegation

Denmark's contributionto the rebuildingof the Cambodian society is steadily growing, with a primary focus on regional and environmentalissues, human rights, free press, democracy and support for the upcoming elections.

Since the Cambodia peace accord was signed in 1991, Denmark (Danida)has supported the reconstructionof Cambodia through a substantialtransitional assistance programme, expected to amount to a total of 345 mio. DKK or approximatly55 mio. USD. The transitionalassistance programme will run in Cambodia until 1998.

In accordancewith the recommendationsmade by the UN Conference on the Environmentand Developmentin Rio in 1992, the Danish Government has set up a special Environmentaland Disaster Relief Fund (EDRF).

In this regard, it is expected that the Danish grant assistance to Cambodia will increase in the years to come. In May this year, a Memorandum of Understandingconcerning environmental assistance was signed between our two governments,indicating the strong Danish commitment to the sustainabledevelopment of Cambodia.

The programme will focus on the sustainableuse of natural resources and environmentalprotection in Cambodia. Poverty alleviation and support for local communitieswill play a key role in the activitiesunder the programme. For the first six years planning period, the programme is expected to amount to almost USD 20 mio. in grant assistance.

The first EDRF project agreementon "CapacityBuilding in the Coastal Zones of Cambodiam has already been signed between the Royal Government of Cambodia and the Governmentof Denmark. Hopefully, this will be the first of a number of activitiesto follow in the near future.

~~~~~Ir V~~~~~~~~~~~~~~~~ Annex 37 - 135 - Page 2 of 2

The rapid development in the region also leads to a number of increasing, and complex, environmental issues of a transboundary nature and significance. This rapid economic development and growth requires exploration of natural resources with effects across national boundaries. A forward- looking policy preempting conflicts over natural resources is a prerequisite for sustainable economic development and poverty alleviation in South East Asia.

Thus, in addition to country specific activities and programmes, the Danish environmental assistance in South East Asia will be based on strengthened regional activities. Activities under the regional programme, covering Lao PDR, Cambodia and Vietnam (the lower Mekong region) are expected to amount to up to USD 100 mio. during the first six year planning phase.

Mr. Chairman, on behalf of the Government of Denmark, I wish to express the hope that these new opportunities will provide a platform for a further strengthened and mutually fruitful cooperation in the future between Cambodia and Denmark.

In conclusion, Mr. Chairman, I am pleased to announce that in order for Denmark to continue to take an active role in the reconstruction of Cambodia disbursement of USD 2.9 mio. will be made available for 1997.

117 - 136 - Annex 38 Page 1 of 2

Consultative Group Meeting for Cambodia Paris, 1-2 July 1997

Belgian Statement

Mr. Chairman,

First of all, on behalf of the Belgian Administrationfor DevelopmentCooperation (BADC), I would like to thank the CambodianGovernment and the World Bank for the outstanding documents and usefull informationwe received during this conference.

Together with the other developmentpartners of Cambodiawe had the opportunityto get better acquainted with the recent socio-economicdevelopments of Cambodia, to hear the Government's strategy and to see how the communityof developmentpartners deals with the development needs.

Reading the documents from the CambodianGovernment and the World Bank, the Belgian Government is impressed with the progress achieved during the last years of macro- economic stability, economic liberalizationand market reform, but at the same time, it shares the concerns expressed by most of the delegationsduring the morning sessions.

The CambodianGovermnent is now facing new challengesby setting an ambitiousgoal to reduce poverty significantlyand enhance economic and social welfare, and by entering as a new member the ASEAN-organisationin a few weeks.

The emphasis of the Belgian cooperation is put on poverty alleviation, conflict prevention and society building with related projects in the field of basic health, agriculture and education, small and medium-sizedentreprises, gender issues, social economics and small basic infrastructure.

To strenghten and concentrate our efforts, the number of countries and multilateral institutionswe are cooperatingwith, will be reduced.

At the same time some few new project countries will be taken into account. I am glad that I can confirm here that Cambodiais considered as one of these new project countries. A cooperation section will be opened in Phnom Penh before the end of the year.

The cooperationbetween Belgium and Cambodiais rather young.

iLT Annex 38 -137 - Page 2 of 2

On the contrary technical assistanceto the former Mekong Committeehas been provided since a long time. Belgiumhas (co-)financedseveral studies and has contributed since 1991 to the Navigation ImprovementProgramme in the form of expert services.

As to the bilateral cooperationwith Cambodia,

BADC offers commodity aid for a total amount of 50 mio BEF in the form of the supply of electrical equipment for Phnom Penh, as well as technical assistance and training regarding these deliveries.

Furthermore BADC contributes in two ways to the CMAC-DeminingProgranmme:

- a contribution in kind of about 45 million BEF through the technical assistance of Belgian qualified explosive ordnance demolitionpersonnel; - a contribution in cash of 30 million BEF to the UNDP-Trust Fund for Capacity Building in Demining Operations in Cambodia.

Since 1993, Belgium has also provided food aid for an amountof about 2 mio US $.

As to indirect aid, Belgiumcontributes to some multilateralprojects such as the WHO projects and the FAO projects in the field of preservationof the ecologicalsystem and reforestation of the Tonle Sap Forest, as well as the environmentalprotection of the Angkor-region.

Belgium also contributes to some NGO-projectsof which the health project for the SIem Reap area of Medecins Sans Frontieres, is the most important.

In the future, oppportunitiesof cooperation,asfor example an integrated project in an area still to be defined, could be considered, but no budget has yet been decided as the cooperation section in Phnom Penh still has to be installed later this year.

Regarding a possible support to the organisationof the forthcomingelections, the Belgian strategy will be in line with the strategy of the European Union and the other develoment partners. This support might take the form of a contributionto a joint action. Annex 39 - 138- Page 1 of 2 CONSULTATIVE GROUP MEETING FYORCAMBODIA PARIS 1-2 JULY 1997


As I said in the general discussion yesterday, Swedish assistance to Cambodia is covered by a two-year agreement in force from January 1997. It focuses on rural development, basic education, mine clearing and promotion of human rights. The long term objective is poverty alleviation. As we see it, this objective can only be achieved under basic conditions of human rights and justice, and reasonable political stability.

The preconditions for the Cambodia-Sweden development cooperation will be reviewed at the end of 1998, considering not only the election process, but also progress in important areas such as mobilization of domestic revenue, promotion of human rights and rule of law, demobilization of armed forces and introduction of administrative reform.

Swedish assistance is channelled through UNDP, IJnicef, ILO and other organisations, considered efficient under present conditions. It helps to keep the number of interfaces low, to the benefit of Cambodia's hard pressed management staff.

Sweden has committed 160 million Swedish kronor (app 21 musd) for the Cambodia program for 1997 and 1998.

Main areas in the present country program are:

* rural development in 5 provinces (Carere project through LTNDP,Rural roads through ILO), * basic education through Unicef, * mnineclearance, mainly through the UN Trust Fund for support of CMAC, * training of civil service staff and support to research and development through the Cambodia Development Resource Institute

Under consideration:

* support to Acleda rural credits through UNDP and ILO * support to Development of Rural Road Maintenance capacity through 11O * support to the elections through UN Trust Fund * drinking water policy development through IBRD and UNDP * continued suppport to Carere rural development project * continued support to basic education through Unicef. * support to the envisaged demobilization project

Tr . ., Annex 39 - 139 - Page 2 of 2 Outsidethe regular Cambodiaprogram and financedby additionalfunds, Sweden promotes humanrights and democracythrough a contributionto the UN Centre for HumanRights.

We also back SwedishNGOs that cooperate with Cambodianpartners.

A second balanceof payrnentssupport in co-financingwith the HDAmay be considered,depending on the politicaldevelopment at large and on Cambodiataking necessaryaction in economicreform and revenuemobilization.

1TV Annex 40 - 140 - Page 1 of 2


Statement bv International FbnanceCorporation edgiS

Kip Thompson Acting Manager Asia Department InternationalFinance Corporation (IFC)

Mr. Chairman and DistinguishedDelegates:

Thank you for another opportunity to address this meeting. As discussed in IFC's opening statement, the Corporation is primarily not a donor agency. As such, we are usually not in a position to indicate how much assistance we expect to provide to Cambodia in the coming years. However, I would like to take this opportunity to provide you with a brief overview of IFC's proposed activities in Cambodia.

In general, IFC would support private sector development in Cambodia by working in five key areas:

First, we will strive to help Cambodia to attract and implement larger, international standard projects, such as the recently approved Angkor Novotel Hotel, by providing long-term, commercial financing for such projects. By supporting viable private sector projects and by catalyzing investments from other sources without relying on goverrnmentguarantees, we hope to demonstrate that good, long-term, private investmentscan be made in Cambodia.

Second, we will continue to play an active role in advising the Government on some broader issues related to the development of the country's private sector. In this regard, we will continue to provide the Government with both formal and informal technical assistance and advice on issues related to private sector development. For example, we are currently initiating the second phase of our work for the National Bank of Cambodia to help prepare the Foreign Trade Bank for privatization.

Third, we expect to support smaller private sector projects with long-term financing through the IFC Small Enterprise Fund which was recently established for a number of challenging countries, including Cambodia. This fund was established to increase IFC's ability to finance smaller companieswhich was limited under our

IF --,. .. Annex 40 - 141 - Page 2 of 2

regular investment program. It has also enabled us to dedicate more IFC staff resources to Cambodia, which should help us to identify and develop attractive private sector projects.

Fourth, we will also help develop small and medium sized businesses in Cambodia through the IFC-managed, donor funded Mekong Project Development FacUity (MPDF) which recently established to work in Cambodia, Laos and Vietnam, MPDF will assist entrepreneurs in developing viable business plans and will provide technical assistance and training to enterprises, financial institutions and local consulting firms. IFC is also contributing $5.0 million to MPDF's five- year, $25.0 million budget.

Finally, through the Foreign Investment Advisory Service (FIAS), which is jointly sponsored by the World Bank and IFC, we hope to extend technical assistance to the Government to help it better attract foreign direct investment. Presently, FIAS is proposing a study to review the current incentive system for attracting foreign investment to Cambodia and to monitor the implementation of approved foreign investmentprojects.

Once again, thank you for the opportunityto address this meeting.

fin . Annex 41 - 142 - Page 1 of 4


ConcludingRemarks by the Cbairman Mr. Javad K. Shirazi The World Bank

Your Excellencies, Delegates,Ladies and Gentlemen.

Many delegates have remarked that our discussionshave been unusually frank over these two days, a conclusionI welcome and endorse. My attempt to summarize what has been said here cannot capturethe full range of views, nor the careful construction of your interventions. I am encouragedin my task, however, by the convergence of views on the key issues, which will serve here as a way to organize what I have heard from you over our five sessionsof discussions.

Considering the difficult conditions in Cambodiaover the last year, including floods and many pressuresto expand expenditures,delegates were uniformly impressed with macroeconomicmanagement and the economy's growth performance. The constancy and discipline of fiscal managementin particularcontained inflationary pressures in 1996 and reduced inflationin 1997. The exchangerate remained stable, and the current account deficitwas financed withoutjeopardizing Cambodia's future creditworthiness. In this stabilizedenvironment, the economy continuedto grow rapidly, reaching nearly 7% last year. Such a performancedeserves the accolade "remarkable" when compared to other countries facing similar circumstancesof post - conflict reconstructionand recovery.

Recalling the discussionsof last year's CG meeting,delegates broadly observed that the Government'sperformance in severalareas had proved disappointing comparedto the expectationsgenerated in Tokyo. Shortfallswere stressed for the following areas:

* effective steps to improve fiscal management,specifically measures to improve revenue performance,have not been forthcoming,with adverse implicationsfor social sectorprograms; * managementof Cambodia's forestryresources have not yet produced tangible results in the controlof logging activities; • civil servicereform and military demobilizationhave not progressed beyond initial planning and conceptualization;and • and the expected improvementsin transparencyand accountabilityin economic managementhave not materializedand in some respects govemance has deteriorated. These shortfalls, delegates observed,threaten to dilutethe gains from successful stabilization and growth, erode the chances for sustained long term

T- . .I Annex 41 - 143 - Page 2 of 4 development,and to underminethe goodwill of the intemationalcommunity toward Canbodia. In this context, severaldonors highlighted the reformsin tax policy and forestry management which the Governmenthad committedto undertake,but so far not carried out, as prior actions for the third year IMF programunder ESAF. Donors urgedthe Governmentto implementthese reforms speedily to pave the way for a resumption of the ESAF process.

Delegates acknowledgedthat politicalfactors have played and will play a pivotal role in Cambodia's economic and social performance. Although it is NOT our custom at these meetings to address political issues,delegates widely expressed disquiet over rising political tensionsand episodes of conflict that threatened to undermine political and economicstability.

Political stability and physical security are key prerequisitesfor development. Tbey shape investor expectations and donor outlooks, and set the overall enabling environment for private sector led growth. Thus, delegates welcomedthe announcements by the Cambodian Delegationconcerning the scheduling of national elections for next May and the plans to resume National Assembly sessions.

Delegates acknowledgedthat sustainingmacroeconomnic and political stability will be highly challengingtasks in the year leading to elections,and that this will place heavy but unavoidable demandson Cambodia's leadership. The stakes are high, but Cambodia's leadershipcannot afford to take time off from the task of national reconstruction and economnicmanagement.

Let me turn now to the major economicthemes of our discussions. Delegates were unanimous in their call for a revitalizationof the reform process. In that regard, an issue of strong interest to delegates was fiscal management,specifically the deteriorating performancein revenuemobilization. That single statistic - declining revenue effort - carries with it many implicationsand concerns. It was also noted that sound macro management, includingrevenues collected and channeled to public programs, is an anchor of political stability. Delegatesalso noted that declining revenue performance would raise donor concernsthat their resources would only substitute for Cambodia's own revenues, and entrench its dependence on increasingly scarce donor assistance. At the same time declining revenueswould raise doubts among investors about growth prospects, and compel the contraction of vital expenditures in the econornicand social sectors,an already visible result.

Delegates singled out severalcontributing causes for the revenue shortfall: underpriced logging concessionsand illegal logging; other monopoly rights and land leases given without payment to the budget; grantingof tax exemptions; and lax tax enforcemnentand collections. This weak governanceand transparencyreceived wide ranging and concemed comment from delegates,due to the scale of the problem and its negative impact on expenditures. Somedelegates expressedthe view that, if left unaddressed, issues relating to corruptionand lack of transparencywould affect negatively future donor assistance.

Xl ., -...... _ ._,.1 Annex 41 - 144 - Page 3 of 4

Therewas broad consensuson some of the measures necessary to improve the situation in the near term and to fulfill expectations from the Tokyo CG. First, the Law on Taxation must be vigorously enforced. Second, the generous tax exemptions granted under the Law on Investment, as well as other ad hoc exemptions, must be eliminated. To provide the legal basis to remove these exemptions, the long delayed implementing regulations for the Law on Investment must be approved. At issue again is the question of political comxnitmnentto enforce Cambodia's revenue and tax systems and to channel revenues to priority development programs. The Government indicated its determination to deepen the tax base and to achieve 1997 targets for tax collection by the end of the year.

A second area of concem is the management of natural resources, in particular the unsustainable exploitation of Cambodia's forestry resources. The Government noted that some progress had been achieved since the last CG meeting in Tokyo. The National Committee on Forest Policy Reform had been established. The mobilization of technical assistance to help the Government better manage forestry resources is nearly completed, and there is growing awareness in the Royal Government that improved forestry management will yield concrete and immediate benefits to Cambodia's budget, economy, and environment. While welcoming the intentions of the Government, delegates viewed these actions as delayed and short of the high expectations generated at the Tokyo CG last year.

Delegates called for more effective controls over illegal logging and for full market pricing in logging concessions. In addition, closer monitoring of logging practices and the strict enforcement of more sustainable harvesting practices would be practical near term steps to bring uncontrolled and illegal logging into a sustainable framework. The Government indicated its intention to address these tasks and to transmit the urgency of donor concerns to higher authorities.

Delegates raised other issues of note. The framework of aid coordination was judged to be developing well in Cambodia, due to the Government's creation of coordinating bodies at the national and sectoral level. Delegates supported the strengthening of Canbodia's aid coordination capacities, reaching down to the local level, so that ultimately, the Government would assume full responsibility for this crucial function. The Govermmentexpressed its intention to improve the effectiveness of aid through better monitoring and auditing of foreign assisted projects.

In regard to the CG process itself, delegates strongly supported the continuation of the annual meetings. They offered their compliments to the Cambodian Govemment for its professional approach to the CG meeting.

As in 1996, delegates again expressed their interest in the acceleration of agricultural productivity, improved rural social and economic services, and better maintenance of the growing rural transport network. The Government has articulated the high priority of rural development and poverty reduction, which delegates were eager to support in their assistance programs. However, delegates registered the need to translate these development priorities into concrete programs and expenditures. i- F r - Annex 41 - 145 - Page 4 of 4

Regardingfinancial support for Cambodia'sreconstruction and development efforts, donors "pledged"about USS450million, with one donor indicating,while its aid will be substantial,it does not wish to providea precisemagnitude at this time. Many delegatesindicated that politicaland economicdevelopments in Cambodia in the comingyear will havea bearingon the extentto whichthese indicationsof aid flows wouldbe realized.

In conclusion,let me say that I havebeen struckby the two differentmessages fromdelegates: one of hope and continuedsupport; and the otherof disappointment over slow, or lack of, progressin severalkey policyareas and uneaseabout rising politicaltensions. This message,although divided, is complementary.It reinforces the suggestionthat Cambodiastands at a crossroads,not onlyin chartingits futurebut also in maintainingstrong intemational support for its efforts.

This forthcomingCG cycle will be a decisiveone in that regard,as it unfolds over the eventfulyear before us. I knowthat I speakfor all delegatesin urgingthe Governmentat the highestlevels to undertakethe reformsand commitments discussedhere in Paris,so that Cambodiawill be assuredof its rightfulplace in SoutheastAsia andeam the strongand continuingsupport from Cambodia's internationaldevelopment partners.


mu-r -r Annex 42

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_5 £ I The World Bank U European Office: 66, avenue d'Iena, 75116 Paris, France

Contacts: Raymond Toye - (33 1) 40 69 30 28 Graham Barrett (1) 202- 458-0344

Donors Call for Revitalized Reform Effort in Cambodia

Press Statement following the Second Consultative Group Meeting for Cambodia, Paris July 1-2, 1997.

Paris, July 2 -- The Royal Government of Cambodia and its aid donors concluded today the second Consultative Group (CG) meeting for Cambodia. This first such meeting was held in Tokyo in July 1996. The Cambodian delegation was led by His Excellency Keat Chhon, Senior Minister in charge of Rehabilitation and Development, Minister of Economy and Finance. The meeting was chaired by Mr. Javad K. Shirazi, East Asia and Pacific Region, the World Bank.

While welcoming strong macroeconomicperformance over the past year and progress in implementing some reforms, donors called upon the Government to revitalize the reform process. Slippage in implementationof key reforms was a widely vocalized concern of the delegates.

The donors commended the Royal Government for its success in the last few years in generating strong economic growth and in stabilizing the economy. The economy's performance in 1996 was impressive; growth accelerated to about 7 percent; inflation was kept in single digits; and the exchange rate remained stable. These achievements, donors noted, came under difficult economic and political conditions.

However, donors expressed concern that there had been shortfalls in carrying out the reform expectations generated at last year's CG meeting held in Tokyo. In particular, concerns were expressed about the weak performancein revenue mobilization, the slow progress toward implementing sustainable forestry practices, and in improving transparency and accountability in economic management.

Donors recognized that current political conditions in Cambodia are having a direct effect on the implementation of the reform program. Thus, delegates welcomed the earlier announcements by the Cambodian delegation concerning the scheduling of national elections in May 1998 and the resumption of National Assembly sessions. The donors expressed their hope that the encouraging announcements from the Government delegation would yield a more stable environment which would be conducive to implementation of reformnsand the continuation of economic progress. Annex 42 - 147 - Page 2 of 2

The Government reconfirmed its commitment to accelerate implementation of key reforms in revenue mobilization, expendituremanagement, sustainable forestry practices and administrative reforn. Donors welcomed these assurances, expressing the urgency of rapid implementation and follow through on existing commnitments.It was also noted that improved govemance and controls on corruption would be essential elements for the revitalization of reform.

At the closing session, donors endorsed the Govemment's reconstruction and development objectives. In support of that program, a total of US$450 million was pledged by the donors for 1997/98. This amount of official development assistance does not include the financial support provided by NGOs. Many delegates indicated that political and economic developments in Cambodia in the coming year will have a bearing on the extent to which these indications of aid flows would be realized. In this context, the delegates noted Cambodia's political leadership has a critical role in the reform process.

In his concluding remarks, Minister Keat Chhon welcomed the financial pledges by the donors for 1997/98, and assured the delegates that the concerns expressed a( the meeting are reflected in the Government's own policy documents, and that it will intensify its efforts to deepen and accelerate reforms.

In regard to the CG process itself, delegates strongly supported the continuation of annual meetings for Cambodia.

The Second Consultative Group meetingfor Cambodia was heldfrom July 1-2, 1997, at the World Bank's European Office, Paris. The meeting was attended by the delegations from Australia, Belgium, Cambodia, Canada, China, Denmark, France, Germany, Japan, the Netherlands, Norway, the Republic of Korea, the Russian Federation, Sweden, the United Kingdom, and the United States. The international organizations participating in the meeting included the Asian Development Bank, the European Union, the International Finance Corporation, the International Monetary Fund, the United Nations Development Program, and the World Bank. Representativesfrom the A,SEAN (represented by Malaysia), NGOs, and the OECD participated as observers. - 148 - Annex 43 Page 1 of 2 Banquet Mondiale 6-.. hE-ropden TdIAphon*t Ii 40693000


Paris, July 2, 1997

HRH Prince H.E. Samdech First Co-Prime Minister Second Co-Prime Minister Royal Government of Cambodia Royal Govermnent of Carnbodia Phnom Penh, Kingdom of Cambodia Phnom Penh, Kingdom of Cambodia

Dear Co-Prime Ministers,

I would like to thank you for your letter of June 16 in which you outlined some of the steps that Cambodia is taking to address the concerns of the international donor community. We have today concludedthe second meeting of the Consultative Group on Cambodia and the participants specifically requested that. as Chairman. I should bring to your attention the major conclusions of this important meeting. I am sure that H.E. Keat Chhon, who ably led the Cambodian delegation, will report to you in detail on the meeting. In this regard, I attach for your information a copy of the Chairman's concluding statement, which was adopted at the meeting. Let me highlight some of the major conclusions.

The delegates uniformly recognizedthat Cambodia has faced daunting economic challenges and a complex political situation, and were genuinely impressed with the able efforts of the Government to sustain strong economic growth and low inflation. The delegates congratulated the Government for remarkable progress made in reconstruction under difficult conditions. They also welcomedthe Royal Government's announcementthat it will hold national elections in May 1998 and resume shortly National Assembly sessions.

However, it is also my task to convey to you the deep sense of concem that permneatedthe discussions at the meeting. As developmentpartners of Cambodia, the donors particularly focused on three concems. First, steps to improve the revenue effort have yet to be satisfactorily implemented. Second, management of Cambodia's forestry resources have not yet produced tangible results in the control of logging activities. And, third, the expected improvementsin transparency and accountability in economic managementhave not materializedand, in some respects. governance has deteriorated.

in . Annex 43 - 14~- Page 2 of 2

Thus, the meeting conveyed two distinct but mutually reinforcing messages: the first one centered on hope and continued support for Cambodia's reconstruction and development effort; and the second was one of disappointment over slow or non-progress in certain reform areas and unease about rising political tensions. It was also the view of the meeting that progress on both of these fronts and more broadly, on revitalization of reforms, could only be secured through your personal conmuitmentsand leadership. As one prominent delegate observed, "the Cambodian leadership cannot afford to take timneoff from the task of national reconstruction."

Accordingly, while the meeting elicited pledges of about US$450 million for 1997/98, delegates noted that it would be increasingly difficult for them to justify to their own governments and taxpayers this level of assistance without the Cambodian Government taking firmnand timely steps to deal with the major issues raised by the donor conmnunityand sunmmarizedin the Chairman's concluding statement. The meeting felt that your strong leadership and commitment were required to maintain macroeconomic stability and address, in a firm manner, Cambodia's pressing development problems, particularly in the fothcoming year leading up to the elections.

With assurances of my highest consideration,

Javad Khalilzadeh-Shirazi Chairman Cambodia Consultative Group Meeting, 1997

.. v. - .... K