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Country Partnership Strategy

June 2011

Cambodia
20112013

CURRENCY EQUIVALENTS (as of 2 June 2011) Currency Unit riel/s (KR) $1.00 = KR4,084 KR1.00 = $0.00024 ABBREVIATIONS ADB ADF CMDG CPS CSP D&D GDP GMS M&E NSDP PFM SMEs TA TVET Asian Development Bank Asian Development Fund Cambodia Millennium Development Goal country partnership strategy country strategy and program decentralization and deconcentration gross domestic product Greater Mekong Subregion monitoring and evaluation National Strategic Development Plan public financial management small and medium-sized enterprises technical assistance technical and vocational education and training NOTE In this report "$" refers to US dollars. Vice-President Director General Director Team leader Team members B.N. Lohani, Vice-President-in-Charge, Operations 2 K. Senga, Southeast Asia Department (SERD) P. Kamayana, Cambodia Resident Mission (CARM), SERD P. Brimble, Senior Country Economist (CARM), SERD I. Ahsan, Counsel, Office of General Counsel M. Alam, PAU Head, SERD E. L. P. Araneta, Principal Operations Coordination Specialist, Private Sector Operations Department S. Bando, Economist (Regional Cooperation), SERD K. Bird, Senior Economist, SERD P. Broch, Senior Transport Economist, SERD S. Date, Senior Transport Specialist, SERD V. P. de Wit, Lead Health Specialist, SERD L. Ding, Principal Trade Specialist, SERD P. Doung, Economics Officer (CARM), SERD W. Duncan, Lead Education Specialist, SERD S. Dy, Education Specialist (CARM), SERD E. Gagnon, Senior Procurement Specialist, COSO S. Hasnie, Principal Energy Specialist (Energy), SERD C. Hem, Senior Project Officer (CARM), SERD T. Hla, Financial Sector Specialist, SERD U. Hoque, Social Development Specialist, SERD

N. Ikemoto, Sr. Natural Resources Management Specialist, SERD M. S. M. Ismail, Young Professional (Financial Sector), SERD A. Jain, Social Sector Specialist, SERD P. K. Jena, Senior Governance Specialist, SERD C. Kim, Programs Officer (CARM), SERD J. D. Lindborg, Advisor (Public-Private Partnerships), SERD P. Long, Senior Project Officer (CARM), SERD R. Luanglatbandith, Economist (Regional Cooperation), SERD E. Masaki, Social Sector Economist, SERD Y. Niimi, Economist, Economics and Research Department C. Ouch, Senior Programs Officer (Governance) (CARM), SERD N. Ouk, Senior Project Officer (CARM), SERD S. Ouk, Social Safeguards Officer (CARM), SERD A. Perdiguero, Principal Economist, SERD J. K. Petersen, Portfolio Management Specialist, (CARM), SERD J. L. G. Reino, Public Management Specialist, SERD G. Servais, Health Specialist, SERD S. Sindhvad, Education Specialist, SERD K. Schelzig Bloom, Social Sectors Specialist (CARM), SERD D. Schmidt, Young Professional (Energy), SERD S. Sok, Senior Procurement Officer (CARM), SERD P. Srivastava, Senior Regional Cooperation Specialist, SERD F. Steinberg, Senior Urban Development Specialist, SERD S. Tukuafu, Principal Financial Sector Specialist, SERD C. Wensley, Lead Water Resources Specialist, SERD H. Yasumitsu, Financial Control Specialist, Controllers Department C. C. Yu, Principal Results Management Specialist, SPD Peer reviewers R. Bolt, Advisor (Knowledge and Results Management), SERD B. Dunn, Environment Specialist, Regional and Sustainable Development Department (RSDD) M. E. Khan, Principal Economist, Economics and Research Department C. M. Kim, Principal Evaluation Specialist, Independent Evaluation Department T. Niazi, Senior Governance and Public Management Specialist, RSDD S. Tanaka, Principal Social Development Specialist, RSDD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page COUNTRY AT A GLANCE I. DEVELOPMENT TRENDS AND ISSUES A. Country Background B. Economic Assessment and Outlook C. Highlights of Previous ADB Country Strategy THE COUNTRY STRATEGY A. Government National Strategy B. ADB Country Partnership Strategy STRATEGY IMPLEMENTATION A. Indicative Resource Parameters B. Program Overview RESULTS MANAGEMENT A. Monitoring B. Risks 1 1 2 2 3 3 4 8 8 9 9 9 10 11 13

II.

III.

IV.

APPENDIXES 1. Country Partnership Strategy Results Framework 2. List of Linked Documents

COUNTRY AT A GLANCE
Economic GDP ($ billion, current) GDP per capita ($, current)b GDP growth (%, in constant prices) Agriculture Industry Services Gross domestic investment (% of GDP) Gross domestic saving (% of GDP) Consumer price index (annual % change) Liquidity (M2) (annual % change) Overall fiscal surplus (deficit) (% of GDP) Merchandise trade balance (% of GDP) Current account balance (% of GDP) External debt service (% of exports of goods and services) External debt (% of GDP) Poverty and Social Population (million) Population growth (annual % change) Maternal mortality ratio (per 100,000 live births) Infant mortality rate (below 1 year/per 1,000 live births) Life expectancy at birth (years) Adult literacy (%) Primary school gross enrollment (%) Child malnutrition (% below 5 years) Population below poverty line (%) Rural population with access to improved water (%) Rural population with access to improved sanitation (%) Environment Carbon dioxide emissions (tons) Carbon dioxide emissions per capita (tons) Forest area (million hectares) Urban population (% of total population) 2006 7.28 558 10.8 5.5 18.3 10.1 22.7 23.1 6.1 38.2 (3.3) (14.8) (3.6) 0.6 28.6 2007 8.63 656 10.2 5.0 8.4 10.1 26.6 23.8 7.7 62.9 (2.8) (16.0) (8.5) 0.7 25.6 2008 10.34 773 6.7 5.7 4.0 9.0 24.5 16.9 25.0 4.8 (2.9) (17.4) (13.4) 0.8 25.3 2000s ... ... 472 [2005] 66 [2005] 54 [2002] 73.6 [2004] 87 [2001] 49.7 [2000] 34.7 [2004] 52.7 [2005] 15.7 [2005] 2009 10.34 765 0.1 5.4 (9.5) 2.3 25.5 20.8 (0.7) 36.9 (6.4) (15.7) (11.6) 1.2 27.5 2010a 11.21 830 6.3c c 4.2 11.6c c 4.3 23.6 21.1 4.0 20.0 (6.0)c c (15.1) (11.0)c 1.3 29.5

1990s 11.4 [1998] 2.3 [1998] 437 [1997] 95 [1998] 50 [1990] 67.3 [1998] 77.8 [1998] ... 35.9 [1999] 24 [1998] 8.6 [1998] 1980 ... ... ... 12

Latest year 13.4 [2008] 1.54 [2008] 461 [2008] 60 [2008] 61 [2007] 77.6 [2008] 94.8 [2009] 39.5 [2008] 30.1 [2007] 40.5 [2008] 23.2 [2008] Latest year 576,000 [2009] 0.04 [2009] 10.45 [2009] 22 [2010]

ADB Portfolio (sovereign loans, as of 31 December 2010) OCR ADF Total Total number of loans 1 55 56 Net loan amount ($ million, cumulative) 7.00 1,159.8 1,166.8 Total number of grants 21 21 Total grant amount ($ million, cumulative) 255.71 255.71 Total number of loans/grants 1 76 77 Total loans/grants amount ($ million, cumulative) 7.00 1,415.51 1,422.51 Disbursements Total funds available for withdrawal ($ million) 175.3 175.3 Disbursed amount ($ million, cumulative) 7.00 984.49 991.49 Percentage disbursed (disbursed amount/total available) 100% 84.9% 85% = not available, [ ] = latest year for which data are available, ( ) = negative, ADB = Asian Development Bank, ADF = Asian Development Fund, GDP = gross domestic product, OCR = ordinary capital resources. a Estimates. b National Institute of Statistics. c ADB estimates. Sources: Ministry of Economy and Finance, National Bank of Cambodia, National Institute of Statistics, Asian Development Bank, United Nations Development Programme, World Bank.

I. A. Country Background

DEVELOPMENT TRENDS AND ISSUES

1. The Government of Cambodia is transforming the country from a post-conflict to a market-oriented economy characterized by steady economic development. State building began from a very low base after many years of war, extreme loss of human life and capital, and widespread destruction of state institutions. Peace and political stability were reestablished following the 1991 Paris Peace Agreement. The 1993 Constitution provides for liberal democratic development and a market economy. Economic performance has been impressive despite weaknesses in governance and transparency. Recent progress to strengthen governance includes the adoption of the Law on Anti-Corruption in 2010. Cambodias strategic location allows it to benefit from progress in regional cooperation and connectivity within the Greater Mekong Subregion (GMS). 2. The Cambodia Millennium Development Goals. The government is committed to achieving the Cambodia Millennium Development Goals (CMDGs) by 2015, but progress has been mixed. Attaining universal primary education (CMDG2); reducing child mortality (CMDG4); combating HIV/AIDS, malaria, and other diseases (CMDG6); and achieving de-mining of unexploded ordnance and providing victim assistance (CMDG9) are on track, and likely to be achieved by 2015. With concerted effort, targets for poverty and hunger (CMDG1) and gender equality (CMDG3) could be achieved. The CMDGs unlikely to be achieved by 2015 include improving maternal health (CMDG5) and ensuring environmental sustainability (CMDG7). 3. Poverty. Cambodias per capita gross domestic product (GDP) rose from $297 in 1995 to $731 in 2009. With double-digit average annual growth from 2004 to 2007, poverty incidence declined by just over 1 percentage point per year, from 34.7% in 2004 to 30.1% in 2007. Rural poverty also declined but remains relatively higher at 35%. Poverty in urban areas (not including Phnom Penh) was 22%. The Gini coefficient, measuring inequality, increased from 0.34 in 2004 to 0.36 in 2007. Food price inflation in 2008 disproportionately affected the non-farming rural and urban poor and near-poor, whose welfare was further threatened by the global economic crisis. While comprehensive data on the impacts of the crisis will not be available until mid-2011, the well-being and livelihoods of many Cambodians were compromised. External shocks during 2008 and 2009 have stretched the ability of traditional social safety nets to cushion the negative effects. In 2011, rising global and regional food prices may place further pressure on inflation and on poorer groups. To address these challenges, in March 2011 the government approved the National Social Protection Strategy for the Poor and Vulnerable. 4. Gender equity. Women today are more able to exercise autonomy and independence; more than 25% of households are headed by women. While progress in gender equality has been made in primary and lower secondary school enrollment, gender gaps and gender stereotypes about what women can and cannot do remain challenges for Cambodian society. These include a 73% girlboy ratio in upper secondary school, gender gaps in adult literacy (where rural women are the least literate), an off-track CMDG target for maternal mortality, ongoing incidences of violence against women, and low female participation in senior positions of the civil service. Only 16% of the female labor force is engaged in the services sector (with 75% in agriculture and 9% in industry, mostly garments). The National Strategic Development Plan Update 20092013 (NSDP Update) calls for strengthened national capacity for gender analysis, awareness building, research, and advocacy.

2 B. Economic Assessment and Outlook

5. Economic performance. Cambodias economic growth rate averaged 10.2% in 2004 2008, but fell sharply in 2009 (to 0.1%1) before beginning a recovery in 2010 (estimated at 6.3%). The decline reflects the impact of the global financial crisis on the three traditional growth driversgarments, tourism, and constructionwhich account for nearly 40% of GDP. However, all three sectors experienced higher than expected growth in 2010, and the recovery is expected to continue through 2011 and 2012. The government responded in an effective and targeted manner to the financial crisis through a fiscal expansion of 3.3% of GDP, but the experience highlights the vulnerability of the economy to external shocks and the need to pursue economic diversification. The strong performance of the agriculture sector during the crisis confirmed its potential to play a more important role in the economy. 6. Constraints to growth. A growth diagnostic carried out in 20082 and updated in 20103 identifies several constraints: (i) poor service by the finance sector for agriculture, agribusiness, and small and medium-sized enterprises (SMEs); (ii) coordination issues along value chains and between various economic participants; (iii) appropriation concerns relating to corruption and various types of uncertainty; (iv) costs of electricity, logistics services, and labor, as well as the level of the real effective exchange rate; and (v) weak labor force skills. The 2009 report identifies three key challenges of rapid growth: urbanization, inequality, and environmental concerns. 7. Private sector. Cambodias private sector remains dominated by informal and very small enterprises and farms, with a few large, modern operations. Only a small number of firms operate between these extremes. The so-called missing middle represents a weakness in the private sector structure (in rural and urban areas) that hinders economic diversification. While the business climate has improved, more needs to be done to attract investment and generate jobs for an expanding labor force. Ongoing private sector constraints include high business compliance costs of regulations, low skills and innovation, high trade facilitation costs, limited access to finance, and low capacity for business management. C. Highlights of Previous ADB Country Strategy

8. The country strategy and program (CSP) 20052009 was extended to 2010 in the country operations business plan, 20082010.4 ADBs overarching goal in Cambodia during this period was sustainable poverty reduction through broad-based inclusive economic growth, social development, and good governance. Four crosscutting themesgovernance, private sector development, gender, and environmentsupported the poverty reduction objectives. The CSP midterm review in August 2007 concluded that the strategic thrusts remained relevant but identified the need to (i) focus on agriculture and rural development to respond to government priorities; (ii) accelerate private-sector-led growth; and (iii) address risk management in weak institutions and poor governance that could compromise efforts to diversify the economy.5

1 2 3 4 5

Official estimate by the Government of Cambodia. ADB, IMF, and the World Bank estimated 2009 growth at 2%. World Bank. 2009. Sustaining Rapid Growth in a Challenging Environment: Cambodia Country Economic Memorandum. Washington, DC. A poverty and growth diagnostic exercise will start in 2011 jointly with the Supreme National Economic Council and the World Bank, and with support from ADBs Economics and Research Department. ADB. 2005. Country Strategy and Program: Cambodia, 20052009. Manila; ADB. 2008. Country Operations Business Plan: Cambodia, 20082010. Manila. ADB. 2007. Country Strategy and Program Midterm Review: Cambodia, 20052009. Manila.

3 9. The 2009 country assistance program evaluation rates ADBs program of assistance in Cambodia successful. Key recommendations include (i) focus on fewer subsectors, (ii) improve investment efficiency and harness synergies between national and subregional initiatives, (iii) foster good governance standards, (iv) explore other financing modalities to supplement Asian Development Fund (ADF) resources, (v) promote private-sector-led growth and income generation through improved rural and urban infrastructure services, and (vi) improve service delivery through more policy dialogue and delegation of project administration.6 10. Portfolio performance was problematic early in the CSP period but improved over time with the proportion of closed operations rated satisfactory and the disbursement ratio for projects well above the ADB average. The 2010 country portfolio review mission emphasized the need to (i) intensify portfolio performance monitoring, (ii) use greater sector selectivity, and (iii) realistically assess executing agency absorptive capacity to manage projects. II. A. THE COUNTRY STRATEGY

Government National Strategy

11. The Rectangular Strategy on Growth, Employment, Equity, and Efficiency, Phase II, provides the development policies for the fourth legislature (20092013). The government launched the NSDP Update in mid-2010, with the overarching objective of reducing poverty to 19.5% by 2015. The major strategic thrusts and their components include the following: (i) Good governance (the Rectangular Strategys core): (a) increasing anticorruption efforts; (b) introducing legal reforms; (c) reforming public administration, including public financial management (PFM), and decentralization and deconcentration (D&D); and (d) reforming the armed forces. (ii) Agriculture: (a) improving agricultural productivity and diversification, (b) focusing on land reform and de-mining, (c) reforming fisheries, and (d) introducing forestry reform. (iii) Physical infrastructure: (a) rehabilitating and constructing the transport network, (b) managing water resources and irrigation systems, (c) developing the energy sector and electricity network, and (d) developing information and communications technology. (iv) Private sector development and employment: (a) strengthening the private sector and attracting investment; (b) promoting SMEs; (c) creating jobs and ensuring better working conditions for workers and employees; and (d) establishing social protection for civil servants, employees, and workers. (v) Capacity building and human resource development: (a) strengthening education and training quality, (b) ensuring enhanced health services, (c) implementing the gender policy, and (d) implementing the population policy. (vi) Creation of a conducive environment for the Rectangular Strategy: (a) promoting peace, political stability, and social order; (b) integrating into the region and the world; (c) creating a favorable macroeconomic and financial environment; and (d) developing partnerships in development. 12. Policy developments. The shifts in policy focus in the NSDP Update include commercializing agriculture and developing value chains for rural development; developing logistics and transport systems, especially in the context of regional integration; increasing education quality and developing skills to support industry; enhancing PFM; strengthening the
6

ADB. 2009. Country Assistance Program Evaluation: CambodiaGrowth and Sector Reform. Manila; Country Partnership Strategy Formulation (accessible from the list of linked documents in Appendix 2).

4 finance sector, including capital markets development; and intensifying commitments to meet the CMDGs, including improved completion of basic education, greater supply of water and sanitation services in poorer rural and urban areas; and a broader focus on poverty reduction, macroeconomic stability, and strengthening public services. B. ADB Country Strategy

13. The government is committed to strengthening its partnership with ADB. Both the government and ADB want to sharpen the focus of ADB operations by increasing selectivity and targeting, and applying limited resources to fewer but larger projects or programs. The government stresses new policy priorities: enhancing agricultural production, increasing quality and relevance of education, and diversifying tourism products and markets. The country partnership strategy (CPS) 20112013 follows six principles: (i) alignment with government policies, (ii) consistency with ADBs Strategy 2020,7 (iii) responsiveness to growth challenges, (iv) building on lessons from ADB operations, (v) working within the resources available and ADB strengths, and (vi) collaborating with development partners and other stakeholders. 14. The 3-year CPS aligns with Cambodias strategic planning cycle and new priorities reflected in the NSDP Update. The government seeks a new development paradigm to respond to changes in the global economy, to strengthen resilience to external shocks, and to achieve higher quality growth. During the CPS period, which may be extended by 2 years as appropriate, the foundations will be laid for Cambodias future economic, social, and political development. The CPS will support government efforts to prepare the next version of the countrys development strategy through analytical sector and thematic work.8 15. In Cambodia, the policy priorities of the NSDP Update intersect closely with ADBs Strategy 2020, especially in the core areas of infrastructure, education, and finance. The NSDP Update places emphasis on enhancing agriculture, which is critical to meeting the CMDGs, particularly gender-related goals, as 80% of the population and 90% of the poor live in rural areas. Most agriculture projects involve either rebuilding infrastructure or stimulating private sector development through agricultural commercialization and economic diversification. 1. CPS Objectives and Themes

16. The overarching objective of the CPS is poverty reduction in line with the governments priorities. The CPS aims to help reduce poverty and promote inclusive growth with an integrated approach to rural development, targeting the areas where most poor reside. With nearly 75% of the population engaged in agriculture, the focus on competitive farms and agribusiness enterprises will create jobs and incomes. Promoting urbanrural linkages, including connectivity, will expand opportunities, as will a sharper focus on gender equity. The CPS aims to enhance human capital by improving rural water supply and sanitation, and access to quality general education and industry-relevant technical and vocational education and training (TVET). 17. To support the governments poverty reduction goal of more than 1% per annum and the NSDP Update policy thrusts, the CPS focuses on two strategic objectives: (i) inclusive economic growth, through physical infrastructure, TVET, agriculture and irrigation, financial sector development, regional integration, private sector development, and economic diversification;
7 8

ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 20082020. Manila. Including through ADBs ongoing technical assistance for the Supreme National Economic Council and cooperation with ADBs Economics and Research Department.

5 and (ii) social development and equity, through basic education, water supply and sanitation, social protection measures, and community-based development around the Tonle Sap. 18. Four cross-cutting themes or challenges are expected to become increasingly important to Cambodias development process: (i) environment and climate change, (ii) decentralization, (iii) urbanrural links, and (iv) regional cooperation. 19. Environment and climate change. Cambodias natural resources, including the Mekong River, are important to the country; future economic growth depends on their sustainable management. ADB will (i) mainstream climate change challenges in sector analysis and planning and project design, (ii) continue to develop improved approaches to resource conservation in the Tonle Sap basin, (iii) coordinate national and subregional programs on climate change and the environment, and (iv) access finance from internal and external sources to support climate change activities in new and existing projects.9 20. Decentralization and deconcentration. Recent D&D developments include the 10-year National Program for Sub-National Democratic Development and its 3-year implementation plan, 20112013. These reforms aim to build democratic subnational structures and institutions. In addition to ADBs direct support to the D&D agenda, ADB sector interventions will be anchored as much as possible in emerging D&D structures, including through the Sub-National Investment Facility, a new funding mechanism for rural infrastructure investments. 21. Urbanrural linkages. Urbanrural linkages have historically provided raw materials to industry, food to the urban population, taxes to support development, and a safety net during crises. As agricultural commercialization takes hold, in contrast to subsistence and smallholder activities, urbanrural linkages will provide a catalyst for higher incomes in rural and urban settings. Connectivity between rural communities and urban growth centers will increase, and rural communities will benefit from improved access to markets and social services. 22. Regional cooperation and integration. Cambodia participates in a number of regional cooperation initiatives, including the ADB-supported GMS program. At the heart of the GMS Southern Economic Corridor, linking Phnom Penh with Bangkok and Ho Chi Minh City, Cambodia works with ADB to convert transport corridors into economic corridors, partly through transport and trade facilitation initiatives and value chains in agro-industry, light manufacturing, and tourism. The CPS will sharpen understanding of the benefits of regional cooperation and integration to Cambodia through analytical work, including on economic corridor development, enabling closer alignment of GMS activities with Cambodias national development strategy. 2. Sectors

23. The CPS identifies five priority sectors and a facilitating sector based on the following prioritization criteria: (i) addresses a critical constraint, (ii) meets the governments priorities, (iii) intersects with ADBs Strategy 2020, (iii) has a high likelihood of satisfactory implementation and strong impact, (iv) complements other development partner activities, and (v) fits within the allocated resources. The five priority sectors (and subsectors) are (i) transport (provincial and rural roads); (ii) water supply, sanitation, and urban development (rural water supply and sanitation, and small towns along GMS corridors and around the Tonle Sap); (iii) agriculture and natural resources (agriculture commercialization and irrigation support); (iv) education and
9

In particular through the ongoing joint ADBWorld Bank Pilot Program for Climate Resilience. Refer to the Environment Assessment (accessible from the list of linked documents in Appendix 2).

6 training (lower secondary education and TVET); and (v) finance (banking regulation, SME finance, insurance, and microfinance). The facilitating sector is public sector management, which forms the base for improved operations of projects in all sectors. The energy sector is identified as a sector for limited engagement during the CPS period. Achievements to date in the energy sector will be consolidated, advisory assistance and policy dialogue on key issues maintained, and coordination enhanced with development partners on strategic issues and plans. GMS considerations can continue to provide a rationale for projects in sectors not included in the national program. During the annual country operations business plan and country portfolio review processes, sector and subsector priorities will be reviewed. The sector mix may change as the countrys requirements evolve, government priorities change, and available resources shift. 24. Transport. Building on ADBs transport work to date, the CPS will focus on expanding the provincial and rural roads network to promote connectivity and trade and tourism activities in Cambodia and the GMS. ADB activities will ensure sustainability of the road subsector and address social issues, improve logistics, promote ruralurban linkages, and support policy and regulatory reforms and institutional capacity. 25. Water supply, sanitation, and urban development. To improve health and quality of life, ADB will continue its support for the CMDG targets for improved water supply and sanitation for the large number of people without access in urban and rural areas. In urban areas, ADB will work to manage the challenges of rapid urbanization and provide basic services and infrastructure to meet the needs of the poor and stimulate the growth of value chains. ADB will develop urban environmental infrastructure (water supply and sanitation) in border towns and growth centers in the Tonle Sap basin. The broader urban development approach will be based on (i) the framework of regional cooperation and integration; (ii) institutional and policy development, and (iii) synergies between urban and rural development. 26. Agriculture and natural resources. The CPS will (i) support sustainable natural resource use and management; (ii) stimulate the growth of competitive farms and rural enterprises, and create significant job opportunities; (iii) build sustainable rural infrastructure, including irrigation, to promote productivity increases, market connectivity, and competitiveness; and (iv) improve food security and climate resilience in agricultural production. The interventions will support the 2010 Rice Production and Export Policy. In preparing agriculture-related projects, attention will be given to lessons from the Tonle Sap Initiative. 27. Education and training. ADB will concentrate on the completion of 9 years of basic education, leading to further education and training. ADB support is part of a program-based approach to meet the objectives of the Education Strategic Plan (20092013), and will focus on lower secondary schooling (grades 79), expanding access and reducing dropout rates, especially for girls, and improving quality. Many of the 200,000 young people joining the labor force every year have weak skills, thus holding back the countrys competitiveness and labor productivity. The CPS therefore focuses on formal and nonformal TVET for men and women to respond to labor market needs and the demands of business, and to improve rural incomes. 28. Finance. ADB will continue its leading role in the financial sector to (i) consolidate the banking reforms achieved to date, upgrade financial infrastructure, and strengthen the regulatory capability of the National Bank of Cambodia; (ii) support microfinance expansion through regulatory and institutional reforms, and consider appropriate reforms to stimulate SME finance; and (iii) support ongoing reforms to develop the insurance industry. ADB will support

7 implementation of the updated Financial Sector Development Strategy (20112020), which is expected to be adopted by the government in the third quarter of 2011. 29. Public sector management. The government is implementing a comprehensive public sector management reform program, comprising D&D, PFM, and public administration reform. Building on the country assistance program evaluations endorsement of ADB support for PFM and D&D reform, the CPS includes support for government measures to deepen public sector management reform, and strengthen anticorruption measures. For D&D, ADB will support the program-based approach under the 3-year implementation plan (20112013) in functional assignments, fiscal decentralization (including PFM capacity development), and subnational financing mechanisms such as the Sub-National Investment Facility. ADB will continue to improve PFM capacity in rural development ministries to provide the foundation for accountability of sub-national public expenditures, by improving accounting, financial management, internal control systems, and procurement; and strengthening internal and external audit capacities, including through ongoing support to the National Audit Authority. The CPS will support the capacity development of government officials in economic policy analysis and management, change management, and leadership.10 3. Drivers of Change

30. Private sector development. The Rectangular Strategy Phase II identifies private sector development and employment as core objectives. The CPS will address private sector development with programs to transform the agriculture sector from subsistence farming to a commercial orientation, improve transport infrastructure, strengthen the regulatory regime governing financial institutions, stimulate small enterprise and farm development, and promote private sector involvement in regional integration. 31. Private sector operations. Private sector operations will respond to the needs of the private sector and government priorities. To receive ADB financial assistance, private sector projects and companies must meet stringent ADB criteria for nonsovereign investments, including long-term financial viability, significant and positive development impact, sufficient project scale, good corporate governance, and compliance with ADB's safeguard policies. On the basis of the government's development plan, ADBs Strategy 2020, and sector diagnostics, the emphasis of operations will be on energy, finance and private equity, transport, agribusiness, and water supply and sanitation. Publicprivate partnership opportunities will be actively sought in all areas of ADB operations.11 Where appropriate, technical assistance (TA) will facilitate project development, address entry barriers, improve governance, and develop capacity. ADBs Private Sector Operations Department will promote trade finance for SMEs, and identify investments and seek synergies with ADB's public sector assistance. 32. Governance. The CPS will give priority to governance activities needed to improve efficiency in public service delivery. In addition to the public sector management interventions, ADB plans to support the Law on Anti-Corruption by strengthening the capacity of the newly established Anti-Corruption Unit to carry out its mandate under the law. ADB will improve sector governance by strengthening PFM capacity, aligning with emerging D&D systems, and providing institutional development. Risk mitigation measures will be introduced for all ADB10

Including through the Public Policy Training Program project covering Cambodia, Lao Peoples Democratic Republic, and Viet Nam. 11 A publicprivate partnership assessment will be carried out in 2011 to identify the potential for publicprivate partnerships in the Cambodia program.

8 financed projects consistent with ADBs Second Governance and Anticorruption Action Plan (2006) and its implementation guidelines.12 33. Gender equity. Gender imbalances are a concern in Cambodia, and ADB is committed to gender equity and womens empowerment. ADB will promote gender equity through operations that deliver specific and tangible benefits to women, applying the gender equity theme or effective gender mainstreaming category, including gender outcomes and outputs, in project design and monitoring frameworks. In addition, ADB projects will carry out capacity development in gender analysis and advocacy. 34. Knowledge solutions. ADBs Strategy 2020 highlights knowledge as a catalyst to propel development and enhance impact. ADBs Cambodia Resident Mission will develop a knowledge strategy for each year of the CPS cycle. Building on ADBs communities of practice and the experience of ADB experts around Asia, the CPS aims to generate and disseminate knowledge as part of the project cycle, make use of the knowledge content of operations, and access knowledge from local and international knowledge institutions. 35. Partnerships. The NSDP Update calls for partnerships in development. Strategy 2020 sees partnerships as a core element of ADBs business model. Multilateral and bilateral development partners support Cambodias development, and coordination is a priority objective.13 The government has improved aid effectiveness by strengthening the 19 government-led technical working groups comprising public sector agencies and development partners. The government encourages program-based approaches to support sector strategies and reforms. ADB will selectively strengthen links with: (i) development partners to improve collaboration and mobilize greater cofinancing resources, (ii) civil society through consultations and roundtables that allow frank discussions and identify engagement possibilities, (iii) the private sector to engage with the business community on ADBs public and private sector operations, and (iv) research centers through joint analytical work. III. A. STRATEGY IMPLEMENTATION

Indicative Resource Parameters

36. Resources. The 20112012 ADF performance-based allocation for Cambodia is $273.48 million. The 2010 ADB debt sustainability analysis concluded Cambodia was at a low risk of debt distress, and eligible for only ADF loan resources. The total indicative ADF lending pipeline for 20112012 is $306.2 million, including $33.5 million from the regional set-aside for the GMS program. Lending of $152 million is programmed for 2013. The indicative nonlending program for 20112013 (including ADB and other sources) is $28.7 million for the national program and $8.45 million for regional project preparatory technical assistance.14 37. Cost-sharing arrangements. Under established agreements with the government, the country cost-sharing ceiling for the portfolio of loans and TA projects is set at 99%. Individual projects may be accorded ADB financing for up to 99% of total project costs. This is expected to ease counterpart financing constraints that have hampered project implementation.
12

Good governance frameworks were introduced to ADB projects in Cambodia in 2007 to mitigate fiduciary risks in financial management and internal control, procurement, complaints and remedies mechanisms, and sanctions. ADB will review lessons learned to ensure high standards of governance during project implementation. 13 In June 2010, development partners indicated support of more than $1 billion for 2010. See the development coordination matrix in Country and Portfolio Indicators (accessible from the list of linked documents in Appendix 2). 14 Country Operations Business Plan (accessible from the list of linked documents in Appendix 2).

9 38. Staff resources. The staffing needs of the resident mission are continually being evaluated based on the composition of projects, increasing demands of aid coordination, and other new thrusts of the CPS. Staffing needs will likely involve an international resettlement specialist, a private sector operations officer, a water supply and sanitation officer, a gender officer, an external relations officer, and additional sector officers and support staff as required. B. Program Overview

39. Overall operations. About five loans are programmed per year in the five priority sectors and the facilitating sector. They account for 88% of the total loan portfolio; three of these are GMS projects. One national energy project and one GMS trade facilitation project are also planned. The national program includes 30 TA projects over the 3 years, of which 14 are project preparatory, 12 are capacity development, 2 are policy and advisory, and 2 are project design advance. The regional program includes eight project preparatory TA projects (seven firm and one standby). The program will be reviewed and adjusted through the annual country operations business plan. 40. Portfolio quality improvement. Improving portfolio quality and efficiency is a focus of the CPS. Responding to country assistance program evaluation and country portfolio review mission findings, the CPS emphasizes (i) applying innovations in portfolio selectivity; (ii) increasing the average size of projects15 through additional financing, merging projects, the project design facility, sector development programs or multitranche financing facilities, and innovative financing mechanisms for projects or groups of projects; (iii) selecting the appropriate financing modality and mobilizing cofinancing; (iv) assessing absorptive and management capacity of executing agencies; (v) selectively delegating projects to the Cambodia Resident Mission to improve project administration and portfolio performance; (vi) improving adherence to project readiness filters; and (vii) improving monitoring and evaluation (M&E) of ADB activities through stronger results frameworks and joint supervision missions for cofinanced projects. 41. Aid coordination and effectiveness. The CPS aims to support the government in aid coordination and increase project implementation effectiveness through ADBs strengthened involvement in aid coordination mechanisms and forums. ADB will participate in program-based approaches, and undertake joint analytical work as part of the Paris Declaration commitments. 42. Communications. ADB will strengthen dissemination of knowledge to all stakeholders on ADB operations and on economic development through the media, the internet, the joint ADBWorld Bank public information centers, and the Cambodia ADB learning resource center. IV. A. Monitoring RESULTS MANAGEMENT

43. CPS implementation will be monitored using the country and sector results frameworks updated annually during the country portfolio review and country programming missions (Appendix 1). ADB sector specialists in collaboration with executing agencies will analyze the sector outcome data. Where needed, ADB will strengthen the M&E capacity of executing agencies. The NSDP Update places priority on M&E of national development projects and activities. A framework is being finalized that will bring together central and sector M&E
15

The average size of projects for the 20052010 CSP was $19.55 million ($430 million for 22 projects), compared with an estimated $26.95 million ($458.2 million for 17 projects) for the 20112013 CPS.

10 systems. This will assist in ensuring the alignment of the CPS with government objectives and priorities, and will lay the groundwork for improved country and sector results frameworks in this CPS as well as the subsequent CPS 20142018. B. Risks

44. Public financial management. PFM and oversight capacity weaknesses pose fiduciary risks for public expenditure. The government is implementing stage 2 of the PFM reform program, which aims to improve financial accountability. To mitigate these risks, ADBs PFM reform program will improve the financial accountability of rural development ministries, the debt management capacity of the Ministry of Economy and Finance, and the effectiveness of the National Audit Authority. 45. Procurement. Weaknesses in the procurement framework and its enforcement are a high risk for corruption in public spending. ADB measures to mitigate corruption risks in its operations include (i) introducing risk mitigation measures for all projects to ensure transparency and accountability in project procurement practices, (ii) tightening project procurement and M&E, (iii) conducting joint investigations of irregularities in ADB-financed projects (by ADBs Office of Anticorruption and Integrity, and the National Audit Authority), and (iv) supporting the governments update of the standard operating procedures and procurement manual for externally assisted projects, and training government officials to apply them. 46. Risk mitigation. The country governance assessment identifies institutional weaknesses in PFM and procurement, and potential for corruption. Mitigation measures include support to PFM reform covering oversight capacity and procurement, support to D&D to develop the governance system for subnational administrations and deepen local demand for accountability, and a direct intervention to support the Law on Anti-Corruption.

Appendix 1

11

COUNTRY PARTNERSHIP STRATEGY RESULTS FRAMEWORK


Country Development Goals 1. Sustainability, peace, political stability, security, and social order to promote rule of law, protect human rights and dignity, and support multiparty democracy 2. Sustainable long-term economic growth at a rate of 7% per annum on a broader basis and more competitive capacity in the context of single-digit inflation 3. Poverty reduction at a rate of more than 1% per annum, and improvement of key social indicators, especially in education, health, and gender equity 4. Increased outreach, effectiveness, quality, and credibility of public services Sectors Selected for ADB Support ADB Indicative Resource Allocation Government in the Next Pipeline Sector Sector Outcomes that ADB Contributes to ADB Areas of and Thematic a Objectives and Indicators Intervention Priorities 1. Agriculture and Natural Resources (Strategy 2020 Core Areas 1: Infrastructure and 2: Environment) $85 million in Sustainable natural resource development, Enhanced Water resources 20112013, 18% of management, and conservation agricultural development and total CPS financing productivity and Forest cover maintained for inland forest conservation diversification (2008 baseline: 59%; 2015 target: 60%) Irrigation system ENV 100% development, Improved agricultural productivity, GEN+EGM 65% management, and water diversification, and commercialization PSD 65% users associations Increased paddy yields (2008 baseline: RCI 35% Flood protection 2.74 tons/ha; 2013 target: 3.00 tons/ha) Inland ecosystem and Increased irrigated area (2008 baseline: wetland biodiversity 1,120,000 ha; 2013 target: 1,245,000 ha) Agriculture sector Improved quality and sustainability of rice development policies exports (2009 baseline: 13,000 tons milled Agro-industry rice; 2015 target: 1 million tons milled rice) development Farm production and crop diversification Crop and noncrop value chain investments Postharvest facilities 2. Education and Training (Strategy 2020 Core Area 5: Education) $60 million in Equal opportunity Secondary education and TVET graduates School rehabilitation 20112013, 12.7% for access to have more relevant knowledge and skills and building of total CPS quality education Equipment and LSE net enrollment rate increased from financing by all children education materials 32.6% in 2009/10 to 47% in 2012/13 and youth LSE completion rate increased from 48.7% Teacher training ENV 0% in 2009/10 to 52% in 2012/13 System and policy An effective GEN+EGM 100% reforms Formal training enrollment increased from TVET program PSD 50% 3,700 to 18,000 by 2015 Vocational training that increases RCI 0% Informal skills and Enrollment in nonformal skills training productivity and technical training increased from 53,000 in 2007/08 to rural employment Scholarships to 210,000 in 2014 in response to disadvantaged groups labor market needs 3. Finance (Strategy 2020 Core Area 4: Financial Sector Development) A growing, $45 million in Increased size, efficiency, and resiliency of Central bank capacity resilient, and 20112013, 9.6% financial system strengthened and efficient financial of total CPS payment systems Number of microfinance loan accounts system financing opened increased to 1.2 million by 2013 modernized (2010 baseline: 1.02 million) Financial sector policies ENV 0% 100% of banks and MFIs meet minimum and strategies GEN+EGM 0% capital adequacy ratio of 15% (2010 Microfinance outreach PSD 100% baseline: 31% of banks and 22% of MFIs) Insurance development RCI 0% Bank average interest rate spread down to 10% by 2013 (2010 baseline: 12.7%)

12

Appendix 1

ADB Indicative Resource Allocation Government in the Next Pipeline Sector Sector Outcomes that ADB Contributes to ADB Areas of and Thematic Objectives and Indicators Intervention Prioritiesa 4. Water Supply, Sanitation, and Other Municipal Infrastructure and Services (Strategy 2020 Core Areas 1: Infrastructure; 2: Environment; and 3: Regional Cooperation and Integration) $73.2 million in All Cambodians Increased use of priority infrastructure Rural water supply and 20112013, 15.5% have access to (including water, sanitation, and economic sanitation of total CPS safe water supply development) by Cambodians (women and Urban environment financing and sanitation by men) and businesses improvements 2025 In Greater Mekong Subregion Southern ENV 100% Economic Corridor: GEN+EGM 27% % of households without toilets decreased PSD 73% from 6.29% (2008) to 0% (2015) RCI 22% % of houses with sewerage connection increased from 23% (2008) to 50% (2015) Rural population 50% with access to safe water 30% with access to improved sanitation 5. Transport (Strategy 2020 Core Areas 1: Infrastructure and 3: Regional Cooperation and Integration) Facilitate trade, Increased movement of heavy goods by $87 million in Provincial and rural road and movement of road and rail, in line with weight regulations 20112013, 18.5% rehabilitation goods and of total CPS Rail freight traffic (ton-km) increased from Rail rehabilitation services; foster financing 151,152 in 2009 to 1 million in 2013 integration of Improved road and rail connectivity ENV 100% domestic markets (interprovincial and regional) GEN+EGM 100% into the region 100% of provinces connected by paved PSD 100% and the world roads by 2013 (2008 baseline: 70%) RCI 0% 6. Public Sector Management (Strategy 2020 Driver of Change 2: Good Governance and Capacity Development) $45 million in Subnational Increased subnational service delivery: Decentralization and 20112013, 9.6% administrations devolution Number of district and municipal of total CPS capable of administrations delivering basic services Public expenditure and financing promoting to the population increased (2010 fiscal management sustainable local baseline: 0) Legal and judiciary ENV 0% development and Share of district and municipal reforms GEN+EGM 44% reducing poverty administration in public expenditure PSD 56% increased (2009 baseline: 0%) RCI 0% Improved public financial management Net present value of debtrevenue ratio decreased (2010 baseline:170.4%) 7. Energy (Strategy 2020 Core Area 1: Infrastructure) Increased per Increased grid-electricity consumption by $45 million in Electrical power capita energy more people, particularly outside of Phnom 20112013, 9.6% transmission consumption and Penh for economic and social development of total CPS Electrical power electrification financing Electrification rate through grid-expansion distribution rates increased to 35.17% by 2013 (2009 Rural electrification ENV 100% baseline: 24.72%) Policy and regulation GEN+EGM 100% Number of households supplied with Sector approaches PSD 100% electricity from the national grid-electricity RCI 0% network increased to 1,131,190 by 2013 (2008 baseline: 633,123) ADB = Asian Development Bank, CPS = country partnership strategy, EGM = effective gender mainstreaming, ENV = environmental sustainability, GEN = gender equity, GMS = . ha = hectare, km = kilometer, LSE = lower secondary education, MFI = microfinance institution , PSD = private sector development, RCI = regional cooperation and integration. a The calculation of indicative resource allocations by sector include only firm projects. Source: Asian Development Bank

Appendix 2

13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/CPS/?id=CAM-2011 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Economic Analysis (Summary) Poverty Analysis (Summary) Gender Analysis (Summary) Environment Assessment (Summary) Private Sector Assessment (Summary) Sector Assessment (Summary): Agriculture and Natural Resources Sector Assessment (Summary): Education and Training Sector Assessment (Summary): Water Supply, Sanitation and Other Municipal Infrastructure and Services Sector Assessment (Summary): Finance Sector Assessment (Summary): Transport Risk Assessment and Risk Management Plan (Summary) Country and Portfolio Indicators Country Performance Assessment Ratings Country Cost-Sharing Arrangements and Eligible Expenditure Financing Parameters Country Partnership Strategy Formulation Country Operations Business Plan Country Assistance Program Evaluation Sector Assessment (Summary): Energy Sector Assessment: Public Sector Management Sector Assessment: Trade and Industry Regional Cooperation and Integration: Cambodia in the Greater Mekong Subregion Sector Assessment and Road Map: Greater Mekong Subregion Tourism Country Partnership Strategy Strategic Framework

Supplementary Documents

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