The World Bank in Cambodia: Reducing Poverty by Addressing Governance Challenges

Nisha Agrawal, Country Manager, Cambodia

Background Material for the Core Course on Public Sector Governance and Anti-Corruption

Washington DC, April 23-26, 2007

Overview of Presentation What is our mission? Why a Governance CAS? What is a Governance CAS--The World

Bank’s CAS for Cambodia (2005-2008)

Our Vision: A Cambodia Free of Poverty

Eradicate poverty and hunger (35% still poor) Achieve universal primary education Reach gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDs, malaria and other diseases Ensure environmental sustainability De-mining, UXO and Victim Assistance

Cambodia: The Country Context A decade of high growth (7% per annum) Moderate progress in poverty reduction (poverty

levels declined from 47 percent to 35 percent during the last decade)

Still one of the poorest countries in the world with a per capita income of $430 per annum

Many institutions of governance were destroyed during the last three decades of conflict and need to be rebuilt

Analytical work pointed to governance being the main constraint to poverty reduction Investment Climate Assessment (ICA)-- documented

the high cost of doing business (2004-2005) Poverty Assessment –highlighted modest progress in

poverty reduction during the last decade but together with sharply rising inequality (2006)

Integrated Fiduciary Assessment and PER (IFAPER) --identified need for critical public financial management reforms (2003)

Cambodia at the Cross Roads—found that accountability mechanisms were weak and needed to be strengthened (2004)

High cost of doing business drives away investments and jobs

Pattern of growth leading to rising inequality and slower poverty reduction

951 1,33

6

1,69

6 2,27

1

4,88

3

2,22

8

1,02

6

1,53

7 2,07

7 2,95

4

7,06

7

2,93

2

0

2,500

5,000

7,500

Poorest Nextpoorest

Middle Nextrichest

Richest Cambodia

1994 2004

Figure 1: Over the last ten years, living standards amongst the richest fifth of the population have risen by 45 percent— compared to 8 percent amongst the poorest fifth real average p.c. consumption (riels p.c. per day) within the geographically comparable sample

Poor public financial management leading to poor service delivery Revenues are inadequate (about 10% of GDP), well

below the average for low income countries (16%) Fiduciary risks to public funds are high due to

weaknesses in budget formulation, execution and reporting

Public procurement remains a principal source of corruption

An underpaid and patronage based civil service is a recipe for high corruption

CPIA Ratings sum up assessment--Cambodia lags its peers on governance indicators

1. Macro. Management

2. Fiscal Policy

3. Debt Policy

4. Trade

5. Financial Sector

6. Business RegulatoryEnvironment

7. Gender Equality

8. Equity of Pub. Resource Use

9. Building HR

10. Social Protection & Labor

11. Policy & Institut. for Environ.Sustainability

12. Property Rights & Rule-BasedGovernance

13. Quality of Budgetary andFinancial Management

14. Eff iciency of RevenueMobilization

15. Quality of Public Administration

16. Transparency, Accountability &Corruption in Public Sector

2005 Cambodia 2005 IDA Countries Maximum

Weak Governance confirmed by a number of global indicators “Governance Matters V: Governance Indicators for

1996-2005” (Kaufmann, Kraay and Mastruzzi, 2006) (data for 213 countries and territories); Cambodia ranks very low on all 6 dimensions of governance

“Doing Business” (2007): Cambodia ranked 143 out of 175 countries in ease of doing business

Transparency International (2006): Cambodia ranked 151 out of 163 countries on the TI Corruption Perceptions Index 2006

WB Country Assistance Strategy (CAS) Designed to tackle governance at 3 Levels

1. At the Country Level--Build back the institutions of governance that were destroyed by three decades of conflict

2. At the Project Level--Protect the funds that we deliver through our projects

3. At the Global Level--Work with other partners—donors, civil society and the private sector--to address governance challenges

I. At the Country Level in Cambodia—focus on 5 themes Promote private sector development by reducing

the costs of doing business Strengthen public financial management

(including management of oil revenues in the future) Improve natural resources management (securing

property rights to land and access to forests) Support decentralization and strengthen local

governance Promote a stronger demand for good governance by

increasing citizens’ voice and participation in the policy making process

Why these five areas High importance for growth and poverty

reduction Ownership and leadership on the government

side Comparative advantage/historical

engagement/role of other donors/selectivity and division of labor

Align all Our instruments to Get Results: Example from PSD Undertook an Investment Climate Assessment (ICA) that

highlighted the need to implement reforms, especially in the area of trade facilitation (customs, inspection agencies) (2004)

Reached agreement with Government on 12-point program of reform (2004)

Designed a Trade Facilitation and Investment Climate Project ($10 m grant) to help implement the reform program (2005-2010)

Supported the policy reforms through the Poverty Reduction Support Operation (PRSO) (2007-09)

Started a new ICA to monitor results, identify new issues and design future projects (2007)

Align All Our Instruments to Get Results: Example from PFM Undertook a Integrated Fiduciary Assessment and Public

Expenditure Review (IFAPER) to identify weaknesses in public financial management and highlight the need for systemic reforms (2003)

Worked with Government to design a 10-12 year program of reform to bring Cambodia up to regional standards (2004)

Coordinated 11 donors to provide support to the reform program through the Public Financial Management and Accountability Project ($14m grant from WB; more from other partners)

Supported the policy reforms through the Poverty Reduction Support Operation (PRSO) (FY07-09)

Will undertake a new IFAPER to monitor results, identify new issues and design future projects (2008)

Results: Cambodia is reforming gradually and showing improvements in governance

1. Macro. Management

2. Fiscal Policy

3. Debt Policy

4. Trade

5. Financial Sector

6. Business RegulatoryEnvironment

7. Gender Equality

8. Equity of Pub. Resource Use

9. Building HR

10. Social Protection & Labor

11. Policy & Institut. for Environ.Sustainability

12. Property Rights & Rule-BasedGovernance

13. Quality of Budgetary andFinancial Management

14. Eff iciency of RevenueMobilization

15. Quality of Public Administration

16. Transparency, Accountability &Corruption in Public Sector

2004 2005 2006 Maximum

II. At the Project Level—Reducing Fiduciary Risks While governance is a long-term challenge, need to take

immediate measures to protect our project funds in the short-term

As part of the preparation for the CAS, the World Bank (together with INT) undertook a “Fiduciary Review”(FR) – a study to understand weaknesses in the underlying fiduciary systems that were leading to leakages in our projects

The FR was only the third of its kind in the world (done proactively) and the only one done in collaboration with the Government (separate presentation follows on this)

Findings of the FR were publicized and raised awareness on issues of corruption in WB-funded projects

III. Partnerships with other donors are essential to take forward the governance agenda

At the last Consultative Group (CG) Meeting in March 2006 held in Phnom Penh, “traditional” donors pledged $600 m to help reduce poverty in Cambodia; a week later, China pledged another $600 million on its own

The Bank is a relatively small financial player—we provide $40-50 m per annum—and cannot tackle governance and corruption challenges alone

We decided to do a joint CAS with ADB, DFID and UN system and to put governance at the heart of the joint CAS

Joint CAS with the ADB-DFID-UN System The Cambodia CAS was the first joint CAS in the world Different donors had been giving very different messages

about the governance challenges facing Cambodia Took one year of intensive work to understand differences in

perspective and to reach a shared perspective The analytical section of the four CASes is now identical and

gives a common message on the governance challenges facing Cambodia

Common donor assistance strategy and program to support the next NSDP 2010-2015 (??)

Reinforcing messages at the country and global levels Maintain quadripartite relationship in country

formally (joint annual retreats) and informally (monthly lunches)

Follow up at the HQ levels with regular (annual) visits to ADB HQ and DFID HQ

Also have a parallel partnership between ADB, Japan and WB—built through in-country retreats and tripartite annual meetings in Tokyo

Visits to other key donor capitals to keep all partners on-message

Using the Bank’s convening power to keep the spotlight on governance As the co-chair of the CG Meeting, the Bank plays a major

role in helping the Government and donors put in place mechanisms to prioritize the reform program and put governance and corruption issues at the center of our dialogue

At the CG meeting, a set of Joint Monitoring Indicators (JMIs) are adopted in a number of governance areas that set the benchmarks for reforms for the coming years

The JMIs are agreed, monitored, and implemented by 18 joint government-donor-NGO-private sector Technical Working Groups (TWG)

Progress is also monitored—and challenges addressed—through the higher level quarterly meetings of the Government-donor Coordination Committee (GDCC)

Partnerships with Civil Society and Communities to build a stronger demand for good governance

Bank has worked traditionally more on the supply of good governance rather than the demand side, but this is changing

Demand for Good Governance Project (FY08) to strengthen state and non-state institutions of accountability (media, labor unions, Ombudsman office, dissemination of laws, establishing grievance mechanisms)

Grant of $2 million from LICUS TF (FY07) to build capacity of civil society on social accountability

Empowerment of the Poor in Siem Riep Project (FY08) to promote poor people’s organizations (farmers’ organizations, microfinance groups etc) and link them better to the tourism sector and other sources of growth

WB Group Partnerships with the Private Sector IFC coordinates the Private Sector Forum and its

working groups that facilitate dialogue between the Government and the private sector

Mekong Project Development Facility (MPDF) providing policy advice and TA at provincial levels and to SMEs

WB leads policy dialogue between Government and donors –in which the private sector participates--on PSD issues through the technical working groups

WB also beginning dialogue with private sector on their role as partners with the Bank in fighting corruption

Lessons from the Design and Implementation of the Cambodia CAS Leadership and ownership matter--Need to find and

back the champions of reform Long-term agenda requires focus and selectivity Also requires patience and perseverance—need to

think of 10-15 year horizons Cannot do it alone--Requires strong investments in

partnerships with all other stakeholders Requires careful monitoring of results to know if

strategy on track Tangible results and progress and success possible

and visible, even in the short-term

Thank you for your attention