Document o f The World Bank

For Official U s e Only

Report No: 32050-KH

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED IDA GRANT

IN THE AMOUNT OF SDR 6.62 MILLION (US$lO.OO MILLION EQUIVALENT)

TO THE

KINGDOM OF CAMBODIA

FOR A

CAMBODIA TRADE FACILITATION AND COMPETITIVENESS PROJECT

MAY 4,2005

Poverty Reduction and Economic Management Unit East Asia and the Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 11 2005

APEC ASEAN ASYCUDA CamControl CAS CATAF CDC CED CFAA CIB EMAF FDA FDI FIAS FMM HRM ICA ICT ITC JICA LJR MAFF MBPI MEF MFA MFK MIGA MOC MPDF OECD PDS PFM PPI PPIAF RGC SITF SLA TRIMS TRIPS WTO

Currency Unit = Cambodian Riels

US$ = SDRl 4,015 = US$1

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS January 1 - December 31

Asia Pacific Economic Cooperation Association o f Southeast Asian Nations Automated System for Custom Data Cambodia Import Export Inspection and Fraud Repression Department Country Assistance Strategy Cambodia- Australia Technical Assistance Facility Council for Development of Cambodia Customs and Excise Department Country Fiduciary Assessment Cambodia Investment Board Export Market Access Fund Food and Drug Authority Foreign Direct Investment Foreign Investment Advisory Service Financial Management Manual Human Resources Management Investment Climate Assessment Information and Communication Technology Intemational Trade Center Geneva Japan Intemational Cooperation Agency Legal and Judicial Reform Ministry o f Agriculture, Fisheries and Forestry Merit-Based Pay Initiative Ministry o f Economy and Finance Multi-Fiber Agreement Most-Favored Nation Multilateral Investment Guarantee Agency Ministry o f Commerce Mekong Private Sector Development Facility Organization for Economic Cooperation and Development Private Sector Development Public Financial Management Private Participation in Infrastructure Public-Private Infrastructure Advisory Facility Royal Govemment o f Cambodia Special Inter-Ministerial Task Force Service-Level Agreement Trade Related Investment Measures Trade Related Intellectual Property Rights World Trade Organization

Vice President: Jemal-ud-din Kassum, EAPVP Country ManageriDirector: Ian C. Porter, EACTF

Sector Director: Homi Kharas, EASPR Sector Manager: Khalid A. Mirza, EASPR

Task Team Leader: Magdi M. Amin, EASFP

CAMBODIA FOR OFFICIAL USE ONLY Cambodia Trade Facilitation and Competitiveness

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ............................................................................... 1

1. Country and sector issues ...................................................................................... 1

2. Rationale for Bank involvenient .......................................................................................... 7

3. Higher level objectives to Mhich the project contributes ................................................................. 7

B. PROJECT DESCRIPTION ............................................................................................................... 8

.4.

1. Lending instrument ............................................................................................. Project developnient objective and key indicators ..................................................

3. Project components ................................................................................................. Lessons leamed and reflected in the project design ........................................................

2.

4.

5. Alternatives considered and reasons for rejection ...............................................

C. IRIPLERIENTATION ...................................................................................................................... 11

............ 1. Partnership arrangements ............................... 1 1

2. Institutional and iniplementation arrangements ............................................ 12

3. Monitoring and evaluation o f outcomes~results ............................... 13

3. Sustainability ...................................... 13

6. Grant conditions and covenants ................ ............................................. 14

. . ...................................................

5. Critical risks and possible controversial aspects .................................. 14

D. APPRAISAL SUMMARY ............................................................................................................... 15

................................ 1, Economic and financial analyses (See Annex 9 ) ................. 15 2. Technical ............................................................................ . . . . . . . . . . ! 5

............................................................................. ...................... 15

............................................................................... ...................... 16

5. Environment .................................. ......................................................................................... 16

6. Safeguard policies ........................................................................................................ 16

7 . Policy Exceptions and Readiness ................................................................. ............................ 16

Annex 1: Country and Sector or Program Background ........................................................................ 17

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................................... 28

Annex 3: Results Framework and Monitoring ....................................................................................... 29

Annex 4: Detailed Project Description .................................................................................................... 31

Annex 5: Project Costs ....................................................................................................,...,..,.........,........39

This document has a rest r ic ted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.

Annex 6: Implementation Arrangements ................................................................................................ 40

Annex 7: Financial Management and Disbursement Arrangements ................................................... 42

Annex 8: Procurement Arrangements .................................................................................................... 45

Annex 9 : Economic and Financial Analysis ............................................................................................ 50

Annex 10: Safeguard Policy Issues .......................................................................................................... 53

Annex 11: Project Preparation and Supervision .................................................................................... 54

Annex 12: Documents in the Project File ................................................................................................ 55

Annex 13: Statement o f Loans and Credits ............................................................................................ 56

Annex 14: Country at a Glance ................................................................................................................ 58

Annex 15: Map .......................................................................................................................................... 60

CAMBODIA

Source

CAMBODIA TRADE FACILITATION AND COMPETITIVENESS

Local Foreign Total

PROJECT APPRAISAL DOCUMENT

BORRO WEIURECIPIENT IDA GRANT F O R POOREST COUNTRY Total:

EAST ASIA AND PACIFIC

0.00 0.33 0.33 0.00 10.00 10.00 0.00 10.33 10.33

EASFP

FY Annual Cumulative

Date: M a y 4, 2005 Country Director: Ian C. Porter

Team Leader: Magdi M. Amin Sectors: Other domestic and intemational trade

Themes: Export development and competitiveness (P);Trade facilitation and market access (P) ;Technology diffusion (S) Environmental screening category: N o t Required Safeguard screening category: N o impact

Sector ManageriDirector: Homi Kharas (1 00%)

Project I D : PO89196 Lending Instrument: Specific Investment Loan

06 07 08 09 2.33 4.00 2.00 2.00 2.33 6.33 8.33 10.33

Project Financing Data [ ] Loan [ 3 Credit [XI Grant [ ] Guarantee [ ] Other:

For LoansiCreditsiOthers: Total Bank financing (USSm.): 10.00 Proposed terms:

Financing Plan (US$m)

Borrower: Kingdom o f Cambodia

Responsible Agency: Ministry o f Commerce 20 A&B Norodom Blvd Phnom Penh Cambodia www.moc.gov.kh

Does the project depart f rom the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7

[

[ ]Yes [XINO

No

Have these been approved by Bank management? [ ]Yes IN0 I s approval for any policy exception sought f rom the Board? [ ]Yes [ IN0

[XIYes [ ] N o

[XIYes [ ] N o

Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7

Project development objective

The objective o f the Project i s to support the Recipient’s strategy to promote economic growth by reducing transaction costs associated with trade and investment, introducing transparency in investment processes, and facilitating access o f enterprises to export markets.

Project description

Component 1. Trade Facilitation Component will finance automation and reform o f trade facilitation agencies. Component 2. Export Market Access Fund wil l finance a technical assistance matching grant facility that would cover 50% o f the cost o f achieving market standards, or evidence o f compliance wi th those standards. Component 3, PPI and Investment Component, wi l l finance a program o f capacity building to implement the L a w on Concessions and the Amended L a w on Investment, to improve the organizational capacity o f key agencies to manage and deliver o f PPIs transactions that are conducted fairly, transparently, competitively and in the public interest. Component 4, the Legal Transparency wil l finance the establishment and maintenance o f a website in the Khmer language to make readily available to the public the final judgments o f al l cases in the Supreme Court and in the Court o f Appeal; and the establishment and maintenance o f a website to ensure the electronic publication o f all Cambodian commercial laws, related regulations and draft legislation.

Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10

N o safeguard policies are triggered.

Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation:

Loadcredi t effectiveness:

Covenants applicable to project implementation:

Before December 2006 the Recipient shall provide to the Bank draft human resources policies and procedures, consistent with the principles applied in the Government’s Merit Based Pay Initiative, and implement the policies fo l lowing consultation with the Bank and other donors.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Cambodia faces a profound development challenge.

Cambodia i s among the world’s least developed countries. According to the NPRS, 36 percent o f the total population o f 13.4 mi l l ion l ives be low the poverty l ine o f US$O.46-$0.63 per day; less than a third o f this population have access to an improved water source; one third i s ill iterate; 45% o f young children are underweight.

The legacy of conflict. Decades o f conflict, ruinous policies and embargo destroyed the institutional fabric o f c i v i l society and commerce. Cambodia’s challenge i s compounded by the legacy o f internal confl ict that not on ly depleted the country’s reserves o f human talent o n wh ich entrepreneurship i s based, but also disrupted the continuity o f social institutions and formal and in formal ru les that provide the framework for trade and investment. The economic landscape reflects this lack o f key institutions, most notably the ru le o f law. I t also reflects an attempt by the Government to fill the institutional vacuum through administrative measures that have largely not worked, and created opportunities for corruption. Basic publ ic services and infrastructure are absent for much o f the population.

Narrow growth based on an extremely small formal private sector. An estimated 80% o f the population i s rural, and l inked to subsistence agriculture. O f these families who depend o n agriculture, 80 percent are poor. Manufacturing employs less than nine percent o f the workforce. A large share o f the private sector operates informally, contributing min imal ly to the tax base and facing l imi ted access to finance and trade.

Extreme dependence on one export sector, and substantial risks. The remarkable growth o f the garment sector f r o m 1997 to 2001 demonstrated the potential impact o f private sector development o n poverty. Garment sector exports grew f r o m $28 m i l l i on in 1995 to approximately $2 b i l l i on in 2004, employing over 270,000. By the end o f 2004, Cambodia had become one o f the 20 largest garment exporters to the US. However, the quota system under wh ich Cambodia’s exports emerged has ended, giving way to a competitive marketplace in wh ich China i s rapidly increasing i t s share. Cambodia n o w faces significant risks because i t s garments comprise 76% o f i t s exports.

Poor infrastructure. Cambodia’s infrastructure coverage i s the lowest in the East As ia region, contributing to high cost, poor quality services and l imi ted access to markets. There i s n o power grid, a lack o f adequate highway and ra i l service, and high port costs. Competit ion i s m in ima l in a l l sectors, lowering quality and raising costs. The services that exist are main ly concentrated in urban areas, and the rural population suffers f r o m lack o f access to markets, f rom unsafe and unreliable water and dependence o n traditional biomass energy. Future growth in such sectors as agroindustry and tourism are particularly sensitive to infrastructure.

Declining FDI over the past decade. FDI has been o n a secular trend downward since 1996, when in f lows reached nearly $300 mi l l ion. FDI in f lows for 2003 were $87 m i l l i on (WDI).

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Policy Environment and Institutional Performance

To better understand the pol icy and institutional environment facing firms, the Wor ld Bank conducted an Investment Climate Survey in 2003 o f 802 enterprises. O f these 200 were rural, 100 urban informal, and 502 were urban f i r m s in Phnom Penh, Siem Reap, Kampong Cham, Sihanoukville, and Battambang. These enterprises ranged f rom micro (fewer than 10 employees) to large (over 100 employees) and included both domestic and foreign f i rms. The key findings:

0 Excessive regulation and weak institutions contributed to l o w productivi ty levels. The Investment Climate Survey found that total factor productivi ty and labor productivi ty are l o w in comparison with Bangladesh, India, China, and Pakistan. Some key factors that contribute to l o w productivity include corruption, weak property rights, informal practices and complex and costly regulation. Cambodia’s unique history has resulted in economic openness, and yet administrative controls that are a heavy and costly burden to Cambodia’s private sector. Cambodia has the most annual inspections, the highest cost per capita to off icial ly register businesses, and requires management time to deal with officials on par with China. A Bank-funded assessment identi f ied that impor t processes require 45 documents, many o f wh ich are associated with unoff icial fees.

0 Institutions vulnerable to corruption. A combination o f l o w salaries - average salaries in the Customs and Excise Department are less than $23 per month - and regulatory processes that create frequent interaction between public officials and firms create powerfu l incentives for corruption. In the Investment Climate Survey, 82% o f respondents reported that they pay bribes, and 71% o f large firms suggest such payments are frequent. These payments amount to a reported average o f 5.2% o f firm sales - twice the similar metric for Bangladesh - but increase with firm size and formality, exceeding 6% large f i r m s .

Constraining trade facilitation processes. Among Cambodia’s regulatory processes, import ing and exporting were identi f ied as having the highest unof f ic ia l costs in the June 2003 survey. The Bank’s 2003 Value Chain Analysis found that the cause o f high trade costs was not related to any one particular institution, but rather the cumulative impact o f overlapping institutions, each o f wh ich required streamlining. As a result, clearance times are among the longest and unof f ic ia l costs among the highest among countries in which the Bank has completed ICAs.

0 Outside the garment sector, market and trade-supporting institutions are absent. There i s a substantial gap both in trade supporting formal institutions and in firms with experience in exporting, including in comply ing with destination-country standards, and manage quality o r resolve disputes. As the institutions are developed, there i s a gap in local understanding o f h o w to use these institutions to affect trade.

0 Weak governance of public-private partnerships and concessions. The private sector represents the best opportunity fo r infrastructure development given financial and human resource constraints and the need for efficiency. However, consumers wil l on ly accrue

2

the benefits o f private participation if there i s competit ion and transparency. However, private infrastructure transactions suffer f rom a lack o f clarity over roles and responsibilities within and between various government agencies with respect to PPI design, procurement, approvals and implementation, a general lack o f transparency in the handling o f dealings between the public and private sectors, and specifically in the negotiation and management o f specific contracts between government and investors, f rom the init iat ion o f a potential project through the construction, implementation or transaction to the operation o f the project - few if any concession agreements or negotiated contracts have been made available for audit or publ ic scrutiny. The consequences o f these problems include non-bankable projects, higher than necessary prices to consumers in the Cambodian economy, and a lack o f information o n the value- for-money received by the public and the RGC f rom infrastructure projects, due to the inabi l i ty to assess and allocate revenues, risks and profi ts in concessions.

0 A lack o f a credible judicial system. Progress i s being made in enacting commercial laws and adopting related regulations, but jud ic ia l system capacity, remuneration and integrity are no t yet being addressed in any adequate way. The inabi l i ty t o enforce laws and contractual rights and obligations in a predictable, transparent and efficient fashion has restricted the abi l i ty o f the financial sector to expand services to even 10% o f the private sector, and continues to undermine investor confidence. Judicial decisions are seen in the private sector as arbitrary and subject to capture.

Policy Reforms in Support o f Trade Facilitation & Competitiveness

1. Cambodia now faces an historic opportunity to change its growth path. Cambodia i s faced with a growing, stable, and integrating East Asian region, macroeconomic stability, and new market opportunities afforded by i t s successful bid to become the f i rs t Least Developed Country to be invited to j o i n the WTO. Beyond WTO, the ASEAN Free Trade Area and China Ear ly Harvest measures provide Cambodia with an increasing number o f market access opportunities free o f tariffs. This provides a good context to undertake a second generation o f reform focused o n enabling broad-based growth. However, without also addressing “behind the border” investment climate constraints, the extent to wh ich market access can be converted to employment gains i s sharply l imited.

2. The Government has elaborated a private sector development strategy. In August 2004, the Government released i t s Rectangular Strategy, in which it committed to “broaden the base o f growth by strengthening governance to attract investment and ensuring competitiveness.”’ In February 2005, the Government further described i t s p la t form as (i) trade facilitation, by rationalizing government agencies that impose high costs and delays o n the private sector and reducing transaction costs; (ii) promotion o f market infrastructure and deregulation; (iii) enhancing market access and access to information; (iv) institution building and enhanced Rule o f Law; and (v) promoting small and medium-sized enterprises. K e y features o f this strategy are l isted below:

’ “Our Hope, Our Strategy, Our Actions” Keynote Address, Seizing the Global Opportunity Conf., Feb 11, 2005.

3

0 Implementing WTO commitments and promoting exports are cornerstones of the Government’s strategy. Cambodia’s Protocol o f Accession commits the country to l o w bound tariffs, phased implementation o f the agreements on Trade Related Intellectual Property Rights (TRIPS), Trade Related Investment Measures (TRIMS), the Telecom Reference Paper, and opening key service sectors, and use o f WTO-compliant trade measures (pricing, tariffs, fees, subsidies and customs measures inter al ia) in exchange for MFN treatment by a l l members. To take advantage o f market access, a new National Export Strategy i s being developed with support o f the International Trade Center Gevena (ITC), wh ich focuses o n expanding the base o f exporters to include agro-industry, handicraft, aquaculture and organically-certified products.

0 The legal framework i s evolving. Legal and jud ic ia l re form has been an area o f slow progress over the past f ive years, but there are indications that CY05 may see the development o f a more conducive regulatory framework. At the t ime o f writing, the fo l low ing laws had either already been presented to Parliament o r were in an advanced stage o f the draft ing process: the Company Law, the Insolvency Law, Secured Transactions Act, Civil Code, the L a w o n Commercial Arbitration, Sub-Decree o n Economic Concessions and L a w establishing a Commercial Court. Drawing attention to the pressing issues o f transparency and rel iabi l i ty in the implementation o f the law, in March 2005, the Prime Min is ter took in i t ia l steps to crack down o n jud ic ia l corruption.

0 A Twelve-Point Plan of investment climate reforms was adopted as a cross-Ministerial, multi-donor platform. The Prime Minister appointed a Special Inter-Ministerial Task Force (SITF) to respond to the findings o f the Investment Climate Assessment. In June 2004, the SITF defined an integrated program of re form to reduce unofficial costs and clearance times, whi le increasing public revenue. This was articulated in twelve intermediate objectives. I t determined, intev alia, to create a cross-agency Reform Team, consolidate inspection mandates across agencies, introduce selective inspections based on risk criteria, reduce documents to a Single Administrative Document, introduce a Single Window process, and reengineer and automate procedures. At present, f ive o f the twelve actions have been implemented, and the remainder are scheduled for completion by December 2005 (see B o x 1). Importantly, within the Twelve-Point Plan, the Ministry o f Commerce has substantially reduced the cost and t ime required to register a business. The cost has been reduced by over $400, wh i le the Minimum Deposit Requirement reduced f rom US$5,000 to US$l,OOO.

0 Redefining the Role o f CamControl. Cambodia Impor t Export Inspection and Fraud Repression Department (Camcontrol) has long been recognized as a source o f redundancy w i th CED. As part of the Trade Facil itation Reform program, the Government w i t h EU support conducted a rev iew to examine the role o f CamControl and h o w the Government can discharge its important regulatory responsibilities, whi le maintaining and/or further improv ing i t s contribution to the overall trade facil i tation objectives. The main options considered are merg ing some or a l l of CamControl’s functions with Customs, Ministry o f Industry, MAFF; or the Ministry o f Health; and (b) creating a new food and drug agency with a work ing t i t le of Food Safety Cambodia. T o the extent that these options eliminate routine trade inspections f rom CamControl’s mandate, they wou ld largely be acceptable, A decision i s expected in May .

4

0 Customs reforms. As part o f WTO accession, Cambodia prepared a new L a w on Customs consistent with the Revised Kyo to Convention that addresses a number o f discrepancies with modem intemational practices including in valuation, staff remuneration, inspection and audit. This L a w was forwarded to the National Assembly with a target passage date o f July 1,2005. The RGC’s pace on delivering o n WTO commitments has been mixed.

0 Streamlining trade documentation. The Govemment, with EU, and has completed technical work that wou ld introduce an enhanced customs declaration to serve as a Single Administrative Document, replacing 45 documents that are currently involved in an import transaction. Streamlining documentation i s a proxy for reengineering the information f low, an essential prerequisite for ICT. This reform specifically included the fo l lowing sub-steps:

P Economic Police Permit, Expor t License and Impor t Permit eliminated P Consolidated inspection, rather than mult iple agencies inspecting independently P Certificate o f Origin n o w not required pre- shipment to be converted to post-shipment P Single Administrative Document P Withdrawal o f Officially Certified Invoice - no longer required on demise o f MFA

BOX 1: TWELVE POINT PLAN: GOVERNMENT COMMITMENTS TO IMPROVE THE INVESTMENT CLIMATE AND TRADE FACILITATION - JULY 2004 -DECEMBER 2005

Action 1. Establ ish a Cross-Agency Trade Fachta t ion / Inves tment Cl imate R e f o r m T e a m

Action 2. Establ ish Transparent Performance Measurement inc lud ing Private Sector Monitoring.

Action 3. T h e trade facl l i tat ion process, inc lud ing a l l licenses, procedures a n d documents, will b e rev iewed to r e m o v e overlaps a n d unnecessary approvals. Following the reengineering, a Single Admin is t ra t ive D o c u m e n t will b e i m p l e m e n t e d a n d o ther documents progressively eliminated.

Action 4. I n t r o d u c e a n overa l l risk management strategy to consolidate and rat ional ize a l l examinat ion requi rements o f the d i f fe ren t c o n t r o l agencies

Action 5. X strategic rev iew o f the ro le o f C a m c o n t r o l wdl b e launched to m o r e produc t ive ly deploy the organization’s un ique knowledge of quali ty c o n t r o l processes a n d m a k e opt i rmzed use o f inputs a n d resources from other agencies, such as the CED.

Action 6. A Single Window process to manage trade facihtat ion will b e p i l o t e d in the Port of Sihanoukvi l le by D e c e m b e r 2005. T h e Trade Faci l i ta t ion process, once streamlined, udl b e automated.

Action 7. T h e G o v e r n m e n t will in t roduce a WTO compat ib le f lat fee for service, a n d the service will b e def ined by a service-level agreement. T h e fee structure ~vdl b e publ ic .

Action 8. Streamline the process a n d reduce the cost of incorpora t ing with the Commerc ia l Regster , w h i c h is mainta ined a t the Of f ice of the C lerk of the C o m m e r c i a l Court, a n d costs a n average o f $630 a n d 30 days.

Action 9. Streamline the process no t i f i ca t ion o f the M i n i s t r y o f L a b o r to start hiring employees, w h i c h costs $250 a n d 30 days to complete.

Action 10. H a r m o n i z e registrat ion for VAT, i n c o m e tax a n d company registrat ion using the same form a n d resul t ing in the same un ique identifier. This would facllitate i n f o r m a t i o n shar ing across agencies.

Action 11. I m p l e m e n t a nat ional award to p r o m o t e good corporate cit izenshlp in the pr ivate sector.

Action 12. Monitoring a n d R e p o r t i n g will take place through t h e Pr ivate Sector Forum.

5

e A Policy on Private Participation in Infrastructure and Law on Concessions i s being considered at the Council o f Ministers. In the PPIhves tment climate area, the Government has defined a clear process for planning, approving, awarding, negotiating, and managing PPI investment, and has enshrined this revised process in a new Concessions L a w and subdecree which i s currently under review at the Counci l o f Ministers fo l lowing extensive consultations with the private sector.

OPPORTUNITY CONSTRAINT PROJECT RESPONSE

COMPLEMENTARY REFORMS

GOALS

Fi A c c e s s

B I L A T E R A L C h i n a E a r l y

E U E v e r y t h i n g B u t Arms-

A S E A N 1 M a r k e t , I n t e g r a t i o n

R E G I O N A L

1 L o n g c l e a r a n c e

H i g h c l e a r a n c e c o s t s

__c_

V u l n e r a b l e t o

S u p p o r t

U n c l e a r P P I R e g u l a t o r y

T r a n s a c t i o n s

T r a d e F a c i l i t a t i o n : I n s t i t u t i o n a l

R e f o r m

G o v e r n a n c e

T r a n s p a r e n c y

Customs Law Single Admin. Document (EU) CamControl Review ( E U ) Risk M g m t Strategy (AusAID)

W T O Accession Tariff Reform National Export Strategy ( ITC) Ag. Quality Improvement (AQll Better Factories ( ILO)

Gov ' t Concessions Law UNIDO Concessions UNCTAD "Blue Book" Gov't Amended LO1 Electricity Law Water Law

Commercial Court Company Law Insolvency Law Commercial Arbitration

E x p o r t - l e d

D i v e r s i f i c a t i o n

B r o a d e r j G r o w t h 1 E m p l f y m e n t 1 I

4. r-1 T r a n s p a r e n c y

I n v e s t o r C o n f i d e n c e

a

New investment promotion strategy. The Counci l for Development o f Cambodia (CDC)'s Cambodian Investment Board (CIB), as Cambodia's investment promotion agency, i s currently undergoing the process o f re-defining i t s role as a result o f the Amendment to the L a w o n Investment, wh ich was approved by the National Assembly in February 2003. The Amended L a w on Investment expl ici t ly moves the CIB toward serving as a facilitative and promotional agency, with many evaluative and regulatory functions replaced by automatic systems. F I A S and MIGA are currently helping C D C define a new corporate strategy including goals and objectives, the strategies and resources it wil l use to achieve these and the performance measurements by wh ich i t wi l l assess its progress and success.

Merit-Based Pay Initiative (MBPI). The Government i s introducing, o n a p i lo t basis, differentiated compensation based o n performance and mer i t in the context o f Public Financial Management (PFM) in the Ministry o f Economy and Finance. A team comprised o f the Ministry o f Commerce, Customs & Excise Department and Port Author i ty has been tasked with proposing a framework, using the MBPI framework developed by MEF, by 20 M a y 2005. I t wil l be funded, in part by user fees.

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0 Acceleration o f the judicial reform process. The RGC’s avowed Legal and Judicial Reform (LJR) Strategy2 outlines seven broad objectives that are aimed at improv ing access to, and the quality of, Cambodia’s legal and judicial services. The third o f these objectives requires the “provision o f better access to legal and judicial information by promoting dissemination o f basic legal knowledge through of f ic ia l publications, electronic media and information folders and ensuring easy accessibility to a l l legal and juridical information for legal practitioners and any other interested party”. And, in accordance with the LJR Act ion Plan formal ly adopted by the RGC in November 2004, acceleration o f the LJR process i s to occur in part by making “the improvement o f access to legal and judicial information” an “operational priori ty” o f the RGC in 2005-2006.

2. Rationale for Bank involvement

Trade facilitation reforms are positively associated with increased trade and GDP growth, whi le investment climate reforms more broadly are associated with decreasing corruption, increasing formalization of business, increased growth and public sector revenue. Wilson, M a n n and Otsuki (2003) found that if below-average APEC members could increase trade facil i tation performance half-way to the APEC average, inter-APEC trade wou ld increase by $254 bi l l ion. UCTAD (2001) found that a 1% reduction in the trade facil i tation costs could increase Asian GDP some $3.3 bi l l ion. Given the end o f MFA, any cost reduction associated with trade facil i tation wou ld also have the effect o f making the garment sector more competitive, and in the long-term contributes to diversification.

P The 2004 Investment Climate Assessment has played a key role in informing national policy, and placed the Bank in a leadership role on the PSD policy dialogue. The Bank leads the donor work ing groups on Trade Facilitation, Private Participation in Infrastructure and Investment pol icy, whi le the Asian Development Bank leads the donor work ing group o n S M E development. The Bank Group i s in a unique posit ion to support the Government due to i t s integration o f the Foreign Investment Advisory Service (FIAS), the Mekong Private Sector Development Fac i l i ty (MPDF), International Finance Corp (IFC) as Secretariat to the Govemment-Private Sector Forum, the Public-Private Infrastructure Advisory Faci l i ty (PPIAF), and relevant technical capacity drawn f r o m throughout the Bank. In the v iew o f the counterparts, the integrated capacity has helped the government achieve more rap id results and convene a cross-Ministerial dialogue.

P The operation supports Cambodia’s results-based Country Assistance Strategy (CAS) The C A S includes a p i l lar o n Private Sector Development wh ich defines resul ts in removing governance impediments to growth. The proposed operation i s aligned against three results. On 13 July 2004, the Bank received an official request for a project t o finance the reform.

3. Higher level objectives to which the project contributes

The project contributes to the higher level objective o f increasing growth through improved governance. The project builds o n the country’s growth strategy, WTO accession, and Rectangular Strategy by facil i tating a fundamental shift in governance o f private activity

* The Strategy was formally adopted by the RGC’s Council o f Legal and Judicial Reform in June 2003.

7

from institutional environment characterized by overlapping, discretionary and costly controls to an institutional environment that facilitates efficient and competitive markets through transparent and predictable processes. I t responds to the finding in the Investment Climate Survey that the leading constraints to business are governance-related, and the specific findings in the earlier Value Chain Analysis, Integrated Framework and Country Framework Report that govemance- related constraints are most acute in trade processes and private participation in infrastructure. The reforms focus o n using transparency, competition, regulatory streamlining and market-based standards to increase confidence, to improve private sector’s capacity to make investment and trade decisions, and to increase the efficiency o f publ ic service delivery. The reforms wil l help Cambodia convert WTO/ASEAN market access to jobs. Improvements in trade facil i tation practices are strongly correlated with increases in trade and GDP.

major or severe problem declines.by 10%. A 50% reduction in the number of documents required to clear imports. Share of export shipments that are physically inspected less than 40% by December 2006. 50% reduction in time required to clear import shipments. The enabling environment facilitates integration of new firms into the global economy, as indicated by the number

B. PROJECT DESCRIPTION

2003 ICA (ICs) in 2006/2007 45 Cross-agency process map.

Performance Monitoring System. 100% Performance Monitoring System.

6.5 days Zero Fund manager reports.

Performance Monitoring System, ICs

1. Lending instrument

The operation wi l l be delivered through a Specific Investment Grant (IDA Grant) that wi l l disburse over four years - f rom September 2005 to December 2009.

2. Project development objective and key indicators

The objective o f the Project i s to support the Recipient’s strategy to promote economic growth by reducing transaction costs associated with trade and investment, introducing transparency in investment processes, and facilitating access o f enterprises to export markets.

of firms preparing draft export development plans. Transparency / accountability introduced into PPI. 1 Zero-few 1 Gradual increase to all transactions by

1 Number of PPI contracts publicly disclosed and subject to 1 1 year 5, implemented sector-bv-sector: 1 competitive procurement processes. Number of judicial decisions publicly disclosed. 1 Zero-few I 50% of commercial cases in Supreme

I Court and Court of Appeals 1 10% reduction per year Response time on investor inquiries. 1 TBD

3. Project components

Component 1. Trade Facilitation Component. ($6.15 million). The application o f appropriate IT to border management activities can significantly streamline operations, improve the level o f transparency and accountability and facilitate the achievement o f a l l border related government objectives. The project wi l l finance (a) an electronic Single Window integrating a l l trade facil i tation agencies, including the deployment o f ICT for automation o f Customs functions, l inked to complementary improvements in systems, procedures and developments in

8

the organizations involved in product clearance (b) adherence to the Kyo to Convention including the adoption o f a risk management capacity; (c) a design o f a mer i t based pay system for Cambodia’s trade regulatory agencies; and (d) the development o f an Integrity Ac t ion Plan for CED based o n a s e l f assessment.

Component 2. Export Market Access Fund. ($2.1 million). The component will finance (a) technical support to the Min is t ry o f Commerce’s Department o f Expor t Promotion to establish the exporter technical assistance window, and (b) a technical assistance matching grant faci l i ty that wou ld cover 50% o f the cost o f achieving market standards, o r evidence o f compliance with those standards. The EMAF would offer i t s services solely in response to private sector demand on a nondiscriminatory and a first-come-first served basis. An in i t ia l survey suggests demand f rom at least 100 enterprises. The Garment Manufacturers’ Association o f Cambodia (GMAC) i s expected to apply for $600,000 cofinancing over three years to finance the International Labor Organization’s Better Factories campaign in order to achieve Core Labor Standards.

Component 3. PPI and Investment Component. ($1.2 million) The PPI and Investment Component wi l l finance a program o f capacity building to implement the L a w o n Concessions and the Amended L a w o n Investment. The objective o f the technical assistance i s to improve the organizational capacity o f the Ministry o f Economy and Finance, Counci l for Development o f Cambodia, National Audit Authority, infrastructure regulatory bodies such as the Electricity Authority o f Cambodia, and infrastructure l i ne Min is t r ies to manage and deliver o f PPIs transactions that are conducted fairly, transparently, competit ively and in the public interest. The Investment Promotion sub-component i s aimed at supporting the CDC and CIB to adopt strategies that streamline the process o f foreign direct investment, and that enhance the attractiveness o f Cambodia as an investment destination through improvements in the regulatory environment as we l l as in factor markets. The program consists o f three distinctive activities: (a) appointment o f a local long-term resident advisor; (b) a series o f 5-days training workshops for 15-20 CIB staff o n subjects l i ke investment generation and facilitation; and (c) installation o f IT system.

Component 4. Legal Transparency Component. ($0.4 million). This Component wi l l finance (a) the establishment and maintenance o f a website in the Khmer language to make readily available to the public the f ina l judgments o f a l l cases in the Supreme Court and in the Court o f Appeal; (b) the establishment and maintenance o f a website to ensure the electronic publication o f a l l Cambodian laws, related regulations and draft legislation in the commercial l aw field, broadly defined; and (c) training to ut i l ize the established systems. A link wil l be established between this site and other relevant websites, including, most importantly, the website o f the Ministry o f Commerce and to the legislation and the subsidiary legislation (i.e. decrees and sub-decrees), as referred to in the judgments. Publication o f such information wi l l contribute to increasing confidence in the capacity o f the appellate courts to interpret, apply and enforce Cambodian laws generally and the commercial legal framework in particular in a fair and consistent manner. An increase in confidence in the transparency and predictabil ity o f judgments wi l l reduce the risk n o w associated with private domestic and foreign investment.

9

4. Lessons learned and reflected in the project design

Demonstrate political will. The reforms financed by the proposed project have wide-ranging implications fo r both publ ic institutions and private sector behavior, including a substantial decrease in opportunities to exploit publ ic office for personal gain. As such, they require strong pol i t ical wi l l to be achieved. The project has incorporated these lessons through sequencing decisions that demonstrate such pol i t ical wil l - such as passage o f enabling legislation, removing Camcontro l f r o m routine inspections and streamlining documents - ahead o f project approval without using conditionality. The approach has also created venues for very broad dissemination and consultation in which the government has made measurable commitments.

Take a cross-agency perspective. The key problems in trade facil i tation presented themselves as issues - such as high unoff icial payments - that could easily be interpreted as caused by the Customs & Excise Department, which has recognized the need to improve its performance and has developed a p lan to that end. However, through a value chain analysis, the problem was recognized as invo lv ing bo th internal issues within departments, problems o f role clarity across agencies, and problems of information sharing and coordination both across agencies and in the interface with the private sector.

Reengineer processes ahead o f ICT investment. One o f the broad and enduring lessons f rom technology investments around the wor ld are that much o f the efficient gain resulting f rom ICT investment i s f rom simplification and streamlining o f underlying process rather than f rom the technology itself. A corollary o f this point i s that processes should be streamlined and information f lows simplified before technology investments. The project has incorporated this point through mapping of the full process invo lv ing a l l relevant agencies, elimination o f process overlaps, and sharing a Single Administrative Document across a l l relevant agencies.

Address incentives and financial sustainability. M a n y ICT investments have failed due to weak incentives to use the new system. The proposed project addresses this question through adoption o f the merit-based pay init iative funded through a WTO-compatible fee o n transactions.

Measurement to enable the “demand side.” Whi le much o f the project investments improve the delivery o f key public sector functions, a core lesson f rom the Bank’s experience with service delivery (as particularly highl ighted in WDR 2004) i s the need to enhance accountability to tax payers and beneficiaries of the service. In the PPI component, this i s incorporated through enhancing accountability of PPI processes to the MEF and treasury, representing taxpayers, Overall, the project wil l ut i l ize a cit izen score card approach through which the media and general publ ic can measure performance. The media i tse l f wil l be consulted on the f ina l design o f the scorecard to better facilitate their reporting.

U s e country systems. The recent work o n donor harmonization and effectiveness has highlighted the need to use, wherever possible, the government’s existing institutions rather than create new project implementation units. The project has integrated these lessons by ut i l iz ing management structures created by the Prime Minister in order to lead PSD efforts as the project’s management structure. Other donors have endorsed this approach and wil l ut i l ize the same structure. Procurement processes, however, wi l l remain consistent with Bank guidelines.

10

5. Alternatives considered and reasons for rejection

Pure customs project, The Bank has undertaken a number o f projects around the wor ld that focus o n customs for reform, and often include institutional strengthening as we l l as automation. The project team considered this and rejected this option due to the fact that trade facil i tation issues extended we l l beyond customs functions, and was effectively an interagency problem as described in the 2003 Value Chain Analysis and Investment Climate Survey. A customs project wou ld have le f t key interagency problems and non-customs functions undressed.

PPI Unit. The Project Team considered the establishment o f a dedicated PPI Unit inside o f the Cambodian Treasury or CDC, as has occurred in the UK, South Africa, Pakistan, Philippines and Vietnam. Wh i le such units can concentrate expertise, this option was rejected because i t ignores the underlying causes o f dysfunction - the lack o f ro le clarity, weak incentives to maintain transparency, and the poor integration o f competitive PPI in to the functioning o f l ine Ministries.

In preparing the capacity building plan, we also considered whether alternative delivery mechanisms might be preferable to those making up the proposed plan. Options considered included appointing one or more long-term advisors to work with individual ministries o r agencies. This option was excluded as only benefit ing a single RGC entity, whi le the capacity- building plan i s focused on trying to reach a l l entities invo lved in the PPI Framework, and being a high-cost solution, offering n o certainty that ministries benefit ing f rom long-term advisors are those that have most need o f them, as the demand for support wil l be part ly driven by the pipeline o f suitable PPI opportunities.

Social Safety Net. The project concept note included the possibil i ty o f f inancing retraining o f workers o r other safety nets for workers fired f rom the garment sector. However, this possibil i ty was rejected due to a lack o f signals of net j o b losses, and due to other donor efforts.

Legal and Judicial Reform. The possibil i ty o f undertaking a stand-alone LJR has been considered by the country team, due to the need for jud ic ia l strengthening in light o f the large number o f laws being introduced currently. However, as indicated in the Country Assistance Strategy, the Wor ld Bank has chosen for the foreseeable future not to engage to any significant degree with the reform o f state institutions until credible evidence o f pol i t ical commitment to re form i s demonstrated.

C. IMPLEMENTATION

1. Partnership arrangements

Partnership with donors. The W o r l d Bank leads a donor sub-working group o n trade facilitation. This work ing group includes seven other donors who coordinate po l i cy and have achieved a division o f labor with respect t o implementing the 12-Point P lan o f investment climate reforms. The European Union, with i t s Mult i lateral Trade Assistance Project, has supported the streamlining o f documentation necessary to introduce a Single Administrative

11

Document, as w e l l as the review and redefinit ion o f the role o f Camcontrol. AusAID, w i th i t s Cambodia-Australia Technical Assistance Faci l i ty (CATAF) has provided important support to help implement a risk management strategy. The IMF and JICA have led the work o f reforming the Customs and Excise Department, while UNCTAD and UNIDO have been extensively invo lved in reform o f investment and PPI. Export diversification work has been led by the International Trade Center and GTZ.

Partnership with the private sector. The private sector has played a crit ical role in demanding and defining the reforms financed by the proposed project. The Government-Private Sector Forum includes an Expor t Processing and Trade Facil itation Work ing Group, co-Chaired by the Sr. Minister o f Commerce and the Chairman o f the Garment Manufacturers’ Association. I t has been raising and discussing key issues throughout the duration o f the Bank’s engagement.

2. Institutional and implementation arrangements

The project will utilize existing coordination structures established by the Government as its management structure. In August 2004, Prime Minister’s Decision No. 12/2004 created a Special Inter-Ministerial Task Force (SITF) o n Trade Facil itation and Investment Climate, Chaired by the Minister o f Economy and Finance and Vice-Chaired by the Minister o f Commerce. On 26 July, 2004, fo l lowing the formal creation o f the new Government, the Prime Minister signed Decision 44/2004, formalizing this as the Government’s focal po int for re form o f the investment climate, trade facilitation, S M E promotion, and PPI - the Steering Committee o n Private Sector Development. The Government established the Trade Facil itation Subcommittee, Chaired by the Sr. Min is ter o f Commerce, as we l l as the Investment Climate and PPI Subcommittee, Chaired by the Sr. Minister o f Economy and Finance.

Executing Agency. Given that over 80% o f funds wil l be ut i l ized to finance the Trade Facil itation and the Marke t Access Components, the Government has nominated the Ministry o f Commerce as the Executing Agency.

Project Management Units. In each key agency (Customs & Excise Department, Ministry o f Commerce, Counci l for Development o f Cambodia, and Ministry o f Justice) a project manager wil l be named to supervise the dai ly implementation o f the Project activities.

Reform Team (Project Coordination Unit). The Government’s Reform Team wil l be response for coordinating project tasks, executing a l l procurements and preparation o f Quarterly Management reports that the Executing Agency wil l provide to the Bank and other donors.

Procurement: Particular attention wil l be given to procurement arrangements to ensure that the project i s executed in a timely, transparent, efficient and integrated approach. Procurement o f works, goods and services under the project wil l fo l low Wor ld Bank Guidelines. Details are given in the Annex 8. All procurement wi l l be executed by the Reform Team which has successfully executed procurement processes for the Project Preparation Faci l i ty. This team’s capacity will be strengthened to ensure that staff has adequate sk i l ls and competence.

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Policy Guidance

Role

.All operational decisions

success

Role

Executing Agency

Project

Unit

* Resolving cross-agency

.Preparation of Bid docs . Procurement . Disbursement . Accounting . Preparation of Quarterly

coordination ISSUBS

Management Reports

Project Mgmt Units

Cambodia Single

Window H E Kem Sithan - Fund

Roles: One accountable official acts as component manager * Responsible for implementation of tasks on time,

. Achievement of project objectives . Prepare TORS and guide consultants . Arrange workshops and other project activities * Ensure sufficient and appropriate staff for activities . Reporting progress monthly to Executing Agency * Referring problems to Executing Agency, and if unresolved,

to PSD Steering Committee . Provide Monthly reports to Executing Agency

Customs IT

H.E KunNhem on quality target

3. Monitor ing and evaluation o f outcomes/results

The Govemment has asked for a second Investment Climate Assessment, o n wh ich many o f the indicators are based, in 2006/07, supporting the mid-term report for the project. This wil l provide an overall assessment o f progress toward the development objectives. To provide more immediate feedback the Government i s establishing a Performance Moni tor ing System. For trade facilitation, the agreed approach combines a simpli f ied version o f W o r l d Customs Organization’s Simplified T imed Release System, as we l l as a user survey based o n the Investment Climate Assessment. Indicators wi l l focus on Processing Time, Inspections, Steps, Perceptions (o f the service provided by and the integrity o f six agencies), and costs (both off icial and unofficial). The indicators wi l l be captured in a reform “Score Card” that wi l l be publ ic ly disseminated, including through public media. The PPI component wi l l be monitored through the Ministry o f Finance and CDC’s ongoing role in project approval, as we l l as the Government Private Sector Forum. The legal transparency component’s websites wi l l be readi ly observable by concemed staff. This monitoring data i s expected to feed in to group performance targets under M B P I .

4. Sustainability

The sustainability o f the technical capacity financed by the project wi l l depend o n (a) the government’s pol i t ical wil l to enforce policies supported by the project through positive and negative incentives; (b) the abi l i ty to finance, after the project, maintenance o f the investments. Positive and negative incentives to maintain policies wi l l be established through govemment’s po l icy messages, enforced by sanctions placed o n c i v i l servants who violate policies, appropriate performance-based This wil l remuneration and promot ion o f staff who promote policies.

13

require intensive, ongoing pol icy dialogue with and within government, a robust monitoring system whose results are available to the public, and donor collaboration. Financial sustainability o f technology investments will be assured through a WTO-compatible fee o n a per-shipment basis sufficient to finance maintenance and salary incentives.

5. Cri t ical risks and possible controversial aspects

and anti-corruption not enforced. Poor Cross-Ministerial Coordination H Inter-Ministerial PSD Steering Committee, Reform Team

public monitoring through investor score cards, PS Forum.

Unofficial fees remain more attractive than the reformed system, causing lower level staff to undermine reforms. Project complexity.

Technological Risk.

Failure to pass enabling legislation in a timely manner Fiduciary Risks

Overall Risk Rating

maintained for duration, cross-agency performance measures. H ICT systems reduce discretion and contact, Merit-based

remuneration, emphasis on political will and enforcement of government policies, public monitoring and accountability.

M Where possible performance-based turn-key contractors are used to minimize the managerial burden.

N Technology choices are limited to proven systems that have been in operation in developing countries.

M Relevant legislation has passed the Council of Ministers. Implementing Sub decrees are conditions of disbursement.

S Action plan to improve capacity is being implemented. Bi- Annual audits required.

S

6. Grant conditions and covenants

The Recipient shall submit to the Bank a mid-term review report by June 30, 2007.

Conditions of Effectiveness:

0 The Executing Agency has selected, using a process agreed with and acceptable to the Bank, a Procurement Officer, a Project Accountant, and a DisbursementiFinancial Management Officer.

0 The Executing Agency has adopted the Government’s Standard Operating Procedures and the Financial Management Manual to the project.

0 The Ministry o f Commerce has formally approved for i t s use and operations, and furnished to the Bank, an Operations Manual for the Export Market Access Fund.

0 The Recipient has made the init ial deposit into the Counterpart Funds Account.

Conditions of Disbursement o f Component 3 (a)

0 Promulgation o f the Sub-Decree o n the Implementation o f the L a w on Investment and Implementing Sub-Decree on L a w on Concessions.

Dated Covenants

Before December 2006 the Recipient shall provide to the Bank draft human resources policies and procedures, consistent with the principles applied in the Government’s Mer i t Based Pay Initiative, and implement the policies fo l lowing consultation with the Bank and other donors.

14

D. APPRAISAL SUMMARY

Trade Facilitation Export Market Access Fund PPI Investment Promotion Legal Transparency

1. Economic and financial analyses (See Annex 9)

Reduced smuggling, more competitive trade partner, reduced management time. Job creation, value added, export revenue and tax collection from new exporters. Increased PPI volume, higher quality of projects, impact of improved infrastructure. Improved confidence in Cambodia as a destination for foreign direct investment. Better economic decision making through better understanding of laws.

The Cambodia Trade Facilitation and Competitiveness Project supports four components whose common attributes are the use o f transparency, predictability, competition and market standards to improve the ability o f the private sector to make economic decisions and to conduct transactions. Some benefits o f improved confidence cannot be readily quantified. Examples o f such benefits are:

Financial Rate of Return I I I I "

However, it i s possible to just i fy the project on economic and financial terms if (a) society as a whole achieves a net economic gain from the project, excluding fiscal transfers, and (b) the project generates - ~ " ,

fiscal revenues that are higher than the project costs

Economic Analysis. The Economic analysis based on the reduction of time required to clear imports. The expected reduction o f time over the course o f the project i s a 50% reduction f rom 6.5 days as determined through the Investment Climate Survey, to 3.25 days by year 4. Global average

in discounted terms.

I Economic Rate of Return I 216% I Economic Net Present Value $44.0 million 1

1 Ado/, I

monetary impact o f time savings i s equal to the value o f 0.5% o f imports according to OECD calculations. Since other donors and officials are involved trade facilitation efforts, we only assume that 20% o f the benefits deriving from faster clearance can be attributed to the project. By projecting trade volumes conservatively, the investment costs, user fees, volume o f imports and the gradual introduction o f time savings, a cost-benefit stream i s projected with an ERR o f 216%.

Financial analysis. The financial analysis estimates the incremental increase in the taxes on imports that would result f rom the project. The provisions o f the project (technology, streamlining, performance- based remuneration, decreased opportunities for discretion) are assumed to change incentives facing traders and public officials in favor o f compliance with agreed tar i f f schedules and a shift from unofficial costs to official revenue (including the collection o f customs duties, excise taxes and penalties, but excluding VAT). This increase from the current baseline i s expected to be 2% per year, stabilizing at 10%. 25% o f this gain i s attributed to the project. The IRR i s 144%.

2. Technical

The project i s expected to be technically viable. Asycuda, a software system developed by UNCTAD essentially for developing countries, and the electronic Single Window are technically proven. The key technological risk i s the integration of A S Y C U D A with the Single Window, which has been investigated and found to be viable. Substantial investment by other donors i s supporting technical capacity. Other technologies applied to the project, such as websites, are mature.

3. Fiduciary

15

Fiduciary r isks are considered to be high due to high country fiduciary risk coupled with the lack o f an adequate project financial management system in place, inadequate capacities and experiences o f the agency and executing units in project financial management and the Bank's FM requirements. To ensure the proposed arrangements are adequate and ready for implementation, an Action Plan was developed in coordination with Bank Financial Management staff. The action plan calls for (i) the adoption o f Standard Operating Procedures and a Financial Management Manual, recently prepared by the Ministry o f Economy and Finance, to the project; ii) assign a team o f staff with qualifications acceptable to the IDA to be responsible for overall project financial activities with supports f rom two local experts, hiring based on qualification and TOR acceptable to the Bank; iii) putting into place an acceptable accounting software package; and v) training project staff on financial management procedures.

4. Social

To the extent the project improves core labor standards and competitiveness o f the garment sector, social risks arising f rom shedding o f the largely female garment sector labor force wil l be mitigated.

5. Environment

None expected.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmcntal Assessnicnt (OPIBPIGP 4.01) [I [XI

Natural Habitats (OP/BP 4.04) [I [XI

Pest Management (OP 4.09) r . 3 [X I Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [I [XI

Involuntary Resettlement (OPIBP 4.12) 1 1 [X I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI

Forests (OP/BP 4.36) [I [XI

Safety o f Dams (OPIBP 4.37) [I [ X I

Projects in Disputed Areas (OPIBP/GP 7.60) [I [XI

Projects o n Intemational Waterways (OP/BP/GP 7.50) [I [XI

7. Policy Exceptions and Readiness

The project results form a substantial policy dialogue arising f rom the Investment Climate Assessment, and culminating in a speech provided to the Seizing the Global Opportunity Conference that outlined the clear commitment to a l l o f the specific reforms and laws. Due to the substantial legislative agency required by W T O accession, a number o f laws required by the project are s t i l l in the legislative process. The key enabling pol icy decisions are (a) the decision o n the future role o f Camcontrol (decision o f Council o f Ministers pending), (b) the L a w on Concessions and implementing sub decree (both drafted, law at Council o f Ministers) and (c) the Sub decree o n Amended L a w on Investment (law passed, sub decree at Council o f Ministers). Decision (a) has been incorporated as a condition o f negotiation, whereas (b) and (c) are conditions o f disbursement o f the relevant part o f Component 3.

16

Annex 1 : Country and Sector o r Program Background

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Background on Trade Facilitation

The design o f the project emerges f rom a sustained policy dialogue, starting f rom the Integrated Framework o f Trade Related Technical Assistance, the Protocol o f WTO Accession, the Investment Climate Assessment, and subsequent policy dialogue with donors.

1. Integrated Framework.

The pol icy matrix o f the Integration and Competitiveness Study (200 1) included the fol lowing actions: 0

0

0

0

Support computerization and automation o f procedures and information systems Clarify roles and responsibilities o f several overlapping agencies involved in border inspection. Support professionalization o f officials with appropriate rewards, accountability and recruitment Support computerization o f related agencies.

2. Protocol of WTO Accession

The Working Party Report, paragraph 97 states that “The Representative o f Cambodia confirmed.. . Customs and Excise Department was reviewing al l customs clearance procedures and processes w i th a v iew to simplification and modernization, and the application o f risk management techniques.. . H e expected automation o f the customs clearance process to result in further efficiency gains, and the new L a w on Customs would provide the legislative basis for this initiative.”

3. Investment Climate Assessment.

In February 2004, the Wor ld Bank presented to the Royal Government o f Cambodia (RGC) i t s draft Investment Climate Assessment, based on a survey o f 502 urban, 200 rural and 100 informal f i r m s (documents and Aide Memoirs in Project File). Recommendation one (of eight) was as follows:

Reform must start from a cross-agency perspective- rather than in agency silos. Currently, each agency pursues mandates independently and communication across agencies i s insufficient. Since the C E D and Camcontrol have overlapping approximately the same powers and responsibilities, their activities should be better integrated or possibly merged over time.

Set quantifiable performance goals - and measure progress. Agreement on a set o f regularly tracked metrics i s proposed, to (1) assess overall performance, (2) compare efficiency across departments and against competitors, (3) assess staff performance, (4) guide staffing and pol icy decisions by management, and (5) improve public relations with respect to process improvement.

Reengineer the Facilitation Process while Introducing a Single Administrative Document, The current “real” trade facilitation process contains numerous steps that provide l i t t le or n o value in facilitating trade and significant opportunities for rent seeking among government agents. As such, basic process streamlining i s required to drive cost and unnecessary processing time out o f the system by eliminating “non valued-added’’ steps. The reengineering i s designed to support the move from independent dealing by each concemed agency with a single, rationalized process facing the customer, which i s the private sector export or importer. Such a process, based on improved information sharing across agencies, could usefully start with the replacement o f the current multiple documents with Single Administrative Document shared by a l l agencies. Init ially, streamlining should focus o n improving the

17

manual processes, but at the same time i t will pave the way to automation. WTO entry requirements (valuation standards and the Harmonization System) should be incorporated.

Rationalize Roles and Responsibilities Across RGC Agencies under a Single Window with Flat F e e for Service and Service Level Agreements To increase efficiency and accountability, trade facilitation processes should be consolidated into a Single Window. The implementation o f a Single Window i s a core step to improving overall customer service, reducing opportunities for rent-seeking and addressing the needs o f the legitimate private sector. The Single Window should consolidate all documentation and payment processing into a single customer interface for importers and exporters operating in Cambodia.

Introduce a Risk Management System to Reduce the Inspection Rate per Container. Current discretionary inspections should be replaced by a system by which inspections are selectively inspected based on risk parameters. The development o f risk parameters would take into consideration historical performance, and the perspective o f the various agencies involved in the TF process.

Automate the Process. T o support the successful implementation o f other streamlining initiatives and to achieve the vast process efficiency improvements the technology has demonstrated, a comprehensive automation system should be deployed. An overall architecture across key agencies should be developed, followed by a phased implementation plan.

HR Management Reform. Although i t i s unlikely that official salaries wi l l ever match the full compensation that customs agents are currently making through of f ic ia l and unofficial payments, i t i s important to increase compensation to reasonable levels. An effective, comprehensive compensation program requires restructuring o f salary scales to increase formal base compensation, restructure positiondgrades to provide additional promotion opportunities and development o f a system o f tangible performance goals. T o pi lot new processes and automation within the trade facilitation process and to increase customer service, an “elite unit” within Customs should be established.

Establish a trusted, transparent, dispute settlement mechanism. Cambodia has committed to establishing a dispute settlement mechanism within i t s W T O commitment^.^ The mechanism should be independent, autonomous, and to the extent possible, include private sector participation. I t should focus on specific technical issues such as nomenclature and valuation rulings, which have as their base, publicly disseminated information.

Introduce SLA Rationalize

Inbound Management Clearance

Committee Reduce Port

Service Charges (Evaluate

Privatization)

Re-engineer process around automation and single window Eliminate Kamsab requirement

(Evaluate Privatization) Certification and Training

for CBlFF

Formalize % of Unofficial Charges Establish “elite unit” within Customs

Consolidate inspections under one agency B create special unit

Support Import Implement Risk PSI program, increase skill process transfer and

assistance; Group transition to insourcing

Introduce SLAsIFlat Fee technical Change AZ

reimbursement scheme

SuDDortina Infrastructure Establish Mlssion and Performance Taroets

Rationalize Roles and Consolidate around customs Increase Staff Remuneration

Increased Enforcement Mechanisms Establish Transparent Arbitration Process

Tie Incentives to Achievement of Goals

Working Party Report Para 99.

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4. Trade Facilitation

Twelve Point Plan: Government Commitments to Improve the Investment Climate and

The Investment Cl imate Assessment was discussed in a series o f Cabinet-level meetings w h i c h resulted in Prime Minister ’s Decis ion No. 1212004 dated M a r c h 22, 2004, to f o r m a Special Inter-Ministerial Task Force o n Trade Faci l i tat ion and Investment Climate, Chaired by the Min is te r o f Economy and Finance and Vice-Chaired by the Min is te r o f Commerce. The Special Task Force was tasked, among other things, to improve investment cl imate and trade facilitation, with the responsibilities as fol lows:

0 Raise and put in to implementation measures to reduce cash payments o n intermediaries related to export- import .

0 Raise and put in to implementation measures to reduce procedures or cancel dupl icat ing procedures in the management o f trade process.

0 Raise and put in to implementation measures to reduce t ime delays fo r goods export and import. 0 Raise and put in to implementation a l l measures that wou ld increase national budget.

The Special Task Force defined an integrated program o f re fo rm to address the most urgent impediments in trade faci l i tat ion and agreed upon a Twelve Point Plan: Government Corninitinelits to Improve the Investnzeiit Climate and Trade Facilitation. The re fo rm measures agreed establishing a cross-agency re fo rm team, consolidating inspection mandates across agencies and introducing selective inspections based o n risk, implement ing a Single Administrat ive Document and Single W i n d o w process, automating information f lows across agencies, streaming business registration procedures and recognizing ethical behavior in the private sector - and are to be implemented o n an urgent basis by December 2005.

TWELVE POINT PLAN:

GOVERNMENT COMMITMENTS TO IMPROVE THE INVESTMENT CLIMATE AND TRADE FACILITATION

Actions Agreed by Special Inter-Ministerial Task Force (SITF) on Investment Climate &Trade Facilitation

Link to WTO Commitments

Actions Agreed by WB

1. Establish a Cross-Agency Trade Facilitationllnvestment Climate Reform Team

The TF agreed to form a team consisting of eight to ten members representing the Ministries of Economy and Finance, Commerce, Agriculture, Labor and Social Welfare, Interior, industry, the CDC, and the Port Authority of Sihanoukville to oversee the change measures in trade facilitation.

Working Party Report Para 39 defines inter- ministerial coordinating committee.

This is done

2. Establish A System Of Transparent Performance Measurement including Private Sector Monitoring

The SITF agreed to establish a performance monitoring system to monitor progress accurately, engender trust of all stakeholders in the reform, and to report progress to the public. This system will report the time and cost of importing and exporting product, and include monitors from the private sector.

The original measurement system was deemed to complex. A consultant has been selected and will begin work in February on a simplified system,

3. The trade facilitation process, including all licenses, procedures and documents, will be reviewed to remove overlaps and unnecessary approvals. Following the reengineering, a Single Administrative Document will be implemented and other documents progressively eliminated.

Currently over 45 documents are required to export a shipment, Working Party Report Through the Sector Wide Approach, the each of which adds time and cost to the trade facilitation process. Table 7 Paragraph 93. European Union funded a consultant to To enhance sharing of information, to reduce cost and to pave the review documentation. The inception report way for automation, Cambodia will implement a Single suggested that the 45 documents can be Administrative Document by December 1, 2004, All other reduced to around seven immediately, with

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progressively eliminated. The SlTF agreed that the reengineering process shouid occur on an accelerated basis.

automation.

4. Introduce an overall risk management strategy to consolidate and rationalize all examination requirements of the different control agencies.

The TF agreed a risk management strategy was necessary and asked for the Bank's help in developing a TOR for this work.

Through the Sector Wide Approach, AusAID is providing technical assistance in this area

5. A strategic review of the role of CamControl will be launched to more productively deploy the organization's unique knowledge of quality control processes and make optimized use of inputs and resources from other agencies, such as the CED.

The SlTF recognizes that the role of CamControl may need to be modernized and updated in light of the maturity of the economy, the private sector's ability to determine quality and its trading relations, The Government will conduct the strategic review of CamControl including several options: retaining the existing profile, merger with CED (following cross-training) or establishment of a new entity such as a Food and Drug Administration.

Through the SWAP, the EU has provided a consultant who has provided his recommendations in February 2005 As of May 2005, the Ministry of Commerce was preparing a recommendation to the Council of Ministers based on the principles and two options of the Report

6. A Single Window process to manage trade facilitation will be piloted in the Port of Sihanoukville by December 2005. The Trade Facilitation process, once streamlined, will be automated by December 2005.

The TF agreed to these timelines, and said that every attempt Working Party Report The Government has requested, and the would be made to complete this work by end 2005. The TF also Bank is preparing, the Trade Facilitation and agreed that the Government will initiate a comprehensive Competitiveness Project, which will include automation project by October 2004. The process will start, as financing for the Single Window. A consultant soon as possible, with the design of an overall architecture that has been selected to design the architecture incorporates all agencies into a seamless network. Within this for the Single Window. overall architecture, implementation will be undertaken in phases.

Table 7 Paragraph 93

7. The Government will introduce a WTO compatible flat fee for service, and the service will be defined by a service-level agreement.

The TF agreed that the Single Window should be implemented in conjunction with a flat fee-for-service compensation mechanism that enables the private sector to pay once for all customs clearance processing. They also agreed that this fee should be tied to publicly stated and enforced SLAs that clearly outline the level of service provided to the customer in exchange for the fee paid, and a refund should be allocated to the customer should the agency fail to provide service within the terms outlined in the SLA.

The World Bank will provide assistance.

Licensing and Registration

8. Streamline the process and reduce the cost of incorporating with the Commercial Register, which is maintained at the Office of the Clerk of the Commercial Court, and costs an average of $630 and 30 days.

Specific measures include a reduction in the minimum capitai requirement from KHR20 million ($5,000) to KHR 4 million ($1 ,OOO), The Legal Affairs Department of the Ministry of Commerce reduced the cost of registration from $615 and 30 days to $177 and 10.5 days.

Streamline the process notification of the Ministry of Labor to start hiring employees, which costs $250 and 30 days to complete.

The SITF endorsed the goal of streamlining licensing and registration to decrease the share of companies that operate informaliy by making formal registration and hiring workers as easy and inexpensive as possible. The SlTF noted that the changes proposed in Item 12 may require changing existing legislation and agreed that reform team would present proposals after taking into consideration ongoing reform efforts.

9.

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I O . Harmonize registration for VAT, income tax and company registration using the same form and resulting in the same number. This would enable a unique identifier and facilitate information sharing across agencies.

Private Sector Governance

11. Implement a national award t o promote good corporate citizenship and governance in the private sector.

Improving governance cannot rest on public action alone, Any strategy to fight corruption, build better institutions, introduce transparency in public contracting must also rest on efforts to strengthen codes of ethics and standards of governance in private sector itself. The TF agreed that the Government will encourage, through the Government-Private Sector Forum, adoptibn of a Code of Ethics by the private sector, The Government also will try to introduce a national award for corporate governance, which will depend on an assessment against objective governance criteria.

12. Monitoring and Reporting

The TF agreed that the private sector, through business associations, will monitor and evaluate progress toward reform obiectives. Proqress reports will be provided to the Government-

At the request of and with guidance of the Sr. Minister of Commerce, MPDF, with FIAS support, has designed and managed the first annual corporate citizenship awards. Twenty four firms applied. The finalists and winners were announced on 10 February 2005.

Paragraph 217 There has been an effort to align the transparency on private sector forum with the Government's trade-related Private Sector Development Steering

5. Implementing the Twelve Point Plan

T o achieve the objectives o f trade facilitation, the RGC has issued a Decision o n the Establishment o f a Steering Committee for Private Sector Development, Decision No. 46 SSR, dated 11 August 2004. Three Sub-steering Committees have been established under this Steering Committee relating to Investment Climate and Private Participation in Infrastructure; Trade Facilitation; and Small to Medium Enterprises. The Sub-steering Committee on Trade Facilitation, which i s chaired by HE Cham Prasidh, Senior Minister and Minister o f Commerce, i s tasked with the following responsibilities:

> Reduce al l complex and lengthy processes at ministerial/institutional level related to import, export o f companies ;

> Abolish duplicated tasks of relevant ministriesiinstitutions in order to install effective examination just in one place;

> Strengthen the implementation o f "Single Window" mechanism at international gates; and > Raise necessary measures to serve the enforcement o f laws and regulations on a l l negative aspects

that impact business activities.

The Trade Facilitation Committee has had the following achievements since i t s establishment:

> A change from separate on-site inspections by Customs and Camcontrol to jo in t simultaneous on-site inspections f rom September 1,2004 where only one jo in t inspection document i s used.

9 From September 1, 2004 onwards: Issuance by the Ministry o f Industry, Mines and Energy (MIME) Certificate o f Processing, Certificate o f Origin by Ministry o f Commerce (MOC), Visa on Commercial Invoice and Export License are done based on jo in t inspection documentation of Customs and Camcontrol. After issuance o f these documents, officers o f MIME and M O C undertake post-export inspection. This replaces pre-shipment inspection by MIME.

> The RGC has offered to establish a jo in t Customs-Camcontrol Focal Point/Office on a permanent basis in Garment factories with greater than 2,000 employees to facilitate and speed up the inspection and clearance process.

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> The number o f steps in the procedure and processing application for Certificate o f Origin, Visa on Commercial Invoice or Export License at MOC has been reduced from 11 steps to 8 steps since M a y 12, 2004. The processing time for issuance o f application for Visa on Commercial Invoice, Certificate of Origin and Export license was reduced from 16 business hours (March 2002) to 12 business hours f rom M a y 12, 2004.

3 A strategic review o f Camcontrol has been completed and recommendations currently under consideration by the RGC.

With respect to a risk management strategy for inspection and clearance o f goods, the Government's Rectangular Strategy states: "In the area o f revenue collection by the Customs and Excise Department, the Ministry o f Economy and Finance wi l l : "Implement forceful strategies and risk management principles to reduce smuggling and illegal activities along borders. Strengthen the legal framework based on new customs l a w and i t s strict implementation including the development o f pol icy on customs and excise, formulating guidelines on customs procedure; and training officials. Promote computerization o f Customs and Excise Department. and develop short t e r m measures to implement a customs automating program including a legal framework, and procedures related to training and project formulation." (p 78) AusAID has established a training program for senior officials, designed to result in a risk management strategy.

Customs and Excise Department Modernization Strategy

The C E D has established a Work Programs on Reform and Modemization o f Cambodia and Customs 2003-2008. K e y areas o f the work plan include:

> Strengthening o f the Legal Framework: A draft l a w on Customs has been prepared and i s currently with the Council o f Ministers. Implementing regulations are being finalized. Policy and Procedures Operating Guidelines and under preparation for dissemination to Customs Officials and industry.

3 Tar i f f Restructuring. 3 Modernization and Simplification o f Customs Procedures: This includes pre-shipment inspection to

be phased out by 2007 and includes the introduction o f a risk management system in 2005. Customs have recently implemented an intelligence unit in this regard.

3 Valuation and Post-Clearance Audit 3 Information Technology Systems and Automation 3 Improving Service and Trade Facilitation: This wil l include introduction o f a dispute settlement

mechanism.

The IMF provided technical support to help implement the W o r k Program, and JICA has a resident expert in the CED to build capacity and support implementation.

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Background on Export Diversification (Component 2)

Along with trade facilitation issues addressed in component 1, access to markets and information on these markets are among key constraints to Cambodia's export diversification. For Cambodian f i r m s , including those garment f i r m s involved in subcontracting arrangements who want to be arms-length and independent exporters, finding and cultivating export markets involves significant investments - and often up-front investments - not only in financial terms but also in terms o f skilled and scarce managerial resources. A highly trained marketing staff i s required to obtain information and understand the needs o f the market. A skilled technical workforce i s required to translate the market needs into appropriate production and quality assurance processes. These activities are information intensive and often require years o f understanding the market, and have to be undertaken in an environment where f i r m s already have to cope with existing problems such as poor infrastructure, inadequately trained work force, delays in securing inputs, complying with procedural requirements o f customs and Camcontrol, and accessing credit f rom an inefficient banking systems.

TUNISIA EXPORT MARKET ACCESS FUND - EMAF TUNISIA T h e creat ion o f e x p o r t m a r k e t access fund (F;IL\IES) in ;ipril 2000 m a r k s a n i m p o r t a n t s h i f t o f focus o f e x p o r t promotion ef for ts : away from a TPO m o d e l l e d by t l i e gove rnmen t , to a publ ic -pr ivate sector par t ic ipat ive approach. I t s emphasis i s on i i i d i v i d u a l expor ters a n d the i r associations, rea l iz ing tha t firms c o m p e t e a n d not nat ions: i t he lps i n d i v i d u a l f i r m s i m p l e m e n t a systematic strategy to enter, sustain a n d e x p a n d e x p o r t markets . T h e fund l ias b e e n set up by CEPE1 (the e x p o r t promotion agency u n d e r t h e SLin is t iy o f Commerce ) through Bank assistance, u n d e r p r i va te management co i is is t ing o f i n te rna t i ona l a n d loca l experts. I t encourages f i rms, especially S V E s , to enter e x p o r t m a r k e t by c o v e r i n g o i i a tempora ry basis up to 50% o f t h e cos t o f consul tant services a n d by providing tec l in ica l assistance. Services are o f f e r e d by loca l consu l t i ng industry a n d in te rna t i ona l experts in co l l abo ra t i on v d i l oca l consul tants in response to p r i va te firms demand. Through i t s 5 years l i fe, t l ie F;lhlEX has assisted 700 firms to b e c o m e exporters, e x p o r t n e w p r o d u c t s a n d services or enter n e w markets . I n i t i a l est imates ind icate tha t each $1 o f ESL1F assistance l ias generated m o r e t h a n $20 o f add i t i ona l expor ts . ;i recen t survey l ias also i nd i ca ted tha t 60% o f firms tha t bene f i t ed from ELLIF assistance are now willing to pay full m a r k e t p r i ce for e x p o r t services. In addi t ion, a smal l e x p o r t consu l t i ng i ndus t? h a s b e e n created a r o u n d t l i e p r o g r a m w l i i c l i c a n b e considered t l i e m o s t i m p o r t a n t accomp l i shmen t o f ELLIF

1 Tunis ia .

International experience suggests that the relaxation o f the information constraint and market access bottlenecks faced by f i r m s would create scope for further product and market diversification and that the benefits normally go beyond the exporting firm. Information spillovers arise on the exporter side, as export activities generate a better understanding o f how foreign markets work. Also, the export success o f a firm may generate demonstration effects for other f i rms , which become aware o f potential opportunities in foreign markets. In addition, exporters acquire valuable information regarding the functioning o f customs administrations, foreign consumer tastes, shipping procedures and distribution networks, which could profitably be used in future transactions with other countries.

Resolving the market access constraint i s a challenge in Cambodia because o f the scattered structure o f the productive sector. Small and medium enterprises represent the bulk o f existing and potential exporters in Cambodia. In several economic activities, including sectors with good prospects and potential for exports, f i r m s do not have the minimum critical size to be competitive and to increase exports, This i s the case in the agro-processing sector, comprising o f a small number o f structured f i rms . most o f which o f small size. Consequently, not only small and medium producers but also large producers do not actively cultivate export markets especially large and sophisticated export markets. They cannot afford to add another area of demand on their l imi ted cash flows. Further, they also recognize that their small size prevents them from making some o f the up-front investments in developing export markets. Even if they are willing, investments in export marketing may not be justifiable because they cannot achieve economies o f scale and scope.

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The above discussion points out that, i f Cambodian producers are to be encouraged to produce for export markets, mechanisms have to be found to bring the market closer to them. Mechanisms are also required to alleviate the producer f rom the burden o f having to undertake most o f the marketing tasks. I f market development, marketing and selling, delivery and logistics management i s addressed, then producers can focus on the core basis o f competitiveness - l o w production costs, good quality, high productivity and a skilled workforce. The solution i s not necessarily direct government intervention or subsidies but policies and strategies to actively court institutions and f i r m s that have specialized marketing expertise.

Background on PPI Governance (Component 3)

Cambodia’s poverty reduction strategy places an important priority on improving delivery o f public services, which were particularly weakened by years o f conflict and neglect. Because needs are so acute and resources so limited, we argue that the state should yield a substantial role for delivery o f public services to the private sector. Because o f i t s resource constraints, Cambodia has in fact been a center o f innovation in public-private partnerships for delivery o f services, including health, water, rural electricity provision, and even the introduction o f labor protection standards linked to trade. In the water sector, the R G C undertook private participation initiative which involved the use o f competitive, output-based contracting o f connections to the public water system. The f i rs t batch o f four towns using the O B A approach was procured and the contracts signed by the R G C in March 2004, resulting in an average reduction in the cost per connection o f 30% compared with the historic cost o f public investments in similar systems. Local participation i s spread across almost al l sectors, suggesting that there i s a local market to respond at least to some o f the PPI opportunities. In the power sector, for example, there i s local ownership in one o f the independent power producers (Jupiter Power - minority Cambodian shareholding), and among the small-scale power producers that provide about 60 MW o f capacity, largely financed from their own funds. In the water sector, a l l the small-scale service providers in provincial and district towns and rural areas (16 in total) are locally owned and primarily internally financed.

Increased private participation in infrastructure (PPI) in Cambodia, under an appropriate institutional and regulatory framework, i s l ikely to provide opportunities for augmenting budget resources and for improving efficiency. The benefits o f the latter can be substantial, particularly when accompanied by pro-competitive reforms (or even monopolistic activities operating under an appropriate regulatory framework). Public-private partnerships, including the use o f Build-Operate-and Transfer (BOT) arrangements or output-based contracting o f private providers o f public services, need to be seen as part o f a strategy to increase the efficiency o f service delivery. T o ensure the best outcomes for Cambodia’s citizens and to support service delivery goals, the Government would need to introduce the principles o f transparency, competition, accountability and rational design in all transactions w i th the private sector.

But the practice o f private participation in infrastructure in Cambodia i s frequently characterized by a lack of competition and transparency, which denies the country the efficiency benefits that are the most important reason to involve the private sector. Because o f the nature o f public services, most o f these efficiency gains can only be captured at the point o f transaction. T o increase the impact o f the private sector in delivering infrastructure services, the report focuses on the framework for contracting w i th the private sector, and identi f ies a number o f legal gaps, institutional overlaps, and lack o f clarity at each stage. The process i s sufficiently “broken” as to require f i r m s to circumvent i t to secure transactions - a process that denies Cambodia most o f the benefi ts o f private participation. The practice o f PPI, however; does not re f lect many o f these apparent advantages; and in the absence o f an appropriate legal. institutional, and regulatory framework, many o f the benefits associated with PPI have not been secured.

In 2003, the Government launched an effort to reform i t s governance o f public-private partnerships using technical support o f PPIAF, the Wor ld Bank and UNIDO. The key objective underlying the PPI Governance Study was to create an enabling framework for PPI that i s sufficiently flexible to allow for

L4

unique sectoral requirements in contracting. A t the same time, the regulatory, procedural, and institutional framework should be sufficiently robust and inclusive to ensure that all PPI transactions - regardless o f the sector, source o f funding or size o f the transaction - are conducted fairly, transparently, competitively, and in the public interest. Strengthening governance for increased private participation in infrastructure and public service delivery rests on four principles that are cornerstones o f a sound, enabling environment for PPI:

3 improving predictability via improvements to the legal and institutional framework; 3 assigning clear l ines o f responsibility within institutions; 3 ensuring accountability o f those institutions responsible for applying the procurement processes

according to the legal framework; and > Improving the transparency and openness o f government procurement processes.

Fol lowing a year-long effort, the Framework announced in the Investment Climate Assessment and agreed by Govemment includes the following elements:

PPI Policy. The PPI Policy sets out the roles and responsibilities o f the various parts o f government w i th respect to PPI projects, as well as specific policy proposals for managing the PPI process throughout the typical PPI project cycle, with various aims to address inter alia several serious concerns with respect to: the lack o f transparency in the handling of dealings between the public and private sectors particularly in the selection, negotiation and management o f specific contracts between government and investors; more systematic control over the contingent and ongoing liabilities taken on by the public sector under PPI contracts; and improvements to supervision of the performance o f PPI concessions during project implementation and operation.

Concession Law and Sub-decree on Concessions. These pieces o f draft legislation embed the key pol icy recommendations underlying the draft PPI Policy in the law. Prior to the Bank-supported PPI Governance Study, U N I D O was commissioned to assist R G C to develop a L a w on Concessions, the intention o f which i s to replace the B O T Sub-Decree and to supersede the relevant provisions o f Order 30BB on the Management of State Properties. The RGC asked the Bank team to work with UNIDO to ensure overall consistency with the approach being proposed in the PPI Policy. The effort resulted in:

Policy Guideline Documents, dealing with:

Financial Management o f PPI Projects - setting out a range o f pol icy options and guidelines for managing government’s fiscal exposure through PPP projects; Policy for Dealing with Unsolicited Bids - setting out guidelines and suggestions for managing the trade-offs involved in balancing the advantages o f encouraging private sector initiative to come forward with sensible project ideas with the potential loss in transparency and efficiency gains o f a well-conceived competitive tender process; Contract Design Issues - setting out some recommendations for ensuring that contract design i s consistent with encouraging private sector participation; the parties responsible for management and monitoring are involved in contract negotiation; and that contracts transfer the appropriate r i sks to the private sector, while being robust to material changes to the context in which to operate; Policy for Contract Publication - setting out some recommendations o n how best to make public the contractual terms for PPI projects, to maximize transparency and enhance public confidence and trust in the integrity o f the procurement process; Policy on Decentralization of PPI Project Governance - setting out some guidance notes on how to ensure that initiatives to improve the PPI governance that are appropriate to the requirements o f large national or large provincial-level projects do not have the undesirable side-effect o f suffocating small scale infrastructure development.

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Capacity building program to implement the new PPI Policy, to be funded under the Project. The Framework establishes processes for the identification, appraisal, tendering and evaluation o f PPI projects, as wel l as the management o f unsolicited bids. Key to the framework i s the distinction drawn between those entit ies responsible for sponsoring and promoting PPI projects and those which act as ‘checks and balances’, monitoring and approving proposed PPI projects.

Awareness of the PPI Framework. The level o f awareness o f the PPI Governance Framework i s mixed. Some ministries and agencies are preparing for the introduction o f the Framework, for example, the Ministry o f Economy and Finance (MEF) has established a unit responsible for PPI while the CDC i s supporting the introduction of the Framework. Other ministries appeared to have l i t t le understanding o f the Framework or their roles under it. No ministry appeared to have a developed strategy for identifying and developing potential PPI projects. Instead, most appear to rely on unsolicited approaches.

Access to sk i l ls . Minis t r ies and agencies appear to generally have adequate sk i l l s in-house to develop and appraise the technical aspects of proposed PPI projects. However, a l l identified weaknesses in financial analysis and, particularly, legal skill areas. Typically, ministries and agencies have few lawyers and those they do have are only recently qualified. The general lack of financial and legal sk i l l s and the l imited familiarity with PPI requirements encourages ministries to adopt a passive strategy towards PPI projects. There i s a strong tendency to wait for the private sector to propose projects on an unsolicited basis rather than actively developing and tendering PPI opportunities.

Min is t r ies and agencies have access to extemal legal advisors during negotiations, the costs o f whom are recovered f rom payments by the selected private sector contractor. Such an approach i s suitable for individual transactions but does not assist ministr ies in the init ial phases o f developing suitable projects. The lack o f legal, and financial, sk i l l s among ministries and agencies i s partly due to an overall shortage o f these sk i l ls within Cambodia, particularly among advisors with some familiarity with PPI requirements. The l o w salary levels within government service also mean that individuals who have acquired these sk i l l s and experience prefer to leave government employment to work in the private sector.

The limited training and experience with PPI and the lack o f skilled staff at the level o f central ministries and agencies i s magnified at provincial and municipal level. Levels o f education are generally lower, for example, high school rather than university graduates, and foreign language abilities much weaker. During discussions, emphasis was placed on the need to include municipality and provincial governments in any capacity building program. Under decentralization measures, these governments wi l l have responsibility for approving investments o f less than S2 mill ion, which i s likely to represent a substantial proportion o f a l l PPI projects in Cambodia.

Background on Investment Promotion

F I A S has long supported the Government o f Cambodia to introduce the regulatory framework that i s more conducive to attract foreign investment, which resulted in the Amendment to the L a w o n Investment in February 2003. The Amended L a w on Investment explicit ly moves the CIB toward serving as a facilitative and promotional agency, with many evaluative and regulatory functions replaced by automatic systems. In response to the request f rom the Secretary General o f the CDC, F IAS and MIGA organized a strategic planning workshop in Phnom Penh on March 2-3 2005. At the workshop, participants stressed the need to strengthen the CIB’s capacity to promote, facilitate and retain investment in order to fulfill i t s new mandate. Their focus o n capacity building was echoed in the resul ts o f MIGA’s institutional assessment (which preceded the workshop), in which CIB’s score was found to be among the lowest for investment promotion agencies in the region. The strategy workshop particularly highlighted the

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importance o f the following: (a) capacity building to implement the strategy; (b) skill building in investment promotion; (c) upgrading IT systems.

Background on Legal and Judicial Reform

1. The RGC’s avowed Legal and Judicial Reform (LJR) Strategy4 outlines seven broad objectives that are aimed at improving access to, and the quality of, Cambodia’s legal and judicial services. The third o f these objectives requires the

“provision o f better access to legal and judicial information by promoting dissemination o f basic legal knowledge through official publications, electronic media and information folders and ensuring easy accessibility to al l legal and juridical information for legal practitioners and any other interested party”.

2. O n i t s adoption o f the LJR Strategy, the RGC also published a draft Act ion Plan listing numerous interventions i t would consider implementing in the short-, medium- and long-term to achieve the strategic LJR objectives. Fol lowing a National Workshop on Legal and Judicial Reform, numerous intemal RGC deliberations and consultations among senior representatives o f the RGC‘ s Executive and Judicial branches, c iv i l society and the intemational community, including the Wor ld Bank, a Short- and Medium-Term Act ion Plan for LJR (the “Action Plan”) was formally adopted by the R G C on November 15, 2004.

3. As the Act ion Plan makes clear: “The Royal Government i s committed to accelerating the Legal and Judicial Reform process”. Acceleration i s to occur in part by making “the improvement o f access to legal and judicial information” an “operational priority” o f the R G C in 2005-2006. In this respect, the Government specifically seeks in the near-term “to collect and publish judic ia l decisions”.

At least in respect o f Cambodia’s commercial law framework, the Ministry o f Commerce continues to do a remarkable j o b o f collecting and disseminating on a timely basis (both electronically and in print) all laws, decrees and sub-decrees dealing with, or touching upon, business activity in Cambodia. For Ministry o f Commerce purposes, the t e r m “commercial law framework” i s properly given a broad definition. Sti l l missing, however, i s the collection and wide dissemination o f the summaries and judgments o f any, le t alone key, commercial cases in the courts o f Cambodia. As a result, Cambodia’s business community, i t s judicial establishment, the Executive and Legislative branches o f Government, the Bar o f Cambodia, the Royal School o f Magistrates, the Faculty o f L a w and other institutions (as well as the public in general) remain ignorant o f how this commercial l aw framework i s being interpreted, applied and enforced. The Government recognizes i t i s time to start the process o f ensuring that this essential information for the operations o f a l l commercial activities in Cambodia i s actually provided.

Formally adopted by the RGC’s Council o f Legal and Judicial Reform in June 2003.

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Annex 2: Ma jor Related Projects Financed by the Bank and/or other Agencies

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

There has been n o formal trade facilitation, private sector development, or automation projects financed by the Bank in Cambodia. There have been a number o f relevant donor-funded technical assistance projects in the sector, as well as analytical and advisory work.

The International Monetary Fund provided the Customs and Excise Department with resident technical assistance for two years in the context o f their Poverty Reduction and Growth Facility. This TA supported the development o f the Customs L a w and related sub-decrees, as wel l as internal reorganization and reform plans referenced in Annex 10. A major recommendation o f the assistance was the automation o f customs processing. The IMF supported the development o f bidding documents, and an evaluation o f alternative providers o f such automation.

A group o f six donors financed the Integrated Framework o f Trade Related Technical Assistance (IF). The IF further found that the major issues wi th trade facilitation in Cambodia are cross- agency in nature, including C E D but also five other agencies operating without clearly distinct mandates and contributing to substantial delays and high levels of unofficial costs. The Integrated Framework included a number o f sub-sectoral studies that identified specific technical gaps that would constrain exporters. This has influenced the design o f Component 2.

Beyond these past studies, the Bank i s working closely with ongoing projects o f donors:

The European Union’s Multilateral Trade Assistance Project (MULTRAP) i s a multi-year technical assistance project for Cambodia and Lao PDR designed to support capacity to achieve WTO compliance. This has included reform o f trade facilitation.

AusAID’s Cambodia-Australia Technical Assistance Facil ity (CATAF) i s providing a range of fast- disbursing technical assistance to achieve private sector-led growth. This includes support for the development of a risk-management capacity within trade facilitation agencies.

UNIDO supported the drafting of the L a w on Concessions.

U N C T A D supported the Blue Book, which provides technical advice toward the development o f the investment facilitation function.

The Bank i s preparing, for FY06 delivery, a project financing the automation and reform o f public expenditure and financial management in Cambodia.

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Annex 3: Results Framework and Monitoring

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Results Framework

PDO To promote economic growth by .educing transaction costs associated Nith trade and investment, introducing :ransparency in investment processes) l nd facilitating access of enterprises to 2xport markets

Intermediate Results One per Component

:omponent One: Trade Facilitation rime and cost to import and export xoducts reduced and made more xedictable.

Component Two: Export Market Access Fund The enabling environment facilitates integration of new firms into the global sconomy.

Component Three: PPI & Investment Transparency / accountability introduced into PPI.

Component Four: Legal Transparency Final judgments of Cambodia's Supreme Court and Court of Appeal are well reasoned, based on law and widely disseminated electronically.

Outcome Indicators Investors perceive Cambodia to have a more hospitable investment climate as measured thorough follow-up ICA (2006- 2007).

Results Indicators for Each Component Component One: A 50% reduction in the number of documents required to clear imports.

Share of export shipments that are physically inspected less than 40% by December 2006.

50% Reduction in time required to clear export shipments. Component Two : Number of firms preparing draft export development plans.

Number of new exporters created, Volume of new exports.

Component Three: Number of PPI contracts publicly disclosed and subject to competitive procurement processes.

Response time on investor inquiries.

Component Four: Number of final judgments of the appellate courts that populate the website and number of 'hits' on this website.

Use of Outcome Information Jpdates of National Poverty Reduction F'aper, feedback to Prime Minister on ?esults of Steering Committee on Private Sector Development, feedback to public through dissemination workshops and through national media.

Use of Results Monitoring

Component One: Public dissemination through national media to enhance accountability.

Internal discussion within donor community on achievement of Consultative Group benchmark PSRC benchmarks.

~~ ~

Component Two: An input to WTO monitoring reports, ASEAN, and Private Sector Forum, all of which regularly discuss Cambodia's export diversification strategy and progress.

Component Three: Consultative Group benchmark. Public knowledge of terms of contracts increases demand for specified services, and thereby increases accountability to perform and, thereby creating a disincentive for corruption.

Component Four: Public and private discussion, analysis and application of Cambodian appellate court jurisprudence, including by judges, judges-in-training, lawyers, law students, and by businesses.

29

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Annex 4: Detailed Project Description

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Component 1: Trade Facilitation

Sub-Component 1.1 ($5.95 in). Automation of Custom and Trade Regulatory Agencies.

Unl ike most countries throughout the world, Cambodia i s one o f only a small number o f countries managing its border-related regulatory functions without the benefit o f appropriate Information Technology (ICT) support. T o achieve the project objectives described above i t i s critical that priority attention be paid to identifying and implementing an appropriate suite o f purpose built I C T solutions that can undertake core border management related functions.

The application o f appropriate I C T to border management activities can significantly streamline operations, reduce the risk o f errors, improve the level o f transparency and accountability and facilitate the achievement o f a l l border related government objectives. The project wi l l ensure the effective and efficient deployment o f IT in support o f Customs and other border related agency operations. Specifically, the project will fund implementation o f new I C T systems and the establishment o f a community network linked to complementary improvements in operational procedures and developments in the organization and institutional arrangements addressed under the trade facilitation component. The sub-component wi l l result in:

P 4 4 P 4 P 4 4 4 4 P P

enhanced control over imports, exports and transit goods; improved control o f exemptions, concessions and duty suspension regimes; reduced cargo clearance times; closer cooperation and rationalization o f activities between key border control agencies; uniform application o f border-related legislation; increased transparency, predictability and lower transaction costs for the business sector: reduced opportunity for inappropriate exercise o f official discretion; enhanced management information; more efficient revenue collection and accounting; more accurate and timely trade statistics; more effective deployment o f human and technical resources; and More accurate information for risk management and post clearance audit purposes.

Implementation o f the sub-component will proceed through two parallel, complementary parts:

Electronic Single Window. The component will finance the development and implementation o f information technology to integrate and automate the trade regulatory and facilitation functions o f a l l key agencies through a shared electronic trade network (tentatively called “CamTradeNet”). This system wil l allow direct trader input o f Customs declarations and other information required by the regulatory agencies in an integrated electronic form. I t will facilitate the sharing o f this entered information electronically by the Government, thereby (a) eliminating the need for multiple, often duplicative requests for information and the associated time and resources; (b) increasing the speed and accuracy o f the disposition o f regulatory functions, and (c) reducing opportunities for unofficial charges.

The resultant electronic “single window” for a l l border processing and clearance related formalities w i l l make a significant contribution to the achievement o f the government’s trade facilitation objectives by lowering transaction costs and reducing clearance times. Ensuring

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appropriate interconnectivity between core govemment agencies and private sector traders (to allow direct trader input o f declarations and associated documentation) and banks (to facilitate the payment o f duties and taxes) i s an essential element o f the sub-component. The Single Window wil l integrate, in phases:

Customs and Excise Department; Ministry o f Commerce; Camcontrol and i t s successor; The Autonomous Port o f Sihanoukville; Dry portsicontainer parks; Ministry o f Agriculture, Fisheries and Forestry; Ministry o f Health Financial institutions.

Procurement and implementation o f UNCTAD’s ASYCUDA automated Customs processing system in the Customs and Excise Department. The system will provide the IT support necessary to introduce a range o f modem approaches to Customs administration including risk management and post clearance audit. The A S Y C U D A system has been deployed in a number o f countries throughout the world and the latest version o f the product i s designed to support selective examinations, trader compliance incentives, effective management o f Customs clearance, payment schemes to facilitate trade and secure duty and tax collection, and the production o f more accurate and timely trade statistics.

The Sub-coriiponent w i l l finance the procurement and effective irnpleinentation of the ASYCUDA system in Cus tom iricluding the provision of appropriate technical assistance to ensure effective implementation of the systenz and its seamless integration wi th non-autonzated system and procedures. The Sub-coniponent w i l l also finance the developinent and inzplenientation of a coniiizunity network to provide an electronic Single window’ to ensure traders are able to discharge a l l their regulatory responsibilities through one gateway. As a part of this development, a n u m b e ~ of sinal1 agency-spec@ systems w i l l need to be developed and irnpleinented to ensure al l key iniport/export related processes are able to be undertaken electronically.

Sub-Component 1.2. ($40,000). Building capacity of trade regulatory agencies to adopt modern border nianagement practices, including selective inspection approaches based on risk management tools in line with the provisions of the revised Kyoto Convention on the Simplification and Izarinonization of Custom procedures.

While the Revised Kyo to Convention i s specifically designed to meet the requirements o f a modem Customs environment, i t s key principles are equally relevant to a l l border management and clearance agencies. The key principles that underpin the Convention include:

Improving transparency, accountability and predictability; Enhanced cooperation between al l border related government agencies; Balancing facilitation with control based on risk management; Use o f post clearance audit based controls; Simplification and standardization in l ine with internationally agreed standards; Cooperation and partnership with the private sector; Compliance management and improvement; Effective deployment o f ICT.

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Modern border management operations imply predictability for private sector operators, and that procedures should be applied in a uniform manner throughout the country. Under international best practice, traders must be able to obtain advice f rom Customs, for example on how goods should be classified and valued. The sub-component wi l l help build capacity to implement an advanced ruling system, with the corresponding legislation, procedures, and control mechanisms. Likewise, the right to appeal against decisions made by border management agencies i s embodied in the Revised Kyoto Convention and current W T O commitments. I t i s an important element that limits the discretionary power o f decision makers and increases accountability and transparency. Another key capability deriving from the Kyoto Convention i s the building o f key ‘value added’ functions and activities wi th in Customs that are considered essential to the implementation o f modern risk-based approaches to customs administration, such as the strengthening o f the risk management capacity throughout the organization; The establishment o f an Intelligence BrancWUnit with responsibility for the collection, analysis, storage and dissemination o f information and intelligence; Strengthening o f the post clearance audit capacity; and the development of a comprehensive compliance managementhmprovement strategy. Activities associated with this sub-component will be closely aligned with the activities o f other donors and the Private Sector Forum.

> The activity wi l l finance ongoing capacity building through the development o f international cooperation, including through mutual assistance agreements;

3 the exchange o f data; P External partnerships, notably in terms o f training and dissemination o f information; and 3 The preparation and introduction o f sound performance indicators covering al l key areas

o f border management, as well as the design, introduction, monitoring and reporting o f client service standards together with a robust system for ongoing performance monitoring.

Buildii ig on the work of other donors supporting trade facilitation, the Sub-conzponent wi l l Jiiiance trainiizg, international cooperation and exchange of information to support:

P Advance rulings systems for tar i f f classification and valuation; P Administrative appeal mechanisms; 3 Enhanced cooperation at the national, regional and international levels; 3 Sound Performance indicators and robust monitoring systems, P Client service charters; 3 Enhanced capacity for risk management, intelligence, and post clearance audit; and > Comprehensive compliance managementhmprovement strategy.

Sub-Component 1.3 ($1 00,000) Implementation arid cross agency integration of appropriate, merit arid incentive-based human resource management policies arid a Iiumaii resource development strategy

Recent research undertaken by the Wor ld Bank into the long t e r m success o f previous Customs and trade facilitation projects has highlighted the need for adequate attention to be devoted to improving a range of supporting HRM policies, procedures and incentive systems. As such the CTFC project includes a sub-component to address:

P Recruitment, selection, promotion and advancement P Mobi l i ty and rotation o f officials P Human Resource Development and Training 3 Remuneration and conditions o f service P Performance managementlstaff appraisal

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In l ine with complementary work being undertaken by the Wor ld Bank and other donors on the adoption o f merit-based incentive and remuneration schemes (including the Mer i t Based Pay Initiative), the project sub-component will focus on the effective integration o f these schemes in a l l relevant border management agencies and will ensure the concept o f ‘merit’ adequately addresses the objective o f trade facilitation. Likewise, where appropriate, the sub-component wi l l focus on reviewing and redeveloping existing bonus schemes to ensure the incentives provided through such schemes are aligned with the long te rm objectives o f the project.

Special attention wi l l be paid to the training and development needs o f Customs and Camcontrol officials. This wil l involve the conduct o f a national training needs analysis, the provision o f advice on the development o f a new and comprehensive national curriculum designed specifically to meet the current and future needs o f new staff and existing officials who require job-specific training to adapt to the changing roles and responsibilities they will be expected to perform. The sub-component will finance the review o f existing practices and the development o f a new human resource management strategy which wil l include, at a minimum:

> a recruitment component setting out in clear terms the standards expected for appointment to relevant agencies including examination results and objective selection criteria;

P a clear set o f requirements for selection, transfer and promotion o f staff together with robust means o f measuring staff performance;

3 a remuneration and conditions o f service regime that encourages and adequately rewards high performance and the maintenance o f a decent standard o f living for al l officials, including the possible development o f a flat fee system that removes incentives to increase the frequency o f activities that are fee-generating; and

P A human resource development strategy aligned to the strategic plan and the future competency needs o f the GDC.

Sub Component 4. ($60,000). Design and implementation of an Integrity Action Plan

Given the vitally important role Customs. CamControl and other border-related agencies play in revenue collection, trade facilitation, national security and the protection o f society, i t i s important that a comprehensive integrity/anti-corruption program be developed and implemented. To assist Customs administrations to establish such programs the Wor ld Customs Organization has prepared the Revised Arusha Declaration on Integrity in Customs. The Declaration consists o f ten distinct but interrelated elements considered essential to a sustainable anti-corruption and integrity enhancement program:

1. Leadership and Commitment 2. Regulatory Framework 3. Transparency 4. Automation 5. Reform and Modernization 6. Audit and Investigation 7. Code o f Conduct 8. Human Resources Management 9. Morale and Organizational Culture 10. Relationship with the Private Sector

The Sub-conzponent wil l finance technical assistance to conduct a self assessmerit and gap analysis of the peifornzance of the Custonzs and Excise Department relative to the Revised Arusha Declaration and the developnzeiit of an Integrity Action Plan based on this assessment.

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Component 2: Export Market Access Fund

The Export Market Access Fund complements a number o f ongoing initiatives, particularly the Intemational Trade Center’s National Export Strategy arising f rom the country’s Pro-Poor Trade Strategy articulated in the PRSP. I t will focus extensively on providing technical assistance to f i r m s and organizations that need to achieve market standards. Such standards wi l l include product quality standards, core labor standards, organic product standards, safety or environmental standards. The main instruments o f the EMAF would consist o f (a) technical assistance to clients o f the program in the preparation o f their export plan: and (b) nonreimbursable matching grants (50 percent o f expenditures), payable to beneficiaries o f the EMAF for eligible activities undertaken within the framework o f an export plan.

Sub-Component 2.1 ($0.5 million). Teclznical support to the Ministry of Coninzerce’s Department of Export Promotion to establish the exporter technical assistance window. The component would finance a management team for the Export Market Access Fund, reporting to the Ministry o f Commerce Department o f Export Promotion. The EMAF management team would have the responsibility (and would therefore have the relevant sk i l l s and experience) to actively help f i r m s and associations prepare export plans, including support with market research on export market standards and compliance needs, and coordinate access to sources o f technical assistance to implement such plans.

Subcomponent 2.2 ($1.6 million). Export Market Access Fund (EMAF). The EMAF would be a technical assistance matching grant facility that would cover 50% o f the cost o f achieving market standards, or evidence o f compliance with those standards. The matching grant, combined with the applicant’s resources, would be used to hire technical support f rom a pre- qualified l i s t o f market providers o f the required assistance. In doing this, the EMAF would also stimulate use o f business and export development services. The EMAF would co-finance: (a) enterprise diagnostics in view o f developing export plans; and (b) consultant services, acquisition o f information (including software and reference material), trips by entrepreneurs to explore specific export opportunities and buyers, mai l ing o f samples, promotion material, and other miscellaneous expenses required to implement the export plans. I t i s expected that the commitment o f f i r m s to their projects would be significantly increased by virtue o f their contribution to the cost. The EMAF would offer its services solely in response to private sector demand on a nondiscriminatory basis. The EMAF would not co-finance investments, equipment purchase, or operational costs o f the beneficiary enterprises.

The EMAF i s consistent with the new framework o f the Wor ld Trade Organization (WTO). The grants are nonactionable subsidies as defined in Article 8 o f the Agreement on Subsidies and Countervailing Measures. They are non-actionable because they are not specific, as provided in Article 8, paragraph 1 (a): specificity under the WTO rules typically involves a targeting o f geographic regions or economic sectors and paragraph 2 of Article 8, principally the exception for research activities carried out on a contract basis for industrial research and for pre- competitive development activity. In accordance with Article 8.3, WTO would be notif ied o f the program. The EMAF would be subject to a quarterly review.

Based on a partial survey of enterprises conducted during project preparation, at least 100 small and medium f i r m s producing tradable goods across the country and a few associations are expected to benefit f rom an EMAF. The Garment Manufacturers’ Association, representing over 200 exporters, i s expected to submit an application for $0.2 mi l l ion per year to co-finance (with the GMAC, the Government, and labor unions) the Cambodia Better Factories Campaign. Better Factories engages the Intemational Labor Organization to support Cambodia’s adherence to core labor standards, which are a requirement o f a segment of the market that Cambodia serves.

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Component 3: Private Participation in Infrastructure and Investment Promotion

Subconiponent 3.1. ($1.0 d l l i o n ) Technical Assistance to Irnplernerit Law on Concessions (See Annex 5).

The overal l objective o f the PPI sub-component o f Component 3 i s t o improve the inst i tut ional capacity o f relevant Cambodian government agencies to effect ively manage, del iver and implement PPI transactions that are conducted fairly. transparently, competit ively and in the pub l ic interest. The PPI capacity building program has three related objectives, namely:

> Creating a common understanding o f the P P I Governance Framework across sectors and spheres o f government, and o f the roles and responsibilities o f indiv idual institutions;

3 Equipping l ine ministries and other contracting authorities with the appropriate capacities t o design, award and implement PPI projects in the context o f sound sector planning strategies;

3 Enabl ing the entities that act as checks and balances o n PPI processes to funct ion effect ively.

The key intermediate indicator i s that the revised PPI process articulated in the L a w o n Concessions and in the Sub-decree o n Implementation o f the L a w o n Concessions (i.e. the implement ing regulations) will be implemented.

The key indicator i s that the L a w and implement ing regulations wi l l be enforced, as evidenced by the RGC hav ing completed a l l P P I transactions subsequent to the promulgat ion o f the L a w in full compliance with the revised PPI Govemance Framework (as defined in the Law) - result ing in improved PPI design, transparent and competit ive procurement, and the attainment o f value for money to RGC and consumers o f infrastructure services.

Core training course on general P P I principles and processes. This wil l provide a basic understanding o f PPI, agreed terms and definit ions and the PPI process. The course will be del ivered at bo th central and provincial imunic ipal level.

Raising awareness o f the P P I Governance Framework. This wil l describe h o w the Framework wil l operate, the legislation implement ing the Framework, the role o f each ministry and agency under the Framework and will be used to disseminate mode l contracts.

Support to specialized agencies involved in the P P I process. This will focus on he lp ing those agencies with roles p romot ing o r p rov id ing checks and balances on sector ministr ies developing PPI projects.

Support in the identification, preparation and negotiation o f pilot PPI projects. This will provide advisory services to sector ministr ies at the central level to pursue promis ing projects. I t wil l help with the development and documentation o f processes, wh ich can subsequently be introduced in to other ministr ies and agencies, as w e l l as p rov id ing on-the-job training to ministr ies involved in the p i l o t projects. Within each component w e have ident i f ied high and secondary p r io r i t y elements. Those elements designated as high pr io r i t y are the most important f o r the successful implementation o f the PPI Governance Framework and should b e funded under the TFCP. They are pre-requisites for the establishment o f a successful program o f p i l o t PPI projects, wh ich will provide a means o f testing the f ramework in practice and fo r dissemination o f the Framework and the benefits o f PPI to stakeholders.

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3.2 Investment Promotion ($0.2 million). Teclinical Assistance to inzplemeizt Amended Law on I n vestm ent.

The objective o f the o f the Investment Promotion sub-component o f Component 3 i s to support the implementation o f the Amended L a w on Investment RGC through the adoption o f strategies that streamline and make more predictable and transparent the process o f foreign direct investment, and that enhance the attractiveness o f Cambodia as an investment destination through improvements in the regulatory environment as well as in factor markets.

The introduction o f the Amended L a w on Investment and proposed implementing sub-decrees move C I B away from a regulatory function and towards a more facilitative and promotional role. The proposed project i s to support the implementation o f the Amended LO1 by building capacity within the C I B so that i t can assume the role o f investment promotion and facilitation more effectively.

The program consists o f three components: appointment o f Khmer-speaking consultant to support implementation; a series o f 5-days training workshops for 15-20 C I B staff on subjects l ike investment generation and facilitation; and installation o f IT system.

Khmer-speaking consultant: to support the Secretaries General o f C D C and C I B in implementing the action plan.

Staff training workshops: a series o f workshops would be facilitated by international consultants on the fundamentals o f investment promotion, facilitation, and retention. The workshops will cover understanding private foreign investment flows, image building, investment generation and investment facilitation.

I T Systems: installation o f hardware and software wi l l be complemented by training for the use and maintenance o f the systems. The systems shall consist o f a website, investor tracking system and supporting hardware.

The abovementioned program i s complemented by other technical assistance programs that are currently under preparation by FIAS and MIGA. These other areas o f assistance consist of:

Long term technical assistance: appointment o f an internationally experienced long-term resident advisor for institutional capacity building. The advisor will prepare an init ial (12 month) action plan from the strategic plan developed in the preceding project, and assist with the implementation o f that action plan, by helping with the organization o f promotional activities, providing mentoring inputs for staff through o n the job training and identifying and coordinating capacity building inputs f rom other sources.

Administrative procedures: identify and eliminate counterproductive business procedures, and streamline the necessary regulations that remain.

Component 4. Legal Transparency Component ($0.4 million)

This Component will assist in financing the collection and electronic publication o f final judgments o f the Supreme Court and o f the Court o f Appeal. I t wil l start as a pi lot project in these courts, with a view to extending such collection and publication to final judgments as well o f the Municipal and Provincial Courts as quickly as possible.

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The Component wi l l finance the establishment and maintenance o f a website within the Ministry o f Justice o n wh ich these f inal judgments wi l l be placed in Khmer . A b r i e f synopsis o f these judgments wil l also b e placed o n the site in English and in French. A link will b e established between this site and other relevant websites, including, most importantly, a website containing a l l commercial legislation. The transcriptions will be in UNICODE K h m e r or some other Khmer font which, in time, wi l l a l low robust, on-line, key w o r d indexing, as w e l l as a sophisticated search capabil i ty. Electronic links wil l also be made to the l a w as referred to in the judgments and, ideally, to an equally searchable site.

In addition, this Component wi l l provide training in ut i l i z ing the system for a l l 120 existing judges o f Cambodia. Training will take place at the Roya l School o f Magistrates in Phnom Penh in a total o f 10 sessions last ing one week each. Each session will have approximately 20 judges in attendance and each judge wi l l attend t w o sessions. The project wi l l cover trainer and part icipant expenses o f attending the training.

Final ly, this Component will finance the electronic publ icat ion o f Cambodian commercial legislation, broadly defined, including a l l relevant decrees and sub-decrees.

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Annex 5: Project Costs

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Local Foreign Total U S $million U S $million U S $million Project Cost By Component and/or Activity

Trade Facilitation Component Export Market Access Fund PPI / Investment Component Legal Component Replenishment o f Project Preparation Facil ity Training, Workshops, Incremental Operating Costs

Total Baseline Cost PrCiiAudits -

Physical Contingencies

6.150 6.150 2.100 2.100 0.800 0.800 0.400 0.400 0.580 0.580 0.100 0.100 0.200 0.200

10.330 10.330

Price Contingencies Total Project Costs’ 10.330 10.330

Interest during construction Front-end Fee

Govemment Contribution (.330) (.330) Total Financing Required 10.000 10.000

Note: At the time of Appraisal, only $0.180 MM o f $0.580 in the Project Preparation Facil ity was utilized. Following replenishment, S0.400 wil l remain unallocated. This balance o f $0.400 i s expected to be utilized to finance the Component 3, bringing the total to $1.2 mi l l ion as per Annex 4.

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Annex 6: Implementation Arrangements

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

H.E. Keat Chhon. Chairman Policy Guidance

Ministry of Commerce/ Trade Facilitation Committee Executing Agency

Project Coordination Unit

Role: -Project Design -All operational decisions -Responsibility for project

success

Role: * Resolving cross-agency

-Preparation of Bid docs - Procurement * Disbursement - Accounting - Preparation of Quarterly - Management Reports

coordination issues

I I I I

Cambodia Single

Window Fund Promotion H.E. Sok Siphana Units H.E. Kem Sithan H.E. Vattana

Roles: One accountable official acts as component manager - Responsible for implementation of tasks on time,

* Achievement of project objectives - Prepare TORS and guide consultants Arrange workshops and other project activities - Ensure sufficient and appropriate staff for activities Reporting progress monthly to Executing Agency - Referring problems to Executing Agency, and if unresolved, to PSD Steering Committee Provide Monthly reports to Executing Agency

Customs IT

H.E. Kun Nhem on quality target

U s e o f Government Institutions. The project management structure re l ies to the extent possible on existing systems and institutions established in Cambodia by Prime Ministerial decisions. Implementation arrangements wi l l be as follow:

Executing Agency. The Executing Agency on behalf o f the Govemment wi l l be the Ministry o f Commerce. This i s in accordance w i th the Prime Minister ’s Decision No.46 SSR dated 11 August 2004, which named the Sr. Minister of Commerce to lead trade facilitation. The Executing Agency wil l be responsible for a l l operational decisions and will be accountable for project success.

Project Management Units. Five Project Management Units wil l be established. PMUs will be established in the Ministry o f Commerce, to implement the Single Window I C T system, the Customs and Excise Department to implement the Asycuda Wor ld software system serving as back-office software for CED, the Ministry o f Commerce Export Promotion Department to implement the Market Access Fund, the CDC to implement the PPI capacity building and investment promotion capacity building, and the Ministry o f Justice to jo in t ly implement the legal transparency component with the Ministry o f Commerce. Within each PIU, the Govemment wi l l nominate one official, as described above, to be accountable for implementing the project on a day-to-day basis, including achievement o f target objectives, preparation o f Terms o f Reference, guiding consultants and contractors, ensuring sufficient and appropriate counterpart staff, and referring progress as well as implementation problems to the Executing Agency. Problems which cannot be resolved at the level o f the Trade Facilitation Sub-committee wil l be referred to the Private Sector Development Steering Committee. Each P M U wil l provide a br ie f monthly report to the Executing Agency including operational progress as well as financial disbursements.

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Project Coordination Unit/Reform Team. Supporting the executing agency wil l be a Project Coordination Unit, which i s the Reform Team as defined by Prakas No. 2289/04CDC, dated August 19, 2004. This PCU wil l be responsible for executing al l project procurements and disbursements, including preparation o f bidding documents, disbursement, project accounting, and preparation of quarterly management reports.

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Annex 7: Financial Management and Disbursement Arrangements

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Summary of the Financial Management Assessment

The review o f financial management arrangements for the project was carried out in January 2005. The assessment concluded that the risk was considered to be high due to high country fiduciary risk coupled with lack o f adequate project financial management system in place, inadequate capacities and experiences o f the agency and executing units in project financial management and the Bank’s FM requirements.

Country Issues and Risk Analysis. The Country Fiduciary Assessment C F A A was carried out in M a y 2003 and i t was noted that the overall country fiduciary risk in Cambodia i s considered to be high. In spite o f the multiplicity o f controls and the centralized nature o f the Public Expenditure Management (PEM) system, weak financial management practices pose serious fiduciary r isks. The fundamental problems result f rom a weak control environment, severe weaknesses in National Treasury (NT) operations, especially in the area o f cash management, inadequacies in the public accounting system, and weak intemal and extemal auditing capacity. These problems are so serious that the Govemment’s budget and reporting systems cannot be rel ied upon to expend resources in an accountable manner. The system i s cash based and most receipts and almost al l payments do not pass through bank accounts. These systemic weaknesses thus raise concerns about fiduciary malfeasance and create the potential for misuse o f funds or corruption.

In order to mitigate the risk and to ensure that the project would have the adequate system in place before project starts, the agency needs to establish an appropriate financial management system for the project with adequate number o f skilled staffs. The capacity in project financial management and reporting to meet the Bank’s requirements need to be established and strengthened. Training needs to be provided to staff responsible for the project.

Financial Management Arrangements. The project financial management arrangements will include the following features:

Implementing Entitv. A reform team wil l be set up within the Ministry o f Commerce (MOC) to coordinate overall implementation o f the four components and responsible for overall project management including procurement, financial management and disbursement.

Funds Flow. All disbursements for the four components will be managed by the reform team. Disbursement o f the Grant proceeds wil l be made through direct payment f rom grant account for major consultant contracts, goods and from a Special Account for small payments i.e. local consultants, sub grants, training and workshop with reimbursements made based on full documentation or against Statement o f Expenditure (SOE) depending on procurement prior review threshold.

Staffing. Currently, there are totally 38 officials in accounting department o f Ministry o f Commerce to handle accounting, budget, finance and procurement. Staff education background i s mostly bachelor degree in accounting but English proficiency i s low. Four o f them were nominated to be responsible for accounting (2) and disbursements (2). Since the proposed staff lack o f experience in the Bank’s procedures and requirements, there i s a need to hire two local consultants to support the team: one in accounting, another in disbursement and financial functions. The T O R and the process o f recruitment o f the two consultants are required to be

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agreed and acceptable to the Bank. The reform team’s capacity wi l l be strengthened to ensure that staff has adequate sk i l l s to implement and monitor the financial management activities.

Accounting Procedures. Recently the Ministry o f Finance has uniformed project management procedures and issued three standard manuals to be adopted for al l external fund projects in Cambodia. Those manuals include 1) Standard Operating Procedure (SOP), 2) Project Financial Management Manual (FMM) and 3) Project Procurement Manual (PMM). As for the financial and accounting procedures for the project, the standard FMM, which elaborated procedures, shall be adopted. The staff assigned and the consultants selected to work on project should be familiar with the manuals and the project’s reporting requirements.

The current accounting activities are mainly related to maintaining budget records according to budget l ine item. The role o f payment processing and payments s t i l l rest with National Treasury. The unit has n o capacity to deal with bank accounts, disbursement and payment processing. The computers have been used to keep simple records and facilitate reports with four sets o f computers available.

Audit arrangement. An independent auditor acceptable to the Bank shall be appointed to audit the annual financial statements according the T O R acceptable to IDA.

Reporting and Monitoring. The project shall provide the Bank with regular reports on fiduciary aspects including annual financial statements and Financial Monitor ing Reports (FMRs). The reporting system wil l be in accordance with the Financial Monitor ing reports; Guideline to Borrowers issued on November 30,2001.

The FMR reports shall include: (1) Discussion o f Project Progress, (2) a Balance Sheet (3) Sources and Uses o f Funds Statement (4) Uses o f Funds by Project Expenditures (5) Output Monitor ing Report and (6) Procurement Report. The formats will be agreed at Negotiation. The chart o f accounts and the reporting module of the accounting package wil l be customized appropriately to facilitate the reporting needs. The reports are required to be submitted quarterly to IDA within 45 days after the end o f each quarter.

The annual financial statements are required to be submitted annually within 6 months after the end o f fiscal year. The format o f annual financial statements wil l be agreed before the first audit.

Action Plan

T o ensure the proposed arrangements are adequate and ready for implementation, the following actions should be taken before project starts. Those include i) apply and adopt the SOP, FMM to the project; ii) assign a team o f staffs with qualifications acceptable to the IDA to be responsible for overall project financial activities wi th supports from 2 local experts, hiring based on qualification and TOR acceptable to the Bank; iii) putting into place an acceptable accounting software package; and v) training project staffs o n the Bank’s requirement and project financial management procedures.

Supervision Plan

The supervision of the Project will include close monitoring o f the FM related aspects. Quarterly FMRs are to be submitted to IDA within 45 days after the end o f each quarter. IDA supervision i s planned at least three times a year for the f i r s t year and twice a year subsequently.

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Audit Arrangements

~

Expenditure category Amount in US$ 1 Goods S 5,800,000

$ 1,120,000 $800,000

2(a) Consulting Services ($1,450,000 less Government contribution o f $330.000) 2(b) Consultant Services under Component 3 o f Project

The MOC will be responsible for ensuring that the annual financial statements are audited and forwarded to IDA within six months o f the end o f the preceding year. The audit would be carried out by an independent auditor appointed under terms o f reference satisfactory to IDA with an option that selection could be bundled with other IDA projects in portfolio handled by MOEF.

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Disbursement Arrangements

Replenishment o f Project Preparation Facil ity $ 580,000

Total $10,000,000

1. Allocation o f Grant Proceeds. The proposed Grant wi l l be disbursed against expenditure category as shown in Tab l e 1. I t i s expected that the proceeds o f the Grant will be disbursed over a period o f four years (September 2005-December 2009).

Table 1 - Allocation o f Grant Proceeds

Training, Workshops and Incremental Operating Costs $ 100,000 $ 1,600,000

The financing percentage for each category will be at 100%.

2. Use o f Statements o f Exuenditures (SOEs). Some o f the proceeds o f the Grant are expected to be disbursed on the basis o f Statements o f Expenditure as follows: (a) service contracts for individual consultants costing less than $50,000 equivalent each and service contracts for f i r m s costing less than $100,000 equivalent each; (b) purchases o f goods costing less than $5,000 each; (c) sub-grants; and (d) trainings and workshops. Disbursements for services exceeding the above limits will be made in accordance with respective procurement guidelines and provisions in the Grant Agreement against submission o f full documentation and signed contracts.

The documentation supporting SOE disbursements wil l be retained by the MOC during the l i f e o f the project and one year after the receipt o f the audit report for the last year in which the last disbursement was made. These documents will be made available for review by the auditors and IDA supervision missions.

3. Special Account. The Special Account (SA) will be established at a commercial bank o n terms and conditions acceptable to the Bank including appropriate protection against set off, seizure and attachments. The accounts would be denominated in U S dollars. with a SA cei l ing o f U S D 200,000. The Special Account (SA), which would cover the IDA share o f eligible expenditures in all disbursement categories, would have an authorized allocation o f US 200,000. The Special Account should be replenished on a monthly basis to assure liquidity o f funds or when the account i s drawn down by 20 percent o f the in i t ia l deposit, whichever comes first. All replenishment applications wi l l be accompanied by reconciled bank statements f rom the depository bank showing a l l transactions in the Special Account.

44

Annex 8: Procurement Arrangements

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

A. General

Procurement for the proposed project would be carried out in accordance with the Wor ld Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure categories are described below. For each contract to be financed by the Loadcredi t , the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement o f Goods (US$5,800,000): Goods procured under this project shall be one package o f hardware and software installation o f a cross agency trade network to be procured through International Competitive Bidding procedures using the Bank’s Standard Bidding Document - Supply and Installation o f Information Systems (Two-Stage Bidding). Procurement o f Automated System for Custom Data (ASYCUDA) would be procured by Direct Contracting to U N C T A D , with Bank’s prior agreement. Hardware such as computer and accessories to be used for development o f website estimated to cost less than $5,000 shall be procured through shopping procedures. Licensed or proprietary software may be procured through Direct Contracting with Bank’s pr ior agreement.

Selection o f Consultants (US$2,250,000): Consulting services for al l four components including audit and advertising, and survey execution services and staff for the PIU would be procured through: (a) Quality- and Cost - Based Selection (QCBS) method and Selection Based on Consultants’ Qualification (CQS) for f i rms, and (b) Selection o f Individual o f Consultant (IC).

Sub-Grants (US$1,600,000): Matching grant paying 50% o f cost o f provision o f technical assistance to exporters. Average size of grantif inn i s $20,000 and estimated 80 f i r m s . Project Implementation Manual wi l l be prepared by the P N .

Training, workshop and incremental operating expenses [US$lOO,OOO]: Training, workshop and incremental operating expenses would be procured using the procedures acceptable to the Bank with due consideration to quality, efficiency and cost-effectiveness.

B. Assessment of the agency’s capacity to implement procurement

Procurement activities wi l l be carried out by the Project Coordination Unit established within the Reform Team in the Ministry of Commerce. The procurement unit in the Accounting Department i s staffed by 5 existing procurement officers (two o f them are tentatively selected to assist in the project) and an additional local procurement staff with Bank’s procurement experience wil l be recruited to work in the P I U for 36 months. Procurement will fo l low the Bank’s Guidelines for both Goods and Consulting Services. Standard Bidding Documents for Supply and Installation o f Information System will be used.

45

An assessment o f the capacity o f the Reform Team to implement procurement actions for the project has been carried out by Ms. Oithip Mongkolsawat o n January 5: 2005. The organizational structure for implementing the project was no t yet established at the t ime o f the assessment but the mission assessed the Accounting Department o f the Ministry o f Commerce.

M o s t o f the issuesirisks concerning the procurement component fo r implementation o f the project have been ident i f ied in the Procurement Capacity Assessment Report (available in the project file) and included lack o f Bank’s procurement experience o f the exist ing procurement staff. The corrective measure wh ich i s to recruit a local consultant with Bank’s procurement experience to w o r k in the PIU for 36 moths was agreed and reflected in the procurement plan.

The overal l project r i sk fo r procurement i s HIGH

C. Procurement Plan

The Bor rower developed a Procurement Plan for project implementation wh ich provides the basis for the procurement methods. This p lan has been agreed between the Bor rower and the Project Team at Appraisal and i s available in SAP. I t will also b e available in the Project’s database and in the Bank’s external website. The Procurement P lan wi l l b e updated in agreement with the Project Team annually o r as required to reflect the actual project implementation needs and improvements in inst i tut ional capacity.

D. Frequency of Procurement Supervision

In addi t ion to the pr io r rev iew supervision to be carried out f r o m B a n k offices, the capacity assessment o f the Implement ing Agency has recommended three times a year for the first year and later o n twice a year supervision missions and post review.

46

Attachment 1

1 2

Ref. Contract No. (Description)

1 Supply and Installation of Hardware and Software for Electronic Single Windowl Community network.

2 ASYCUDA World Package for Customs and Administration.

Details of the Procurement Arrangement involving international competition

3 4 5 6 7 8 9

Estimated Procurement P-Q Domestic Review Expected Remarks Cost Method Preference by Bank Bid-

Post) Date (yeslno) (Prior I Opening

$3,600,000 ICB no no Prior Feb 1 , 0 6

$2,200,000 Direct no no Prior Aug 15, Contracting 05

Goods :

1

Ref. No.

1

2.

(a) List o f contract Packages which wil l be procured following ICB and Direct Contracting:

2 3 4 5 6 7

Description of Estimated Selection Review Expected Duration Assignment Cost Method by Bank Proposals

TA for risk $200,000 QCBS Prior Jan. 1: 06 36 months management, HR, Integrity development program, valuation, intelligence. Project Implementation $1 50,000 QCBS Prior May 1, 05 36 months Support (Support evaluation of bids and oversight of project implementation).

(PriorlCost) Submission Date

(b) All ICB and Direct Contracting shall be subject to the Bank’s prior review.

Consulting Services

(a) List o f Consulting Assignments with short-list o f international f i rms.

Component 1 : Trade Facilitation

47

Component 2 : Export Market Access Facilitv

Ref. No.

1

Description of Estimated Selection Review Expected Duration Assignment cost Method by Bank Proposals

(Prior/ Post) Submission Date

Export Market $500,000 QCBS Prior Nov. 1, 05 24 months Access Facility

Duration Proposals

I Manager

1

2. 3.

4

Component 3 : PPIDnvestment Promotion

Private Participation $200,000 QCBS Prior Nov.1, 05 36 months in Infrastructure Pilot PPI Projects $400,000 QCBS Prior Nov. 1, 05 36 months Strategy $35,000 IC Post Oct. 1, 05 24 months Implementation Capacity Building $ 165,000 QCBS Prior Nov. 1, 05 24 months (IT and Training)

Consulting Services.

1 1 2 1 3 1 4 1 5 1 6 1 7

Description of Assignment

Development of system to publish commercial decision on web Training of judges and key staff

Description of Estimated Selection Assignment ~ Cost ~ Method

Estimated Cost

$320,000

$80,000

Review by Bank (Prior / Post)

Component 4: Legal Transparencv

Consulting Services.

v- Ref. No.

2 1 3 4

Selection Method

QCBS

IC

5

Review by Bank (Prior / Post)

Prior

Prior

6 1 7

Expected Duration Proposals Submission Date 1 1 Dec. 1, 05 24 months

Dec. 1, 05

48

PIU Staff, Audit and Operations

6

Expected Proposals Submission Date

August 1, 05

August 1, 05

August 1 ,05 December 05 Auaust 1, 05

Consulting Services.

7

Duration

36 months

36 months

36 months

36 months

1 1 2

Ref. No. Description of Assignment

1

2.

3. 4. 5.

3

Estimated cost

$28,800

$28,800

Procurement Officer

Disbursement Officer Accountant Bi-annual Audit Monitoring surveys

$28,800 $56,000 $50,000

4

Selection Method

IC

IC

IC QCBS IC

5

Review by Bank (Prior/ Post)

Post

Post

Post Post Post

(b) Each contract for consult ing services exceeding $100,000 in case o f f i r m s and $50,000 in case o f individuals; and each contract invo lv ing single source selection, irrespective o f value, shall be subject to p r io r review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists o f consultants fo r services estimated t o cost less than $100,000 equivalent per contract, m a y be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

49

Annex 9: Economic and Financial Analysis

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Trade Facilitation Export Market Access Fund PPI Investment Promotion

The objectives and components o f the Trade Facilitation and Competitiveness Project are united by the use o f transparency, competition and market standards to support private-led growth in Cambodia. Many benefits o f the project cannot be readily quantified. Examples o f such benefits are:

Reduced smuggling, better valuation, lower unofficial costs, reduced management time Export revenue and tax collection, job creation Increased PPI volume, higher quality of projects, impact of improved infrastructure lmrxoved confidence in Cambodia as a destination for foreian direct investment

1 Legal Transparency I Better economic decisionmaking through better understanding of laws.

However, i t i s possible to justify the project on economic and financial terms i f (a) society as a whole achieves a net economic gain f rom the project, excluding fiscal transfers, and (b) the project generates fiscal revenues that are higher than the project costs in discounted terms. The attached analysis indicates that the project i s justified using a small subset o f the expected benefits.

Economic Analysis

The Economic Analysis i s based on one expected benefit, the reduction of time required to clear imports. The expected reduction o f time over the course o f the project i s a 50% reduction f rom 6.5 days as determined through the Investment Climate Survey, to 3.25 days by year 4. As indicated in the monitoring table, this wil l take place gradually over the course o f four years. According to a quantitative analysis o f historical data by Organization for Economic Cooperation and Development (OECD), each day saved o n average results in an economic gain equal to the value o f 0.5% o f imports. By projecting the investment costs, user fees, import volume and gradual introduction o f time savings, a cost-benefit stream i s projected. A model o f GDP and trade growth i s constructed using the provided assumptions. GDP growth i s projected at 4%, and the import to GDP ratio i s held constant at 58% (to be conservative, although the rate has increased over time). The value per declaration i s held constant at $42,800.

A number o f donors and government officials are involved trade facilitation efforts, and there i s a natural process o f institutional improvement that we expect to take place in Cambodia. Therefore, we only assume that 20% o f the benefits deriving f rom faster clearance can be attributed to the project.

Financial analysis

The financial analysis estimates the increase in the taxes on imports that would result f rom the project, and compares them with taxes that would have been collected under the status quo. The project i s assumed to have a positive impact on official revenues because i t changes the incentives facing traders and public officials in favor o f compliance w i th agreed tar i f f schedules. I t makes compliance easier, since the previous array o f officials and agencies would be replaced by an online system requiring single entry o f required information, introducing performance-based remuneration, and decreasing opportunities for discretion, direct interface, and corruption. Coupled with public messages and enforcement actions, the net result i s expected to be a gradual increase in official revenues.

The expected rate o f growth of revenues (including the collection o f customs duties, excise taxes and penalties, but excluding VAT) i s two percent per year over five years, stabilizing at a ten percent increase in public revenues. 25% i s attributed to the project (Prime Minister’s messages, other donors, CED).

50

o o o c 0 0 0 0

0 0

" N m m - in

9 0. '4 '4

0. 0. -? -? m m c1

0 0 z m

7 a, ln

-

3

v,

h

2

c L

0 Q

0 U

a,

E .- L L ._

0

Annex 10: Safeguard Policy Issues

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

The fol lowing i s a summary o f decisions on safeguards policies.

OP 4.01 Environmental Assessment (EA). Environmental considerations are integrated into the TA component o f the project, and other donors are supporting several relevant programs. N o formal EA i s required.

OP 4.04 Natural Habitats,The project wi l l not finance activities that would significantly convert or degrade any protected areas, known natural habitats, or established or proposed critical natural habitats as defined under the policy. N o action i s required under this policy.

OP 4.09 increased use o f pesticides . NO action i s required under the policy.

Pest Management. The project wi l l not procure any pesticides nor wi l l it result in an

O P S 11.03 / OP 4.11 affect sites with archeological, paleontological, historical, religious, or unique natural values. N o action i s required under this policy.

Cultural Property. The project wi l l not finance activities that wi l l adversely

D 4.20 (being converted to OP 4.10) affecting Indigenous Peoples as defined in this policy. No action i s required under this policy.

Indigenous Peoples (IP). The project wi l l not finance activities

OP 4.12 resettlement as defined under the policy. N o action i s required under this policy.

Involuntary Resettlement. The project will not finance land acquisition or involuntary

OP 4.36 conversion or degradation of critical forest areas or related critical natural habitats as defined under the policy. N o action i s required under this policy.

Forestry The project will not finance activities that would involve significant

OP 4.37 i s not anticipated in the project investment. N o action i s required under this policy.

Safety o f Dams. The project will not finance any dams and dam construction or repair

OP 7.50 international waterways as defined under the policy. N o action i s required under this policy.

International Waterways. There are n o known project components involving

OP 7.60 the policy. N o action i s required under this policy.

Disputed Areas. The project i s not located in any known disputed areas as defined under

BP 17.50 Public Disclosure. The Integrated Safeguard Data Sheet wi l l be publicly disclosed.

53

Annex 11: Project Preparation and Supervision CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Planned Actual PCN review 712212004 7/22/04 Initial PID to PIC NIA Initial ISDS to PIC NIA Appraisal 412012005 4121 12005

BoardlRVP approval 61212005 Planned date of effectiveness 810212005 Planned date of mid-term review 612112007 Planned closing date 1211 12009

Negotiations 412812005 51412005

The following institutions o f the RGC were responsible for Project preparation:

0

0 Trade Facilitation Committee 0 Ministry o f Commerce 0

0

0 Customs and Excise Department 0 Ministry o f Justice

Private Sector Development Steering Committee o f the Royal Government o f Cambodia

Ministry o f Economy and Finance Council for Development o f Cambodia

Bank staff and consultants who worked on the project included:

Name Title Unit Magdi M. Amin, TTL Sr. Private Sector Development Specialist EASFP Hamid A. Alavi Sr. Private Sector Development Specialist MNESP Gerard McLinden Senior Trade Facilitation Specialist PRMTR Ramesh Siva Sr. IT Specialist ISGIF Michael Schur Sr. PPI Specialist PPIAF Maiko Miyake Investment Officer MIGOP Eric Haythorne Sr. Counsel LEGPS Huot Chea Economist EASPR Eric Sidgwick Sr. Economist EASPR Otihip Mongkulsuwat Procurement Specialist EACTF Nipa Sribhibudhas Financial Management Specialist EACTF Maria Lourdes Pardo Lawyer LEGEA Teck Ghee Lim Social Safeguard Specialist EASSD Priya Mathur Environmental Specialist EASES Laura A. Mitchell Team Assistant EASPR Hans Korb IT Specialist Bank consultant

Bank funds expended to date on project preparation: 1. Bank resources: 242,8 5 7 2. Trust funds: 60,000 3. Total: 302,000

Estimated Approval and Supervision costs: 175,000 1. Remaining costs to approval: 60,000 2. Estimated annual supervision cost: 90,000

54

Annex 12: Documents in the Project Fi le

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

World Bank 2004: Seizing the Global Opportunity: An Investment Climate Assessment and Reform Strategy for Cambodia. Washington, DC: The World Bank.

. 2003a. Canibodia: Legal and Judicial Sector Assessment. Washington, DC: The World Bank.

. 2003b. Towards A Private Sector -Led Growth Strategy for Cambodia - Volume 1: Value Chain Analysis. Washington, DC: The World Bank.

International Labor Organization. 2002. “Second Synthesis Report on the Working Conditions Situation in Cambodia’s Garment Sector.”

World Bank and Asian Development Bank. 2003. Cambodia - Enhancing Service Delivei.)i through Improved Resource Allocation and Institutional Reforni: Integrated Fiduciary Assessment and Public Expenditure Review. Washington, DC, The World Bank.

World Bank and the Public-Private Infrastructure Advisory Facility. I ieastructure in Cainbodia: A Country Framework Report. Washington, DC, The World Bank.

2002. Private Solutions for

Trade Facilitation and Econoniic Developnient: Measuring the Impact. John S. Wilson, Catherine L. Mann, and Tsunehiro Otsuki. World Bank Policy Research Working Paper 2988, March 2003.

European Union Multilateral Trade Assistance Project for Laos and Cambodia (EU MULTRAP), Strategic Review of CaniControl Digby Gascoine, Phnom Penh, February 2005.

European Union Multilateral Trade Assistance Project for Laos and Cambodia Final Report: Review and Rationalization of Trade Docuiizeiitary Requirenients, Ian James Scott, February 2005.

Streanilining Trade Facilitation: A Reconmendation for Comprehensive Trade Facilitation Reform iii Cambodia. SMS Cambodia, Consultant to World Bank, October 30th, 2003.

Project Concept Note

Aide Memoirs

Royal Government o f Cambodia

Prime Minister’s Decision No. 1212004: Special Inter-Ministerial Task Force (SITF) on Trade Facilitation and Investment Climate.

Prime Minister Decision 4412004 SSR dated 26 July 2004. Steering Committee for Private Sector Development, dated 26 July 2004.

Decision 46 SSR, 1 1 August 2004. Establishes Three Sub-steering Committees relating to Investment Climate and Private Participation in Infrastructure; Trade Facilitation; and Small to Medium Enterprises.

Draft Law on Concessions, Draft Customs Law, Draft Sub decree to the Amended Law on Investment

55

Annex 13: Statement of Loans and Credits

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Dif ference between expected

and actual disbursements Original Amount in US$ Millions

Project FY Purpose ID

IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO64844 2004

PO71207 2004

PO70542 2003

PO71146 2003

PO73311 2003

PO71445 2002

PO71247 2002

PO70875 2002

PO73394 2001

PO52006 2000 PO65798 2000

PO60003 2000

PO04030 1999 PO50601 1999 PO04033 1997

KH-Rural Electrif. & Transmn KH-P~ov. & Rural Infrastructure Project KH-Health Sector Support Project KH- RURAL INVESTMENT & LOCAL GOVERNANCE

WATER KH - Demobilization and Reintegration KH - Eco. & PS Capacity Building Project KH-Land Management and Administration KH-Flood Emergency Rehabilitation Proj KH BIO & PROT AREA M KH-BIO & PROTEC AREAS M KH-Forest Concession Mg t & Control Pilot KH-Road Rehab. KH-SOCIAL FUND I1

KH-AGRICULTURAL PRODUCTIVITY IMPROVEMENT

KH-PROV & PERI-URB

Total:

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00 0.00

0.00

40.00

20.00

17.20

22.00

16.90

18.40

5.50

24.30

35.00

0.00 1.91

4.82

45.31 25.00 27.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

2.75 0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00

6.27

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00 5.22

40.89

19.34

25.74

18.76

20.83

10.61

6.14

23.70

2.90

1.57 1.02

1.48

9.04 0.24 5.15

5.33

2.34

-4.44

2.16

1.93

-3.95

3.38

4.48

-1.76

3.77 0.44

1.1s

9.17 -8.84 10.69

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.71

0.00

1.57 0.92

-0.11

-0.69 0.00 0.57

0.00 2.75 11.49 187.41 25.85 2.97 303.34

56

CAMBODIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of U S Dollars

Committed Disbursed

IFC IFC

FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic Approval

2003 Amansara 1.04 0.00 0.00 0.00 1.04 0.00 0.00 0.00 2005 Canadia Bank 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SCA Cambodia 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000104 SEF ACLEDA Bank 6.00 1.10 0.00 0.00 1.00 1.10 0.00 0.00

Totalportfolio: 22.04 1.10 0.00 0.00 2.04 1.10 0.00 0.00

Approvals Pending Commitment

F Y Company Approval

Loan Equity Quasi Partic.

2000 SEF ACLEDA Bank 0.00 0.00 0.00 0.00

Total pending 0.00 0.00 0.00 0.00 commitment:

57

Annex 14: Country at a Glance

CAMBODIA: Cambodia Trade Facilitation and Competitiveness

Cambodia at a glance 411105

GDI W G D P

POVERTY a n d SOCiAL Cambodia

2003 Population, mid-year (millions) GNI per capita (Atlas method. U S $ J GNi (Atlas method, U S $ biiiionsl

Average annuai g rowth , 1997-03

Population ( % J Labor force (% j

M o s t recent est imate ( la test year avai lable, 1997.03)

Poverty (% of population below nstionai poverty IineJ Urban population (% of total populationi Life expectancy a t birth iyears i Infant mortality (per 1,000 l ive b i i ihs j Child malnutrition (% of children under 5) Access to an improved water source (% ofpopuiat ionj illiteracy (% ofpopulat ion age ?5+J Gross primary enrollment (% of schoo l -a~e popuiationJ

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983

GDP (US5 bilifonsl Gross domestic investmentIGDP Exports of goods and serviceslGDP Gross domestic SavingSIGDP Gross nationai savingslGDP

Current account balancelGDP Interest paymentslGDP Total debtiGDP Total debt servicelexports (cash basis) Present value of debtlGDP Present value of debtiexports

1983-93 1993-03 (avsrage annua i growth) GDP 6.6 GDP per capita 3.4 Exports of goods and services . . 20.8

13.4 300 4 0

2.4 2 5

36 15 56 84 45 30 30

118 124 112

1993

2.5 11 2 16 4 -5.1 0.5

-4 2 0.0

73.4 9.9

2002

5.5 3.6

19.2

East A s i a & Low. Pacif ic i ncome

1,855 2,310 1.080 450 2,011 1,038

1 .o 1 .9 1.1 2.3

40 30 69 58 32 82 15 44 76 75 10 39

111 92 112 59 111 85

2002 2003

4 0 4 1 22 2 24.9 55.1 62.2 14 0 15 3 20.5 22.4

-1.4 -3.0 0.1 0.2

72.4 75.5 0.9 0.9

61.2 97.1

2003 2003-07

5.3 4.8 3.5 3.1 9.4

, Development diamond*

Life expectancy

-

~ GNi

I 1 I Access to improved water source

I Cambodia Low-income group

Economic ratios.

Trade

+ Investment Domestic - savings

I Indebtedness

Cambodia I Low-income o r o u ~

STRUCTURE o f the ECONOMY

f % of GDPj Agricu iture IndJstry

Manufactunng Services

1 1983 1993 2002 2003 Growth of investment and GDP ( O h )

47.3 35.0 36.0 . . 12.9 28.0 27.7

8.6 20 2 20.2 39.8 37 0 36.2

6 0 - I

I 40 -

Private ConsumDtion .. 100.5 80.2 78 7 . i o 1 I

1983.93 1993-03 2 0 a 3 1 Growth of exports and imports (Oh) (average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic inveslment imports of goods 2nd services

Manufacturing 54 2

3.1 14.7 17 4 5.8

4 3 7.7

12 8 14 7

-3 2 17.7 15.1 4 3

3.2 7.8

13.4 16.9

5 6 6 6

10 2 2 1

0 7 6 8

22 7 8 7

150 -

10 1 98 99 30 C 1 02 03

Exoorts d l m o o r t s

Note 2003 data are preliminary estimates

* The diamonds show four key indicators in the country (in bold) compared with its income-group average If data are mlssing, the diamond wili be incomplete

5 8

Cambodia

IBRD E - Bilaleral

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, excludes current grants) Current revenue Current budget balance Overall surplusideficit

TRADE

(US$ millions) Total exports (fob)

Rubber Logs and sawn timber Manufactures

Total imports (cifl Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ miliions) Exports of goods and services Imports of goods and sewices Resource balance

Net income Net current transfers

Current account baiance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ miliions) Conversion rate (DEC. /ocal/US$j

EXTERNAL DEBT and RESOURCE FLOWS

(US$ miilions) Total debt outstanding and disbursed

IBRD IDA

Total debt service (cash basis) IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1983

1983

1983

1983

9 0 0

0 0 0

25 0 0 0 0

0 0 0 0 0 0

1993

4 6 -1 0 -4 5

1993

284

422

1993

348 592

-244

-1 6 156

-104

2 689 0

1993

1820 0 0

34 0 0

176 5 0

70 0

63 0 0 0 0 0

2002

3 7 2 1

11 1 1 1

-6 7

2002

1,750 63 41

1,440 2,314

75 353 648

2002

2,354 2,687 -333

-169 447

-55

154 -99

663 3,917 0

2002

2,900 0

306

22 0 2

180 146

0 139

-8

30 47

0 47

2 45

2003

0 5 -0 5

10 4 -0 2 -7 1

2003

2,046 98 23

1,700 2,596

80 413 758

2003

2,572 2,990

-417

-1 83 475

-1 25

191 -66

737 3,980 0

2003

3,139 0

400

25 0 2

188 155

0 77 -8

76 63

0 63

2 60

Inflation (Oh) h

GDPdeflator " " C L ' C P I I

I Export and import levels (USS mill.)

3 000

1 1

97 88 99 c0 01 c2

Z Exports Imports

1 Current account balance to GDP (%)

:omposition of 2003 debt (US$ mill.)

Development Economics 4/1/05

59