social order; (ii) partnerships in development; (iii) favorable macroeconomic and financial environment; and (iv) Cambodia's integration into the region and the world. The specific strategies and priorities in each of the above four areas are described in the following sections.

PEACE, POLITICAL STABILITY AND SOCIAL ORDER

277. As stated in the Rectangular Strategy, peace, political stability and social order constitute the most important conditions for strengthening macroeconomic stability and promoting sustainable development and poverty reduction. Therefore, the Royal Government will continue to further strengthen peace, political stability and social order, reflecting the nation’s decisive move towards development and prosperity, leaving behind the legacy of wars, genocide and internal strife that have destroyed Cambodia over the past three decades.

278. Peace, political stability and social order are crucial for building the state and implementing state reform. Therefore, the top priority of the Government is by all means to strengthen the fabric of peace. Moreover, the strengthening of peace, political stability and social order will promote a «credible image» of Cambodia, build the confidence of investors and tourists in the country and generate favorable conditions for the people’s dignified livelihoods that significantly contribute to economic development.

PARTNERSHIPS IN DEVELOPMENT

279. As stated in the Rectangular Strategy strengthening partnerships with all development partners -- the donor community, the private sector and civil society -- is a top priority of the Royal Government. The basic principles that will guide the building and strengthening of partnerships with the donor community are embodied in the Resolutions of the General Assembly of the United Nations, the work of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), as well as the initiatives of the World Bank and the United Nations Development Program. Government-Private Sector Forum will be further strengthened to enhance its effectiveness as a mechanism of partnership between the public and private sectors. Cooperation between the State and the civil society based on rule of law to enhance Democracy, freedom, social order and primacy of law will be further strengthened. The Royal Government would like to see the civil society become an effective partner of the Government in nation building.  To this end, the Royal Government will encourage the activities of the Non-Governmental Organizations and other duly-registered associations working to serve and benefit the people and the nation. The Royal Government welcomes the participation of the NGOs in the process of socio-economic rehabilitation and development and the promotion of Democracy and respect for human rights. The Royal Government will speed up the drafting, adoption and implementation of the Law on Non-Governmental Organizations, after broad consultation with all relevant institutions and organizations.

280. During the third mandate of the Royal Government an important challenge for both the Government and the development partners is to identify and implement approaches that will improve aid effectiveness in reducing poverty and achieving Cambodia's Millennium Development Goals. The Royal Government would like its development partners to align their assistance programs with Cambodia’s development priorities and to harmonize their practices based on the principle and guidelines that have been agreed to in various international fora, in particular the OECD/DAC arena. The Royal Government is convinced that using nationally owned strategies to plan and manage ODA and a greater harmonization of donor practices will not only enhance national ownership of the development activities but will also improve aid coordination and aid effectiveness. The Royal Government also encourages the development partners to consider planning their country assistance programs within the context of program/sector based approaches that will not only minimize the multitude of stand alone projects that place a heavy burden on the limited capacity in government institutions but will also bring a sharper focus to ODA supported activities.

281. The Working Group mechanism to monitor progress on specific policy issues has been in operation since 1999. So far, the membership of most of these working groups has included donor representatives only. Some of them have operated in an ad hoc manner without an overall framework for their operations. Over the past year, on behalf of the Royal Government, the Council for the Development of Cambodia (CDC) has been discussing with development partners how to restructure the working groups in order to enhance the aid effectiveness and to bring a greater coherence to ODA supported activities. The CDC gave a proposal to the development partners on the basic principles for restructuring the working groups in October 2003. An agreement on the basic principles to restructure the working groups was reached. These basic principles were endorsed by Samdech Hun Sen, the Prime Minister at the Pre-CG Meeting held on 10 September 2004 in Phnom Penh.

282. The Royal Government and the development partners have agreed to establish seventeen Joint Technical Working Groups at the sectoral/thematic level. It is also agreed that the formation of these joint technical working groups will be based on the following basic principles:

First, to strengthen the ownership and leadership of the Royal Government, the joint technical working groups shall be lead by the responsible ministry or agency and will include members from other concerned ministries and the development partners. The appointment of the chairperson of the working group shall be made by the Minister of the ministry/agency that will lead the working group. Based on the experiences of some working groups, the newly appointed chairperson of the working group must have the political will and commitment and willingness to devote his/her time to lead the working group. The development partners will nominate a donor coordinator and an alternate coordinator to ensure donor-donor coordination and continuity of the operations of each working group.

Second, each working group must prepare its Terms of References (TORs) that clearly defines its roles and responsibilities. However, to ensure consistency across working groups the TORs of each working group will include the following basic generic elements:

1. Each Working Group shall jointly prepare detailed strategies or policies for the sector that is being dealt with by the Group, if they have not been developed so far, ensuring that these strategies or policies are consistent with the Rectangular Strategy. For Working Groups that have already developed the strategies or policies, they should be revised if necessary.

2. After the strategies or policies have been prepared, each Working Group shall develop an Action Plan and identify priorities and modalities of support for the implementation of the Action Plan. The Action Plan shall be considered to be a joint document of the Royal Government and the donor community for monitoring progress by the Working Group.

3. Each Working Group shall be responsible for mobilizing resources needed for the implementation of the agreed Action Plan. If the resources are not enough, both the Government and the donors shall work together to re-prioritize their activities in line with the available resources.

4. Each Working Group shall jointly monitor progress against benchmarks that have been set forth to increase aid effectiveness and to achieve the strategic objectives laid out in the Rectangular Strategy and Cambodia's Millennium Development Goals.

283. To ensure coordination among the 17 joint technical working groups, the Royal Government and development partners have also agreed to create a “Government-Donor Coordination Committee (GDCC)” to provide policy guidance, to set priorities, and to propose measures to solve problems raised by joint technical working groups.  This committee will meet regularly every 3 months. Samdech Hun Sen, the Prime Minister has appointed Senior Minister, Minister of Economy and Finance and the First Vice Chairman of the CDC, to be the chairman of the GDCC. The membership of the GDCC will include Ministers or heads of government agencies, Ambassadors or heads of diplomatic missions, and heads of multilateral institutions. In addition, the Government-Donor Coordination Committee will be assisted by a Secretariat. This Secretariat will be located at the Cambodian Rehabilitation and Development Board (CRDB) at CDC.  The role of the Secretariat is to liaise with the joint technical working groups and to collect progress reports as well as identify problems facing the joint technical working groups during the implementation of their activities. The Secretariat will prepare a quarterly progress report including issues and challenges as well as proposed remedies to tackle the problems and submit it to the GDCC for its consideration and decision making. In case, the GDCC is not able to make decisions or solve the problems, the Secretariat will report directly to the Head of the Royal Government for decision-making or to provide direction and guidance. 

284. At the Pre-CG Meeting held on 10 September 2004, Samdech Hun Sen, the Prime Minister also identified the following urgent tasks that each joint technical working group should complete before the forthcoming Consultative Group Meeting scheduled for early December 2004.

First, both parties coordinate to finalize the list of members and TORs of the joint technical working group, as soon as possible.

Second, each joint technical working group has to appraise the progress in the nine priority areas for joint monitoring that were agreed to at the 6^th Consultative Group meeting held in June 2002 as well as identify any outstanding issues and challenges. The reports of the technical working groups will be consolidated into one document that will be presented at the Consultative Group meeting to be held in December 2004.

Third, each technical working group has to develop its action plan and benchmarks for consideration and adoption at the Consultative Group Meeting to be held in December 2004.

285. On the issues concerning harmonization and alignment of donor activities to improve aid effectiveness a number of significant developments have taken place over the last year in the international arena as well as in Cambodia. In the international arena, the OECD/DAC Task Force on Harmonization published its Good Donor Practices Papers that were endorsed at the High Level Forum that was attended by the heads of multilateral and bilateral development institutions and representatives of the IMF, other multilateral financial institutions, and partner countries gathered in Rome in February 2003. The Forum also issued a declaration that committed development partners to support the harmonization efforts to improve aid effectiveness that is now known as the Rome Declaration on Harmonization. After the Rome meeting, OECD/DAC has been following up on the implementation of commitment made in the Rome Declaration. It has carried out a survey on the status of harmonization and alignment practices in 14 countries including Cambodia. This survey consisted of a three part questionnaire. After extensive discussions within the Government, among donors, and between Government and donors the questionnaire was completed not only on time but also Cambodia was reported to be the first country to return the completed questionnaires to OECD/DAC.

286. The Royal Government has also prepared an RGC action plan to implement the Rome Declaration’s commitment in close collaboration and support from the development partners. This action plan is presented in the Royal Government's report on "Building Partnerships for Development: An Update".  In moving ahead with the implementation of the Action Plan, the Royal Government recognizes that there are serious challenges ahead. The most serious of these challenges is the divide between agreed global policies on harmonization and alignment by the authorities at the national or headquarters of our development partners, and the follow up actions needed to change the practices and behavior of donor operations at the country level. In the case of a number of our bi-lateral partners, the authorities in the capitals have now prepared their Action Plans for harmonization and alignment in line with OECD/DAC principles. Early this year, on behalf of the Royal Government, the Council for the Development of Cambodia (CDC) had asked the OECD/DAC Task Team to not only share these Action Plans with partner countries but also to closely monitor and periodically report to partner countries on:

• whether or not the Action Plan prepared at the capital of a member country or the headquarter of a multi lateral organization has been shared with their country field offices;

• whether or not the capital of a member country or the HQ of multilateral organization has provided clear direction or instructions to their country field offices to implement their national or HQ action plan; and

• what authority has been delegated to country field offices to implement the action plan in the partner country context.

287. On the National front, the Government-Donor Partnership Working Group that was established in response to Royal Government’s proposal at the last CG Meeting in June 2002 has been busy in supporting both the work of the OECD/DAC as well as examining harmonization issues in Cambodia's context. The Working Group commissioned three studies to collect and analyze the necessary background information, in early 2003, to begin its work on tackling the harmonization issues. These studies focused on three areas: (i) the capacity building practices of Cambodia's development partners, (ii) practices and lessons learned in the management of development cooperation; and (iii) preparation of national operational guidelines for development cooperation. The first two studies have been completed. Also, the first draft of the third study has been prepared. The study on the capacity building practices is now being discussed by the Council for Administrative Reform with development partners to arrive at a set of recommendations on which there is consensus, and to develop an action plan for their implementation.

288. The Royal Government believes that the civil society and NGOs have played and should continue to play an important role in monitoring the implementation of poverty reduction initiatives. Cambodian NGOs are a part of the civil society as well as international NGOs who represent the international civil society. NGOs can contribute much to poverty reduction plans based on their development experiences and are in a strong position to convey the needs and concerns of vulnerable groups to policy makers. The Royal Government would like to encourage a greater participation of the trade unions, ethnic associations and farmers' associations in the monitoring of the implementation of the poverty reduction initiatives. To better target poverty reduction initiatives the participation of the poor and vulnerable groups in the monitoring of the poverty reduction efforts should also be strengthened. There is also a need to strengthen the capacity of the Parliament in order for it to make concrete inputs.

FAVORABLE MACROECONOMIC AND FINANCIAL ENVIRONMENT

289. As stated in the Rectangular Strategy, building on its achievements in macroeconomic and fiscal management, the Royal Government will endeavor to achieve economic growth in the order of 6 to 7 per cent per year, maintain low inflation to a single digit, keep the exchange rate stable and increase international reserves. The Royal Government will maintain a prudent monetary policy, including a market-based exchange rate. The policy of de-dollarization will be cautiously continued, reflecting the development of the domestic and international economies.

290. The maintenance of strict budget discipline is crucial to ensure a favorable macroeconomic and financial environment to consolidate the foundation for sustainable and equitable economic growth. The priorities of the Royal Government during its third mandate are to:

• improve the collection of taxes and non-tax revenues, including the strict implementation of the Law on Taxation, and other related laws such as the Law on Investment,

•  reduce corruption and tax evasion,

•  dismantle the culture of tax exemptions,

•  broaden the tax base,

• strengthen tax and customs administration, and

• strictly manage state assets including tangible and intangible properties as well as state enterprises and joint-ventures

• reform the public financial management system, in particular rationalization of expenditures based on the principles of transparency, accountability and economic efficiency,

• improve audit and public procurement systems, according priority to social and economic expenditures and public investments especially physical infrastructure. 

291. To implement the above priorities, on the behalf of the Royal Government in the Third Legislature of the National Assembly, Samdech Prime Minister Hun Sen has directed all members of the Royal Government to fully respect at all times the following ten disciplines in the public financial management:

1. Continue to root out the “culture of tax waiver and tax exemptions” in Cambodia.

2. Take serious actions to ensure collection of all kinds of revenues as planned or go beyond the target.

3. Timely transfer all revenues to the National Treasury. It is forbidden to retain and use collected revenue to offset extra-budgeted expenditures, including the mechanism of off-setting revenue and expenditure, advanced commercial loan from companies and earmarking revenue to pay back expenditure.

4. To be courageous and determined in fighting against all kinds of smuggling, and pursuing the recovery of arrears from government's debtors, especially the recovery of the arrears from taxpayers.

5. Target expenditure to priority goals of development and take serious strides to cut expenditure on unnecessary or not yet necessary items, and make budget savings and reduce wastages.

6. Strengthen and further enhance the implementation of laws and regulations related to public procurement.

7. Strengthen audit in budget management (on both revenue and expenditure side) including the inspection by the Ministry of Economy and Finance, internal audit of their respective ministries and institutions, and independent external audit.

8. It is forbidden to sign any contracts with private companies that have tax obligations, and any other contracts that have implications for state revenues and expenditures without the participation and prior approval from the Ministry of Economy and Finance;

9. It is forbidden to contract commercial credit;  and

10. Take serious strides to strengthen the management of all forms of state assets by fully enforcing the laws and regulations related to state asset management.

292. The Royal Government is conscious that increasing domestic savings is crucial for the long-term economic development of Cambodia. Thus, the Royal Government will continue to implement measures to strengthen the domestic banking system by improving management, strengthen bank supervision and surveillance and enhancing the mobilization of savings to finance private investment projects and thereby promote economic growth.  The Royal Government will continue to strengthen the rural finance sector to enhance financial services including low-interest loans within the framework of the market economy, considering the experiences of other ASEAN countries in the provision of financial services to the poor, low-income families and small and medium enterprises that promote rural development and raise living standards in rural and remote areas. Moreover, the Royal Government will take serious steps to develop laws, regulations and capacity of institutions in the mobilization of domestic resources through continuously reforming and improving the tax system, strengthening commercial banks and the insurance sector and establishing a capital market consistent with Cambodia’s Vision and Plan for Financial Sector Development for 2001-2010, developed with the technical assistance from Asian Development Bank and adopted by the Government in August 2001. 

293. In terms of specific priority actions, the Ministry of Economy and Finance (MEF) will take the following actions:

1. In the area of revenue management and collection, the MEF will:

• Develop measures to strengthen MEF capacity to formulate policies and establish mechanism for an integrated budget management.

• Develop a framework for the mobilization and allocation of revenue to all administrative levels and establish guidelines to improve revenue collection at the provincial and commune levels.

• Develop options for an integrated medium- and long-term revenue collection for the preparation of the medium term expenditure framework (MTEF).

• Develop options for an integrated budget management framework to be used in the process of national budget formulation and review of national budget implementation.

• Clearly identify tax and non-tax arrears for effective revenue collection.

• Strengthen auditing, which includes internal audit within ministries/ departments and external audit, and inspection, both the inspection of the Royal Government and inspection of the MEF, on the management of national budget, especially revenue collection.

2. In the area of revenue collection by the Customs and Excise Department, the MEF will:

• Strengthen customs revenue collection through: (a) the strict implementation of law on individuals who have a record of not complying with laws and regulations and on goods with high risk of losing revenue; and (b) the strengthening of the implementation of the Royal Government’s orders related to preventing and cracking down on smuggling.

• Implement forceful strategies and risk management principles to reduce smuggling and illegal activities along borders.

• Strengthen legal framework based on new customs law and its strict implementation including the development of policy on customs and excise; formulating guidelines on customs procedure; and training officials.

• Implement a comprehensive customs program in analyzing revenues and providing updated and accurate revenue and trade-related data and statistics.

• Promote computerization of the Customs and Excise Department, and develop short term measures to implement customs automating program including legal framework and procedures related to training and project formulation.

• Identify and implement measures to strengthen Customs Department, including the improvement of benefit and incentive structure for customs officials and good governance.

3. In the area of tax revenue collection, the MEF will:

• Strengthen tax revenue collection through the implementation of Fiscal Law and other related laws such as the amended Law on Investments of the Kingdom of Cambodia.

• Continue to expand tax base by extending the "Real Regime" to other provinces/municipalities and strengthen the implementation of the Value Added Tax (VAT) and the VAT refund mechanism.      

• Improve analysis and forecasting of tax revenue aimed at formulating new policy options to increase tax collection.

• Develop procedures to strengthen information flow, especially information on large taxpayers, between Customs and Excise Department and Tax Department.

• Increase the use of banking system to facilitate tax payment, especially for large and medium taxpayers.

• Strengthen excise tax administration in Tax Department.

• Strengthen tax auditing, especially for large and medium taxpayers.

• Strengthen management and collection of tax arrears including the development of IT system for operating on-spot tax auditing as well as account settlement for taxpayers.

• Continue to strengthen Tax Department including restructuring and recruiting new staffs, enhancing services to taxpayers, implementing training programs, conducting internal audit, and equipping with necessary facilities.

• Enhance information verification to search for turnover from the estimated regime to the real regime.

4. In the areas of management and collection of non-tax revenues, the MEF will:

• Take immediate measures to strengthen legal and institutional framework for the management and collection of non-tax revenues.

• Strengthen the management of state assets.

• Strengthen the management of state asset privatization according to existing laws and regulations.

• Take immediate actions to (a) strengthen the collection of non-tax revenues from leases or sales of real estate, including strengthening lease and contract procedures; (b) strengthen non-tax revenue collection from state-owned enterprises by improving the management framework for those enterprises; (c) strengthen non-tax revenue collection from selling public goods and providing public services; and (d) strengthen non-tax revenue collection from natural resources management. 

• Strengthen management and collection of revenues from lottery and gambling activities based on international experiences on options that can increase revenues from those activities.

• Strengthen legal framework on casinos operations and enhance revenue collection from casinos in proportion to their profits by strengthening the capacity of officials who are responsible for the task.

• Develop and implement procedures which give the MEF a final decision-making power on all concession contracts and agreements to increase revenues from concessions and also prevent adverse effects on national budget.

• Adopt and strictly implement disciplinary measures against ministries/ institutions or officials responsible for non-tax revenue collection who fail to transfer revenues to the national treasury or keep those revenues for spending outside national budget framework or not according to legal procedures.

• Strictly implement auditing and inspection on non-tax revenue management of all ministries/departments and related public enterprises.

294. Enhancing public financial management is crucial for the strengthening good governance, and therefore, the RGC has formulated a clear vision of public financial management (PFM), and the steps necessary toward the achievement of the vision. The PFM reform program is built upon four sequenced and prioritized platforms: (i) a more credible budget; (ii) effective financial accountability; (iii) the RGC policy agenda becomes fully affordable and prioritized; and (iv) RGC managers become fully accountable for program performance. As part of the PFM reform, the RGC will pilot a merit-based initiative and embark on the organizational change of the Ministry of Economy and Finance to support the reform efforts. The RGC strongly welcomes the "Sector Wide Approach - SWAP" that has been discussed and agreed with development partners to implement the reform program. This will provide an opportunity for Cambodia to play as an equal partner and especially enables the Ministry of Economy and Finance to bring together good strategies and experience from development programs and various strands of its ongoing improvement and reform efforts and to reformulate them into an integrated and consolidated PFM reform program for higher accuracy, effectiveness, and efficiency.

CAMBODIA’S INTEGRATION INTO THE REGION AND THE WORLD

295. As stated in the Rectangular Strategy, the Royal Government will continue to push for the integration of Cambodia into the region and the world, specifically focusing on bridging the development gaps among the member-countries of the Association of South East Asian Nations by promoting full partnership in the implementation of the various elements of the Initiative for ASEAN Integration as adopted by the ASEAN Summits, in particular the measures and projects adopted by the 8^th ASEAN summit in November 2002 in Phnom Penh.  The Royal Government will also continue its active participation in the implementation of Greater Mekong Sub-region Program, especially the flagship programs adopted by the 1^st Summit of Greater Mekong Sub-region Program in Phnom Penh in November 2002 and the projects under “the Development Triangle Zones” between Cambodia, Viet Nam and Lao PDR and "the Development Triangle Zones" between Cambodia, Lao PDR and Thailand, and the “Economic Cooperation Strategy” among Cambodia, Lao PDR, Thailand and Myanmar.  To maximize the gains from international integration, Cambodia must strengthen its institutional capacity to implement cooperative strategies with neighboring countries such as the concept of “Four Countries-One Economy”, the creation of the triangles for economic growth and the establishment of cross-border Economic Processing Zones.

296. There is worldwide recognition that free trade significantly contributes to the reduction of poverty and improvement of the living standards of the people. Thus the Royal Government will continue to liberalize trade and ensure free flow of goods and services both within the country and between Cambodia and other key partners in the region and the world.  Increasing the unfettered access of Cambodian products to the regional and world markets will provide Cambodia with economy of scale and opportunities that attract investment, create employment, generate increased incomes and accelerated economic growth that result in poverty reduction. Indeed, Cambodia's participation in the ASEAN Free Trade Area and accession to the World Trade Organization constitute strategic and historical steps in the rehabilitation and development of Cambodia.

297. The Royal Government will strictly implement its obligations under the World Trade Organization, recognizing that Cambodia's membership in the WTO requires great efforts in the formulation, adoption and the implementation of laws, regulations, procedures and methodology for valuation, assessment report on the effects of trade protection, studies on rice production and agricultural markets, agricultural value chain analysis, handicrafts, pure drinking water, fisheries, factories, tourism and other labor services that Cambodia can benefit from WTO.  The Royal Government is strongly committed to using this opportunity to embark on the reforms of all sectors.

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