COSTS, RESOURCES AND PROGRAMMING

5.01  Successful and timely implementation of NSDP strategies and achievement of NSDP targets call for substantial and well-directed additional investments and their focused, efficient and effective use. These investments would have to be made both in the private sector to sustain and increase economic activity, and in the public sector to provide impetus to growth and alleviate poverty. This chapter considers mainly the public sector in regard to:

• The levels of such investments needed during NSDP, 2006-2010, keeping also in mind the constraints imposed by the absorptive capacity of the public administrative system;

• Various sources of funds for such investments; and

• The manner, procedures and methods of programming and operationalising such investments.

5.02   Macro-Economic projections, endorsed by the IMF, envisage a steady GDP growth of 6.0% during the five-year NSDP period, 2006-2010, taking into account all the foreseeable exogenous and endogenous factors (Annex II:1). To achieve that level of growth each sector has to grow at certain projected, feasible, annual rates as at Annex II:1. To attain projected levels of sectoral growth, certain minimum (and possible) levels of "real investments" would be necessary in various sectors (Annex II:2).

Table 5:1: Levels of Investment Needed
2006-2010 (US$ million)

5.03  Investments in the private sector consist of two parts, domestic and foreign direct investment (FDI). Macro-Economic projections estimate FDI, now largely confined to the garment industry and tourism sectors, would be of the order of US$ 1,258 million during the period. But, RGC is confident that FDI could increase to a much higher level during NSDP and could be made more dynamic and diversified, to broaden and deepen coverage across sectors, to be geographically spread out, and become sustainable in the longer term. RGC will ensure that this is achieved through various administrative, legal and financial reforms already mentioned in Chapter IV to create a very conducive, competitive environment so that Cambodia becomes and grows as a safe, predictable and profitable long-term destination for such investments.

5.04  The financial sector (banking and insurance) is not yet a major partner in domestic investments though the banks do provide funds for various credits, including rural credit. Prevalence of high interest rates inhibits growth in lending. Borrowing levels from financial institutions for long-term investments are still quite low. A sizeable part of US$ deposits with the commercial banks in Cambodia is still not being fully availed of for investments within the country, some of it even going to investments elsewhere. Tapping financial sector funds to work for Cambodia's growth is therefore an important priority and would be possible by increasing demand for domestic investments.

5.05  This Chapter is about Public or Public Sector investments. The figure of US$ 2,384.60 million in Table 5:1 as public sector investments covers mainly "capital" investments or "real" investments. It represents what is "possible" but does not fully take into account all the essential "needs" in terms of social sector expenditure and others to reach CMDGs and the overall goals set in Chapter III as well as additional recurrent costs arising from new investments and incremental costs. Future "needs" in the public sector, over and above the amounts to be spent as current expenditure under annual budgets (which will tilt more towards social and other priority spending, away from defence and security) include the following:

• New capital investments and additional costs of ongoing ones.

• Additional recurring expenditures over and above normal increases on existing items (such as civil service salaries), including additional maintenance costs on new investments.

• Additional expenditure on non-capital items such as new or additional subsidies and scholarships.

• Expenditure on external technical assistance, albeit at a rapidly reducing level.

5.06 To accommodate all the essentially required expenditures to reach all the goals and targets (CMDGs in particular), the total financial outlay during NSDP period, 2006-2010, needs to be (in million US$):

5.07  Another reliable indicator of "required" expenditure is the detailed set of programmes and activities along with cost estimates contained in the three-year rolling Public Investment Program (PIP), which reflects not only the proposals of the ministries and agencies but also their absorptive capacity. Projecting the total figure of US$ 1,937.59 million estimated in the PIP, 2005-2007 and taking into consideration the need for important initiatives to be taken for accelerating the pace of progress towards the goals and targets to be reached by 2010, the total financial outlay of NSDP would need to be CR 15,225 billion equivalent to US$ 3.5 billion, coincidentally the same as derived from the macro-economic framework at paragraph 5.06 above. This amounts to about $ 700 million on an average per year, increasing progressively from 2006.

5.08  At the time of formulation of NSDP detailed programme and project proposals have not been fully developed for each sector and cross-sectoral issues. As already detailed in earlier chapters, these will be developed in the first few months of 2006, taking fully into account the overarching priorities mentioned at paragraph 4.05 of Chapter IV. Therefore, it is not possible or necessary at this stage, to arrive at precise levels of activity-wise costs. In any case, such costs would be calculated in a more detailed manner as programmes and activities are planned and resources are made available, and will be presented through successive three-year rolling PIPs.

5.09  Allocation of overall outlay: Adequate resources should be made available in a balanced, focused and targeted manner to various sectors to achieve priority goals and targets already discussed in Chapters III and IV. As stressed earlier, the major goal is to reduce poverty which calls for increased investments in rural and remote areas, where 90% of the poor live, with focus on growth in agriculture. All other productive sectors, which would drive growth, need to be assured of required resources. Priority social sectors, which help promote, consolidate and sustain human capital (which also contribute to growth over the longer-term), likewise need to be assured of adequate resources. Given these pre-requisites and in the absence of any reliable guide relating to past investments, the best possible allocations of overall resources have to be made, with emphasis on priority growth and human development sectors to accelerate general development and to achieve poverty reduction and other CMDG targets. Accordingly, RGC has determined that the total outlay of CR 15,225 billion or US$ 3,500 million envisaged for the public sector alone for the five years, 2006-2010, would be allocated as shown at Table 5.2. Some essential aspects of the table are:

• Public sector expenditure allocations are consistent with macro-economic projections.

• Such allocations are realistic in relation to overall availability of resources, viz., US$ 3,500 million (if all EDP resources are properly aligned to NSDP).

• Public sector allocations focus on and are confined to sectors and activities which have no scope of attracting private sector investment or participation.

• Given that poverty reduction is of highest priority, and poverty levels are high in rural areas, public sector outlays pay special attention to rural areas; over 60% of resources will go for the benefit of rural areas.

• Priority is attached to social and economic sectors that will have an immediate impact on reducing poverty, achieving CMDG and economic growth targets.

• The amount of US$ 3,500 million includes all amounts to be spent in the public sector (para 5.05) from all sources of funding elaborated in para 5.11 (much of it outside government budget, at present). It excludes private sector investment or participation, either partially or fully, in public infrastructure or other public sector activities through BOT or similar arrangements.

• The allocations to each sector are based on estimated needs and cater to the expected growth for reaching poverty reduction and CMDGs.

• Detailed explanations are provided as Notes under the table.

5.10    RGC recognises that there are ongoing programmes and projects, particularly those supported by EDPs, which would absorb some part of the available resources. RGC would review (through TWG mechanism, for example) all of them to see that they fall within the ambit of priorities outlined in this document. Furthermore, RGC will endeavour to ensure that the resources released through such a review and the non-committed outlays are so redirected that priority sectors get the needed share in the final allocations as in Table 5:2. For each sector, detailed plans would be made to utilize the allocations in close consultations with all relevant ministries and agencies.

Resources Available for the Public Sector 

5.11   The Royal Government is however confident that the total estimated expenditure of US$ 3,500 million in the public sector, during the NSDP period, 2006-2010, could be met from the following sources of funds:

• Surpluses (for capital investment) in the annual budgets of the government (total income, current and capital, less budget support from EDPs, and current expenditure, including debt servicing and repayment).

• Grant-Aid from traditional EDPs (bilateral, multilateral and NGOs).

• Concessional terms loans from EDPs (mainly MFIs).

• Resources from non-traditional sources, including non-traditional partners (both grants and semi-concessional loans).

• Debt relief likely to be available because of Cambodia's status as Low Income Country (LIC), thus releasing funds from debt-servicing to achieve important CMDG targets.

5.12   Based on the inflow of funds from external development partners so far, and projected annual budget surpluses, it is estimated that availability of funds for implementation of NSDP for the five year period, 2006-2010, would be as follows:

• About CR 3,370 billion or US $ 775 million or about US$ 155 million per year, from government budget current surpluses (a major goal of the government is to mobilise more domestic resources); and

• US$ 2,500 million at about US$ 500 million per year from traditional external development partners, both as loans and grants, including all amounts directly spent by EDPs on Cambodia's account.

5.13   Thus, a total of US$ 3,275 million is estimated to be available for all public sector activities of NSDP during 2006-2010, against the estimated need of US$ 3,500 million, leaving a gap of US$ 225 million. This gap would widen further if allocation and use of funds particularly from external development partners do not get fully aligned to the priorities of NSDP; in other words, if any of these get spent on non-priority items chosen by any EDP.

5.14    If projected expenditure of US$ 3,500 million in the public sector during the NSDP period takes place as envisaged, there is every expectation that the goals and targets of NSDP (poverty reduction, CMDGs, robust economic growth) could be achieved. There are two prisms (or scenarios) through which this could be viewed. First, is that the entire amount of US$ 3,500 million is made available according to priorities of Table 5.2, limiting freestanding external technical assistance (FTA) to not more than US$ 500 million. This is the minimum required and is feasible.

5.15   The second scenario is one where all EDP resources are not fully available for the purposes prioritised in the NSDP. In other words,

• FTA uses more than US$ 500 million; for instance, according to DCR 2002 and 2003 (page 20 of the main report), 44.1% of all EDP funds during 1999-2003, were spent on freestanding technical cooperation. Projecting this to US$ 2.5 bn EDP funds presently expected for NSDP period, the amount of FTA would be US$ 1.1 bn, which exceeds US$ 500 million taken into account in the NSDP by US$ 600 million; and

• Some programmes and projects undertaken by EDPs are not within NSDP priorities.

5.16   Since successful and efficient implementation of NSDP requires the amount of US$ 3,500 million to be spent in the manner outlined in Table 5.2, any excess expenditure over US$ 500 million on FTA and amounts spent on EDP projects falling outside the scope of NSDP would, to that extent, reduce the EDP resources available for NSDP. Such reduction would increase the financial gap and this would (a) either have to be made good by additional resources, or (b) achievement of NSDP targets would suffer to that extent.

5.17   There is a high level global partnership compact to help poorer countries to achieve CMDGs and to provide the needed funds for this purpose. In this spirit, RGC will strive to ensure in close collaboration with EDPs that external resources are fully aligned to NSDP goals and targets by redirecting funds away from less priority areas now receiving funds from EDPs, including significant reductions in FTA, so that 'net real transfer' of funds could take place for investments envisaged in NSDP. The most preferred mode of receiving a major share of development assistance would be increasingly through "budget support" linked to measurable qualitative and quantitative performance in each chosen sector. Such budget support would help in three ways: (a) enhance government ownership and leadership of development priorities, policies and programmes; (b) proper tracking and transparent accounting of external assistance; and (c) in-country oversight and accountability through democratic institutions for receipt and use of external funds. RGC will strive to seek EDPs' cooperation to move towards "budget support" as the most preferred mechanism for providing external support, but it is recognised that this process could take some years to develop and progress. To start with, attention has to be devoted to aligning and harmonising assistance programmes through methodologies like SWAP to achieve cohesion and synergy and avoid overlap and/or duplication. This work would be undertaken through various TWGs.

5.18   The gap of US$ 225 million represents 6.43% of the total estimated outlay of US$ 3,500 envisaged under NSDP. This gap could increase to as much as US$ 1,025 million if the scenario at para 5.15 prevails. RGC is confident that either way the gap could be made good by:

• Additional government revenues that may accrue from increased domestic revenue mobilisation efforts and possible successful exploitation of the country's oil and gas reserves.

• Additional funds from EDP countries as part of redeeming their commitment to achieving global MDGs by significantly increasing development assistance targets to approach 0.7% of their national GDPs (viz., Monterray Declaration, 2002), especially given Cambodia's status both as an LDC and as a pilot country for harmonisation and alignment.

• Resources from non-traditional EDPs.

• Funds released through possible debt relief.

5.19    Cambodia receives external aid both as loans and as grants but being a Least Developed Country (LDC), it cannot afford to incur such loans, however concessional they may be, since it cannot burden its future generations to repay such loans. RGC prefers therefore to:

• Receive external assistance as much as possible mostly in the form of "grants", to be used for all social sectors, and for innovative direct funding at grass-root levels; and drastically reduce the share of funds received for technical assistance, surveys, and such;

• Reserve use of loans, as much possible in concessional form or semi-concessional form -- the latter in a sparing manner, for mainly capital expenditure only in infrastructure creation, or high priority, clearly measurable, high yield or income or revenue generating programmes.

Programming: NSDP, PIP and Annual Budget

5.20   The financial allocations made for various sectors under NSDP (Table 5.2) are broad directions or indications for moving forward. In order to become operational, they have to be further broken down into clear proposals for specific capital and current expenditure on an annual basis. For this purpose, the existing three-year rolling Public Investment Programme (PIP) mechanism will be used to identify, plan, phase and cost estimate specific activities every year for the next three years. PIPs therefore form an integral part of the NSDP. In preparing inputs for PIPs, each sector and sub-national level will clearly bear in mind the overall goals to be reached and the clear targets set in the NSDP. In preparing the PIP every year, based on inputs from various sectors and sub-national levels, the central agencies will ensure that the PIP follows the directions, emphasis and orientation in terms of investment outlays, contained in the NSDP as revised from time to time. Proposals or projects not in conformity with or not compatible with NSDP will not be accorded any priority in the PIP.

5.21   As earlier mentioned EDPs would be strongly and repeatedly urged to ensure that they do not take up on their own, or support, programmes or projects, which are not a priority under the NSDP. This will be ensured through the processes of cooperation outlined in the new Strategic Framework for Development Cooperation Management now under finalisation. However, it is recognized that programmes and projects that have already commenced would have to run their course. But, as already stated, even in those cases every effort would be made to review and redirect the programmes or projects towards the priorities of NSDP.

5.22   RGC will ensure that the Medium Term Expenditure Framework (MTEF) and annual budget expenditure allocations are synchronized with NSDP allocations, goals and targets as well as PIP framework (which in its turn would be aligned with NSDP allocations and targets). Thus on a step-by-step basis NSDP goals, targets and overall allocations, as revised from time to time, would guide, direct, and influence PIPs and annual budgets.

5.23   NSDP will be ready in its final form towards the end of 2005. Since the next aid-mobilisation meeting with EDPs will take place only in March 2006, the PIP for 2006-2008 to be presented at that meeting will be made consistent with the priorities outlined in this NSDP document. However, the annual budget for 2006 would be ready by December 2005 leaving no time for achieving clear coherence with NSDP and PIP. But it is recognized that budget expenditure proposals are likely to be generally in the direction proposed in NSDP, albeit with some slight differences in emphasis. Full synchronization among NSDP, PIP and annual Budgets would be ensured from mid-2006 onwards. RGC's four key central agencies shall be in regular mutual contact and ensure that this is achieved. In doing so, they would look at the whole picture for each sector and use budgetary outlays through policy based budgets, not as stand-alone allocations but as complementary inputs into externally supported programmes.

5.24  The NSDP and accompanying PIP for 2006-2008 will be presented as the main RGC documents for the planned aid-mobilisation (CG) meeting to be held in March, 2006.  In the following years, the annual progress report on NSDP implementation and the updated PIP will form the main documents for such aid-mobilisation meetings.

5.25  Through high level international declarations at Rome and Paris, all EDPs have committed to align their future assistance programmes to the priorities and plans developed under the leadership and ownership of recipient countries. To begin this process of alignment, which would evolve over a period of time, RGC will request EDPs, starting from the aid-mobilisation meeting of March 2006, not only to indicate the bulk amount they would pledge as assistance to Cambodia, but also to specify: (a) the amounts they would earmark for each sector in conformity with NSDP allocations; (b) to the extent possible, the kind of programmes or projects that they would support along with financial allocations for each; (c) the amounts to be spent on ongoing programmes or projects; (d) fresh funds available for new ones; and (e) the free standing technical assistance component of the total.

5.26   As already mentioned, NSDP has to be a live, dynamic and flexible guiding tool, capable of being adapted and adjusted to emerging data and circumstances. The output and outcome results on key goals and targets will therefore be regularly monitored and evaluated to guide annual adjustments in NSDP. The methodology and procedures for the same are explained in the next chapter (VI).

| Content | Back | Top | Next |

Home | 8^th CG Meeting | 7^th CG Meeting | Partnership and Harmonization TWG | GDCC | Policy Documents Guidelines | Donor Dev. Coop. Pgm. | NGO