CHAPTER V
FINANCING THE NSDP THROUGH PIP 2006-2008

147.  An important priority of RGC's first Action Plan on Harmonization and Alignment, that was agreed to with development cooperation partners just before the last CG Meeting, was the preparation of a single National Strategic Development Plan (NSDP) for 2006-2010 to, inter alia, enable development partners to align their programs and projects with Cambodia's development priorities. The NSDP has been prepared through an extensive consultation process involving all stakeholders. The NSDP is a live document that will be adjusted and updated annually based the annual monitoring and evaluation exercises.

148.  The implementation of the strategies and policies outlined in the NSDP will be achieved through a focused and prioritized Public Investment Program (PIP) which is one important instrument to implement these strategies and policies. The PIP, adopted by the Royal Government of Cambodia on 27 January 2006, has been formulated within the framework of a three‑year rolling plan to capture priority proposals and needs on an on-going basis. The programs and projects that constitute the public investment program will be financed both from the National Budget and with assistance from development cooperation partners. From now on, the National Budget will be aligned to support the implementation of NSDP through financing of the PIP. The PIP is comprised of Government’s priority programs that are being implemented and/or are planned to be implemented in various sectors and constitute the basic information for the allocation of national budget resources as well as for the mobilization of development cooperation resources.

149.   Successful and timely implementation of NSDP strategies and achievement of NSDP targets would need substantial and well-directed additional investments and their focused and effective use. Such investments are needed in both the public and private sectors.

150.   Under the Multilateral Relief Initiative, the IMF Executive Board made a decision to provide debt relief to Cambodia at its meeting in December 2005. As part of this initiative, the IMF will cancel 100 percent of Cambodia's borrowing from the IMF up to 1 January 2005 that amounted to US$ 82 million. The Royal Government's sound track record of prudent management of the economy was an important contributing factor in IMF's decision. the Royal Government will use the resources that will become available because of this relief to finance the implementation of the NSDP. The Royal Government is currently in the process of strengthening its public debt management system. The outcome of the negotiations on the rescheduling of loans with the governments of the United States and Russia that were delivered in the 1970s and 1980s is likely to increase the debt service burden on the limited budget resources of Cambodia. To optimize the benefits of the ODA for the people of Cambodia and to minimize the burden on future generations, the Royal Government encourages development cooperation partners to consider financing through grants to support the implementation of the NSDP priorities and policies. The use of loans will be made only in those cases where it has been established that resources from grant aid are not available and that the proposed program or project will contribute to investments that will ensure a quick return and accelerate economic growth. In all cases, the implications of each new loan will be carefully examined, including its impact on macro-economic stability, before acceptance of the loan. Loan assistance may be considered in case of:

• infrastructure development programs and projects that can produce large impact on national economy and have a high internal rate of return on investment; and

• areas that help generate and promote external sector transactions that enhance the foreign exchange earnings capability.

In the case of large programs and projects that require feasibility studies or other pre-investment analysis that are being considered for financing through loans, such work will be financed through grant aid. The Royal Government shall:

• stop use of loans for studies not directly related to investment programs/projects; and

• minimize expenditure on consultants and foreign experts out of loan assistance.

151.  Based on projections of economic growth and gross investments needed in the public sector, it is estimated that US$ 3,500 million will be needed for the public sector during 2006-2010 to achieve the goals and targets of the NSDP. Within this envelope, priority attention given to ensure a rural focus for poverty alleviation and allocations for activities which will benefit rural areas directly.

152.  The resources to implement the NSDP will come from: (a) surpluses in the current account in the annual national budget: (b) grant aid from traditional development partners; (c) concessional loans from multilateral financial institutions (MFIs); (d) resources from non traditional partners including for very high return and strategic programs and projects using ordinary capital resources (OCR) from MFIs; and (e) funds that could become available from possible debt relief. A high priority of the Royal Government is to direct resources in a meaningful way to "real investments", including through significant reductions in technical assistance projects, and to persuade development partners to fully align their assistance with NSDP priorities.

153.  The Royal Government has been proactive in putting in place a government-donors coordination mechanism to enhance aid effectiveness and to ensure that the use of official development assistance (ODA) is being made to optimize its benefits for the people of Cambodia in a transparent and accountable manner to achieve the goals of the NSDP. The joint sector/thematic Technical Working Groups (TWGs) and the high level Government-Donors Coordination Committee (GDCC) that have been operational for just over a year provide both the Royal Government and the development partners a forum to jointly review progress for the first time on a quarterly basis and to take corrective actions to ensure that the ODA is being used to implement the programs and projects outlined in the PIP 2006-2008 to achieve NSDP priorities.

154. The 2006-2008 PIP takes into account all the on-going and committed projects for which data is available. High priority pipeline projects submitted by various line ministries and agencies have been accommodated to the extent possible within the overall ceiling of allocations made in the NSDP. In some cases, bulk allocations have been indicated for high priority programs and projects that will be developed for the respective sectors to implement the strategies outlined in the NSDP. It is envisaged that most of the high-priority pipeline projects would need funding support from development cooperation partners. The Royal Government does not encourage development cooperation partners to provide support for any programs and projects that are not included in the PIP. The PIP for 2007-2009 will be completed by the end of 2006.

155.  Total financial outlay envisaged for the three year period, 2006-2008 is US$ 1,975 million or about 56.5% of the total outlay of US$ 3,500 million expected to be spent during the NSDP period, 2006-2010. The sector distribution of the planned expenditure on programs and projects in the PIP 2006-2008 is in line with the target sector allocations of the NSDP (Table A). Over 80 percent of Royal Government's committed resources are allocated for the social sectors. However, in addition to the resources already committed by the Royal Government and the development partners for these programs and projects, the allocation of new resources to be mobilized, US$ 563.4 million for 2006-2008, would need to be as follows:

• US$ 189.8 million or 33.7 percent for Infrastructure sector.

• US$ 171.7 million or 30.5 percent for economic sectors.

• US$ 129.7 million or 23.0 percent for Services and cross sectoral Programs.

• US$ 72.2 million or 12.8 percent for the social sectors.

156.  In terms of the composition of PIP programs and projects, nearly 82 percent of the resources will be needed to support the on-going and committed programs and projects and only just over 18 percent will be available for new high priority pipeline development programs and projects (Table 5). Just under 25 percent of the committed resources of development partners for the next three years are planned for technical assistance. However, resources to be mobilized over the next three years will need to focus on reducing the technical assistance component to less than 15 percent of total new resources to be mobilized.

157.  In terms of the distribution of on-going and committed programs and projects, and high priority new programs and projects in each sector:

• in the social sector, the on-going and committed programs and projects account for nearly 98 percent of resources allocated to this sector;

• in the infrastructure sector the on-going and committed programs and projects account for nearly over 81 percent of resources allocated to this sector; and

• in both the economic sector and the services and cross sector programs, the on-going and committed programs and projects account for just over two-third of the resources are allocated to these sectors.

158.   Over the last three years, from 2003 to 2005, disbursements were US$ 539.5 million in 2003, US$ 553.7 million in 2004, and the preliminary indications are that disbursements in 2005 were around US$ 525 million. The RGC is gratified by the support of its development cooperation partners and hopes that they will continue to provide their support to enable Cambodia to achieve its goal of reducing poverty among its people.

159.  The total cost of the Government’s planned development programs, both on-going and new programs, over the next three years (2006-2008) is estimated to be around US $ 1,975.0 million. The Royal Government of Cambodia has committed from its own resources US $ 350.0 million for these development programs. Thus, the total requirements for additional resources over the next three years will be US$ 1,625 million that averages to US$ 541.7 million per annum. Some of our multilateral and international development cooperation partners have already committed to provide US$ 1,117.3 million. Therefore, a gap of US $ 563.4 million in the financing of these development programs remains at the present time for which the RGC is seeking additional support from its traditional and non-traditional development cooperation partners.

TABLE 5: DEVELOPMENT PROGRAMS AND PROJECTS BY SECTOR: PIP 2006-2008
(Amounts in thousands of US$)

Total Cost of Programs
and Projects
2006-2008

334

100.0%

  ۰ Capita Investments

85.35%

14.65%

100.0%

355,677

  ۰ Capital Investments

197

14.65%

85.35%

56,637

15.92%

100.0%

394

85.02%

223

14.98%

24.95%

81,760

14.51%

SECTOR

Planned Development Programs Cost in

Committed Resources

ODA Resource Mobilization Target

2006

2007

2008

2006-2008

Govt.

External Partners

$

%

SOCIAL SECTORS

 ۰ On-going & Committed project

157,070

204,882

291,904

653,856

97.81%

237,681

358,141

58,034

 ۰ Pipeline Projects

4,777

5,506

    4,328

14,611

2.19%

234

200

14,177

Total: Social Sectors

161, 847

210,388

296,232

668,467

100.00%

237,915

358,341

72,211

ECONOMIC SECTORS

 ۰ On-going & Committed Projects

126,505

108,227

85,081

319,812

68.08%

23,345

273,543

22,924

 ۰ Pipeline Projects

  35,805

47,254

66,874

149,933

31.92%

1,111

-

148,822

Total: Economic Sectors

162,310

155,481

151,955

469,745

100.00%

24,456

273,543

171,746

INFRASTRUCTURE

 ۰ On-going & Committed Projects

165,132

153,809

128,210

447,151

81.17%

25,073

336,003

86,076

 ۰ Pipeline Projects

22,880

36,141

44,703

10,724

18.83%

-

-

103,724

            Total: Infrastructure

188,012

189,950

172,913

550,875

100.00%

25,073

336,003

189,800

SERVICES & CROSS SECTORAL PROGRAMS

 ۰ On-going & Committed Projects

71,425

63,545

60,579

195,549

68.39%

6,877

147,968

40,703

 ۰ Pipeline Projects

16,406

30,636

43,322

90,363

31.61%

-

1,410

88,954

Total: Cross Sectoral Programs

87,831

94,181

103,901

285,912

100.00%

6,877

149,378

129,657

TOTAL: ALL PROGRAMS

 ۰ On-going & Committed Projects

502,132

530,463

565,773

1,616,369

81.84%

292,976

1,115,655

207,737

 ۰ Pipeline Projects

 79,868

119,537

159,227

358,631

18.16%

1,345

1,610

355,677

TOTAL

600,000

650,000

725,000

1,975,000

100.00%

294,321

1,117,265

563,414

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