Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1074 Project Name Cambodia Trade Facilitation and Competit Region EAST ASIA AND PACIFIC Sector Other domestic and international trade (100%) Project ID P089196 Borrower(s) ROYAL GOVERNMENT OF CAMBODIA Implementing Agency H.E. Kem Sitham Secretary of State Royal Government of Cambodia Ministry of Commerce 20 A&B Norodom Blvd Cambodia Environment Category [ ] A [ ] B [X ] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [ ] S 2 [X] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared August 26, 2004 Estimated Date of Appraisal Authorization April 29, 2005 Estimated Date of Board Approval June 2, 2005 1. Key development issues and rationale for Bank involvement Cambodia’s vulnerabilities as a Least-Developed Country are well known. Poverty remains high at 36% of the population of 13.1 million. Around a third of this population have access to an improved water source; one third is illiterate; half of young children are underweight. The majority of the population is linked to subsistence agriculture, which has grown at less than 2% per year over the past ten years. Decades of conflict and ruinous policies destroyed the institutional fabric of civil society and commerce, and left in its place a combination of excessive regulation and absence of market institutions – including a viable legal system. Foreign direct investment has declined each year since 1997. Growth in the garment sector has been spectacular, but Cambodia is now the second most dependent country in the world on garment exports. This source of growth is vulnerable as the quota regime under which Cambodia has emerged is being dismantled. The development problem is fundamental and urgent. This situation defines a twofold challenge: to strengthen governance and increase growth. Cambodia’s National Poverty Reduction Strategy (NPRS) states that “the central objective of the Royal Government’s policy is to promote broad-based sustainable economic growth with equity, with the private sector playing the leading role.” 1 NPRS defines supporting strategies, including 1 Royal Government of Cambodia, National Poverty Reduction Strategy , February 2003. p. iv. Page 2 a pro-poor trade reforms and investment climate reforms to diversify away from GSP and strengthen the role of the private sector in public service delivery. The Royal Government has taken important steps toward these ends. Key among these were its successful bid to become the first LDC to be invited to join the World Trade Organization. Cambodia’s Protocol of Accession commits the country to low bound tariffs (30% for agriculture and 18.2% industry), phased implementation of TRIPS, TRIMS, TBT and opening key service sectors, and use of WTO trade mechanisms in exchange for MFN treatment by all members. Further gains have been achieved through ASEAN – including China Early Harvest. However, without also addressing “behind the border” investment climate constraints, the extent to which market access can be converted to productivity and employment gains is sharply limited. The Bank’s recent dialogue on private sector development has resulted in a report and reform strategy, Seizing the Global Opportunity 2 , building on the Integrated Framework, 3 Value Chain Analysis 4 and Investment Climate Survey. Among the factors identified that contribute to low productivity were extremely high incidence and cost of bribe payments that result from poorly designed and overlapping regulatory processes and contribute to informality. These are most acute in trade facilitation, inspections and entry processes. The report further identified that: a) the productivity of agro-industry –a sector that has the potential to achieve the broad- based employment gains sought – are impeded less by excessive regulation and more by the lack of formal and informal trade-supporting institutions to reduce risk; b) the private sector’s role in service delivery – desirable primarily for its impact on the efficiency of infrastructure service delivery rather than its resource mobilization potential – is constrained by an unclear policy, legal and institutional framework that promotes closed, negotiated, uncompetitive transactions. The Royal Government clearly owns the strategy and reform plan, which has been discussed with the Government’s senior leadership since February 2004. Through Prime Minister’s Decision No. 12/2004 the Government established a Special Inter-Ministerial Task Force (SITF) on Trade Facilitation and Investment Climate, Chaired by the Minister of Economy and Finance and Vice-Chaired by the Minister of Commerce. Prime Minister Decision No 44 converted this into a permanent Steering Committee on Private Sector Development. This Committee, on 7 June 2004 defined an integrated program of reform to reduce unofficial costs, reduce clearance times increase official revenues by first viewing the process across agencies rather than in vertical silos, and then streamlining and automating processes. It determined, inter alia, to create a cross-agency Reform Team, consolidate inspection mandates across agencies and introducing selective inspections based on risk criteria, consolidate documents to a Single Administrative Document, introduce a Single Window process, reengineer and automate procedures. These are to be initiated in July 2004 be implemented on an urgent basis by December 2005. The borrower’s strategy and timeline reflects the terms of accession to 2 Cambodia: Seizing the Global Opportunity - Investment Climate Assessment & Reform Strategy. World Bank (2004). 3 Integration and Competitiveness: A Pilot Study prepared under the Integrated Framework for Technical Assistance . November 2001. 4 Towards a Private Sector Strategy for Cambodia: Value Chain Analysis. World Bank (2003). Page 3 the World Trade Organization. 5 The Reform Team was established and began its work on 9 July 2004. On 13 July 2004, the Bank received an official request for a project to finance the reform. The operation supports Cambodia’s results-based draft Country Assistance Strategy (CAS) includes a pillar on Private Sector Development. The PSD pillar includes three sub-components: Trade Facilitation, Removing Impediments to Diversification, and Transparency and Accountability. The proposed operation’s components are aligned against three results. Other donor programs in the areas covered by this project, including AusAID’s Cambodia Australia Technical Assistance Facility (CATAF) and the European Commission’s Multilateral Trade Assistance Project (MULTRAP), will be coordinated closely with the proposed operation. In addition, the overall private sector reform program will be coordinated through the proposed Technical Working Group on Private Sector Development (co-chaired by the Bank and ADB) jointly with the government to ensure overall coherence. 2. Proposed objective(s) The overall development objective is to increase the private sector’s contribution to poverty reduction through growth, export diversification and improved service delivery. The proposed operation support Cambodia’s pro-poor trade strategy by reducing the cost, time and transparency of export and import transactions and clearance processes. Improvements in trade facilitation practices are strongly correlated with increases in trade and GDP. In the short run, this would also have the effect of making the garment sector more competitive in a post-quota environment, and in the long-term contributes to diversification. Specific results sought: Cost and time required to clear import and export shipments is reduced, as measured by: · A reduction in the number of steps required to clear imports; · Reduction in the percentage of export shipments that are physically inspected or scanned; A reduction in the time required to clear export shipments; · The private sector’s estimate of the cost of unofficial payments as a share of revenues will decline; · The enabling environment facilitates integration of rural/informal firms into global economy, as measured by the number of firms seeking export opportunities; · Transparency / accountability introduced into PPI, as measured by share of PPI contracts undertaken by the Government that are publicly disclosed and subject to competitive procurement processes by June 2006. 3. Preliminary description The Cambodia Trade Facilitation and Competitiveness Project is conceived as an investment project funded by an IDA grant of USD $10 mm, paired with Government and donor resources of an estimated $2 million. It would have three components. 5 Cambodia’s Working Party Report, Page 93 Table 7 commits to achieving automation by December 2005. Page 4 · The Trade Facilitation Component , expected to require 60-80% of the resources, would finance, along with AusAID and European Commission resources, a cross-agency trade facilitation reform program agreed with the SITF on June 7 2004. Key actions to be funded include the design and implementation of a Single Administrative Document incorporating all information needs to facilitate trade; reorientation of CamControl away from mandatory inspections and toward new functions; the architectural design and implementation of a Single Window process and Customs modernization within a streamlined cross-agency procedure. · The Diversification Component, requiring 20-30% of the funds, would finance the development of (a) a program to support the penetration of Cambodian producers into international markets; and (b) a possible program to mitigate the effects of adjustment in the garment sector, which may include retraining for new activities. Building on current work by UNCTAD/ITC, options are being considered to fulfill four key gaps: pre-export financing, insurance, export plan development and market information at the producer level. · The Private Participation in Infrastructure Component , requiring an estimated 10-15% of the resources, would finance implementation of a capacity building program designed to support a revised policy framework, law and institutional roles for private participation in infrastructure. The capacity building program itself has been designed under the PSD Dialogue and is attached. Approval of the PPI Policy, Law and Subdecree by the Council of Ministers would be a potential condition to trigger the Component. 4. Safeguard policies that might apply N/A 5. Tentative financing Source: ($m.) BORROWER/RECIPIENT .2 IDA GRANT FOR POOREST COUNTRY 10 BILATERAL AGENCIES (UNIDENTIFIED) 2 Total 12.2 6. Contact point Contact: Magdi M. Amin Title: Private Sector Development Spec. Tel: (202) 458-4216 Email: mamin2@worldbank.org