Report No. 32784-KH Cambodia Rural Sector Strategy Note Towards a Strategy for Rural Growth and Poverty Reduction June 20, 2005 Rural Development and Natural Resources Sector Unit East Asia and the Pacific Region Document of the World Bank Abbreviations and Acronyms AAA Analytical and Advisory Services DFlD Departmentfor International AAC Annual allowable cut Development (UK) AAIEP Advisroy Assistance to Industryfor DoF Department of Fisheries Export Promotion EBA "Everything But Arms" EU Initiative ADB Asian Development Bank EC European Community ADESS Agricultural DevelopmentSupport ECHO European Commission to Seila HumanitarianOffice AEW Agricultural ExtensionWorker EEZ Exclusive Economic Zone AFD Agence Franqaisede EMT Ennatien Moulethan Tchonnebat Developpement ("Local rural credit") AIC Agricultural Inputs Company ESSP EducationSector Support Program AQlP Agriculture Quality Improvement EU European Union Project FA0 Foodand Agriculture Organization AMK Angkor Microfinance Kampuchea FDI Foreign District Investment APlP Agriculture Productivity FINNIDA Department of International ImprovementProject Development Co-operation AQlP AgricuIture Quality Improvement (Finland) Project FRMR Fundfor the Repair and ARD Agriculture and Rural Development Maintenanceof Roads AusAlD Australian Agency for International FWUC FarmerWater User Community Development GDP Gross Domestic Product ASDL Agriculture Sector Development GRET Groupe de Recherche et Loan (ADB) d'Echanges Technologiques ASEAN Association of South East Asian GTZ Deutsche Gesellschaft fur Nations Technische Zusammenarbeit BAMS Bureauof Agricultural Materials GmbH and Standards ha hectare(s) CAEEP Cambodia-AustraliaAgricultural IMF International Monetary Fund Extension Project (CAAEP) IFAD International Fund for Agricultural CAR Council of Administrative Reform Development CARD1 CambodiaAgricultural Research IFAPER Integrated Fiduciary Assessment and Development Institute and Public Expenditure CAS CountryAssistance Strategy IFSR Independent Forestry Sector c c s Commune Councils Review CDC Council for the Development of IMF International Monetary Fund Cambodia IP Indigenous People CEDAC Centre d'Etude et de IPM Integrated Pest Management DeveloppementAgricola IRAM lnstitut de Recherches et Cambodgien d'Applications des Methodes de ClAP Cambodia IRRl Australia Project Developpement ClDA Canadian International IRCC Institutefor Rubber Research of DevelopmentAgency Cambodia CLP Councilfor Land Policy IRRl International Rice Research CDRl Cambodia Development Resource Institute Institute JlCA Japan International Cooperation COM Council of Ministers Agency CSES Cambodia Socio Economic Survey LADIT Landlessness and Development ClSF CommunelSangkat Fund InformationTool DAE Departmentof Agricultural LASED LandAllocation for Social and Extension Economic Development DANIDA Danish International Development LBAT Labor-based appropriate Assistance technology DAO DistrictAgricultural Offices LIL Learning and Innovation Loan ODA Officialdevelopmentassistance LMAP Land Managementand p.a. per annum Administration Project PAP PriorityAction Program MAFF Ministry of Agriculture, Forestry PDAFF ProvincialDepartmentof and Fisheries Agriculture, Fisheriesand MEF Ministry of Economyand Forestry Finance PRASAC II Programme de Rehabilitation et MDG Millennium DevelopmentGoal d'Appui au Secteur Agricole du MFI Micro-Finance Institution Cambodge, Phase II (EU) MFO Micro Finance Organization PRDC Provincial Rural Development MIME Ministry of Industry, Mines and Committees Energy PRlP Provincialand Rural MLMUPC Ministry of Land Management, InfrastructureProject Urban Planning and Construction PSlA Povertyand Social Impact MOC Ministry of Commerce Assessment MOE Ministry of Environment RDB Rural Development Bank MOEY Ministry of Education,Youth and RGC Royal Government of Cambodia sports RILGP Rural Investmentand Local MOI Ministry of Interior Governance Project MOWVA Ministry of Women's and RPO Rural Producers Organization Veterans' Affairs RPRP Rural Poverty Reduction MOWRAM Ministry of Water Resourcesand Program (IFAD) Meteorology RSSN Rural Sector Strategy Note MPWT Ministry of PublicWorks and SAC StructuralAdjustment Credit Transport (World Bank) MRC Mekong River Commission SEDP Socio-Economic Development MRD Ministry of Rural Development Plan MTEF Middle-Term Expenditure SlDA Swedish International Framework DevelopmentAgency NAHPIC NationalAnimal Health and SME Small and Medium Enterprise Production Investigation Center TA Technical Assistance NBC National Bank of Cambodia TWG TechnicalWorking Group NCDM National Committeefor Disaster UNDP United Nations Development Management Program NDMP National Disaster Management UNESCAP United Nations Economicand Policy Social Commission for Asia and NGO Non-GovernmentalOrganization the Pacific NIS National Institute of Statistics VAHW Village Animal HealthWorker NPRS National Poverty Reduction WHO World Health Organization Strategy WTO World Trade Organization O&M Operationsand Maintenance Table of Contents FOREWORD ACKNOWLEDGEMENTS EXECUTIVE SUMMARY .................................................................................................. i PART I: PRO-POOR DEVELOPMENTAND GROWTH: THE CENTRALITY OF RURAL DEVELOPMENT ............................................................................................................................................. 1 PAST GROWTH HAS NOT LED TO SIGNIFICANT POVERTY REDUCTION .............................................................. 1 RURALLIVELIHOODS ARE LIMITED BY LACKOFOPPORTUNITIES AND VULNERABILITY ................................. 2 MANAGEMENT OF LAND AND NATURAL !7ESOURCES IS UNDERGOING DRAMATIC CHANGES .......................... 5 THEPERFORMANCEOF THEAGRICULTURE SECTORHAS BEENDISAPPOINTING.............................................. 7 BASICSERVICESAND INFRASTRUCTUREARE CRITICALLY LACKING............................................................ 11 PART II: CATALYZING RURAL DEVELOPMENT KEY ELEMENTS OF A PRO-POOR - AGRICULTURE AND RURAL SECTOR DEVELOPMENT STRATEGY ............................................ 15 IMPROVING MANAGEMENT OF AND ACCESSTO PRODUCTIVE NATURAL RESOURCE ASSETS ......................... 16 Land administration and management reforms ..................................................................................... 16 ................................................................................................ 23 .................... BRIDGING GAPINACCESSTO SUPPORTINGSERVICESAND INFRASTRUCTURE....................................... Definingprograms to i THE 58 Infrastructure services development in rural areas ........................................................ Expandingfinancial services in rural areas .......................................................................................... 61 Ensuring access to and quality of rural social services ........ ............................. 63 PART Ill: DELIVERING RESULTS AND NEXT STEPS ........................................................................ 67 STRENGTHEN LINKSTO SUPPORTIVE CROSS-SECTORALAGENDAS ............................................................... 67 Public resources management ................... ...................................................................................... 68 Decentralization and local governance ..................... Legal andjudicial reform. andfighting corruption ..................................................... Private sector development and the non-farm rural economy ............................................................... 73 CONCENTRATEON KEY PUBLIC SECTOR ROLES ............................................................................................ 76 COORDINATION NEEDS, INCLUDINGOF DONOR SUPPORT ............................................................................. 77 NEXT STEPS ............................................................................................................................................... 80 ANNEX 1 CAMBODIA'S MILLENNIUM DEVELOPMENT GOALS 83 ANNEX 2 FARMING SYSTEMS 85 ANNEX 3 MAPS ... ................................................... ............................................................................................................... .......................................................................................................................................... 89 REFERENCES .............................................................................................................................................. 93 LIST OF TABLES Table 1. Sector contribution to GDP and employment ...................................................................................... 1 Table 2.Average percentage share o f different sources o f income intotal householdincome inrural areas by 3 Table 3. Cambodia-Estimates o f Land Tenure/Use, 2004 ................................................................................ quintile ............................................................................................................................................................... 7 12 Table 5 Approved Investment (US$tsd) ......................................................................................................... Table 4 Infrastructure services coverage: Comparison with neighboring countries ....................................... .. 13 Table 6. Characteristics o f agricultural technologies andprivate sector incentives to provide them ..............47 Table 7.Returns o f agricultural public investments and impacts on poverty reduction inChina and India ....69 Table 8 .Areas inwhichcross-sectoral reforms affect the rural economy: Selectedexamples ....................... 76 LIST OF BOXES B o x 1. Summary findings and recommendations from Cambodia's Gender Assessment Study....................... ............................................................................... 5 6 B o x 3 Status o f economic and social infrastructure services inrural areas .................................................... Box 2 Results o f the WFP FoodEconomy Zones analysis .. 12 B o x 5. K e y public expenditure management issues inagriculture .................................................................. B o x 4. Challenges o f large-scale irrigation development inCambodia................................... i....................... 37 44 B o x 6. K e y constraints to Cambodianagricultural trade development............................................................ 50 B o x 7.Improvingthe predictability of contracts ............................................................................................. 73 B o x 8. Lessons from recent reviews o f external assistance............................................................................. 79 LIST OF FIGURES Figure 1 Average agricultural sector growth rate . ................................................................... 8 Figure 2. Average yields in2001 intonslha ............................................................................. 9 *** Foreword Recoveringfrom three decades of conflict, over this last decade, Cambodia has undergone dramatic economic, political, and social transitions. Cambodia experienced rapid institutional changes as it restored peace, moved from a centrally planned to a market-oriented economy, and moved from isolation to regional and global integration. Inthis context, the 2002 and 2003 local and national elections, the sustained 6 percent economic growth rate o f the last decade, and the accession to the World Trade Organization constitute major achievements. Cambodia has achieved political and macroeconomic stability and has initiated key structural reforms. Nevertheless, Cambodia's economy remains vulnerable, and economic growth has not translated into widespread poverty reduction. With a GDP per capita o f US$280 and social indicators showing little progress since the 1960s, Cambodia remains one o f the poorest countries inthe world. The legacies o f war-the losses inphysical and social capital, depleted human capital, and the remaining land mines-will continue to challenge the country's overall development inthe short and medium terms. In addition, the country's small and open economy i s faced with the challenge o f establishing institutions and infi-astructure that will allow it to realize the benefits and mitigate the risks o f regional and global integration, in an increasingly competitive regional environment. To a great extent,progress will depend on achievements in rural areas. Ninety percent o f Cambodia's poor live inrural areas. Over the last decade, gaps betweenrural and urban areas have deepened, and little progress on overall poverty reduction has been made. Thus, the general consensus i s that more inclusive growth and progress on poverty reduction will depend largely on addressing the key constraints faced by the rural economy. The government's National Poverty Reduction Strategy (NPRS, 2003-2005) recognizes the need to deepen and accelerate reforms and to focus the limited resources on four pillars: agriculture and rural development, education, health, and infrastructure. Although both the government's Second Socioeconomic Development Plan (SEDP 11, 2001-2005) and NPRS have identified general priorities for the rural sector, more work i s needed to develop concrete programs to revitalize the rural economy. T o maximize impact, these plans needto start with a clearer and more strategic articulation o f priority actions that linkreforms and investments to available resources, improte the focus on outcomes and results, and strengthen the coordinationbetweenamong stakeholders. The WorldBank was asked to contribute to thisprocess throughfurther analytical work, in particular by articulating its proposals in a Rural Sector Strategy Note (RSSN). The first phase of the work led to the preparation o f a draft Note (March 2003-March 2004). The second phase (March 2004-May 2005) enabled the government, donors, and other partners to discuss the draft Note and led to the preparation o f this document as a contribution to the ongoing dialogue around strategic priorities to develop rural areas and specific actions to reach agreed results. The purpose of this Note i s to provide a broad framework to explore options for Cambodia's future directions for rural development with the government, donors and other development partners. In addition, this Note informed the preparation o f the World Bank's new Country Assistance Strategy (CAS), which was developed as a joint exercise with the Asian Development Bank (ADB) and the United Kingdom's Department for International Development (DFID).The Note provides a profile o f existing conditions inthe rural sector, and highlights areas for priority attention to achieve broad-based and healthy growth rates sufficient to enable the rural sector to continue contributing significantly to i - i a l and non-rural incomes and employment. The note is organized in three mainparts. Part i provides an overview o f the performance of Cambodia's rural economy. Part IIreviews the key issues affecting the rural sector and proposes elements o f a pro-poor agriculture and rural development strategy. Part III discusses cross-cutting issues affecting the delivery o f results, as well as proposals for follow-on activities to this Note. Acknowledgements This report was preparedby a team ledby Marianne Grosclaude, and consisting o f Louise Scura and Stephen Mink,with contributions from Wael Zakout, Malcolm Childress and Keith Bell (land), William B. Magrath and Peter Jipp (forestry), Douglas Olson and M e i Xie (water management), Idah Pswarayi-Riddihough (natural hazard management), Ronald Zweig (fisheries), Steven Schonberger (natural resource management), Andrew Goodland (agribusiness, off-farm rural employment), Philippe Boyer (agriculture), Christina Malmberg Calvo (rural infrastructure), and Richard Burcroff. Steven Schonberger and Mudita Chamroeun facilitated the consultation process in Cambodia, with the help o f James Brew (IFC) as regards the private sector. The team was supported by Evelyn Bautista-Laguidao and Cecilia B. Tan-Yap in Washington DC, and Amara Khiev inPhnom Penh. Background papers for the report were prepared by Kent Helmers, John Gibson and Pia Wallgren (sources o f income o f rural households), Olga Torres (rural finance), Peter Millington (water management), Joseph Emstberger and Liu Xueming (sources of growth), Christian Castellanet (agricultural extension), Bruno Vindel and Emmanuel Pousse (deconcentration o f agricultural services). The report benefited from comments fiom its peer reviewers: Gershon Feder (DECRG), Dina Umali-Deininger (SASAR) and Louise Bevan (Consultant), and fiom detailed comments from Kazi Mahbub Al-Matin, Chorching Goh (EASPR), Magdi Amin (EASFP), Imogene Jensen (EASTR), Luiz Tavares (EASUR), Gillian Brown (EACTF), Glen Morgan (EASES), Rebecca Sekse (EASEG), Chandrasekar Govindarajalu (ENV), Rohit Khanna (ENVGC), Eric Haythome (LEGPS), Zhi Liu (EASIN), and James Brew (IFC). Helpful guidance was also received from Nisha Agrawal (Country Manager, EACSF), Homi Kharas (Sector Director, EASPR), Mark D. Wilson (Sector Director, EASRD) and Hoonae Kim(Sector Manager, EASRD). The team extends its thanks to H.E. Keat Chhon, Sr. Minister o f Economy and Finance, and H.E. Hang Chuon Naron, Secretary General of the Ministry o f Economy and Finance, who supported and coordinated the consultation process with govemment agencies and other stakeholders; and to H.E. Chan Tong Yves, Secretary o f State, Ministry o f Agriculture, Forestry and Fisheries, H.E. Im Chhun Lim, Minister, Ministry o f Land Management, Urban Planning and Construction, H.E. Sok Siphana, Secretary o f State, Ministry o f Commerce, H.E. Veng Sakhon, Secretary o f State, Ministry o f Water Resources and Meteorology, and H.E. Ly Thuch, former Minister, Ministryo f RuralDevelopment, for the time they devoted to collect andprovide feedback on behalf o f their respective ministries. W e would also like to acknowledge valuable comments and contributions from govemment agencies in Fhnom Penh and in provinces, from the donor community, including those received through the joint Government-Donors Technical Working Groups, and from the many representatives o f the private sector, research institutes and NGOs, who contributed their views and feedback on the initial drafts. The document has been edited by Alicia Hetmer, and a Khmer translation, available on the World Bank Group's website (http://www.worldbank.org/easrd),has been prepared by Tia Savora. Executive Summary Profileof ExistingConditions and a Vision for RuralDevelopment 1, While Cambodia's economicgrowth has been moderatelystrong over thepast decade, this growth has been concentrated in urban areas and in a few, vulnerable activities. The Cambodian economy has signs o f fundamental weaknesses: the base o f growth i s narrow and i s concentrated in the manufacturing and tourism sectors, which accounted for much o f the growth since 1993. The rural-urban income gap i s widening due to the urban bias o f the growth to date and the slow growth in rural incomes. Agriculture, which i s focused predominantly on subsistence rice production, has experienced relatively modest growth, with productivity o f land and labor well below regional comparators. Nonetheless, the broader agriculture sector, including direct harvesting o f natural resources such as fish and forest products, i s still Cambodia's single most important source o f employment and livelihoods for approximately 70 percent o f the country's population. However, current trends indicate that the sector's ability to continue to contribute in this manner i s limited, and the amount o f new employment outside agriculture generatedby the growth in the manufacturing and tourism sectors has been very limited. 2. A robust rural economy and the income growth and employment that it will generate are paramountfor the achievement of Cambodia's economic and social goals. Cambodia continues to experience rapid population growth and weak absorption o f labor by other economic sectors. These two factors combine to indicate that rural population growth will continue, at least in the short and medium terms, to need to find productive engagement largely in rural activities. If population growth continues at approximately 2.5 percent annually, and rapid growth in employment opportunities outside the agriculture sector does not occur, most o f the 250,000 people joining the workforce each year will have to be supported by the broad agricultural sector, including harvestingnatural resources. Given the limited alternative economic opportunities, one important corollary will be increased pressure on the land, forest, and fishery resource base as rural households seek their livelihoods. 3 . Cambodia is one of the two countries in the region (together with Lao PDR) in which the agriculture sector represents the largest share both GDP and employment. Nonetheless, the performance of Cambodia's agriculture sector has been disappointing. Its agricultural growth lags behind that o f neighboring countries, and significant productivity gaps separate Cambodia from other major agricultural producers and exporters in the region. While the government intends to rely on private sector investments and agriculture as the two engines o f economic growth, Cambodia i s poised to enter the WTO at a time that its agricultural exports and private investments in ago-industries have been decreasing over the past years. 4. Rural livelihoodsface numerous and high risks that limit rural incomes. The result is the predominance of subsistence agriculture and dependence on common property natural resources, especially for the poorest households. Rural households operate in a risky environment in which the incidence o f shocks and crises-floods; crop and animal losses through disease; health crises; and land grabbing by powerful groups or individuals-is high. Subsistence agriculture i s still prevalent and harvesting natural resources remains the main safety net for poorer households. Faced with l o w and seasonal agricultural revenues, rural households also are constantly looking for work or other income-generating activities, the majority o f which will be temporary and poorly rewarded. 5. Significant improvements in how natural resources are managed are essential to support rural growth based on both extending areas under agricultural production and ensuring sustainable availability of natural resources. The current natural resources management framework has provided very limitedbenefits interms o f rural growth and poverty reduction, and there are several indications of decreasing availability o f resources. Both intensification and extensification o f agricultural activities will put additional pressures on the resource base. Some measures have been taken to transfer use rights from large-scale commercial interests to direct government and community control. However, this transfer has not been accompanied by development and implementation o f effective management systems that ensure the access o f rural households to these resources. In addition, increasing land available to the landless and small- holders involves a complex process o f reducing large land holdings as well as the potential conversion o f degraded forest, flood plains, and other land with multiple uses. To better manage the resource base, including the sustainable conversion o f land, the government will have to improve the resource information base, establish viable land-use planning mechanisms, and develop socially acceptable mechanisms for allocating use rights to farmer households. More generally, secure access to natural resource assets will be an essential anchor to broad-based rural growth and reductiono f vulnerability. 6. Increased transformation of the smallholder agricultural sector away from subsistence toward greater commercial orientation, including regional specialization, will be essential to improve productivity and incomes o f farmers, and thereby accelerate agricultural growth and poverty reduction. Cambodia has achieved overall rice self sufficiency, although there are still localized deficit areas. While attention to food security needs will continue to be important in some areas, particularly as regards nutritional balance, there i s scope to move to more specialization and market orientation. However, the pace o f this shift will depend on rural households' perception of the progress in addressing risks associated with greater dependence on markets for basic needs and incomes. Reducing rural households' vulnerability consists o f a number o f elements, ranging from improving land tenure security, better managing natural hazards (for example, floods), reducing the burden on producers o f informal road passage and market access fees, and deepening markets through such measures as cost-reducing infrastructure investments and facilitating competition inmarket chains. 7 , Increased productivity and specialization also will require rural producers to have improved access to information and technology. Rural producers' access to information and technology are important for regional specialization in agricultural production and to achieve the production potential revealed by existing low crop and livestock yields. The development of agricultural research and extension capacity, which began I 5 years ago, remains dependent on donorfunding. In view o f capacity and budget constraints inthe public sector, it will be essential in this process for the government to focus on the key public role and foster the appropriate involvement o f private providers. Confronted by the combined challenges o f balanced intensification, diversification, and regional specialization, an approach based on multiple service providers likely will deliver results more quickly and sustainably than focusing on building public extension service capacity. Furthermore, advisory services to farmers will need to be complemented by access to financial services tailored to their needs `andaccess to quality inputs. 8. While progress has been made, basic services and infrastructure are critically lacking. Access to infrastructure i s very closely tied to the growth o f the rural economy, linkingproducers to market, reducing the costs o f production inputs, increasing the competitiveness o f Cambodia's exports, and promoting private sector investments in rural areas. Despite significant investments over the past decade, rural areas are underserved by basic social, economic, and infrastructure services, and lag behind neighboring countries in most areas. Formal or semi-fonnal financial .. 11 services, and lag behind neighboring countries in most areas. Formal or semi-formal financial services do not serve the majority o f rural areas. Education and health infrastructure and services also are under-developed by regional standards, increasing rural households' vulnerability and limitingtheir accessto economic opportunities. 9. Improvements in basic social services and infrastructure, as well as the broader business environment, also will support the development of off-farm activities contributing to rural economic growth. Non-farm rural economic activity, mostly informal, already makes a large contribution to rural household incomes. Income diversification serves as both risk management and income generation for households. ?,urd households are involved in a broad range o f activities that include agriculture; construction; transportation; factory work, services, and government work as regards wage labor; cr in micro-businesses. These last include making processed foods for sale; providin$ services; petty trading in agricultural produce, fish, and livestock; and making and trading manufacturedgoods. 10. A vision to develop rural areas. This Note recommends a set o f strategic reforms designed to stimulate on-farm and off-farm development in rural Cambodia. These reforms would be in policy, institutional capacity at both the central and local levels, and reorientation o f public investment. The strategy emerges from a vision o f the desirable and the possible: a Cambodian rural sector inwhich: There i s good local governance, and local communities are involved inkey development and resource allocation decisions. Access to productive natural resources i s fair and transparent, and activities involving the use o f naturalresources are sustainable. Credit i s available for on- and off-farm investment and can be secured by fixed assets including land. Adequate development o f labor-absorbing activities in the industrial and services sectors improves farm household incomes through full- and part-time off-farm employment opportunities, and the number o f people working on farms and completely dependent on subsistence farming and informal activities declines. Farmproductivity and farm incomes increase. The incidence of catastrophic household shocks i s reduced, with households better able to mitigate and manage risks. Diversification into othe; crops and products occurs as farmers freely respond to changing market prices and unbiased incentives. Farming develops in different regions o f the country according to the differing potential o f areas. Economic development i s spread more evenly throughout the country, and the rural- urban income gap narrows. Key Strategic Elements 11. The Second Socioeconomic Developmept Plan (SEDP 11, 2001-2005), the National Poverty Reduction Strategy (NPRS, 2003-2005), and, more recently, the new government's "Rectangular Strategy," which will serve as the basis for the preparation o f the National Strategic Development Plan 200&2010, provide general directions to agencies involved in the development o f rural areas. These general directions remain to be turned into a full-fledged, coherent strategy to develop rural areas. To contribute toward the achievement o f the MDGs, and to ensure sustained ... 111 growth o f the rural economy while ensuring that the benefits o f agricultural and rural development are widely shared by rural households, including the poorest, the following key strategic orientations are proposed. Specific priority actions, developed under Part I1o f this Note, also are summarizedinthe matrix attached at the end o f this executive summary. 12. Both the legal framework and technical management systems for natural resources will have to be strengthened in the short run. The legal framework governing land, forestry, fisheries, and water i s incomplete. Compounded with weak enforcement o f existing laws and regulations, this incomplete legal framework limits the security o f access by rural households, adds to the uncertainty o f the business environment, and increases the scope for rent-seeking behavior by natural resource managers and users. Management systems that strengthen local accountability while ensuring that broader and longer term sustainability concems are respected are urgently required to improve the management o f resources currently being exploited as de facto open access areas with little or no protection o f customary and household access rights. Priorities include: 0 Improving land tenure security-particularly for the poor and disadvantaged groups- through land titling, while increasing access to land for the landless and land-poor and addressing the root causes o f landlessness. 0 Implementing marine and freshwater management systems that ensure access o f fisheries-dependent communities while maintaining sustainability o f stocks. 0 Implementing a combination o f forest management systems that permit the realization o f local community, broader economic growth, and biodiversity and other conservation benefits with emphasis on enforcement mechanisms based on transparency and both local and higher level accountability. 0 Developing and piloting area-based water management systems to reduce vulnerability to floods and droughts, allow for intensification o f farming systems, and ensure sustained and good quality water supply services. 13. A combination of improvements in output and input markets, as well as policies and investments to support diversification and intensification of production, are needed to enable rural economicgrowth to reach a minimum of Spercent to 6percentp.a and match the needs of a growing rural labor force. Compared to current sector performance, this i s a high growth rate, and increasing rice productivity will go only so far toward meeting it. Achieving a higher growth rate will require diversification away from rice, which for the most part must be market driven and, to a significant extent, export oriented. Farmers' and agribusiness competitiveness and integration with global markets i s limited by low productivity, weak production and marketing infrastructure, and other institutional factors (such as corruption) that raise the costs o f conducting business and inhibit efficient transmission o f signals from markets to rural producers, transporters, processors, and Cambodia's nascent rural financial markets. To address these issues, this Note argues that deep reforms are needed in agriculture sector management, starting by articulating a clear program for agricultural development that focuses on (1) improving the delivery of quality, demand-driven agricultural services and (2) addressing hightransaction costs inmarketingchains. 14. Policies and incentives remain to be developed, in consultation with farmers and the private sector, to enhance the supply response in traditional outputs such as rice, livestock and fish; and to facilitate diversification in production and value-added processing, as well as determining the factors that will enable the rural poor to capture a larger share o f the additional value generated from rural-based production. Options exist (and examples are emerging in iv Cambodia) for pursuing a strategy o f pro-poor rural growth through market-led diversification, including contract farming and marketing associations. However, these require substantial changes in the rural investment climate and the organizational structures linkingrural producers withprocessors and the market. 15. Additional investments in basic infrastructure and social services, as well as improved access toJillancia1 services, will be critical to support rural economicgrowth: 0 Additional investments are needed inbasic education, particularly to increase completion rates o f girls in rural areas. Investments that improve general health-particularly o f women, who account for over 50 percent o f agricultural labor-and reduce the cost o f health services, can reduce a major source o fhousehold vulnerability. 0 Improved access to roads, electricity, and potable water supply will increase opportunities for market access and provide opportunities to develop non-farm activities. 0 Improved access to a broader range o f financial services, tailored to the needs o f rural households, will reduce the vulnerability o f these households and will be needed to support the diversification o f the rural economy. 16. The diversity of income sources and the significant variations among and within regions, districts, and communes make it clear that there are no generic solutions for rural development. Rather, the process needs to be locally specific, responsive to the local conditions, and circumstances, and able to maximize the participation o f local organizations and populations. Strengthening the participation o f local organizations and populations in planning and policy development will contribute to better prioritization o f public investments. Inaddition, the national level needs to support local planning and governance processes by addressing the cross-sectoral policy and institutional issues that affect the rural sector. Delivering Results and Next Steps 17. To deliver results, an elaborated rural development strategy will need to take into consideration several additional elements that both cut across rural space and link it to the rest o f the economy. These aspects are horizontal links to other national agendas; institutional capacity constraints that suggest concentrating public sector attention on key roles; and pursuit o f selective coordination needs, including o f donor support. 18. Strengthen links to cross-cutting agendas. Progress on agricultural and rural development depends not only on addressing issues within these domains but also on progressing on important agendas that cut horizontally across sectors. The National Poverty Reduction Strategy (NPRS, 2003-2005) and second five-year Socioeconomic Development Plan (SEDP 11, 2001-2005), and more recently the government's Rectangular Strategy, identify the most important o f these agendas. Sectoral progress i s recognized to depend on parallel progress in three aspects o f improving governance: (1) civil service reform, (2) decentralization and local governance, and (3) anti-corruption. In addition, there i s the horizontal agenda o f private sector development that underpins the ago-processing xralue chains and the non-farm rural economy more broadly. Such issues define the enabling enviroknent for rural development. They are key elements to get right for rural development to proceed at the pace needed to bring welfare improvements to rural people. 19. The main responsibility for such issues will reside, in large measure, outside the agencies responsible for agriculture and rural development; however, passive engagement on their part V would be a mistake. First, to be effective, broad directions o f reform will need to take root in sector agendas. The alignment o f sector agendas will put these rural-focused agencies in the vanguard o f benefiting from change. Second, in some areas, agricultural and rural development agencies are defining solutions able to contribute to broader agendas. Examples are improvements to intergovernmental financial transfers, as well as local development planning and implementation, inthe context o f the recent decentralization reforms. Sector agencies can gain by engaging constructively but will needto improve their institutional capacity to do so. 20. Concentrate on key public sector roles. A challenge for the government is selectivity in its focus on building capacity to fill roles in guiding economic development toward efficient and equitable growth. The govemment has already largely shed dctivities that still burden the public sector inneighboring countries, such as direct involvement inproduction and state domination o f market institutions. It still faces enormous tasks to provide public goods, address market failures, and provide useful services that the private sector i s likely to find unprofitable. Additional roles include creating consensus on implementing and coordinating sector policies that involve conflicting goals. Furthermore, the government has a critical role to fulfill in following principles and employing measures to create good governance. Inaddition, with the importance o f donors in funding support for public investments, there is the additional challenge o f coordinating these donor activities to align with national priorities. Limited capacities in govemment agencies put a premium on selectivity even in the provision o f various services that will be important to rural producers as they seek to diversify activities and orient more to market opportunities. Creating the conditions for further private sector development and leveragingthe capacity and resources o f the private sector to provide the inputs, services and infrastructure needed to revitalize the rural economy would have to be at the core o f the rural developmerat agenda. 21. Focus selectively on coordination needs, including donor support. Given the multiplicity o f govemment agencies involved in agricultui-a1 and rural development, the number o f external partners malung significant contributions to development financing, and still-emerging core capacities in public functions, there i s a premium on govemment's focusing selectively on coordination needs. Current efforts for coordination will be most effective if accompanied by stronger government leadership. The 2003 initiative to coordinate donor policy and support that led to the creation o f several joint government-donors technical working groups (TWGs), i s a good start. Consideration also could be given to ways to consolidate and coordinate the agendas o f these groups, thereby enabling a perspective on the overall volume o f donor commitments for agriculture and rural development, including its sub-sector composition. Coordination also would provide a venue for aligning donor support more generally to the sector reform agenda for agricultural and rural development inCambodia. 22. Next steps: Moving toward a common framework to develop rural areas. This Note is expected to contribute to the policy dialogue between the government and its partners on the prioritization of economic reforms and investments in rural areas toward defining a common agenda for growth and poverty reduction in rural Cambodia. Consultations on this Note were conducted with the govemment, and with other stakeholders, including other donors, to ensure balance and accuracy. The Note i s not intended to present a comprehensive strategy, since important information gaps and limited engagement with the govemment to date leave significant work for subsequent stages. Further dialogue would aim to clarify strategic directions with the government, identify priority sub-sectors and information gaps needing further assessment, and determine specific areas in which sufficient knowledge exists to embark on implementing concrete agendas leading to visible results on the ground. The World Bank stands prepared to support this subsequent phase o f work inagreement and coordination with the government and its other partners. vi r 0 (d M a L U Cca I. x .3 i3 3 3 h 4 gP3 4 8 4 B 4 4 P4 m8 n $1 1 3 . -0 w .-S 111 %c 111 .C 'fE B B II: L; Part I: Pro-Poor Development and Growth: The Centrality of Rural Development Past growth has not led to signiJcantpoverty reduction. 1. Conducive macroeconomicfundamentals allowedfor impressivepost-conflict growth rates. Economic growth has been solid, averaging 6 percent during 1994-2001, with the exception o f 1998 following the mid-I997 pclitical events. Economic recovery accelerated during 1999-2001, with annual GDP growth averaging 7 percent. Fiscal revenue has improved; inflation has been limited (below 4 percent); and the exchange rate has stabilized. Important structural progress also has been made, with the implementation o f the bank relicensing program, the ongoing strengthening o f the tax and customs administration, and drafting o f key commercial laws needed to meet the requirements o f WTO accession. 2. The Cambodian economy, however, remains vulnerable, with growth narrowly based and urban biased, and a weak business environment. The impressive growthperformance of the last decade largely reflected a recovery from the past, and has been dependent on a very narrow, urban-oriented base. The growth o f the manufacturing sector has been steady at an average 14.7 percent p.a. over the 1993-2001 period, but primarily based in the garment industry. Future prospects are uncertain in view of the expiration o f the US-Cambodia bilateral textile agreement at the end o f 2004 and China's entry to WTO. Growth inthe services sector, which contributes 36 percent to GDP, has been limited, and heavily dependent on the tourism sector (table 1). Investors' confidence i s limited, and the general business environment i s perceived by entrepreneurs as poor, with corruption being the major issue.' Agriculture, the most prominent sector both in terms o f share af GDP (37 percent in 2001) and share of the labor force (74 percent, Labor Force Survey, 2002), has expanded by approximately 3.5 percent annually in real terms during 1993-200 1.2 However, agriculture experienced large year-to-year fluctuations and contributedlittle to employment creation. Sector Share of Growth Share of Employment Poverty incidence GDP, 1993- employment, Growth, 1998- by main income 2001 2001 2001 2000 source (1999 (%) (%) PA) CSES) % Agriculture 37 3.5 73.7 1.55 78.9 Industry 27 14.7 s.4 43.29 3.8 Services 36 1.9 17.9 1.08 11 3, Formal off-farm employment is limited, particularly in rural areas. Employment growth in the manufacturing sector has been strong but starting from a very small base. Approximately 220,000 workers (a high proportion of whom are women)-8 percent of the workforce-are employed by the garment indusby. Employment creation in the services sector also has been 1 Cambodia: Seizing the Global Opportunity-Investment Climate Assessment and Reform Strategy, World Bank 2004. 'Agriculture, or the agriculture sector, refers here to the broad range o f crop, livestock, forestry, and fisheries activities. 1 limited over the last decade. In the absence o f other opportunities, most o f the people entering the labor market remain in rural areas and are counted as part o f the agricultural work force with a highdegree o f underemployment, as reflectedinlow rural wages.3Low skills levels further limit young rural dwellers' access to economic opportunities. 4. The high rate of population growth (2.5 percent p.a.) exertspressure on the economy to createjobs, and the agriculture sector is absorbingmost of the new entrants on thejob market. One o f the most striking figures i s the highproportion (55 percent) o f the population under the age o f 20. This large increment of young people together with a significant number (150,000) o f former military are entering the job market with few opportunities to find gainful employment. Some 220,000-250,000 people are entering the job market each year, most o f them inrural areas, while at the same time few people will retire. One o f the greatest challenges will be to provide productive employment to this rapidly growing labor force. More rapid rural growth will clearly play a pivotal role in generating employment, raising rural incomes, and in reducing poverty in Cambodia. To continue to absorb these new entrants in the labor market, agricultural output and incomes will have to increase`on a sustained basis at least on pace with the increasing labor force, which in real terms means at least 5 percent to 6 percent per year. Higher growth rates would be required to also increase real wages. However, the burden o f solving the employment issue cannot rest solely on the agricultural sector. Continued emphasis on creating the enabling environment for the rapid growth of the industrial and services sectors i s also needed. 5. Growth has benefitedprimarily urban areas and not led to widespreadpoverty reduction in rural areas where most of the population lives. The Cambodia NPRS estimates that the incidence o f poverty has declined from 39 percent o f the total population in 1993-94 to 36 percent in 1997.4 The NPRS also found that, on average, the poor are living close to the poverty line and that, consequently, there i s considerable potential for poverty reduction through growth with equity. Conversely, trends couldreverse and poverty could worsen with slower growth or an even more constrained distribution o f benefits. Reduction in poverty incidence and progress toward reaching the MDGs-both mainly in urban areas-suggest that past economic growth has mostly benefited urban areas, where 15 percent o f the population lives, with limited trickle down to the rural economy, and no indication o f progress in rural poverty reduction. The GDP per capita in rural areas i s estimated at US$119, compared to US$280 nationwide. Ninety percent o f the poor live inrural areas and 79 percent o f the poor depend on the broader agriculture sector for their livelihoods. Progress in reaching the government's poverty reduction goals will not be achieved without addressing, head on, several key constraints faced by the rural economy. Rural livelihoods are limited by lack of opportunities and vulnerability, 6. Dependence on subsistence agriculture is high. Cambodia i s still a predominantly agrarian society, with 70 percent o f the population, and an even higher percentage o f the poor (79 percent) engaged in agriculture, and subsistence consumption absorbing approximately 60 percent to 65 percent o f agricultural output (FA0 2003). With the poverty line defined on the basis o f caloric Riel3,5004,000 per day for agricultural wages, and Riel 3,8004,200 for non-farm wages (Helmers and others 2003). However, with a population estimated at 10 million in 1993-94 and 11.4 million in 1997, in absolute terms the number of poor has increased over the last decade from 3.9-4.1 million (in absolute terms, a 5 percent increase). Findings in this section are extracted from the "Sources of Income in Rural Areas" background study conducted by Helmers and others 2003, unless otherwise indicated. 2 intake, food insecurity remains an important aspect of rural poverty. While overall food and rice availability has improved in recent years, and a small rice surplus has emerged, many rural households do not have adequate or reliable access to food supplies. Up to two-thirds o f the 1.6 million rural households face seasonal food shortages each year, and 50 percent of children under age 5 are underweight (NPRS). Rice alone makes up 25 percent to 30 percent o f the total expenditures o f poor households. These figures suggest that agricultural productivity increases targeted to subsistence farmers could have a significant impact in terms o f poverty reduction (particularly caloric intake), and facilitate the transition to more commercially oriented farming activities. Highgeographic variation suggests that problems o f storage, transport, and alternative income earning opportunities exist as well. 7. Exploitation of natural (common pool) resources is a common strategy to complement agricultural incomes from small landholdings. Since the country's economy i s not yet diversified, land and natural resource essets still play a critical role in rural households' livelihoods. Improving livelihoods and reducing vulnerability o f rural populations are, therefore, critically dependent on the patterns o f ownership and access to land and natural resources. Although there are regional variations, in general, land holdings are small with an average 1.5 ha (ha) per household, with half o f farms below 0.75 ha (CSES 1999). Average land holding size has been shrinkingwith population growth, resulting in seasonal or permanent out-migration to cities and less populated areas, and greater dependency on off-farm employment, when available. The poorest households are characterized by little or no access to agricultural land (less than 2 ha in unfavorable locations) and, consequently, a stronger reliance on common property resources to meet subsistence needs. The poorest households also generally have no kinship support, large young families o f 5-12 children, few assets (no or one draught animal, few farming implements), food shortage 3-8 months each year, high indebtedness, and typically are unable to repay or borrow additional amounts (ADB 2001). Table 2. Average percentage share of different sources of income intotal household income inruralareas by quintile Sources of rurnl household incomes by expenditure quintiles (SA) Source of income Poorest I Second I Third I Fourth I Richest I Total Meanhousehold lincome (1000 rieliyear)I 2,5531 3,0571 3,3511 3,8751 5,6161 3,6891 Source: CSES 1999 (inbold are figures above the average for all households). 8. Informal off-farm employment is an important source of income for rural households. Rural households cope with lack of full time, remunerative economic opportunities by diversifying sources o f incomes.6 Studies thht have tried to quantify the relative importance o f Researchon sources o f income inCambodia is pa:chy at best, with few nationwide studies and little detail on many issues critical for the identification o f policies and projects to support rural development. The most comprehensive study has been the CSES 1999, although this work has limitations related to the 3 these sources found that 29 percent to 50 percent o f income (cash and in-kind) comes from agriculture; 14 percent to 22 percent from fisheries and forestry-based activities; and as high as 36 percent to 57 percent from business and wage labor. The majority o f wage and business revenues come from casual, seasonal agricultural and nonagricultural wage labor, and seasonal micro-business activities; access to steady and remuherative nonagricultural employment i s usually observed only for the wealthiest. Rural household members faced with low and seasonal agricultural revenues are constantly looking for work or other income-generating activities, the majority o f which will be temporary and poorly rewarded. 9. The overall mix of productive activities that contribute to rural household income is, therefore, very heterogeneous across households and regions. Agro-ecological zones, access to and proximity of markets, and the presence o f an agricultural extension worker are correlated with rural households' sources of incomes.' Proximity and access to fisheries and forest resources determine their relative contribution to rural livelihoods. Research has found significant positive correlation between proximity to roads and the importance o f non-farm economic activities, and between the presence in a village o f an agricultural extension worker and agricultural incomes. Opportunities for non-farm employment are better in the south and southeast, where road networks are more developed. Both for access to markets to sell locally produced goods and services, and for access to wage labor, availability of roads, and to a lesser extent water transport, i s also an important factor in determining income levels. Women, who constitute the majority o f the agricultural labor force (54 percent), participate much less in the non-farm wage income activities, although more inmicro-business activities. Ethnic minorities, concentrated inthe more isolated and less densely populated areas o f the northeast, depend much more on agriculture and natural resources for their livelihoods. 10. The incidence of shocks and crises is extremely common, with 90 percent o f households on average subject to a crisis causing income loss within a 1-year period. Income losses are sizeable- nearly 30 percent o f total rural household income i s lost each year due to household shocks and crises (Helmers and others 2003). Crop failures (due mainly to flood and/or pest damage), illness o f household members and highlivestock mortality rates are the main causes o f catastrophic loss. As a result o f repeated crises, indebtedness o f rural households is high,8contributing to distress sales o f land and increasing landlessness. Studies o f landlessness indicate that 12 percent to 17 percent o f rural households in Cambodia have no land, although this figure varies considerably among provinces, districts, and communes. Female-headed households suffer disproportionately from landlessness. Women are in general more vulnerable to poverty and other risks, with less access to health and education services, agricultural extension, paid employment, and land ownership and other property rights (box 1). 11. Access toformal social protection is likely to remain limited in the near future. Despite increases in government budget allocations for social sector interventions in recent years, implementation o f laws and policies related to social protection has been weak, the coverage of experience o f the field enumerators and the relatively small (though nationwide) sample size. There are, in particular, gaps inthe research with respect to highland and coastal populations and, more generally, on the roles o f rice and other field crops, non-farm income, and common pool resources in the incomes o f poorer rural households. However, there is general consistency inthe broad findings o f many o f the rural income surveys, which suggests that the research findings are reliable, even though limited in scope and coverage (Helmersand others 2003). 'P. Auffret, "Rural Poverty in Cambodia: Impact of Land Distribution and Alternative Policies," World Bank 2003. Research also shows that credit conditions also are worse for the poor, who have to rely more heavily on informal moneylenders and higher interest rates. 4 existing programs i s limited, and resources are insufficient to meet the basic livelihood needs o f beneficiaries. Most programs aimed at reducing the vulnerability o f the poor are funded by external assistance, which raises questions as regards their s~stainability~. the absence o f In formal mechanisms for managing risks, rural households rely on informal coping strategies ranging from borrowing from money-lenders or relatives, to distress sales o f assets (livestock, land), or migration (seasonal or permanent) to sities or other regions. 12. Thesefindings suggest that a strategy to improve rural livelihoods require a comprehensive and complex set of actions, recognizingthe dependency o frural households on multiple activities and the need for responses tailored to the diversity o f local situations and rural households. Future prospects for sustainable use o f land and natural resources, as well as improvements in rural livelihoods, will be shaped by three key factors: (1) the policy and regulatory framework affecting access to and management o f key resources, such as land, forests, fisheries, and water; (2) a cohesive strategy for agricultural and rural development; and (3) opportunities for off-farm employment, particularly in rural areas. While focusing on ways to increase economic opportunities in rural areas, whether on farm or o f f farm, choices should also be guided by the need to reduce the vulnerability o f rural households to income crisis, including through safety nets. Inview of their extensive participation in the rural economy, and their greater vulnerability and lack o f access to opportunities, policies and programs to develop rural areas should ensure that the specific needs o f women are addressed (box 1). Box 1. Summary findings andrecommendationsfrom Cambodia's Gender Assessment Study Key issues. Women are even more constrained by unequal access to natural resources and services. They have a major role in agricultural production and a potentially more important role in reducing food insecurity. Women are a minority among beneficiaries o f agricultural and rural-livelihoods-related services and assets. High illiteracy rates and the content and location o f extension services are two key constraints to improving women's access to agricultural extension services. Despite a gender-responsive Land Law, women are vulnerable to having their land rights ignored. Rural roads and transport, as well as water supply, and the provision o f financial services are priorities for women. Women are under-represented in agriculture sector decisionmakixg and the civil service. However, government and donor-supported programs are increasingly responsive to these concerns. The agriculture and rural development section o f the NPRS includes gender-specific targets and indicators. Recommendations. (1) Promote decentralized growth and expand efforts to develop employment opportunities inrural areas to limit the negative social impacts o f the urban migration o f young women. (2) Support the development of small-scale enterprises, which are more likely in the short term to provide employment to women. (3) Develop strategies for upgrading the literacy and slull levels o f women. (4) Address the social protection needs o f female migrant workers. (5) Develop innovative ways to provide agricultural information and extension services to women. (6) Ensure improved and secure access to land and natural resources for women. (7) Continue investments in locally planned rural infrastructure so that both men and women's needs are recognized and addressed. (8) Make health services affordable for poor women. (9) Increase women's participationat the village level. Management of land and natural resources is undergoing dramatic changes. 13, Demographics and natural .resources endowments create specific challengesfor different regions. Cambodia i s richly endowed with land; substantial natural resources, notably forests and Draft Cambodia Social Protection Strategy Note, World Bank, EASHD, 2005. 5 fisheries; and a wide variety o f natural habitats and ecosystems, including upland and lowland forests, freshwater wetlands, and diverse riverine areas. However, 70 percent o f the population i s concentrated on 30 percent o f the land, along the lowland corridor from the Thai border in the Northwest to the Vietnamese border in the Southeast. Most land i s used for rice cultivation and fishing inthe flood plain and riverine areas, with populationpressure increasinglythreatening the Tonle Sap ecosystem (flooded forest and lake fisheries). The presence o f remaining landmines i s an additional issue inparticular inthe Northwest and some o f the central and southern provinces. In contrast, dense forest and low population density characterize the North/Northeast and Southwest o f the country (see map in annex 3). Transition zones between lowland and uplands are experiencing increasing immigration and encroachment o f farmers on forested areas. Strategies and policies for the management o f natural resources would need to recognize these differences and provide responses tailored to regional and local situations: different population densities and different agro-ecosystems. 14. Previous work conducted by the World Food Program (WFP) evaluated the relative importance o f different agro-ecosystems (box 2). A rapid comparison o f this classification with land-use maps and poverty maps (annex 3) shows that the incidence o f poverty i s higher in lowland rain-fed and scrub/degraded-forest areas, in which the majority of the population is concentrated. However, UNDP's maps o f progress toward meeting the Cambodia M D G s (annex 3) show a different situation, with a clear distinction between the Northem provinces, late on most MDGs, and the rest o f the country, inwhich more progress i s b d g made inreaching some or all the MDGs. Although the quality o f the data on which the maps are builtmay be challenged, the maps support the idea o f different regional priorities and comparative advantages. Box 2. Resultsof the WFP FoodEconomy Zones analysis Lowland rain-fed areas: 45 districts, 2.9 millionpeople. The majority o f the population relies on a single nonirrigated wet season rice crop as a major food and income resource. Small independent land holdings. Income supplemented by a variety o f seasonal activities. Terrain relatively flat andunder extensive cultivation. Riverine: 28 districts, 1.7 million people. The majority o f people rely on cash crops, floating or dry season rice, and fishing for food security and income. Population resides next to major rivers or incommunes adjoining the Tonle Sap. Urbadmarket: 17 districts, estimated at 1.3 million people. Populationrelies on cash incomejobs and small business inurban governpent centers. Scrub/contract labor: 24 districts, 1.2 million people reside inthese areas. People rely mainly on degraded-forest resources and wage labor for income. Limited cultivation o f rice, insufficient to meet annual needs. Landless households commonly found in these areas. Vulnerable to reduction o f forest resources through exploitation, and isolation from markets and major roads. Forest: 37 districts, 450,000 people. People rely mainly on forest products for food and income. Dependent on access to forested areas. Very low densities, fewer than 8 people per square kilometer. Mixed: Forestlrice (4 districts, 229,000 people), forestlriverine (3 districts, 122,000 people), forestlscrub (9 districts, 230,900 people), rice/scmb/forest (3 districts, 104,500 people), unclear/diversified (7 districts, 565,000 people). Source: Helmers and others 2003. 6 15. Recent changes in natural resource management policies have left vast areas of the country (30 percent to 40 percent of total area) with unclear management arrangements. Following the recent cancellation o f nonperforming forest concessions, approximately 1.6 million ha o f forest areas have reverted to "forest reserve," for which management arrangements still must be defined. The cancellation o f another 1.86 million ha o f nonperforming forestry concessions i s also under consideration. An additional 1.73 million ha seem to be scrub land, undergrowth, non-wooded land, ,"i similar unused areas not yet declared to be under any specific ownership, control, or use. Additional cancellations o f economic concessions above the authorized size under the new Land Law will further increase the reserve o f land potentially available for agricultural development. However, the exact use o f these areas and potential for development under agriculture or agro-forestry systems has not been assessed (Part 11). In the fisheries domain, half of areas previously under concession arrangements (approximately 500,000 ha) were cancelled in 2001, but joint-management arrangements involving local communities have to be further developed. In the short term, sustainable and transparent management arrangements need to be developed to prevent misappropriation and over-exploitation o f these resources. Table 3. Cambodia-Estimates of LandTenureKJse,2004 Source; LandTenure in Cambodia-Data Update, CDRI,2001, IFSR 2004, MAFF2004. Theperformance of the agricultiire sector has been disappointing. 16. While agriculture's contribution to the economy is high by regional standards, agriculture's performance is lackluster and its growth potential uncertain. The dominant contribution o f agriculture to GDP (37 percent in 2001)'O and its importance as a source o f income and livelihood are artifacts o f the undiversified nature o f the economy rather than o f robust growth inthe agricultural sector. Inthe 1990s, agricultural growth inCambodia was one o f the lowest in the region (figure l), although performance has improved in recent years. Political unrest, the regional financial crisis in 1998, and severe floods in 2000 all helped reduce growth. Another feature o f the sector's growth performance ctor has been large year-to-year fluctuations. These reflect vulnerability to weather conditions and suggest insufficient investment inthe sector and possible over-exploitation o fnatural resources. lo is This h g h for the region and compares with 51percent of GDP inLao PDR, 23 percent inVietnam, 17 percent in Indonesia, 16 percent in China, 15 percent in the Philippines, 8.5 percent in Thailand, and 8.1 percent inMalaysia in2001. 7 Figure 1.Average agriculturalsector growth rates (real, 1995prices) 7 6 5 s 4 3 2 1 0 Source: FAO. 17. Growth of the agriculture sector has been led by crop production and fisheries. Within agriculture, crop production-particularly of rice-has grown faster than population, at approximately 4.8 percent p.a. between 1993 and 2001 (constant 2000 prices). Evaluating the growth performance o f the fisheries sector i s difficult because of lack of reliable data. However, sources concur in estimating that the contribution of the fisheries sector to agricultural GDP growth has been commensurate with that of the rice sector. Fishery output value i s estimated to have grown by 6.0 percent p.a. over 1993-2001," Despite its importance in Cambodia's farming systems,12livestock output value grew at a much lower rate of 2.4 percent p.a., with greater inter- annual variability due to vulnerability to disease and floods. Over 1993-2001, following the suspension o f commercial logging in forestry concessions and cancellation of several forestry concessions, crops contributed an average of 19 percent to total GDP growth, fisheries 12 percent, livestock 4 percent; and forestry to a 6 percent de~rease.'~ 18. Theproductivity of Cambodian agriculture is low, in terms o f both labor and land, with a gross output value estimated at US$200/worker and US$280/ha. There have been productivity gains, from an estimated 1.3 t/ha inthe early 1990s to 2 t/ha since 2000. Nevertheless, rice yields remain low compared to neighboring counties' perf~rmance,'~suggesting room for additional productivity gains. An important structural constraint is low soil fertility in50 percent of the area under rice cultivation, which also i s where the majority o f the farming population i s concentrated (Nesbitt 1997). Other constraints are the low level of fertilizer use; risks associatedwith flooding; and the prevalent subsistence orientation of farming systems, which contributes to low investments inagricultural inputs.Furthermore, it shouldbe notedthat the low rice productivity i s also the reflection of the prominence of lowland rain-fed rice farming systems practiced by approximately 80 percent o f farmers. It i s estimated that only 17 percent o f paddy land benefits 'IThis latest data should be considered with caution although, due to the inclusion of small-scale fishing data only inthe late 1990s (not included inprevious years, making comparison difficult). Livestock contributes on average to 17percent o f rural households' incomes (Helmers and others 2003). l3This compares with a 15percent contribution to GDP growth by services and 56 percent by industryover the same period. I4In 2002, 2.6 tonha in Thailand, 3.3 tonha in the Philippines, 3.5 todha in Lao PDR, 4.4 todha in Indonesia, 4.6 tonha inVietnam, and 6.3 tonha inChina (FAO). 8 from water control structures. Productivity o f other important crops (maize, cassava) appears to be on the lower end compared to other countries inthe region (figure 2). Figure 2. Average yields /n 2001 in ton/ha 20 WCambodia 15 (flVietnam 0Thailand 0LaoPDR 10 0China W Indonesia 5 0 Rice 1 Maize 1 Cassava 1 Soybeans 1 2.07 1 2.76 1 10.5 1 0.85 1 0Vietnam 4.29 2.96 12 1.24 2.62 3.73 17.5 1.42 3.13 2.55 4 0.9 6.15 4.7 16 1.62 4.39 2.84 12.9 1.22 10Malaysia 3.14 3.05 10 Source: FAO. 19. Cambodian agriculture is strikingly undiversified, with 90percent of the total areaplanted with rice (2.3 million ha).15Rice plays a major role infood security as the primary staple as well as contributes to a modest surplus for export. Cultivation o f other crops i s done mainly at household scale and i s growing fast, but from a low initial base, covering 8 percent o f cropped areas. The remaining 2 percent i s planted with industrial crops, including rubber and tobacco. Rubber remains a major export commodity for Cambodia, ranlung first among its agricultural exports in value. Livestock i s a common source o f complementary income for rural households. The prominence o f rice among Cambodia's crops comparedto other countries inthe region i s not a reflection o f the lack o f potential for crop diversificationbut results from the largely subsistence orientation o f Cambodia's agriculture. The potential for diversification o f existing farming systems i s significant, provided key constraints-lack o f infrastructure, o f reliable market and technical information, access to financial services, access to inputs, insecurity o f tenure-are addressed. Farmers have adequate incentives for new investments in more intensive production patterns and diversification away from rice. 20. Regional specialization is underway, although still limited. The prevalence o f subsistence agriculture means that farm holdings are generally unspecialized, with the exception o f areas with higher productivity and better market access. However, traditional production zones have always l5This compares with 80% for Lao PDR, 62 percent for Vietnam, 57 percent for Thailand, 38 percent for Indonesia, 32 percent for the Phlippines, and 12 percent for Malaysia (IRRI2001). 9 existed, for example, rubber inred soil areas and 50 percent o f rice production coming from five provinces. In addition, regional specialization i s becoming more +bible. As the government further clarifies its agricultural development strategy, consideration should be given to promoting further specialization based on regional and local comparative advantages. This specialization would require the development o f a capacity to analyze agricultural potential at the local level to informpolicy and investment choices at local and national levels. 21. Despiteprogress in liberalizing tradepolicies, official agricultural exports remain low, and unofficial trade is growing. Regionally, Cambodia ranks lowest in terms o f agricultural tradability16 and food import ~apacity.'~Current exports o f agricultural produce represent approximately only 6 percent o f total merchandise exports, which are heavily dominated by garments (77 percent). Trade in agriculture, forestry, and fishery products has fallen in recent years-from U S 2 5 2 million in 1997 to just US$89 million in 2001 (IMF 2003). This decline i s explained mainly by the reduction in exports o f forestry products after the logging ban. Growing unofficial exports of rice (an estimated 450,000 tons in 2001), fresh fish, and live animals to Thailand and Vietnam are indicators o f substantial distortions and inefficiencies in marketing and trade facilitation. 22. The main barriers to agricultural trade appear to be important inefficiencies in marketing and trade channels. Since the late 1980s, Cambodia has pursued a gradual liberalization o f the economy, including a floating exchange rate, eliminating quantitative restrictions in trade, reducing tariffs, and dismembering state monopolies in the key input and output markets. Although hightariffs remain on some goods, recent accessions to, first, ASEAN (1999) and, more recently, WTO (2003) have set Cambodia on a course o f further rationalization o f its trade policy and a gradual reduction o f tariffs. Institutional and governance issues, resulting in substantial unofficial trade flows, as well as market organization, financing, and infrastructure constraints that affect marketing and trade o f key commodities have been well documented (Integrated Framework and recent work on value chain analysis). 23. Therefore Cambodia may not yet be able to seize opportunities from globalization of markets and liberalization of trade, such as those resultingfrom the recent WTO accession or the China-ASEAN Early Hawest Program," with resulting loss of prospective income for rural communities and for the national economy. Cambodia i s and will remain a small economy. Future growth o f the agricultural sector will depend on its capacity to gain access to regional and international markets, necessitated in part to offset growing food imports. Cambodia's imports of milled rice, vegetable oil, h i t s and vegetables, poultry, and pork have been progressing over the last decade. The short-term impact o f trade liberalization on rural incomes and rural poverty has not been clearly assessed yet. Inprinciple, lowering import tariffs could be expected to create additional competitive pressures on the agricultural and non-farm rural sectors by increasing the in-flow o f foreign goods and agricultural produce. In practice, however, due to enforcement issues and the development o f unofficial trade, tariff barriers have been effective to only a limited extent. Whether the rural sector can rise to the challenge o f global l6Agricultural tradability (ratio o f total agricultural imports+ exportsto agricultural GDP) i s a measure o f the sector's openness. Food import capacity (ratio o f the value o f food imports to total nonfood exports) measures the capacity of a country to have foreign exchange to finance food imports. In November 2002, China and the ASEAN (Association of South-East Asian Nations) members, including Cambodia, signed an Early Harvest Program (EHP) of the Framework Agreement on Comprehensive Economic CooperationinPhnom-Penh, Cambodia. The objective is to promote trade of agricultural commodities and foodstuffs with Chinathrough an "Early Harvest" tariff reductionprogram. 10 competition in the medium and longer terms i s difficult to foresee, although the reform agenda proposedbelow could mitigate some o f the more severe consequences. Basic services and infrastructure are critically lacking. 24. Development of the rural economy requires theprovision of basic infrastructure and social services. The growth o f the rural economy i s closely linked to access to infrastructure. Road transportation i s vital for much o f the economic activity in rural areas. Roads link producers to markets and lower the costs o f trade, thereby potentially reducing the costs o f farm inputs and increasing farm gate output price^.'^ Access to transport infrastructure has a clear impact on the development of off-farm income generation opportunities (Helmers and others 2003), and the presence o f permanent village markets i s correlated with higher householdincome levels (Auffret 2003). Simple trading o f goods and services i s hampered by weak transport infrastructure and the inability to communicate over distances. The absence o f power and telecommunication networks dissuades private investment inrural areas Finally, the development o f human capital i s hindered by the limited access to educational and health facilities and poor quality water supply and sanitation. 25, Rural areas are underserved by social, economic, and infrastructure services. Rural infrastructure was severely damaged and/or neglected during the years of fighting. Despite improvements in recent years, there i s still a very long way to go to improve rural dwellers' access to infrastructure. This lack of access i s especially true in less populated areas in the Northwest and Northeast, to which inflows o f population are observed. Cambodia lags behind other countries in the region for most indicators (box 3 and table 4). Moreover, its institutions serving rural areas are challenged by problems o f capacity, public financial management and allocation o f resources, and corruption. Decentralization and outsourcing to the private sector have the potential to strengthen rural service delivery, but substantial governance and capacity challenges remain. l9However, t h s may not be sufficient, and beriefits can be captured by traders when monopolies exist, for example, onprovision of credit. 11 Box 3. Status of economic and social infrastructure services in ruralareas Water supply and sanitation: Less than 26 percent o f households have access to safe drinking water, and, o f those, only a mere 4 percent o f the poorest 20 percent do. Less than 16 percent o f rural households have access to sanitation facilities. These numbers are below the 2005 targets o f 40 percent and 20 percent, respectively. There are no sewage systems outside major cities, and Cambodia has one o f the highest rates o f water-borne diseases inthe world; Transportation: Approximately 6 percent o f the poorest quintile live more than 5 km from the nearest road. Less than 30 percent o f villages can be reached by vehicular traffic during the wet season. The network is in poor shape, with 52 percent o f roads reported in poor condition and 8 percent in bad condition in2003. Energy and telecommunication services basically are available only in populous and large township areas. Cambodia has the lowest electrification ratio among East Asian countries, as low as 5 percent in rural areas. As for telecommunication, fixed-line penetration for the entire country i s only 0.27 per 100 households, while mobile penetration was 1.27 per 100 in 2000. Fixed-line coverage i s even lower in rural areas, to which expansion would require massive irlvestments. Mobile services have extended- with high tariffs-to some rural areas. Health: Most of the rural poor live far from health facilities. Infant and maternity mortality rates are high. Healthcare facilities are confined mostly to larger urbancenters, leaving rural areas almost totally unserved. Education: Only 46 percent o f villages have a primary school. Indicator Cambodia Vietnam Thailand Lao PDR China Percent roadspaved, 1999 a/ 16 25 97 44 22 Maintelephonelinesper 100inhabitants, 0.24 3.75 `9.39 0.93 13.8 2001 a/ Percentpopulationwith access to electricity, 16 76 82 22 2000 bl- Improvedwater source (% rural population I 26 I 72 I 81 I 29 I 66 with access, 2000) a/ Improvedsanitationfacilities (% rural 10 38 96 19 24 populationwith access, 2000) a/ 26. The rudimentary banking system does not yet serve the rural poor and the agriculture sector. Access to financial services i s an important factor to enable households to cope with variability o f incomes and vulnerability, and to respond to existing economic opportunities. The financial sector benefits from a relatively sound legal and regulatory framework. Following the promulgation of the Banking and Financial Institutions L a w in 1999, the bank restructuring process completed in 2002 has improved public confidence in the banking sector. However, lending activities o f banks continue to stagnate," and growth in private sector credit has been virtually nonexistent in the past two years,'l despite strong demand from SMEs. Recent estimates of access to micro-credit indicate that only 15 percent of Cambodia's rural population has access 2o The main reasons identified are (1) loans are mostly short term, with very high interest rates, providing principally impodexport financing and working capital to the trade and service sectors (tourism); (2) most banks are foreign owned and their focus is on providing services to their home country customers in Cambodia; and (3) banks are concentrated in urban areas, with only a few banks having branch offices outside major cities, leaving most o f the rural population with no access formal financial services (ADB *'2002). Credit to the private sector is 7 percent o f GDP, significan`riy lower than that o f other Asian countries at a comparable stage of development (IMF2003) 12 to credit from a formal or semi-formal institution (bank or registered microfinance institution or organization). Thus, 85 percent o f the rural population are left to rely solely on informal sources such as friends, relatives, moneylenders, or middlepersons. Different sources estimate the demand for credit by rural households at US$40-125 million p.a.22Studies indicate that the formal sector i s reluctant to lend in rural areas because o f higher costs, few perceived opportunities and the inability to effectively assess credit risks. Conversely, farmers and rural SMEs outside major cities are unable to approach banks and therefore prefer to turn to the informal credit market (Torres 2004). Access to savings services i s even more limited. 27. The rural business climate is poor, with corruption perceived as the main constraint. Investment Climate Assessment findings23indicate that the perception o f entrepreneurs inside and outside of Cambodia i s that corruption i s widespread and that the country i s still prone to instability. The weak rule o f law, bureaucratic costs, and corruption are perceived as the main constraints to doing business in Cambodia. The availability o f factor inputs-finance, slulls, and infiastructure-probably as a result o f narrow growth and the nature o f existing micro-enterprises and SMEs, are identified as secondary constraints. However, compared to urban firms, rural firms were more concemed with potential macroeconomic instability, the cost o f financing, transportation, and electricity. 28. Investments in rural areas appear to be declining. An "Assessment o f the Agro-Industrial Situation in Cambodia" undertaken under the European Commission's PRASAC I1 project confirms a downward trend inregistered agro-industry investment. Overall investment approvals have declined dramatically, and approvals in agriculture-related industries even more so. Since 1998, the share of agriculture-related industries has declined from 22 percent to a l o w 3 percent. A similar downward trend is observed in numbers o f newly registered SMEs. In addition, investments in the agricultural sector have been relatively capital-intensive and support extensive rather than intensive forms o f agriculture, with limited contribution to rural employment creation (Van Acker 1999). Given the expectations thah agriculture and the private sector would foster the country's economic development (SEDP 11, NPRS), these trends are wonying. Table 5. Approved Investment(US$tsd) Year 1998 1999 2000 2001 I Agro-industries 2,023 29,558 5,929 - Foodprocessing 7,972 11,913 - 2,016 Leather processing - - 1,116 - Tobacco 7,195 - - 3,652 Woodprocessing 164.464 14.148 - 1.236 Total a` 181,653 55,619 7,044 ITotal approved investment 832,531 482,240 226,014 197,710 6,904 I ~~ % of agro-industries 22 12 3 3 1 Source: PRASACI1(2003). "/These figures relateto approvedinvestment.Actual investmentmight be muchlower. 29. Agro-industries are under-developed and generally under-performing. Innumber, the vast majority o f the private sector consists o f rmall agro-industrial firms. Despite its apparent comparative advantages, which are driven by relatively low labor costs and abundance o f land, Cambodia's value added in agro-industry i s very l o w compared to other countries inthe region or 22 The ADB estimated total rural finance demand at US$120-130 million p.a., o f which one-third for micro-credit ranging inloan size from US$50-300. 23 Cambodia: Seizing the Global Opportmity, World Bank 2004. 13 other sectors such as garments.24Lack o f reliable surpluses constrains the development o f ago- industries. In addition, it appears that technology upgrades in post-harvest handling and processing are limited by lack o f credit facilities for the sector (FA0 2003). However, more research i s neededto analyze the key constraints faced by agribusiness firms and develop possible responses. 24Cambodia:Seizingthe GlobalOpportunity,World Bank2004. 14 Part II: Catalyzing Rural Development Key Elements of - a Pro-Poor Agriculture and Rural Sector Development Strategy 30. The Second Socioeconomic Development Plan (SEDP 11, 2001-2005), the National Poverty Reduction Strategy (NPRS, 2003-2005), and the Cambodia MDGs (appendix 1) have provided a general framework to guide agencies involved in the development o f Cambodia's rural areas. More recently, the new government's "Rectangular Strategy" has proposed a set o f economic policy directions to achieve the country's growth and poverty reduction objectives. These remain to be translated in a full-fledged strategy to develop rural areas by rural sector agencies. Part Io f this Notes described the complexity and interconnectedness o f Cambodia's rural issues. Thus, a rural development strategy for Cambodia requires a balanced use o f appropriate policies, investments, and institutional measures that affect not only agriculture but also the broader base o f rural activities. These measures include those specific to the rural sector, such as land and natural resources management, agriculture, as well as those specific to rural institutions. In addition, policies fundamental to the economy as a whole, such as for infi-astructure, the financial sectors, and broadpublic sector reform, also will have a profound impact on rural development. 31. The government's over-arching goal to reduce poverty in rural areas will be achieved by promoting more rapid and sustained agriculturalgrowth-including of forestry, livestock, and fisheries-and rural non-farm growth. Promoting agricultural growth and raising agricultural incomes will necessarily involve enabling large numbers o f farmers to shift from subsistence to market-oriented agriculture. Inthe short term, the current gaps and inefficiencies in the land and natural resource management framework will need to be addressed, to ensure land tenure security, access to natural resources and the sustainable use o f those resources, that are the very foundation o f agriculture and a source o f complementary revenues for the majority of poor rural households. Promoting agricultural growth also will require better linking farmers to domestic and intemational markets, and creating the conditions for diversification to higher value crops, livestock, and fisheries to meet emerging local and international demand. It will demand investments in key market-related infrastructure and institutions to enhance the domestic and international competitiveness o f Cambodia's agncultural products. There i s increasing evidence that serious governance constraints affect the competitiveness o f Cambodia's rural products. Progress on policy and institutional reforms to address these issues therefore need to accompany further investments. Fostering sustainable agricultural supply response from farmers to meet market demand also will require policies and investments that ensure access to other factors o f production, such as improvedtechnologies, financial services, and animal health services. Finally, improving the quality of rural services (education and health) to strengthen human capital inrural areas will be critical to meet the new market challenges and facilitate the movement o f the rural population from agriculture to the industrial and services sectors, whether inrural or urban areas. 32. This section discusses the key areas for action that need to be taken to breathe life into rural development. They are: . Improving Access to and Management of Productive Natural Resources-will be critical for the livelihoods o f the poorest segments o f the population. The focus i s on balancing priorities among competing uses o f land, forest, fisheries and water; establishing equitable access and stable and transferable tenure; involving local communities; and reducing the incidence o f crises and shocks through, inter alia, improved water management. 15 Increasing Agricultural Income-moving away from self-sufficiency focused on rice monoculture and providing incentives for agricultural diversification. Measures to promote higher factor productivity for land and labor aimed at subsistence farmers could have a substantial impact on poverty (interms o f caloric intake), and facilitate the transition to more commercially oriented farming systems. Improved agricultural support services and market functioning would serve to further stimulate productivity. Diversification o f agriculture and o f the rural economy needs to be supported, by identifying and addressing key constraints to the diversification o f farming systems and the development o f the non-farm rural economy. Bridging the Gap inAccess to RuralInfrastructure and Support Services-improving the sectoral allocation and geographic balance o f public investment. Given the diversity o f income sources and the significant variations between and within regions, districts and communes, it i s clear that there are no generic solutions for rural development. Rather, the process needs to be locally specific, responsive to the local conditions and circumstances, and maximize the participation o f local organizations and populations, therefore with deconcentration and decentralization essential. Improving management of and access to productive natural resource assets 33. Since the country's economy i s not yet diversified and agriculture and direct harvesting o f natural resources are economic mainstays, land and natural resource assets play a central role in Cambodia's economic and social development. While rural development and economic development more generally will require the Cambodian economy to diversify away from primary producing activities, inthe short and medium terms, improving livelihoods and reducing vulnerability of rural populations will be critically dependent on the patterns o f ownership and access to land and other naturalresources. 34. Future prospects for sustainable use o f land and natural resources and improvement o f rural livelihoods will depend on policies and regulations affecting three priorities: (1) access to and management o f key resources (land, forest, fisheries, and water), (2) strategic orientations for agricultural development, and (3) opportunities for off-farm employment. Across the four main natural resources-land, forests, fish, and water-analogous management systems are needed that possess key features covering resource assessment, allocation and access, monitoring, and enforcement. All the natural resources share the common need for a more reliable assessment o f the status o f each resource as a solid foundation for policy and management decisions affecting that resource. Inall cases, the appropriate starting point for each assessment i s an analysis o f the inherent capability o f the resource to support different types and magnitudes o f use, as well as a related assessment o f the institutional capacity in the natural resource sub-sectors to manage such uses. Land administration and management reforms 35. The rules governing rights to land have been in constant flux over recent history. The Khmer Rouge, which governed Cambodia from 1975 to 1979, collectivized all land and destroyed all land records, including cadastral maps and titles. The regime brought about one o f the greatest population displacements inhuman history, forcing millions to move from cities and towns to the countryside and from one part o fthe country to the other. Many thousands also fled 16 across borders. The right to own land was reestablished in 1989, enabling farmers to claim possession rights o f plots up to 5 ha after 5 years o f continuous cultivation, and households to gain ownership title to residential plots up to 2,000 square meters. Concession rights were granted for plantation plots exceeding five ha. Land left vacant for more than three years reverted to state ownership. Following the enactment o f the land law, a program was initiated calling for applications for land tenure certificates to confirm occupancy and use rights. More than 4 million applications were submitted. However, to date, only a small percentage o f the land tenure certificates have been issued due to the limitedcapacity o f the government. 36. The Ministry of Land Management, Urban Planning and Construction (MLMUPC) was established in 1998 to takeprimary responsibilityfor land management. Land management for Cambodia includes leading the development o f the policy and regulatory framework, and coordination o f land-use planning and geodetic and cadastral surveying. MLMUPC i s also charged to coordinate land registration and administration and property valuation. Implementation o f land registration, administration o f land transactions, and land-use planning are the responsibility o f the Provincial and Municipal offices o f the MLMtJPC. The Ministry o f Agriculture, Forestry and Fisheries (MAFF) has responsibility for the management o f forestry land and wetlands, as well as the administration o f agricultural, forestry, and fisheries concessions. 37. A 1998 assessment by the World Bank identified 7 main problems in the land sector: (1) inadequate legal and regulatory fiamework for land administration and management; (2) weak institutional and human resources capacity to implement a reform program; (3) lack o f tenure security for most o f the population, which has permitted land grabbing by elites and powerful interests, and a large number o f land disputes; (4) inadequate regulatory framework and unclear institutional responsibilities for land classificationand reclassification, including the definition o f boundaries for forest land, protected areas and other state land, as well as agricultural land. The boundaries o f all o f these were determined ad hoc; (5) increasing landlessness, estimated at 12 percent-13 percent o f the rural p o p ~ l a t i o n ~(6);unregulated and uncertain access by the poor to ~ natural resources on state land; and (7) lssk o f regulations and transparency in awarding economic concessions. 38. These issues remain key concerns. Nonetheless, Cambodia has made significant progress in addressing some of them, particularly the establishment o f legal and regulatory frameworks and roles and responsibilities for land administration and management.26In particular, progress has been made through the (1) establishment, in 1998, o f the Ministry o f Land Management, Urban Development and Construction to lead the government's efforts on the land reform agenda; (2) establishment in 2000 o f the Council o f Land Policy with membership o f 13 ministries to guide the preparation o f land policy formulation; (3) adoption o f a national land policy by the Council o f Ministers in M a y 2001; (4) enactment o f a new land law in August 2001; and (5) adoption o f several sub-decrees under the land law, including systematic and 25 CSES-1997 showed 13 percent o f rural households possessedno agricultural land; CSES-1999 showed 15.8% had no land. Using a different sampling method, the Oxfam Landlessness and Development InformationTool (LADIT) survey in 2000 showed 12 percent landless. The more recent update conducted for the Assessment o f Potential Impacts o f Social Land Concessions (PSIA 2004) found a 12 percent landlessnessrate among rural households. 26 In 2001 the government initiated a Land Management and Administration Project supported by the World Bank, ADB, and the Finnish and the Gennan governments, with three objectives: to complete the regulatory framework, establish sustainable land registration institutions, and issue approximately 1 million titles by 2007. 17 sporadic land titling, land registration, Cadastral Commissions for out-of-court land dispute resolution, and social concessions for land distribution. Several other sub-decrees are expected to be adopted in2005, including management o f economic concessions, state land management, and recognition andregistrationo f indigenous people landrights. 39. Strengthening land tenure security and expanding titling. Tenure security i s addressed in the provisions o f the 2001 land law that codifies the establishment o f property rights and creates the basis for a modem landregistrationsystem. It establishes that ownership rights can be derived directly from existing occupation beginning before the land law was promulgated, thus giving most existing occupants legal protection. With donor assistance, the government also has developed additional capacity for land administration, and has made some progress on land titling. Systematic mapping and titling will be expanded across the country over the next 10 years, but progress i s expected to remain slow. The current target is the issuance o f 1million land titles in 10 provinces and Phnom Penh Municipality by 2007. More tangible improvements in property rights will take time, even with the establishment o f the legal and regulatory framework, the institutional structure, and dispute settlement resolution mechanisms. However, to realize the full benefits of those reforms, it is important that other parallel interventions be conducted to facilitate the development o f land markets and improve access to credit. These interventions include improving the policy environment for sales and rental markets, such as allowing registration o f leases in land offices, applying a property tax structure to discourage the speculative holding o f unused land, adopting a secured transactions law, and strengthening the financial sector inrural areas. There i s a risk that, inthe absence o f more broadly accessible credit and effective social safety nets in rural areas, land titling may lead to increased land concentration. Operational land markets would enable people to sell land in case o f sudden need for cash and, therefore, also could result in concentration o f land, because those with access to credit value land more highly. 40. The 2001 land law provides for government acquisition o f private lands when the public interest requires it. The registered owner i s legally entitled to "fair and just" compensation. However, no sub-decrees or regulations specifically relating to land acquisition or resettlement exist, In practice, land often i s obtained by the state without compensation or through ad-hoc local negotiations. 41. Strengthening land dispute resolution. Due to the weak capacity o f the courts to deal with land cases, a National Land Dispute Settlement Commission, with provincial committees, was set up in late 1999 to resolve, out o f court, land disputes. The 2001 land law sought to address remaining deficiencies in the dispute resolution system by allowing the establishment o f Cadastral Commissions. The commissions comprise a non-court system to resolve disputes over untitled land and provide protection to households involved in current land-grabbing cases. The commissions operate at the district, provincial, and national levels. The sub-decree creating the Cadastral Commissions was issued in 2002. As o f 2004, cadastral commission offices had opened, and substantial staff training had been provided. Despite progress on the dispute resolution mechanism, conflicts over land cannot be reduced substantially without better information on land use, clear policies and regulations on land classification, adequate capacity to resolve disputes, and, ultimately, demarcation o f boundaries generally accepted by all. 42. Rationalizing land classijication for a more efficient use of land resources. Land in Cambodia i s legally classified as either state or private land. Approximately only 20 percent o f the land i s classified as private. However, this official private-public allocation bears little relationship to existing land use or to the suitability of land for particular uses. There are large areas o f unused land under state control that are suitable for private use. Furthermore, a 18 significant portion o f state public land allocated for protection or managed use by the state has been cleared and settled, and i s being used for agriculture. There is, therefore, an urgent need to rationalize both the amount and types o f land under state control. 43. To complicate this picture, the actual area, location, and boundaries o f the state land are not known with any certainty. Furthermore, there is no current agreement on the institutional responsibilities to identify, survey, and demarcate state land. State land comprises two categories: "state public land" and "state private land." State public land i s intended only for conservation and management. It therefore cannot be disposed o f by the state for private use. Incontrast, state private land can be disposed o f by the state for private use and i s often given out in concessions rather than directly distributed through outright sale or grant. 44. A forthcoming sub-decree on state land management will provide the regulatory framework for classification, reclassification, and management responsibilities o f state land and will establish the legal framework for the institutional responsibilities to undertake these tasks. The government i s expected to develop and adopt this sub-decree in 2005. The sub-decree will enable the delineation o f various categories o f state private land and state public land, including forest lands, and protected areas. Importantly, it will allow for the rationalization o f the amount o f land in the state public domain and the reclassification o f land not needed for effective management, releasing land for other uses. 45, Rationalizing economic concessions. The 2001 land law allows agricultural land concessions, commonly referred to in Cambodia as economic concessions, to be given out for commercial farming o f products for both international and national markets. Since the program's inception, a total o f 827,286 ha have been granted for agricultural concessions. However, as o f August 2002, MAFF had revoked non compliant, non effective or illegal concessions totaling 103,680 ha, leaving 26 concessions totaling 723,606 ha in effect. While the legal limit to the size o f each such agricultural concession i s 10,000 ha, over half of the area o f concessions-463,606 ha-is above the legal size limit. There is, therefore, an urgent need to rationalize both the amount and type o f land under economic concessions. 46. I n practice, a large portion of the economic concessions has been granted on forest land. Despite the concession logging suspension in effect since 2002 on all other forest land, the terms o f the economic concessions allow logging trees inthe concession area. Moreover, insome o f the concessions, the clear felling o f the natural vegetation in the concession area has been the only activity undertaken under the concession, raising concerns that the economic concessions are de facto being used to circumvent the 1oggi:zg ban and the new safeguards in place for review and allocation offorest concessions. It i s urgent to (1) make more systematic and transparent the process by which economic concessions are evaluated and granted and (2) adopt a rigorous and open review system similar to that now emnloyed for forest concessions. 47. I n addition, even though one of the rationales for the agricultural land concessions is to generate revenuesfor the state, inpractice, the economic concessions have not generated much government revenue. There are several reasons for this. First, although royalties also are due from logging associated with land clearance, little has been collected since the standing stock in the concession area i s not documented and the amount cut i s not effectively monitored. Second, since royalties for the economic concessions are calculated on the basis o f production, and most o f the concession land, an estimated 641,500 ha, has remained unused for agriculture, little revenue has been generated. Thus, there i s a real need to revise the basis o f revenue calculation and strengthen the systems for revenue collection and accounting. 19 48. One of the key questions remaining is that of the modalitiesfor concessionreduction. With ADB support, work is underway as part of the preparation o f the Economic Concessions Sub- decree to clarify how concession reduction would take place. 49. Land distribution is envisaged as a means to address landlessness. Despite the land distribution in 1989, over recent years, the number o f rural households without recognizedaccess to the use o f land has increased. Landlessness i s economically significant inCambodia because of the undiversified nature o f the economy. With limited options for off-farm rural employment, access to land for subsistence agricultural productio,i, along with access to other natural resources for direct harvesting, i s de facto the only social safety net available to rural households in the short term. The growing incidence o f landlessness i s due inpart to forced or distressed land sales, and dispossession by military and politically connected people.27 The significant proportion o f householders who never owned land reflects the increasing demographic pressure on land in the most densely populated areas. Landlessness i s found to be highest among families headed by single women (21.2 percent). It has driven a significant number o f households out o f their villages.28 50. To address landlessness, the 2001 Land Law containsprovisionsfor "social concessions," that is, grants o f private state land to households for social purposes that can be used for cultivation or residence (Chapter 2, Article 17, Chapter 5, Articles 48-62). The sub-decree detailing the issuance o f social concessions was approved by the Council o f Ministers in March 2003. There is a strong social rationale for transferring the usufruct and/or the ownership o f these unused lands to landless households, and such transfers are envisaged as an important instrument inpoverty reduction. The program would allow significant amounts of unutilized land to be put into production while directly benefiting the poorest. 51. However, as previous land distribution in Cambodia has demonstrated, land distribution alone i s a temporary solution at best. With its large young population poised to enter the labor force, Cambodia will quickly outgrow this solution. The aim is for the social concession program to have a strong economic rationale and be more than a temporary social safety net. Therefore, the program must (1) assist beneficiaries to graduate from subsistence agricultural production, and (2) convert the unused state land into a more productive use, thus increasing the national production and productivity and providing an engine for broader-based rural growth and employment creation. 52. I t is not envisaged that all stateprivate land will be distributed to smallholders, but rather that a combination of well managed economic concessions and social land concessions will be appropriate. As part o f the background paper for policy development under preparation for the economic concession sub-decree, the appropriate role for economic concessions i s being reviewed in depth The recent work conducted to assess the poverty and social impact o f the proposed social land concession program indicated that little good agricultural land i s currently left idle and readily available for di~tribution.~'Possible additional sources of land for distribution under social concessions include: 27 O f the land that was expropriated, the parties thought to be responsible are listed as military (36%), provincial authorities (36%), former owners (13%), local authorities (12%), relatives (2%), and others (LADIT 2002) LandlessnessandDevelopment Information Tool (LADIT) 2000. 29Assessment o f Potential Impacts o f Social Land Concessions (PSIA 2004), World Bank. 20 0 Cancelled forest concessions and other areas o f unmanaged forest land not needed for forest management or environmental protection and suitable for agriculture production 0 Cancelledeconomic concessions 0 Small parcels o f state land incommunes 0 Other areas o f state public land currently under the control o f government agencies, including the military 0 Landrecoveredthrough enforcement o f Article 18 o fthe land law. 53. Since, initially, land to be distributed needs to be classifiedinto agriculture or urban land, the first need i s for the government to adopt the sub-decree on the state land management. The sub- decree will enable the reclassificationo f land and allow for the release o f the land currently under the control o f various state agencies. Inaddition, since a substantial area o f land suitable for land distribution i s currently under economic concessions over the legal size andor nonperforming economic concessions, it i s essential for the government to adopt the economic concession sub- decree to facilitate the cancellation o f these concessions and enable distribution o f the land from the cancelled concessions. Therefore the two forthcoming sub-decrees-on economic concessions and on state land management-are essential to ensure successful implementation o f the social land concession program. The viability of the social land concessionprogram will depend on the government's political will to adopt and implement these sub-decrees as well as to efectively enforce the land law. 54. Largely, the social concessions are intended to be based on the distribution of vacant state land so that the program does not face costly land acquisition issues. Nonetheless, for land distribution through social concessions to result in sustainable livelihoods for beneficiaries and agricultural output increases, significant investments in accompanying productive infrastructure (water control, roads), technology transfer, improved access to markets and social infrastructure will be required. Initial analysis o f the potential poverty impact o f land distribution confirms observations from other countries that the poverty impact o f land distribution alone i s limited (Auffret 2003). However, complementarj investments in essential infrastructure and technical support services help to enhance the poverty impact o f land distribution. Thus, to evaluate the feasibility and long-term sustainability o f such a program, it will be important to assess the relative costs and benefits o f different pzzkages o f support. Another important element for the success o f a social land distribution program will be the inclusion o f specific measures to address existing governance risks and capacity constraints. The "Assessment o f Potential Impacts o f Land Distribution" (PSIA 2004) provided initial insights on the feasibility and modalities o f such a program. Ongoing work for the preparation o f an agrarian structure study in 2005-2006 (World Bank) will provide further information for the design o f the proposed social land distribution program. 55. The following priority actiir s are recommended to rationalize land access and allocation, improve land tenure security, and thus promote rural development: 21 RecommendedPriorityActionsfor LandAdministrationandManagementReform Priority area #1 Strengthen land manage nt through coordinated interagency efforts Land management encompasses land classification and reclassificationamong various categories o f land, land-use planning, zoning, and management control over land use. The specific elements o f landmanagement urgentlyneededto achieve these objectives are: 9 Expedite thefinalization of the sub-decrees calledfor under the 2001 land law. Those to be adopted in 2005 are the: (1) state land management sub-decree; (2) sub-decree on management of economic concessions; and (3) sub-decree on the recognition and the registration of indigenous people landrights. 9 Rationalize the land classiJication system. The forthcoming state land management sub- decree under the 2001 land law will provide the regulatory framework for classification and reclassification of state land-between state public and state private land-and outline the procedures for alienation and disposal of state land. These, however, are only the first steps; implementation o fthe sub-decreewill require substantial focus and assistance. 9 Strengthen land-use planning. This includes the coordination of land-use planning with socioeconomic development plans and natural resources management, decentralization o f land management and planning authority, and development o f land-use plans for priority areas. Land-use planning should be the responsibility o f the commune councils with support from MLMUPC and other relevant agencies. 9 Pilot social concessionsand evaluatefeasibility toproceed tofull-scale implementation of a ocial concessions program, including land distribution and related support plementation of pilot projects began in 4 different districts at the end o f 2003. distribution program will distribute idle state private land to households identifiedas having priority needs for social land concessions. To materialize the benefits o f the social land concessions, and economic and social infrastructure, training d enterprise development need to be provided to the beneficiaries o f land distribution. e program will require a coordinated approach and significant resources from both government and donors. Distribution o f landunder the social concessions programrequires t ofArticle 18 o f the land law and implementation of the state land management ic concessions sub-decrees. 9 Rationalize economic, fisheries, andforestry concession systems. A coordinated approach, standard assessment and approval procedures, and improved revenue collection and management practices should be adopted acrossthe types o f concessions. Priority area #2 Strengthen land administration to i rease land tenure security and supportthe developmentof efficient land markets The overall policy goal ofland administration is to clarify andrecord ownership and other rights of all properties (public andprivate) inaccord with the landlaw. 9 Systematically expand are tion. This expansion should include the issuance o f a target of 1 million land titles by 2007, as well as recognition o f communal land-use rights, which are particularly important inhighlandareas. 9 Strengthen and streamline thefunctions of land r offices to enable efficient and transparent registration o f land transactions. 22 h Develop and implement an anticorruption strategy with the focus on streamlining sporadic land titling to become titling on demand; eliminate informal payments; establish, implement, and monitor minimum service standards, and strengthen internal investigation o f corruption > and misconduct. Strengthen land dispute resolution. Support implementation and monitor performance of the Cadastral Commissions. h Review and revise transfer land structure and taxes on sporadic land titling to ensure full > participation inland registration. There is also a need for complementary actions inthree other areas to ensure that the benefits of land titling materialize. These are (1) support the development o f secure transactions regulations; (2) strengthen the financial sector to enable the use o f landtitles as collateral; and (3) reformthejudiciary to enable more appropriate in-court resolution o f land disputes. Forest management reforms 56. Cambodia's forests w e estimated to cover approximately 11.1 million ha3', approximately 61 percent o f the country's total area (map, annex 3). Parks and protected areas account for 3.3 million ha, approximately one-fifth o f the total area, most o f it forested, but the quality o f management and level o f resource protection are low. Fromthe higho f approximately 6.8 million ha in 1999, the government has reduced area under forest concessions to approximately 3.1 million ha. A 2002 GTZ survey found that some 80,000 ha nationwide, consisting primarily of poorly stocked and degraded forest, were under some recognized form o f community forestry. The remaining approximately 5 million ha o f forest land, while officially in the public domain, are not effectively managed or protected. 57. Theforest sector has considerablepoteirtial to contribute sustainably to rural development and rural livelihoods in Cambodia, both directly and indirectly. Direct contributions include: augmenting public revenues from managed extraction o f timber and other resources; augmenting household incomes and consumption derived from timber and non-timber forest products (NTFPs)~';and increasing employment and incomes from value-added processing o f forest products. Forest land, beyond that needed for effective forest management, also can contribute to rural development through cdrefully planned conversion to other productive uses. However, current policy and regulatory and management arrangements are weak. They need to be strengthened considerably to enable (1) increasing the sector's sustainable contribution to public 30 Independent Forestry Sector Review 2004. In 2003, an informal consortium o f government, donor agencies, and NGOs commissioned a team of independent experts to examine experiences in the Cambodian forestry sector, including the recent controversy over the World Bank's role in advocating reforms in forestry concessions and forest lzv enforcement. The Independent Forestry Sector Review intended to provide a perspective o n the underlying challenges facing the sector and o n the adequacy o f the balance and range of the reform program that has b'een pursued by the government. The review, completed in2004, provideda startingpoint for further forest sector policy dialogue 31Inline with similar countries at a similar level o fdevelopment, forests contribute to a substantial share o f the livelihoods of nearby rural households. Firewood and charcoal account for virtually all rural household energy supplies; forest-based hunting and fishing are common activities for rural households in riparian areas; and collection o f resin i s thought to be a major source o f cash income (an estimated 20,000 tons collected annually worth approxjwately US$6 million) for roughly 100,000 households living in forested areas. 23 revenues and rural livelihoods and (2) preserving the ecologicaf2 and cultural value o f forestry resources. 58. Forest conversion and land development are largely unplanned and not managed. The findings o f the Independent Forestry Sector Review estimate the annual deforestation rate at 1 percent, 33as a result of a combination o f illegal logging and spontaneous as well as govemment- sanctioned conversion o f forest land to use for agriculture. The losses are concentrated in a number o f key areas. These are in the Northwest near the border with Thailand, in Rattanakiri, along national Route 4 and coastal roads, and flooded forest around Tonle Sap. The forest area o f Cambodia i s essentially the unplanned residual o f the country's natural endowment, illegal logging, and the spontaneous growth o f agricultural settlement. Numerous encroachments by farmers, often following illegal logging, are in the aggregate the most substantial threat to the forest resource, but conversion also takes the form o f government-sanctioned industrial crop development through large-scale economic land concessions. While substantial areas o f forest land likely have potential for sustainable use under agricultural and other land uses, the conversions currently takmg place are problematic. The areas potentially suitable for agriculture have not been assessed or identified; and no procedures or plans have been establishedto regulate the conversion of forest land to other uses and ensure that conversions are in the public interest and are conducted transparently and through sound land management practices. 59. The Ministry of Agriculture, Forestry and Fisheries (MAFF) has responsibility for the management of forest land, as well as the administration of agricultural and forestry concessions. The 2002 Forest Law provides for a Forest Administration consisting o f a vertical structure divided into central level, regional inspectorates, cantonments, divisions, and triages. This is based on a model o f early post-colonial experience and is intendedto permit the effective management o f a national forest territory with minimal interference and distortion from local authorities. The single line o f control structure was established in a detailed implementing MAFF Prakus in2003. The Forestry Administration inMAFFi s also the primary agency responsible for detection and investigation o f illegal logging. This responsibility i s a natural and logical extension of its resource management responsibilities and i s inkeeping with international practice. 60. Governanceproblems related to illegal logging in Cambodia have attracted more attention than any otherfeature of the sector. Many o f the govemance challenges facing forestry, such as civil service remuneration, accountability, and performance, are qualitatively the same as those facing other sectors. Others are more specific to forestry, such as questions o f law enforcement, inter-sectoral oversight and coordination (especially between MAFF and other ministries with shared oversight responsibility such as Land end Environment), and the specific issue o f independent monitoring. Rampant illegal logging, with the apparent connivance o f senior govemment officials in the mid-l990s, led to Cambodia's forestry sector becoming a major preoccupation o f the international community and put forestry at the heart o f the governance and development debate. Estimates o f illegal logging rates in the mid-1990s raised fears o f the potential exhaustion o f the commercial potential o f the resource base within a few years. Crackdown efforts in the late 1990s and early part o f this decade appear to have been partly successful, but the extent o f the remaining problem has not been quantified. When the logging 32Environmental services, especially watershed management, and soil and water conservation are part o f the complex o f benefits that derive from forests. Despite suggestions in the popular press and elsewhere that deforestation i s damaging water resources in Cambodia, particularly the Tonle Sap, analysis by the Mekong River Commission has shown that sedimentation i s not damaging the lake and that the lake is not becoming shallower. 33IndependentForestry Sector Review 2004. 24 ban (inplace since 2002) i s lifted inearly 2906 the anticipated timber harvesting inannual coupes will present new challenges for forest law enforcement. 61. The presence of an independent monitor, a role recently jilled by a private contractor (SGS), helps to discipline the Forestry Administration in a role that is inherently fraught with moral hazard. In principle, illegal logging i s also subject to other Cambodian legal provisions (for example, larceny) that are under the independent purview o f other agencies, such as the Ministry o f Interior. Military and police authorities have been involved occasionally in suppression activities, seizures o f logging equipment, and other actions, but the cross-ministry coordination o f forest law enforcement inCambodia has been ad hoc and largely ineffective. 62. Forest concession system reform needs to anticipate gaps and problems between design and implementation. With inadequate preparation and analysis, in the mid-I990s, Cambodia launched a poorly conceived and undisciplined forestry concession strategy that, at its peak, covered 6.8 million ha, including virtually all the commercially valuable timber resource, as well as other lands not well suited to commercial exploitation. With donor assistance, this system gradually has been reined in and now consists o f approximately 12 concessions covering something less than 3.14 million ha. Furthcr concession cancellations (including an additional 6 concessions covering approximately 2 million hectares) have been recommended by a technical review team o f the Forest Administration. However, government has not taken action on these recommendations. 63. At the same time, the government has developed a comprehensive system for regulating concession planning and operations. As designed, these provisions address the full range o f modern forestry practice including silvicultural methods, inventory and resource assessment, engineering design, and social and environmental safeguards. Currently, legal concession operations are in abeyance while plans and approval processes are being piloted. As and when operations resume, there will be a new set o f challenges as the diversity o f control problems increase, a larger number o f field staff are involved in concession oversight and the material throughput o f the concession system will increase. It i s realistic to expect additional problems and gaps between design and implementation at that point. These will need to be anticipated and met with ongoing technical assistance; greater transparency; and more conscious efforts to publicize standards, approvalprocesses, and permit conditions. 64. Management of the broader forest estate needs to become more sophisticated and differentiate betweenforest land of national interest and other areas. Forest land management generally needs to be brought more effectively under the national land policy development process, and the amount o f the forest estate need to be rationalized, taking into account inherent resource capabilities and institutional management capacities. Forest resource management in Cambodia needs to become more sophisticated, regimented, and documented. Irrespective o f the product orientation o f management (timber, resin, wildlife, environment) or management modalities (concession, community, or public agency), standards for description, consultation, prescription, projection, evaludtion, and documentation need to be defined by the government and fulfilledby the respective resource managers. 65. The official public forestry estate i s largely un-surveyed and un-inventoried. However, realistically, only a relatively small portion o f the forest i s genuinely o f national interest and capable of being managed for more than local objectives. Moreover, most forest land i s not covered by adequate plans o f any sort. W i l e the Forest Administration has put inplace measures to ensure suitable management o f the residual concession estate, there i s a virtual policy and management vacuum with respect to the other forest areas, especially those outside protected 25 areas. It i s unlikely that even the recently restructured Forestry Administration can be mobilized to provide effective management to this large an area. Therefore, the limited resources and capabilities o f the Forestry Administration should be focused on the small subset of forest land that i s o f national importance, effectively, the concession area and a limitednumber o f other large blocks o f high-value forests. A first step in that direction would be a careful reevaluation o f the forest estate and its partition into: (1) areas where there i s an overriding national interest that the forest remain directly managed by the Forestry Administration for revenue generation, biodiversity conservation, protection o f hydrologic functions, etc; (2) forest areas that might be managed locally; and (3) areas that might be converted to non-forest uses and managed locally. 66. I n forest areas not suitablefor conversion to other uses, administrative arrangements in the forestry sector need to be further developed to allow for broader local involvement in forestry management. There i s a need to develop alternative forestry management mechanisms giving communities a greater say in the management of forests, including high-value forests. In such cases, the Forest Administration, fully within its legislated mandate, can cooperate with local authorities on a range o f innovative management arrangements that give local authorities opportunities to take initiatives and recognize the benefits o f sustainable management practices. One option is provided by the Community Forestry Sub-decree approved by the Council o f Ministers inDecember 2003. This sub-decree establishes procedures by which local communities can be granted managerial and considerable regulatory control over forests on which they are dependent. Further development of local forest management and decision-making requires delegation o f authority and definition o f a system o f checks and balances between local and national authorities. At present, Cambodian forest law provides no clear basis on which to develop such relationships. They are permitted, however, within the principles and prerogatives established under the Law on Administration and Management o f Comm~nes/Sangkats.~~ 67. Community forestry arrangements have substantial applicability in Cambodia. Through them, motivated by the right to retain a relatively large share of forest-based income, local communities are empowered to manage publicly owned forest land. Currently, fewer than 100,000 ha (approximately 80,000 ha in late 2002) are formally under recognized community management. And, while substantial scope for expansion o f community forestry exists, only a small portion of the total forest resource could effectively be brought under community management inthe near-term. Obstacles to rapid expansion include the time requiredto formulate meaningful community forestry associations, the cost o f providing services and technical assistance, and the competing pressure to address immediate threats facing some o f these areas such as illegal timber harvesting and land grabbing. Existing community forestry pilots in over 400 communities, the passage o f the community forestry sub-decree, and the expected cancellation o f nearly 2 million ha currently under forest concessions have set the stage for a potential expansion o f locally managed forests in Cambodia. To date, community forestry has been established in degraded forest areas and in areas o f relatively high population density, principally around Tonle Sap and along the Lower Mekong. In Rattanakiri, the potential to include larger, better stocked forest areas in less populated regions of the country has just begun to be explored. A successful expansion o f community forestry in Cambodia will depend critically on the Forestry Administration developing a capacity and structure to provide services, technical 34 Chapter IV o f the Law (in particular, Articles 42-47) provides for the delegation o f functions or delegation o f authority for specific functions by State authorities to the Commune Councils. While Article 45 states that Commune Councils do not have authority in their own right to decide on forestry issues, Articles 42 and 43 allow such authority to be assigned or delegated to a Commune Council by the Forest Administration. In addition, Article 47 suggests that the Ministry o f Interior can issue a sub-decree if clarification o f the core or delegated roles o f Commune Councils i s needed. 26 advice, and material support through locally oriented structures including commune-level forestry and agriculture entities and commmity forestry associations themselves. 68. Among other possibilities is the development of private-public partnerships for management contracts at the local and provincial levels. These contracts would aim to attract private investors into activities on public land under the supervision o f local govemments and communities and following the national guidelines for sustainable management. Financial arrangements would need to promote responsible management and quality oversight from local authorities. 69. Arrangements for local communities' involvement in forest management need to be strengthened. Even with respect to forest areas to be managed primarily by the Forest Administration with a view toward national concerns (revenue, environmental issues), there invariably will be important local consequences o f management. Such impacts could include loss of resource access due to logging, protection, road access, or developments accompanying forest management. Safeguarding local welfare and ensuring that conflicts with local people do not compromise the effectiveness o f management efforts will require genuine efforts and diligent adherence to established procedures for considering and accommodating local concerns. Currently, local level consultation are undertaken in an ad hoc manner and are often highly personalized, creating opportunities for rent-seeking behavior and corruption, exclusion and neglect o f the interests o f vulnerable groups, and politicization o f decision-making. To address these issues, the government needs to accelerate and broaden its ongoing process of forest administration development and reform. Government might consider incorporating formal training on community consultation into existing skill development programs. Effective local consultation should be undertaken as part o f forest management planning and well before the commencement of operations. The development of a participatory monitoring system could help improve transparency and efficiency inresource utilization building on nascent efforts that are by conservation NGOs, Buddhist monks axid others that are already under implementation. A deliberate learning-style approach could be adopted with pilots in areas selected on the basis o f different forest and social characteristics. This approach could lead in short order to well justified and broadly applicable standards and arrangements. 70. Royalty revenues collection needs to be made systematic and adequately monitored. Following the suspension o f concession logging, total forest revenues have fallen from an average of US$8-12 million through the 1990s to approximately US$2 million in 2002. On the basis o f best current estimates o f the a n n d allowable cut (AAC) on the concession system (currently 3.1 millionha) at approximately 250,000 cubic meters, a resumption of logging would translate to an anticipated royalty revenue o f approximately $15 million per year.35, should the existing governance and revenue collection issues be addressed. In addition to revenues from what i s intendedto be sustainable management o f forest concessions, royalties also are due from logging associated with land clearance as well as from small-scale commercialization o f wood and non- timber forest products (including resin, poles, and fire wood). Revenues accruing from these sources tend to be small and are subject to leakages due to weak supervision o f collection and revenue management. 35This contrasts with an earlier World Bank/FAOiUNDP estimate of US$lOO million p.a. The change results largely from the roughly 60 percent reduction in the concession area and a drop in estimated economic stumpage prices from a high in 1996 o f approximately US$SO per cubic meters. In addition, duringthe eight intervening years, illegal logginghas reduced the potential sustainable yield, withthe result that a long period of recovery will be required before allowable harvest levels can return to their potential. 27 71. Industrial policy needs to be reviewed, including an assessment of current processing capacity. Forestry sector development strategy in the mid-1990s was aimed at establishing a large-scale wood processing industry. The capacity that resulted may have been significantly beyond the potential o f the resource base, although this remains to be assessed. Based on a reasonable estimate of carrying capacity o f the resourcebase, Cambodia cannot support the large- scale wood industry anticipated by government in the 1990s. Currently, most legally installed processing capacity i s idle, and wages and taxes from wood processing are very limited. In addition to the capacity in fixed mills, there i s a multitude o f small, sometimes illegal, and mobile sawmills contributing to pressure on the resource base. However, the volume and composition o f this capacity is not known. Retrenchment in the area under forest concessions needs to be matched by downsizing and/or restructuring o f the installed capacity (and better control o f the mobile milling capacity), because this excess demand contributes to pressures for illegal logging and over exploitation. 72. While wood processing industry development had been aimed at the production o f utility- grade lumber and plywood, Cambodia may be better placed as a producer o f luxury timber. This strategy would fit with the country's need to develop extensive management strategies based on l o w harvest rates in the deciduous forest areas and could be developed through partnerships with international manufacturers. As a first step, research into the capacity o f luxury species to withstand commercial harvesting i s needed. 73. To help bring about the needed downsizing and reorientation in the wood industry sub- sector, the government should put first priority on employing timber taxation and the forest revenue system to send appropriate market signals to industry. As currently defined, forest resource planning, at least so far as the concession system i s concerned, involves the estimation o f a sustainable allowable cut. The government's stance in renegotiating concession contracts, especially the timber royalty provisions, needs to reflect reasonable estimates o f the installed industry's willingness to pay as well as the government's reservationprice, which, among other things, should consider the social and environmental values o f the existing forest under concessions. Any reasonable timber price regime would not provide artificially inexpensive timber for continued operation o f the mills but, rather, would provide incentives for closure o f excess capacity and movement towards higher-value content. The development o f a robust annual bidding coupe system could provide invaluable price discovery information that easily could be incorporated in concession restructuring. However, annual coupes may present a much more challenging scenario for forest crime monitoring and control, and the specific modalities would need to be carefully studied. There are several critical risks associated with a coupe system, including difficult detection and prosecution o f forest crimes, exposing communities to deterioration o f customary rights, undermining efforts to develop private sector investment inthe forest sector, and making timber revenue collection more difficult given the potentially very large number o f scattered annual biddingcoupes. 74. The rate at which this adjustment will take place could be hastened by relaxing pending contract requirements for additional processing investments (in lieu o f other company commitments) and by ensuring that there are few obstacles to realignment o f milling capacity among the remaining concessions. Enforcement o f licensing requirements, legal provisions on sawmill location, and other controls should follow as the next step in liquidating excess capacity. On the basis o f capacity that remains after these measures, a long-term program to monitor and control forest industrydevelopment inrelation to resource capacity i s needed. 28 75. The following priority actions are recommended to rationalize the allocation of forest land; control the unplanned conversion and loss of forests; protect the ecological, economic, and cultural value of forests; and increase the sustainable contribution of the sector to rural livelihoods and development. These recommended actions should be reviewed in the context of the ongoing discussions on the results of the Independent Forestry Sector Review. RecommendedPriority Actions for Forest Management Reform Priority area #1 Consolidateforest concession management reforms P Complete forestry concession system restructuring. Government's review of concession Strategic Forest Management Plans has resulted inrecommendations that effectively amount to proposals to terminate an additional six concessions. While controversy remains about six other remaining concessions, Govemment shouldnot delay further interminating unworkable concessions. Concessions that remain under consideration should be asked to provide time- bound plans for meeting outstanding regulatory requirements. The progress made in rationalizing the forest concession system can provide valuable lessons for getting a better handle on the other types of concessions(land, fisheries). 9 Strengthen capacity of the Forestry Administration at different levels to supervise forest concessions and ensure appropriate consideration is given to customary and livelihood uses of forests by local communities. 9 Strengthen revenue collection and management. Review the experience with the collection o f royalties, stumpage anduse fees, and design and implement aprogram to improve revenue management and supervision o f collection. Priority area # 2 Rationalizeforest land use 9 Assess forest land use. Following adoption of the forthcoming sub-decree on state land management, conduct an assessment o f forest land, including protected areas, to identify the core areas of forest land which would need to be retained as state public land to ensure effective protection of biodiversity and critical ecosystems; and forest management, as,well as determining which o f the areas are suitable for local management, and which o f the remaining areas couldbereleased for conversionfor agriculture and other uses. /Accelerate completion of land mapping, demarcation, survey and inventory of forest land. /Study optionsfor sustainable management of forest areas outsideparks andprotected areas, includingpossible linkages with local government and a review of the ongoing community forestry pilots to assess lessonsleamt to date andpotential for scalingup. Priority area # 3 Revisit structureof the forestry sector 9 Focus `single line of control" arrangements to forest areas of national significance, remaining concessions, large blocks o f commercially viable forests with limited demands from communities, and areas to be protectedand managed for primarilynational forest policy objectives. Specific, docuqented and widely disseminated provisions should be piloted for > local public inputinto management decisions andrevenue sharing. Develop arrangements and capacity to integrate forestry input to provi development support. In areas where forest resources are fragmented, scattered, or most closely integrated into rural livelihoods and agricultural development, forestry services need not to be organized on a territorial basis. Instead, and within the provisions o f the forest law, 29 the Forestry Administration could be restructured on a service-oriented basis to accentuate local accountability for support to tree planting, reafforestation, woodlot management, and > management of forests for local livelihoods and agroforestry development. Broaden the basis of forest crime reporting and prosecution, to bring wider perspectives, reduce conflicts of interest and increase accountability and transparency. While law enforcement i s a critical and integral extension of the forest management function o f the Forest Administration, a wider range of public agencies, local government and civil society could be drawn into oversight o f illegal logging, land encroachment and other forest crimes. Priority area ## 4 Facilitate the restructuringof the wood processin > Facilitate the restructuringof the woodprocessing industry. Facilitate the right-sizing o f the large-scale capacities installed in the wood processing industry, transitioning to low throughput mills producing high-quality wood products for high-end export markets, and leaving only a minimal capacity for processing construction grade timber for the domestic > market. Conduct mill census and capacity survey. To ascertain the total millingcapacity, including compositionandprocessing volume, includedinfixed andmobile mills. Fisheriesmanagementreforms 76. Cambodia's fisheries resources, from its vast riverine, Vetland, and coastal habitats, support millions of people with food, income, and livelihoods. The sector i s also a potentially important source of royalties for the g~vemment,~~contributes 10 percent to agricultural GDP,37 and provides an important export commodity. Fisheries resources, including fish and other aquatic animal and plants, and flooded forests also are of critical importance for ecological and habitat conservation, ecotourism, and culture. The inland fishery, which i s the most important economically, accounts for 80 percent of fisheries GDP, mainly from the Tonle Sap Lake and River areas,38the Mekong and Tonle Bassac River area,39and the upper Mekong River area.40 The dry-season size o f the Tonle Sap is 2,500-3,000 sq km, which increases in flood season to 10,000-15,000 sq km. Fishing i s a major source of income for approximately 45 percent of households in riparian province^.^' Inland fisheries statistics are unreliable, but composite estimates based on available information suggest that Cambodia ranks first in the region and fourth in the world for freshwater capture fisheries, with an annual yield estimated 300,000- 450,000 metric tons. 36 However, accurate estimates of total revenues actually collected from auction of fishing concessions and licenses fees are not readily available. 37 Probably underestimated, because rice paddy field fishing, as well as the value o f other animal and plant aquatic products collected, i s unaccounted. 38 The Tonle Sap lake and river area i s by far the richest inland fishing area and includes the provinces o f Kompong Chhnang, Pursat Battambang, Banteay Meanchey, Siem Reap, Kompong Thom, and the northem "artAlso ofKandal. important for the inland fishery and includes the southern part o f Kandal, Kompong Cham, Takeo Prey Veng, and Svay Rieng. 40 Important for small-scale subsistence fishing and includes Kratie and Stung Treng. 41 According to a survey o f communes in 8 provinces conducted in 1998, 1 percent o f households considered fishing as their primary source o f income, and 35 percent as their secondary source of income. Figures are lower at the national level. Using 1999 CSES data, incomes from fisheries represent at national level 6 percent o f household incomes (Helmers and others 2003). 30 77. In addition, Cambodia's 435-km coastline4* includes three major estuarine bays-Kompong Som, K o h Kong, and Kampot-and the 55,600-sq km Exclusive Economic Zone (EEZ),43which extends 200 nautical miles offshore and supports a productive marine fishery. Inshore and offshore waters o f the Cambodian Sea are home to approximately 474 marine fish species, of which approximately 30 species are economically important. It i s estimated that fewer than 10,000 households are involved inmarine fishing. The official marine capture fisheries statistics, which peg annual catch at approximately 30,000 metric tons, underestimate actual yields. These statistics are based solely on the estimated catch o f licensed fishing gear. They do not include estimates o f the substantial catch by unlicensed gear, including unlicensed foreign boats that land their catch outside o f Cambodia, unlicensed domestic commercial boats, and small-scale fishers. 78. By law, thefisheries domain belongs to the State, and the Department o f Fisheries (DoF) in MAFF has the authority to manage, protect, conserve, and develop fisheries resources. More specifically, DoF i s responsible for enforcing regulations, granting concessions, issuing licenses, and collecting fees. However, management capacity i s weak; management on the ground i s largely ineffective; and the sector i s characterized by intrasectoral, intersectoral, and international conflicts. 79. Despite recent steps to address governance problems in the inland fisheries, current weaknesses in the policy framework and in law enforcement remain to be addressed. After more than a decade o f collective management schemes duringthe period o f the Khmer Rouge and Vietnamese occupations, inthe late 1980s a fishing concession system similar to that used during the French colonial era was reintroduced for inland fisheries as a management tool and revenue source for the government. Two-year concessions for fishing lots are awarded to the highest bidder in a public auction.44 Fishing lot operators are obliged to follow management rules outlined in the concession's cahier des charges, which prescribes (1) the area o f the fishing lot assigned for exclusive use by the concessionaire and the "area set aside for people" within the fishing lot, in which common access is to be allowed; (2) the duration o f the open season (typically October through M a y north o f Phriom Penh; November through June south o f Phnom Penh); and (3) the types and numbers o f allosable fishing gear. Nevertheless, illegal fishing i s widespread. The efficiency o f the commercial concession system needs to be reassessed, including the extent to which the two-year concession system gives incentive for sustainable resource management. 80. In addition to the large-scale fishing lot fishery, under the current fisheries law, the freshwater fishery also includes medium-scale operators licensed to fish in public fishing areas (outside fishing lots, reserves, and protected areas) during specified time periods. The freshwater fishery also encompasses small-scale operators who do not require licenses and are allowed to fishanytime inpublic fishing areas, as well as inprescribed common-access areas within fishing lots. Inaddition, freshwater fish left behind inreceding flood waters are collected from rice fields as a subsistence activity. Both medium-scale and small-scale operators are supposed to comply with the general fisheries regulations, including gear restrictions. However, illegal and destructive fishingpractices are common. 81. The management system based on a complex system for the segregation of commercial exploitation in fishing lots from the middle-scale commercial fisheries to small-scale, mostly subsistencefisheries, has enhanced thepctential for conflicts among these various segments of 42Along the provinces/municipalities of K o hKong, Sihanoukville, Kampot, and Kep. 43The demarcation of Cambodia's Exclusive Economic Zone is disputed with both Vietnam andThailand, 44The transparency and regularity ofwhich hasbeenquestioned. 31 the freshwater fisheries. The govemance issues are serious, and the social costs are high. Privatized enforcement o f the fishing lots (in the absence o f efficient law enforcement), and appropriation of use rights by powerful groups and local officials, including village and commune chiefs, prevent communities from accessing released areas in some locations. Traditional fishing areas remaining within the concession system exacerbate conflicts.45Furthermore, intersectoral conflicts about water use with agricultural and navigationuses are common. 82. In 2000 large-scale fishing lots were estimated to cover almost 10,000 sq km o f the most productive freshwater areas. These included anchor locations in riverine areas as well as expansive areas of floodplain that comprise the residences o f hundreds o f thousands o f people, hundreds o f thousands o f ha o f agricultural land, as well as flooded forest habitats essential as breeding and nursery grounds for many fish and other aquatic species. In June 2001, following violent conflicts over water use among fishing lot concessionaires and farmers, the area under fisheries concession was reducedby more than halfto 417,000 ha. 83. This cancellationo f concessions, which effectively reducedthe amount o f agricultural land as well as the number o f people living within the concession area, should reduce somewhat the likelihood o f intersectoral conflicts. Nonetheless, the cancellation was done without consultations on how the resource would be used after the cancellation nor preplanning on how the resource subsequently would be managed. The resulting ambiguity led, in some areas, to even more intensive exploitation o f the resource and more intrasectoral conflicts. The released areas are meant to be co-managed under a community fisheries management system. 84. Communityfisheries pilots need to befurther consolidated as an alternative management system. To address the conflict between fishing lot owners and small-scale fishers as well as to address the broad-based fisheries management issues o f overexploitation and use o f destructive fishing techniques, co-management o f fisheries-voluntary collaboration among all stakeholders in the fishery to achieve the common objective o f sustainable use of the fishery-has been recommended. DoF has developed a sub-decree on community fisheries. However, Cambodia has limited experience to date with co-management. CDRI (2002) identified 162 community fisheries, established since the late-1990s with the assistance o f donors and NGOs, that involve over 300,000 people and cover over an estimated 225,000 ha. These are largely individual efforts, with little effective coordination across them. It i s important to monitor these pilot activities and leam lessons from their experiences for broader implementation. 85. Marinefisheries management also is hampered by serious governance issues and lack of resources to enforce the existing regulations. The marine fishery i s subdivided into two parts: (1) coastal or inshore fishery in water fewer than 20 meters deep; and (2) offshore fishery in waters more than 20 meters deep. The offshore waters are fished exclusively by the large-scale fleet, which include vessels with engines o f more than 50 HP. These large-scale boats typically are owned by Thai or Vietnamese nationals, only a small number o f whom are licensedto fish in Cambodian waters. Boats owned by Cambodian nationals fish the coastal waters. These include the small-scale fleet, comprised o fboats without or with very small engines, which are allowed to fish unlicensed; and the mid-scale fleet, comprised o f boats with engines less than 50 HP, which are supposed to be licensed. Inoffshore waters, conflicts with Thai and Vietnamese fishermen are common, and enforcement o f the FishingLaw, in terms o f unlicensed foreign vessels and illegal fishing practices, is a major issue, given the limited resources o f DoF. Catches from offshore waters are not accurately recorded, since most o f them are landed directly in Thailand and 45 Several assessments indicate that released areas also are the least productive and less accessible. 32 Vietnam, making assessment o f the status o f the resource difficult. With support fkom DANIDA, a coastal zone management program i s being implementedto address some o f these issues. 86. Thepolicy and legalframework for thefisheries sector is improving, but several concerns remain. A new draft Fisheries Law has been prepared, and several sub-decrees and a Master Plan to develop fisheries have been drafted. The revised law would include a stronger focus on community involvement in co-management o f fisheries resources, at least in inland areas. However, a number o f concerns remain: 0 A better assessment of the resource is needed to inform policy decisions. There are indications o f selective over-fishing, with a declining catch value and catch per unit o f effort. However, fisheries statistics are notoriously unreliable, and n o assessment o f species stocks i s available-whether for inland or marine fisheries-as the basis for further policy and regulatory developments. 0 The development of the regulatory framework needs to be informed by research and stakeholder consultations. The release o f concessions in the public domain in 2000 was not preceded by adequate feasibility and impact studies, resulting in the undesirable consequences chronicled above. Before key regulations are finalized, more work i s needed on the potential poverty and social impacts o f reforms. Furthermore, DoF has been hesitant in conducting inclusive consultations, and it needs to be more proactive in engaging in public dialogue. To address these concerns, a DFID-financed impact assessment o f recent reforms i s wdenvay that i s complemented by several donors' and NGOs' efforts on consultations. Additionally, more research i s needed to inform the development o f a viable community-kasedmanagement (or co-management) system, and to explore alternative management options fitted to local conditions and DoF's capacity. A study would be worthwhile to compare the "co-management" system with that o f the fishinglot system, even consideringthe short two-year lease period o fthe latter. 0 In the rapidly changing Cambodian environment, the adequacy of the provisions of the new law and subsequerif regulations will have to be closely monitored and, should adverse effects be identified, a proactive approach to amend legal and regulatory provisions should be taken by DoF. 0 The capacity of the government to enforce laws and regulations remains a constraint. The development o f the new law and subsequent sub-decrees will have little effect so long as laws and regulations cannot be properly enforced. The issue cannot be addressed by DoF alone, and will require the cooperation o f key stakeholders (local governments, military) .46 87. Additional benefits could be generated .from aquaculture development and improvements in thefisheries value-chain. Cambodia has considerable potential for aquaculture development, including low-intensity systems such as the integration o f fish culture directly in rice paddies during cultivation. Inaddition, the development o f market channels through private investments in support systems such as ice production and processing facilities that meet international standards can greatly benefit aquaculture development and trade in fisheries in general. These are discussedbelow, under the section on ``Improving Agricultural Incomes." 46This is a key challenge inthat there have been some reports o f the military's attacking DoF officers who attempt to enforce regulations that affect military interests. 33 RecommendedPriorityActionsfor FisheriesManagementReform Priorityarea #1 Strengthenthe institutionalframework for fisheries resources management 9 Institutional reform and strengthening. Review the existing system, including the related responsibilities among ministries. Form an inter-ministerial committee to help with the coordination and use of aquatic resources. Strengthen donor coordination in the fisheries sector among common strategic lines toward a sector-wide program. 9 Monitor the implementation and the impact of the new legal and regulatoryframework to promptlyidentify possibly needed further adjustments. 9 Address the gap between policy/regulatory framework development and implementation/enforcement. Strengthen deconcentrated fisheries offices and capacity to implement the existing law and regulations at the local level. Strengthen partnerships and > collaborationwith local government, communities, and NGOs. Gradually improve stock assessment capacity for both the marine and inlandfisheries. The assessments would be used to assist in the design of policies, regulations, and enforcement mechanisms to manage the stocks effectively; achieve sustainable yields; and reduce over- fishing and degradation o f stock value. These assessments would include stakeholder consultations and shouldtake into account the risks o f cross-sectoral impacts to fisheries from agriculture, forestry, and infrastructure development. Inthe longer term, a better assessment o f the stock biomass, species composition, and size distribution would provide the basis to determine the economically sustain e yieldunder several scenarios. Priorityarea #2 ngthenfisheries resourcemanagement strategy 9 Rationalize theconcessionsystem. Reviewthe effectiveness ofthe currentcon in meeting the government's goal of sustainable and efficient fishenes resources management. P Review lessons learnedfrom experience with community fisheries. Review the results of the pilots and design a viable community-based management system, including the formulation o f procedures to engage and consult with the stakeholders. This review also should explore alternative management options for DoF. 9 Institute fisheries management reforms that appropriately address sustainability, fishing access, and user rights issues of small-scale fishem Based on the above reviews and on international experience, explore alternative management options. Water and flood management reforms 88. Water resources management, irrigation and flood management, and rural water supply and sanitation will play key roles in the Cambodian rural development agenda. Water i s a critical natural resource. Its appropriate use and management are key for rural development and poverty reduction in five ways: (1) as a key input to agriculture production-to improve rural livelihoods, food security, and nutrition; (2) as the single most important source o f hazardrisk in the extremes of its availability-droughts and floods; (3) as the source for safe drinking, bathing, sanitation, and other domestic uses-to reduce illness from water-borne disease and related costs of health care and impairment for work and education; (4) as the basis o f the aquatic ecosystem- to sustain inland capture fisheries production; and (5) as an important mode o f transportation for bothpeople and goods, particularly inisolatedareas duringthe wet season. 34 89. Cambodia has abundant water resources. It receives an estimated annual runoff of 475 billion cubic meters (BCM) from the Mekong system, which drains over 85 percent o f the country. However, rainfall i s concentrated in the six-month wet season, and there i s very little reservoir storage to capture and regulate wet-season runoff. During the six dry months, evapo-transpiration far exceeds rainfall, and river levels drop significantly, resulting inlimited available surface water resources, outside o f the Mekong River mainstream and Tonle Sap. Floods are an annual occurrence and are virtually unmanaged, except for a dike that protects Phnom Penh. The annual floods bring positive benefits to the flood plain by replenishing soil nutrients and moisture, and dispersing fish for spawning. However, they also damage infrastructure, crops, and personal property as well as cause costly restrictions to economic and other activities. Groundwater resources are estimated at approximately 20 B C M overall, but the potential for groundwater use i s uneven geographically, and i s relatively uninvestigated and untapped. In many areas, aquifers are complexly layered. Furthermore, high arsenic levels are a serious problem in some areas near the Mekong mainstream. 90. The institutional, policy, and legal framework for water management needs to be consolidated. The Ministry o f Water Resources and Meteorology (MOWRAM) was established in 1999 and is responsible for water resources management, including flood control and large- scale irrigation and drainage. Other government entities with responsibilities related to water include (a) the Ministries o f Industry,Mines and Energy (urban and peri-urban water supply and sanitation), Rural Development (rural water supply and sanitation, and small-scale irrigation), Public Works and Transport (draimge, flood control, and navigation), Environment (water quality), Agriculture, Fisheries and Forestry (wetlands and fisheries management); and Health (water quality, and health impact); (b) Provincial and Municipal governments; (c) Commune Councils; and (d) Village Development Committees. Considerable effort has been dedicated during the last several years to developing a water resources policy and legal framework. Noteworthy are the (1) National Water Resources Policy, awaiting endorsement by the Council o f Ministers; (2) new draft Water Law, awaiting approval by the Legislature; (3) Water Resources Strategy; (4) Water Strategy Framework; (5) Water Sector Roadmap; and (6) draft outline water resources investment strategy. 91. These policies/strategies/laws have been supported by various donors and were well prepared. However, there i s a needto: Rationalize, consolidate, and endorse the existing policies/strategies/laws; Prepare and adopt sub-decrees and regulations to implement the various provisions o f the Water Law, publicize them, and build the capacity o f relevant agencies to implement them; Enhance government ownership and continue to improve donor coordination related to the Cambodia water resources agenda; Improve coordination among relevant government entities with water-related responsibilities at all levels Develop highly focused strategic action plans for the relevant government entities to direct their water-related programs in the context o f these policies/strategies/laws and to take into consideration other sector development objectives (agriculture, fisheries, environment protection). 92. Water resourcesplanning and managemenl at the river-basin level are important to ensure sustainable use of water and land resourcesfor the benefit of the rural population now and in the future. International water resources management principles indicate that water resources 35 management should be carried out within the context o f river basins and should include the participation o f central ministries, local governments, water users, and other stakeholders. Cambodia's water resources originate primarily in the Mekong River Basin. Thus, river basin planning in Mekong sub-basins in Cambodia needs to be carried out in the context o f Mekong River Basin planning, which i s coordinated by the Mekong River Commission (MRC). MOWRAM recently replaced the Ministry o f Public Works and Transport as the government agency responsible for coordinating Cambodia's participation in the MRC, so MOWRAM'S capacity to undertake this function needs to be strengthened. 93. Irrigation development needs to be implemented within the broader context of agricultural diversification and the goal of increasing rural incomes. Cambodia`s agriculture is almost totally dedicated to rice. Only approximately 20 percent o f the rice area, or 473,000 ha, includes irrigation schemes. However, effective irrigation coverage i s far less. Within the 946 existing irrigation schemes, which comprise the 470,000-ha command area, only approximately 250,000 ha, or slightly more than half, receive sufficient irrigation water because o f the general dilapidated status and poor initial design and management o f the schemes. Most rice i s produced without irrigation-planted duringthe wet season or at the end o f the wet season and the beginning of the dry season inlarge areas from which the water recedes, leaving considerable soil moisture. Year-to-year production i s extremely variable, because it i s highly dependent on the weather, in particular, the timing and level o frainfall. 94. Presently, the country i s considered "self-sufficient" in rice production in that the domestic market demand i s met and small quantities are exported. Nonetheless, most rice production in Cambodia i s consumed on-farm, and food security remains a major issue for poor households, Therefore, measures to increase production could help inselected areas to meet food deficits, and perhaps increase the cash income o f these farmers, thus directly address poverty. Suggested measures are to (1) improve agricultural technology in rain-fed and recession rice production areas and (2) rehabilitate inexpensive small-scale irrigation systems to enhance flood recession rice production targeted at subsistence rice producers. 95. Expansion or improvement of large-scale irrigation systemsfor rice production in most cases would not be cost-effective. Instead, irrigation developmentshouldfocus on diversifying to higher-value crops. Whether Cambodia will be able to (economically) increase rice exports significantly will largely depend on the evolution of external factors such as the excess production capacity inneighboring countries, current glut o f rice on the intemational market, and long-term trend in cereal prices. In addition, rice production could be significantly increased without major investments in new large-scale hydraulic infrastructure. Therefore, the incremental costs and benefits o f new large-scale irrigation development need to be compared to the incremental costs and benefits o f enhancing rain-fed production and less expensive rehabilitation of existing irrigation systems. The economic viability o f such investments needs to be better assessed case by case. Cambodia presently imports a number o f products, such as fruit and vegetables, that presumably could be produced at lower cost for the domestic market inside Cambodia if adequate quality control, transport, and marketing mechanisms were in place. Emphasis needs to be placed on irrigation systems in conjunction with diversification to higher- value crops. Simultaneously, all of the complexities that such an emphasis implies must be kept in mind: cultural impediments to converting rice farmers to producers of other crops; quality control requirements for fruits and vegetables; marketing, processing, transport, and storage issues; and timely access to agricultural credit. 36 Box 4. Challenges of large-scale irrigation development inCambodia Most donor-financed projects are concentrating on small to medium-sized irrigation schemes on the basis that the added complexity o f the larger schemes i s difficult to manage inthe current institutional and social context. Challenges o f larger schemes include: Numerous farmer water user communities (FWUCs) within one scheme, when FWUCs are still new, the legal framework incomplete, and the capacity o f MOWRAMinneed o f being strengthened Differences inmanagement capacity o f each FWUC, leading to potential conflicts Difficulty in achieving coordinated irrigation scheduling with provincial Departments o f MOWRAM (DOWRAMs) not yet skilled enough to deliver efficient service N o clear operatioins and maintenance (O&M) procedures or funding for the larger infrastructure items that are retained by MOWRAM 0 Some difficulty ingetting all the FWUCs within a large scheme to cooperate. Conversely: In countries in whlch the private sector benefits from a favorable business climate environment, private sector involvement i s easier inlarger schemes. 0 There are economies o f scale for new crops, for example, cotton, horticulture, fishfarming. 0 Larger-scale cooperative farming and marketing arrangements are possible with greater market access and price competitiveness. There are more opportunities for technology take-up and improved irrigation efficiency. However, such an enabling environment for large-scale irrigation schemes remains to be created in Cambodia. 96. Prioritization of water management iwzrrestments must be rationalized based on clear criteria and drawing from theprinciples described above. Planning documents for investments inwater management (such as those prepared for the SEDP I1or the NPRS) usually include lists o f schemes proposed for rehabilitation, for which additional resources are being sought by the govemment. H o w the proposed investments relate to broader local development goals and sector objectives, as well as the process for prioritization o f investments, often are unclear. 97. Flood management should emphasize living with floods including, where possible, preserving and enhancing the benefits and reducing the negative impacts. The impacts o f annual floods are diverse and include: 0 Social costs: Isolation o f houses left with only boat transportation possible; sources o f clean water cut when wellheads are submerged, spread o f intestinal and other illnesses 0 Economic costs: Significant crop losses, damage to roads. These costs will increase as Cambodia's economy develops. A govemment policy dependent solely on international agencies bearing the full costs o f hazard mitigation i s not viable, and the govemment must be prepared to shoulder a'greater share o f these ~osts.~'To make poverty reduction efforts sustainable, hazard risks need to be managed more proactively, employing both preventive and mitigation measures, and both structural (drainage infrastructure, dikes) and nonstructural elements. 47Inthe 2000-2001 floods, assistance from the irdernational community approached the full direct losses from the flood, estimated at US$l6e miilion (equivalent to half o f the government's recurrent budget for 2000). Borrowing from the ADB and the World Bank alone reached 50 percent o f the direct losses. Worldwide, outside assistance generally pays for less than 10percent o f countries' natural disaster losses. 37 98. Despite several efforts to build its capacity, the National Committee for Disaster Management has remained weak and unable to carry out its coordinating role. The NCDMwas created to coordinate efforts in disaster management in the country. Its membership i s drawn from agencies concerned with natural hazard management and mitigation. However, the draft National Disaster Management Policy, written in 1997, has yet to be approved by the govemment. Despite the Committee's reporting directly to the Prime Minister, it has remained virtually powerless even to coordinate activities such as damage assessments and information flows to vulnerable communities prior to the occurrence o f disasters. Given the likelihood o f future disaster events, it i s imperative that N C D M receive technical assistance to improve its systems and procedures for damage assessment, needs assessment, and disaster reporting, as well as its coordination capacity. 99. There is a need for a more proactive approach to natural hazard management, with emphasis on preventive and mitigation measures. In addition to the provision o f capacity building, future efforts in the hazard management field in Cambodia must be supported by an overall National Hazard Management and Mitigation Strategy, which i s proactive and adapted to the constraints o f the government, in particular, its fiscal and technical capacity. The strategy should provide a comprehensive riskmanagement framework that includes Risk identijication: Understanding existing hazard exposures and assessing the level o f vulnerability to the potential impacts o f those hazards Risk reduction: Undertaking measures to avoid hazards and resist disaster impacts Risk sharinghransfer: Implementing strategies to reduce the financial impacts o f disasters on the poor and the economy. 100. This framework must be closely linked to the policy decisions needed to make effective partners o f the various NCDM members and NGO community. The present emphasis on post- disaster activities will need to be balanced with preventive and mitigation measures. Elaboration of the strategy must be participatory, and input should be solicited from the various stakeholders involved in funding disaster management. In particular, the framework should integrate lessons learned from international and local good practice. In the context o f recurring and apparently worsening water disaster conditions in Cambodia, the framework also should make use o f available technology for disaster management. 101. With regards to the reduction of local vulnerability, three key areas warrant further study: e Community-based hazard management. Natural disasters significantly impact poor families and impede the delivery o f basic social services such as water, health, and education. The best way to address these impacts i s to involve the local communities in the development o f mitigation and coping measures. Some NGOs have been exploring ways to support local communities in this respect with encouraging results that warrant further study. e Community-based hazard management will need to be re-enforcedwithpublic awareness programs, and e Building social safety nets for communities to help them cope in the aftermath of disasters. These safety nets must encourage self-reliance and avoid perpetuating the community's dependency on aid through the development o f nonagricultural sources o f income, establishment o f credible banking and financial institutions that provide savings services and credit facilities, and investments in essential infrastructure. For needy 38 communities to be effectively served, there i s a need to understand current their coping mechanisms and how these can be strengthened. 102. Flood mitigation measures need to be incorporated in infrastructure design. Technical designs, particularly for infrastructure, shouldbe multipurpose. For example, roads can be builtto withstand disasters as well as to provide high ground for stranded people and animals. Multipurpose designs also may be a cost-effective way to incorporate flood mitigation features into technical designs and these aspects need to be reviewed more closely. Study o f this issue should also aim to understand the development and implementation o f building codes and inspection codes, as well as the enforcement o f the norms and accountability. These latter activities would needto be supported by appropriate legal and policy frameworks. 103. Rural water supply and sanitation coverage in Cambodia is low by all standards. Approximately only 25 percent o f rural households have access to safe drinking water and approximately only 10 percent o f rural households have access to sanitation facilities. While demand for drinkingwater i s increasing inrural areas, the quantity and quality of water resources from both surface water and groundwater sources i s not adequate in some areas. There are no sewage systems outside Phnom Penh. Latrines are used in rural areas, but coverage i s low. Cambodia has one of the highest rates of water-borne diseases in the world. The use o f unsafe water and poor sanitation facilities, combined with inadequate hygiene, has been identified as the most important reason for high infant mortality/morbidity rates. High arsenic levels also are an issue inseveral areas. 104. More work is needed on a rural water supply and sanitation strategy to guide investments in the sector. The MGDs for Cambodia call for the provision o f safe water supplies to 40 percent o f the population, and sanitation services to 20 percent of the population, both by 2005. Recently, the Ministry o f Rural Development (MRD) and the Ministry o f Industry,Mines and Energy (MIME) developed and adopted simultaneously a rural and an urban Water Supply and Sanitation Policy. However, there i s no rural water supply and sanitation strategy that lays out the actions and the related investments needed to meet these goals. Given the importance o f the health o f the populationto economic growth and welfare, safe drinkingwater and sanitation in rural areas should rank high among public investment priorities, with due consideration to the opportunities for private investment insmall piped-water systems. 105. Roles of different stakeholders in rural water supply and sanitation should be strengthened. MRD implements a number of donor-funded rural water supply and sanitation projects. NGOs, too, are very active inthis area. Inaddition, water supply and sanitation comprise a significant number o f commune-level projects financed by Commune Councils out o f the Commune/Sangkat Fund: 180 projects valued at US$627,476 (2002 data). The private sector i s fairly active inwater supply inperi-urban areas, and opportunities for replicating this approach in some rural areas of the country should be explored. However, there will be a need for public monitoring and regulation o f the.ivater quality as well as o f the potential for negative effects on the aquifers. 39 RecommendedPriority Actions for Water and Flood Management Reform Priority area # 1 Consolidatethe existinginstitutionaland policy framework 9 Prepare and adopt sub-decrees and regulations to implementprovisions of the Water Law, building on lessons from projects and usingcomprehensive consultations. Develop strategic action plans to guide the water-related programs o f concerned government agencies. Build the capacity of those agencies to implement water regulations. 9 Continue to improve donor co~rdination,~~and establish cross-ministerial standing committees or working groups to address coordination issues in the water sector and to monitor intra-agency cooperation. Strengthen accountability of line agencies for the implementation o f agreed actions. 9 Explore, in the context of deconcentration and decentralization, water resources management, irrigation development, flood management, and water supply and sanitation options at the community level. 9 Participate in the cross-country initiatives of the Mekong River Commission, including development of a water resources strategy, with stakeholder participation from selected priority sub-basins. Enhance participation in the Mekong River Commission, including improving linkages and coordination o f Cambodia water resources strategy and programs with transboundary Mekongwater resourcesmanagement and development programs. Priority area #2 Make planning and investments more strategic and supportive of broader economic developmentgoals 9 Rationalize theprioritization of planned investments, whether small or large scale, through the use of clear selection criteria. 9 Start working at the river-basin level and ensure consistency with agricultural and other broader economic development goals. Prepare and implement irrigation and flood management schemes within the context o f the river basin plans that (1) emphasize benefits to the poor, (2) are compatible with and enhance fishery benefits, (3) are compatible with the natural flooding and flood recession regime, (4) are economically viable and benefit a large number of people, and (5) are prepared and mplemented in conjunction with farmer water user committees. 9 Developplans and water managementproceduresfor apriority sub-basin and communities that will (1) limit water usage and return flow discharges to amounts and water-quality levels that preserve and sustain the environment; (2) set broad allocations to different uses (environment, irrigated agriculture, municipal, and industrial) and discharge requirements to meet this sustainability objective; and (3) design and implement monitoring and water rightddischarge administration systems to manage water use withinthese constraints. Priority area #3 Mainstream disaste eparedness and mitigation 9 Review and approve the National Disaster Management Plan. Seek donor technical assistance, training, and investments to improve NCDM's capabilities, damage assessment systems and procedures, and needs assessment and reporting capabilities. Design a comprehensive risk management strategy; balance the current approach to natural disaster ~ 48 In the current process to establish joint government-donor technical working groups (TWG), an agriculture and water management group has been created. In addition, a French-financed program i s supporting the establishment of a strategic Task Force inMOWRAM. 40 management with one that 13 proactive and adapted to the constraints o f the RGC, in > particular, to fiscal and technical capacities. Review the lessons from experience with approaches of community-based hazard management by NGOs and other donors to better design future support from NGOs and the donor community. P Integrate disaster preparedness and mitigation in land-use planning and infrastructure design. Priority area #4 Mobilize resources for expansion of rural water supply and sanitation > Enable equitable access to rural water supply and sanitation through increasing investment > inwells andlatrines inmoreremoteareas, aswell as sewage systems where appropriate. Encourage private sector participation. Greater private sector involvement in rural water supply and sanitation development should be encouraged, both because o f the scarcity o f public investment funds and because operation and management o f some facilities may be better left in private hands. In other countries, the private sector plays an increasingly important role inproviding essential water supply and sanitation services. Increasing agricultural incomes 106. For progress on poverty reduction in the face of high population growth rates, the agricultural sector of the rural economy must grow at a minimum of 5 percent-6 percent per annum (see Part Iof this document). Compared to current sector performance, this i s a high growth rate, and increasing rice productivity will go only so far toward meeting it. 0 The potential contribution to GDP growth from increases inrice production through intensification or expansion o f cultivated areas i s limited by the absorptive capacity o f the internal market, poor quality for exporting, excess productive capacity in the region; and the overall long-termtrend incereal prices regionally and worldwide. 0 However, even with the market limitations, increases inrice production and milling efficiencies potentially will contribute up to 3 percent annual growth (FA0 2003). 0 Growth inforestry and fisheries production i s limitedby the carrying capacity o f the resource and the tradeoffs between increased harvesting for commercial purposes versus resource values in the context o f availability o f non-timber products, rural safety nets, and other noncommercial uses. 107. Achieving a higher growth rate will require diversification away from rice. Diversification, for the most part, must be market driven and, to a significant extent, export oriented: 0 Given the low domestic income levels, concentration o f higher incomes, and skewed income distribution, which limit growth in domestic demand, additional contributions to growth from diversification beyond traditional rice, forestry, and fisheries products require an export-market orientation. 0 If production and mslrket constraints are addressed, national demand could lead agricultural secto,growrii to an average 4.4 percent p.a. Future incremental domestic 41 food demand will derive from (1) population growth (some 2.5 percent p.a.) and (2) with income growth, changing dietary composition from rice to meadfish, vegetables, and more highly processed food.49 Although there i s a potential for import substitution inthe case o f high-quality rice (100,000 tons current import) and other products including vegetables and h i t , sugar, vegetable oil, poultry, and pig, realization o f this potential would only be possible once market, institutional and infrastructureconstraints have been removed. Currently, domestic production cannot compete with imports for a number o f products, particularly from Thailand and Vietnam. 0 Farmers' and agnbusiness competitiveness and integration with global markets i s limited by low productivity, weak infrastructure, and other institutional factors (such as corruption), which raise costs and inhibit efficient transmission o f market signals to rural producers, transporters, processors, and Cambodia's nascent rural financial markets. 108. Supportive policies and incentives need to be developed, in consultation with farmers and the private sector, to enhance the supply response in traditional outputs such as rice, fisheries, and livestock; and to facilitate diversification in production and value-added processing, as well as determining the factors that will enable the rural poor (producers and laborers) to capture a larger share o f the additional value generated from rural-based production. Even with reduced distortions on the demand side and an effective and diversified supply response, favoring small farmers and rural laborers requires improvements in the efficiency and equity o f access to productive assets and input markets including land, water, finance, and technology. Options exist (examples are emerging in Cambodia) for pursuing a strategy o f pro- poor rural growth through market-led diversification, including contract farming and marketing associations. However, these options require substantial changes in the rural investment climate and the organizational structures linkingrural producers with processors and the market. 109. A higher growth rate will essentially involve a transformation from a primarily subsistence-oriented agriculture characterized by low input rice monoculture and low returns to land, to a more commercially oriented and more diversified agriculture. This transition has already started and needs to be facilitated by supportive policies and investments. Thus, a series o f cross-cutting reforms and interventions are required to reduce the perceived risks o f shifting from subsistence to more commercially focused farming. Future trends in farming to a great extent will depend on government policy choices for rural areas in regards to (1) reorienting agricultural policy, resources allocation, and support services to respond to the needs o f diversified farming systems, and (2) resolving production, marketing, and trade problems faced by key commodities (rice, fish, livestock, rubber); as well as (3) irrigation and water management investment priorities; (4) road and village infrastructure development, especially inmore remote areas, and (5) land management and tenure security. The focus o f this section i s on (1) and (2); (3) to (5) are covered in other sections o f Part I1o f this Note. 49Takinginto account the decreasing share o f food expenditures with income increase, an income growth rate o f 3 percent nationwide, as a rough estimate, would drive agriculture sector growth at a maximum o f 4.4 percent p.a. (Combining the 2.5 percent population growth and, 1.9 percent from shifting dietary patterns -3% @ 63.5%, when 63.5 percent i s the share o f incremental income spent o n food). The income elasticity for various food items has been estimated at 0.46, 0.75, and 0.92 respectively for rice, non-rice basic staples, and meadfish (FAO, Emstberger and Liu2003). 42 110. The diversity o f local situations requires emphasis on a decentralized approach with greater community participation. However, a number o f systematic constraints, such as bottlenecks in the marketing and trade regulatory environment, will require coordinated actions involving central level agencies. A combination o f (1) actions to strengthen sector management for apcultural development; (2) services to support production, marketing, and trade o f agricultural products; and (3) commodity-specific programs i s therefore proposed. Strengtheningsector management 111. Developing a clear agricultural developmentprogram is a priority. As a first priority, the government's strategy for apcultural development needs to be clarified, and general priorities translated into specific programs, which would receive increased government and donor support. The NPRS identifies the following priorities for agricultural development: (1) accelerated and sustainable irrigation development; (2) accelerated land titling and distribution o f idle land under MAFF's management; (3) development o f exports o f rice and other agricultural products, and processing and quality control facilities; (4) strengthening essential agricultural support services including extension, research, marketing, credit, and input distribution; (5) expansion o f livestock production with emphasis on animal health services, nutrition, and range management, and establishment o f meai processing plants; (6) introduction o f appropriate technologies for rice-fish farming and aquaculture; (7) promotion o f community-based forestry and fisheries management; and (8) strengthening capacity at all levels o f rural sector agencies. However, the NPRS does not define a clear strategy for agriculture, and its broad directions have yet to be translated into more specific priority programs. 112. Sub-sector strategies and policies exist in several areas, but their consistency and actual implementation, as well as ownership and support atpolitical level, remain at issue." A combination o f consistent programs aiming at revitalizing key sub-sectors (addressing identified production and marketing constraints affecting the competitiveness o f specific sub-sectors, for example, rice, rubber, fish, livestock) and programs aiming at improving the quality o f service delivery to the agricultural sector (for example, agricultural extension system, market information system, and financial services to allow for further diversification o f agricultural production in response to market demand) would provide a framework to rationalize and focus the currently scattered efforts o f various stakeholders in the sector. A credible agricultural development strategy also would support MAFF's advocacy efforts for an increased budget allocation to the sector. 113. Resources need to be aligned with the agricultural development strategy. Agriculture and rural development lag behind other priority sectors in terms o f improvements in public expenditure policy and management, and alignment o f resources with their development objectives. Linkages between planning and budgeting and pro-poor targeting o f resources have improved in the health and education sectors; however, agriculture and rural development have yet to make progress on this front. With projected revenue collection well below financing needs o f the NPRS, expenditure rationalization should be a highpriority. In addition, the lack o f clear sector policy and output information makes the evaluation o f the efficiency of public expenditure inagriculture and rural development difficult. Finally, given the volume of external assistance in total government expenditures-estimated at 75 percent or more for agriculture and rural 50Noteworthy are a draft Seed Law and Seed Strategy, a Livestock Policy and Strategy, an Agricultural Education Strategy, National Extension Guidelines, a draft Fisheries Law (with Council o f Ministers), and draft sub-decrees and regulations o n agricultural standards. 43 development- improving the management o f external assistance to ensure greater alignment with RGCpriorities is also critical. 114. Serious public expenditure management issues undermine the economic, geographic, and intrasector efficiency of resource allocation in the rural sector, and a small overall resource envelope means impact is limited. The 2003 Public Expenditure Review (IFAPER) identified the following major issues inthe sector, based on a review o f MAFFand MOWRAM": Box 5. Key public expenditure managementissuesinagriculture Government resources allocated to sector are quite low (less than US$I per capita), given the hgh share o f population dependent on agriculture. However, there i s a need for a clear pro-poor growth program that could be translated into the MTEF before any budget increase can be justified. Recent increases in expenditures have gone to subsidies, rice seeds, for example, rather than to priority sectors. The budget process is undermined by considerable off-budget flows. High off-budget revenue collection is a serious concern, especially in the forestry and fisheries sub- sectors, in which collections are not monitored effectively against budget. The profitability o f rubber companies i s very poor, and state-owned agricultural enterprises are not monitored by MAFF. Management o f donor aid i s also a major problem, with no comprehensive recording and monitoring o f resources allocation and expenditures in the sector. The economic allocation of resources is somewhat ineficient. The wage bill share o f recurrent expenditures has dropped byhalf inrecent years. Onthe positive side, operation and maintenance at the provincial level have increased. Poor execution in the early part o f the year undermines budget management, with especially negative impact o n activities linked to the seasonal agricultural calendar. The sub-sector and geographical allocation of resources is ineficient. Even though extension ranks high in the government's strategies for poverty reduction (SEDP 11, NPRS), MAFF's allocations for agricultural extension are less than 1percent o f budgets2 A major share o f resources is allocated to central ministries (MAFF, MOWRAM). More than half o f MAFF's PAP expenditures have been spent o n forestry replanting, o f which a large share has been spent o n staff remuneration. There are no targetindtracking mechanisms to ensure pro-poor budgets and expenditures. There is no system for monitoring budget and financial information o f MAFF departments and affiliates. Source: IFArcR 2003. 115. Agriculture sector institutions need to be modernized to reflect the shvt in economic orientations,from centrally planned and production-oriented to commercialized and market- oriented. Cambodia's shift toward market-oriented agriculture i s reflected by the ongoing divestment/privatizationo f former state-owned enterprises (AIC, KAMFIMEX, rubber estates, seed farms) and the liberalization o f agncultural trade, which followed the earlier liberalizationo f agricultural prices. However, these changes are slow, because they continue to face substantial resistance from vested interests. In parallel, sector institutions have yet to be restructured to reflect the new orientations o f the economy. Four aspects requiring further support are (1) redefining the role of the public sector inagnculture; (2) reviewing the role and responsibilitieso f key institutions, particularly in the context o f decentralization and deconcentration; (3) completing ongoing privatizations; and (4) addressingkey missingskills. 51Findings apply to the agriculture and water components o f the rural economy; the IFAPER did not cover other agencies directly involved inthe rural economy. 5216percent inThailand. 44 116. Redefining the role of thepublic sector in agriculture. Several o f the current functions performed by MAFF and related institutions are obsolete and inappropriate roles for public agencies in a market-oriented economy. MAFF and public agricultural institutions need to focus on the delivery o f public goods, moving away from direct involvement in production, input distribution, and marketing, which are better done by the private sector. Examples of inappropriate government involvement include the production o f seeds on state-owned seed farms for sale andor distribution to farmers and the distribution o f chemical inputs. Conversely, a number o f key public (macro) functions are still under-developed, for example, economic analysis for policy development, epidemiological surveillance, promotion o f rural producer organizations, and development and enforcement o f food safety standards. A functional review o f MAFFto be undertaken under the ADB's Agricultural Sector Development Loanwill provide the basis for a plan to modernize the institution, including redefining key functions o f the ministry, and corresponding staffing and skills needs. Increased political support and leadership will be needed to implement the needed restructuring. Progress with civil service reform also will be crucial to support these changes. 117. Reviewing the role and responsibilities of key public institutions and increasing synergies with local planning procexyes. The organization and mandate o f MAFF at the central and lower administrative levels (?rovincial and district offices) has not yet evolved to reflect recent changes in Cambodia's economic and administrative orientations: the new role o f the public sector in a market-oriented economy, and, more recently, the decentralization and deconcentration processes. In particular, the roles o f Provincial Departments o f Agriculture, Fisheries and Forestry (PDAFFs) and District Agriculture Offices (DAOs), which are critical for effective linkages between farmers and the ministry, are poorly defined, reducing the effectiveness o f policymaking and implementation and delivery o f agricultural services. 118. There i s an urgent need to redefine the mandate o f these offices to better serve the core functions o f planning and knowledge o f the local economy. The core functions are fostering agricultural productivity (supporting the development o f farmers' organizations, extensions services, and market information services), surveillance and control o f animal and plant diseases, and managing forestry and fisheries resources. The presence o f MAFF at the 1ocaVdistrict level to execute national policies, inform the ministry o f local agricultural development, and monitor the implementation o f laws and regulations relevant to agricultural production also will need to be redefined inview o f the government's decentralization policy. Similarly, the role and presence o f provincial and district extensicn services need to be redefined as part o f a broader analysis o f MAFFpresence at the provincial mdlocal levels, including the appropriate levels o f funding and staffing at those levels. With support from the Agriculture Productivity Improvement (APIP) and Agricultural Development Support to SEILA (ADESS) projects, work has been initiated on the needed modernization o f PDAFFand DAO. 119. Completing the ongoingprivatization of formerly state-owned enterprises, and creating an enablingframework for theprivate sector. Privatization o f the major state-owned enterprises inthe agriculture sector isunderway, with support from the ADB.53Itis expectedthat the process will be completed by 2006. Combined with improvements inthe business climate, its completion will open the way for greater private sector involvement inthe provision o f inputs and marketing support services. 120. Addressing missing sector-specific skills. The lack o f financial and economic understanding or skills in agriculture-related government agencies i s reflected in the lack o f 53First Agricultural Sector Loanand upcoming Agricultural Sector Development Loan. 45 capacity (at all levels) for policy development, socioeconomic andor investment analysis, water and farm management economics, agricultural marketing and trade issues, and general rural business skills. These skills are urgently required ifline agencies are to contribute effectively to policy planning, provide sound recommendations for investment from farmer level to sector level, and realistically evaluate policy and investments options. Sector planning i s supply driven and output oriented, rather than rural incomes and poverty reduction oriented. Awareness or experience of participatory approaches, farming systems approaches, andor o f agricultural economics within the technical ministries and their departments (both central and provincial levels) i s low. Govemment staff tend to maintain a top-down, rather than a service-provider, approach (as, for example, in agricultural extension and water management). Facilitating technical and market support services 121. Agricultural extension can play a key role in bridging the current technology gap in agricultural production and post-harvesting handling and processing. The mandate for agricultural extension services i s placed with the recently created (1998) Department of Agricultural Extension inPhnom Penh, and the Offices o f Agricultural Extension (provincial and district levels). A National Extension Strategy was developed in 1998 with support from AusAID, and training has been provided to agricultural extension workers (AEW) at provincial and district level in 13 provinces (CAAEP and CAAEP I1projects). In parallel, a number o f NGOs and donor-funded programs have developed different models for the delivery o f extension services,54 including farmer-to-farmer technology transfer models, and combined delivery o f credit and extension packages targeting poorer farmers. 122. However, extension services remain embryonic, with only 0.7 percent of farmers having access to anyform of extension service,55and important quality and effectiveness issues remain. While women represent 54 percent o f the farming population, they represent only 10 percent o f farmers with access to extension services. In general, messages remain top-down, and cultural and skills constraints have hampered AEW engagement in more desirable two-way exchanges with farmers.56There are indications o f various innovations initiated by farmers, but these are not yet well documented. Few programs are engaged in support to farmers' exchanges or farmers' associations. Success stories in the delivery o f extension services through the private sector are rare and seem to be linked to high investment capacity, allowing strategies based on long-term returns to investments. Farmers involved in such schemes seem to be the wealthiest and best endowed. However, there has been n o systematic assessment o f the relative effectiveness o f these different programs. 123. Agricultural research is weak and supportedprimarily by donor initiatives. The most notable achievement has been the establishment o f the Cambodia Agricultural Research and Development Institute (CARDI), the main national agricultural research institution, through Australian support. Local research institutions remain poorly integrated both with the private sector (farmers and agribusiness) and other institutions such as agricultural extension and educational institutions. Under the ADB's Agricultural Sector Development Loan, a master plan for agricultural research will be prepared to address issues faced by the sector. With support from 54Reviewed in"Extension Review," report by C. Castellanet for the World Bank 2003. 55Castellanet 2003. 56 Fewer than 25 percent o f Provincial Departments o f Agriculture staff have certificates or higher qualification; the percentage i s probably lower at district level. The current Agricultural Extension Guidelines estimate the staffing needs at 5 skilled extension officers in each district (a total o f 900 for the whole country), o f whom approximately 150-200 have received initial training so far. 46 the APIP project, a strategy for agricultural education has been developed; however, it remains to be implemented. 124. The central questionsfor thefuture of a national extension system supported by the public sector are financing and sustainability. MAFF's budget represents 1.4 percent o f the government budget (IFAPER2003), o f which only 1percent goes to the extension department. A fully public, centralized extension system able to reach all communes and villages would be costly for government, even in the medium term. For the sustainability, efficiency, and transparency o f a public extension service, the question o f staff salaries i s essential. The current salaries at district level are far below the salary range offered in projects managed by donors, NGOs, and the private sector. This gap makes it difficult for the government extension service to retain qualified civil servants posted as district extension officers. In the absence o f adequate salary and operational budgets, public extension services will continue to perform poorly.57 Furthermore, the current system might not be the best system to capitalize on farmers' own initiatives and innovative capacity, including farmer-to-farmer communication.58A "middle way" with targeted, public-funded extension that enabled and supporting the development o f pluralistic approaches with some competition among different service providers (private, NGO) would better accommodate the existing context. However, inview o f past resistance to such an approach inMAFF,a clear indicationofthe government's interest andwillingness to work inthis direction will be ne~essary.'~ Table 6. Characteristicsof agriculturaltechnologiesand privatesector incentivesto provide them Typeof good I Public good Private Features I Non-excludableand Excludable and nnn-rivnl rival Examples Weather forecast Hybrid seeds Mass communicationof Commonpasture Farmmanagement Biotechnology productionandmarket management computerprograms products information Shared fishery Privateconsultation Agricultural Naturalmanagement on farmingand machineryand techniques marketing chemicals I Livestockvector Livestockdipping Veterinary supplies control Likelihood of private provision I Very low Low 1 Higher `ource: Umali-Deininger 1997, World Bank 2( 2. Note: Non-excludable= a person who does not pay can still receive it. Non-rival = one person's use does not lower another person'sbenefit from it. 57 Currently, extension staff have to continuously look for additional sources o f income; looking for '*Salary "benefits" distorts their planning o f their activities. increasesto support a public extension system based on the proposed 5 extension staff per district, remunerated at appropriate level to retain qualified staff (approximately US$l50/month, based on project/private sector salaries for trained agricultural technicians) would represent a budget o f US$1.62 million per year for salaries only, 3 times the total current budget for extension (or 42 percent o f the total PDAFF's budget at the moment). 59 Inthe past, MAFF's policy on extension has been unclear inpractice, with the ministry allowing the development o f separate extension systems in different departments-the I P M program in DAALI, livestock production extension in DAHP, and rubber extension in DGPH-in parallel to the activities o f DAE. Attempts to affiliate private providers with extension services with MAFF-implementedprograms have encountered strong resistance from MAEF. Examples are APIP and the provision o f training for VAHWs byNGOs, and CAAEP's provisionfor contracting o fnongovernmental extension services. 47 125. The absence of market and trade services and inefficiencies in value-chains affect the competitiveness of Cambodian agriculture. In 2001 agricultural exports (excluding forestry) declined to their lowest level since 1994, US$54 million (of which 90 percent was rubber), while agricultural imports increased to US$301 million (FAOSTATS). Production efficiencies do not compare well. Research and market information systems on high-value products are lacking, while quarantine, food, and biosafety standards are inadequately implemented. Enforcement o f regulations is poor; transport costs are high; and myriad unofficial fees add to the cost o f doing business and are major impediments to private investment in the agriculture and agribusiness sectors. The WTO accession process has brought these issues to the attention o f the govemment. 126. With the exception of limited professional associations of some farming and agribusiness groups, formal marketing and trade facilitation institutions are virtually nonexistent in Cambodia. Limited access to market information i s a key constraint to diversification o f production. Furthermore, public policies' past focus on output has neglected market demand for quality and standards. At the same time, the ability o f small-scale producers to take full advantage o f emerging market opportunities depends in large measure on their ability to meet market demand for quality and standards. Increasingly, these standards are regulated, I particularly for international trade in products, by intemational and bilateral agreements, standards, and systems. The private sector also plays an increasing role in the development o f quality standards. The productivity o f small-scale producers often depends on the quality o f inputs, with quality often difficult for the purchaser to assess. Small-scale producers often are harmed by fraudulent product. Examples for which this issue i s important and for which labeling on retail packaging needs to be accurate and informative are seed quality, animal pharmaceuticals, and fertilizer and pesticide content. Cambodia i s pursuing a strategy o f integrating with intemational markets and gradually becoming a member o f various international trade associations. These advances come with attendant responsibilitiesregarding regulating trade and specific domestic concerns (for example, pesticide use). Thus, international trade agreements are now driving the domestic capacity building agenda. 127. During the ASEAN and WTO accession processes, the development of quality and standards regulations has accelerated.Noteworthy initiatives include: 1. Two draft laws on technical regulations and standards are being prepared, the first for a Cambodian National Standards Institute (to serve as the inquiry point referred to in the WTO Agreement on Technical Barriers to Trade); and the second for the Quality and Safety o f Products and Services. 2. Under pressure to address the widespread availability o f hazardous pesticides and rural population exposure to them, the govemment has issued a Sub-decree on Standards and Management o f Agricultural Materials. It also has created the Bureau o f Agricultural Material Standards (BAMS) inMAFFto implement and monitor enforcement o f the sub- decree. 3. A national Codex Alimentarius committeehas been established. However, enforcement o fregulationsremains a key issue. 128. Ensuring that small producers have the means to meet market requirements will require increased support. Cambodia has begun to marshal various sources o f intemational assistance to strengthen its capacity in the field o f agricultural product and food safety 48 regulation.60Despite these efforts, the lack of capacity in both domestic market regulation and sanitary and phyto-sanitary (SPS) regulation for exports directly hinders rural producers ' productivity and access to markets. For example, the low capacity o f Cambodia's veterinary inspection system means that de;pite duty- and quota-free access to EU markets under the "Everything But Arms" EU Initiative (EBA), local meat, poultry, and fishery products do not fulfill the EC's sanitary andphyto-sanitary requirements andtherefore cannot be imported to the European Community. In addition, potentially major export markets often apply their own individual standards, which add to the complexity o f breaking into these markets. Plans are underway to export seafood to Japan and river fish to the United Kingdom, but Cambodia will need to improve inspection, packaging, and administration for these plans to materialize. Earlier attempts to export fish to Europe were blocked by the EC due to lack o f quality control. Moreover, if the current promotion o f agro-industrial investment in Cambodia favors large-scale producers, the risk i s that small producers will be the last to acquire the skills and means to meet the requirements o fthese export markets.61 129. A difficult but important issuefor the government is how to build domestic capacity to address food safety issues and meet export market requirements for quality and standards while promoting small producers' access to these systems and capacity to meet the requirements. Addressing this issue will require concerted action, probably through producer groups to reduce transaction costs. Extension and access to information will be important to facilitate small-holders' ability to participate in emerging markets. Further work is necessary to identify options to address these issues within the specific capacity and resource constraints o f Cambodia. 130. However, addressing the cross-cutting issues that affect marketing and trade channels for Cambodian merchandise, including agricultural products, i s beyond the sole responsibility o f rural sector agencies, and will require concerted actions with a number o f other agencies, such as the Ministry o f Commerce, Customs, the police, and the military (box 5). Agricultural sector institutions have a role to play in advocating for accelerated changes in these areas. However, demonstrated broader political support and leadership at the government level in responding to identified trade facilitation deficiencies i s needed. At the sector level, public sector focus should be on promotion o f food safety and standards, because promotion o f quality i s best done by the private sector. Improved access to financial and business services i s needed to enable investments invalue-adding processing technologies byagribusiness entrepreneurs. 6o Under APIP, the National Animal Health and Production Investigation Center (NAHPIC) has been reorganized and strengthened as the hub o f a national laboratory network. NAHPIC will be important as part o f the regulatory system for domestic food safety and international trade in livestock and meat products. Through an ASEAN support project, New Zealand, includes Cambodia in activities to undertake phytosanitary capacity development, including a national phytosanitary database that would support issuing import permits and export certificates among other capacities. An additional two phases provide for senior officials to get training and to develop strategic plans for each country: (1) through the Advisory Assistance to Industry for Export Promotion (AAIEP), UNESCAP (Bangkok), has provided support to Cambodia on the fisheries sector to identify through a market study new export potential and, with consultants fiom Infofish, workshops on food safety and HACCP; (2) U N D O also has provided support on food safety systems. AusAidi s also providing assistancethrough an ASEAN project. For 2005 case studies o f other East Asian countries' experiences gearing up to meet international agricultural import regulations, see World Bank Agriculture and Rural Development Department (ARD), http://web.worldbank.org/WB SITE/EXTEFWAL/TOPICS/TRADE. 49 Box 6. Key constraints to Cambodian agriculturaltrade development There are significant constraints related to tradefacilitation, with weaknesses in the Customs and Excise Department. A large number of government agencies are involved inprocessing and inspecting imports and exports, adding to costs and increasing delays in transactions. Current legislation permits any 1 o f 10 agencies to be present at international checkpoints, with at least 5 always represented. Informal/unoBcial payments characterize marketing systems in the country, including informal road tax collections, "fees" for export licenses, and other border and market charges. These payments greatly increase the costs o f trade and encourage smuggling, which i s still prevalent in Cambodia. These issues are compounded by the long and remote borders with neighboring countries and high duties on certain goods, such as consumer goods and petroleum. Poor rural infrastructure constrains the movement o fproduce around the country and isolates many agricultural communities, especially duringthe wet season. Qualiv of agricultural produce is low due to a combination o f lack o f awareness o f quality issues on the part o f farmers, inappropriate processing technologies, old and l o w standard o f processing equipment, and damage attributed to poor handling and storage and transportation. The agro-enterprise sector is small scale and not well developed, leading to low value added in product transformation. Enterprises operate in an environment characterized by weak infrastructure as well as constraints to business development, including a weak financial sector, highlevels o f corruption, and l o w levels o fbusiness skills. Defining programsto improvethe performance of core agricultural sub-sectors 131. Development of functional nation-wide and cross-sectoral responses to the many issues faced at different levels o f commodity chains will take time. Solutions to commodity-specific issues for key commodities may be more quickly and easily supported through specific support programs. This approach would both strengthen organizations o f producers and facilitate the development ofpublic-private sector partnerships. Rice 132. Rice's contribution to agricultural growth will remain limited, but improvements to existing systems are central for food security and the basis for further diversijication of production. MAFF's current action program emphasizes increased rice production and rice exports (the target output for 2003-04 i s 4.5 million tons, up from approximately 4 million tons in2002).62However, the absorptive capacity of the domestic market, the current glut of rice on the international market, and the excess production capacity in neighboring countries limit the potential contribution of the rice sector to agricultural growth inCambodia. Furthermore, in2001 approximately 10 percent of the rice marketed domestically (approximately 60,000 tons) was exported officially, while 33 percent o f the paddy sold by farmers (over 450,000 tons) was exported unofficially, indicating a significant fragmentation of the marketing chain. 133. At the farm level, increased rice yields alone could contribute only marginally to signijicant increases of farmers 'incomes, with returns oh rice production estimated at US$l00-150/ha at currentprices, and average size of farms of approximately 1.5 ha. However, increasedyields could help withfood securityfor subsistenceproducers in areas in which no other economic alternatives arepresent in the short term. The potential for increasingrice yield ~ 62 Annual Conference on Agriculture, Fisheries and Forestry, 2003-2004, MAFF. 50 levels, cropping intensity, and unit area productivity in the different rice ecosystems i s good. Increasing productivity requires increasedyields through the use o f improved varieties, fertilizers, and irrigation. Agricultural extension i s central to promote intensification o f farming systems as well to develop a seed system that increases access o f smallholders to improved seeds. 134. As regards seeds, substantial progress has beenmade inthe development and diffusion of new varieties, inparticular, with support from the CIAP and AQIP projects (AusAID) and under the APIP project (World Bank). However, much more work i s still needed to develop the legal, regulatory, and institutional framework necessary to enable the development o f a competitive and efficient private seed sector. Together with higher and more balanced fertilization, improved varieties, and good on-farm management, irrigation can increase both yield and cropping intensity. Technically, increases are possible especially in areas characterized by medium to high soil fertility, inwhich an average rice productivity o f 5 t/ha/year-double the present productivity level-is feasible (FA0 2000). However, at current prices, heavy irrigation investments for rice monoculture are not economically feasible. Investments in irrigation should include complementary measures to ensure the diversification o f rice farming systems, for example, to integrated rice-fish or rice-livestock systems; or the development o f higher value crops. 135. Rice also represents a high percentage of expenditures of the poorest households. Thus, any policy for the rice sector should take into account the potential adverse impact of increasedrice prices on the poorest segments o f the population. 136. The development of high-quality rice production for export is dependent on a conducive investment climate. It i s expected that high-quality rice production ("Thai approach") has better return than the production o f lower quality, high-yielding varieties ("Vietnamese approach"). However, due to the specific soil and ago-climatic conditions, high-quality rice could be produced on only a fraction o f Cambodia's total rice area. Consequently, only a relatively small number o f farmers could be involved in the cultivation o f this type o f rice. Furthermore, production and marketing o f high-quality rice are highly dependent on private investment and a conducive bminess en~ironment.~~The Rice Value Chain Study (World Bank 2002) estimated that Cambodia's potential for high-value rice exports is inthe range o f 200,000- 300,000 tons (ADB 2002), and that an additional 100,000 tons could be produced to substitute for current imports o fhigh-quality rice.64 137. Increasing the competitiveness of Cambodia rice for export. Exporting rice to world markets also would require improving post-harvest systems and addressing existing constraints to rice marketing and trade. The current lower farm gate prices have discouraged investments in inputsand production technology improvements (ADB 2002). Constraints on rice marketing and trade will have to be addressed, including qGality, post-harvest losses, poor infrastructure and support services, consistency o f supply delivery, and transparency o f transactions. The Cambodian Rice Miller Association identified "irregularities" (i.e. rent-seeking activities and unofficial fees) as a major constraint to officially exporting rice from Cambodia. The export protocols and inspection regimes are time consuming and costly for exporters, resulting in the export o f rice through informal channels.65 It was also estimated that rent-seeking activities 63 Some private investment inhigh-quality rice mills has occurred over the last few years and encountered some success both with farmers and with exports to international markets (Sources o f Growth study, FA0 2003). 64This compares witha total paddy production o fapproximately 4 milliontons in2001(FAOSTATS). 65The total cost o f export procedures adds approximately US$14/ton to the cost of exported rice, and the estimated cost o f ineffective regulations amounted to 85 percent-126 percent o f total government 51 contribute to a mark-up o f 20 percent-30 percent o f prices received by farmers. Reduction in transaction costs could both improve the competitiveness o f Cambodian rice on international markets and lead to higher farmer gate prices, possibly triggering more investments in improved millingtechnologies andpost-harvestpractices. 138, Addressing identified constraints and inefficiencies along marketing chains in partnership withprivate entrepreneurs. Compared to other sectors, the rice sector benefits from more advanced professional organizations (Rice Millers Association, Seed Grower Association), although they are still weak. It also has benefited from stronger government attention in terms o f research and extension support. Constraints to production and marketing are fairly well documented, so thepriority is to turn recommendations into action. Livestock 139. The livestock sector has the potential for widespread productivity gains and income growth. Demand for meat inneighboring countries i s projected to increase. Indonesia, Malaysia, and Thailand already are importing large numbers o f live animals. InVietnam, shortage o f meat i s expected in the near future, because living standards and purchasing power are improving. Smuggling live cattle across the borders from Cambodia to Vietnam i s known to happen, and undeclared exports o f live cattle to Thailand have been ongoing for several years (ADB 2002). 140. Improving livestockproduction and marketing systems could bring rapid benefitsfor a large proportion of the rural population. Raising livestock i s an integral part o f Cambodia's farming systems and provides an important contribution to the cash incomes o f most households.66 Backyard pig and poultry production i s a major source o f cash income for most rural households despite the fact that productioninputsare minimal and mortality rates high. 141. With the exception o f poultry, the growth rate o f animal stock has not been particularly strong, Large animals (cattle and buffalo) are still used mostly for animal traction purposes, and their growth has declined over the past decade mostly as the result o f increasing mechanization. Swine performance from 1996-2000 has suffered from negative effects o f floods and animal health problems. Poultry registered an average annual growth rate of 8.8 percent over 1996-2000 (ADB 2002). However, this growth seems to be mostly explained by the construction o f large- scale industrial poultry production units close to urban areas, which compete directly with small producers. 142. I n the short to medium terms, opportunities are to befound in increasing the efficiency of the widely practiced backyard livestockproduction, emphasizing animal health services and nutrition. Much work is still needed to build the animal health system at the national level, including effective epidemiological surveillance and border controls. Nevertheless, initial investments in the development o f private village veterinary services in some provinces have already reduced the mortality rates of farm animals, calling for a nationwide expansion o f these services. Despite the importance o f livestock sales for household economies, opportunities to increase the efficiency o f livestock marketing chains and value-added captured by small producers have received limited attention so far. expenditures in the agriculture sector in 1999 (Center for International Economics and Ministry of Commerce 2002). On average, livestock provides 17 percent of household incomes at the national level (Helmers and others 2003). 52 143. I n the long term, the prospects for contract growing of pigs and poultiy, with food conglomerates and agribusiness corporations as investors, could be of interest. With increased agricultural output, there i s a potential to develop a vertically integrated agribusiness system based on local crops, livestock, and fishery products, encompassing: small- to medium-scale feed crop production systems; animal feed and fish meal processingplants; swine, poultry, and fishery production using locally formulated feed concentrates; and fish and meat processing. Cambodia could have a competitive edge over other ASEAN countries in such ventures since it is a low-cost producer of raw materials for Jish and animal feeds processing (FA0 2000). However, recent experience (such as the case o f Thai CP feed mills) shows that investment climate and export facilitation issues must be addressed first. Fisheries 144. This section focuses on the culture fishery and marketing o f fisheries production from both capture and culture. The management aspect o f capture fisheries i s reviewed above, under natural resources management. In addition to its role in fisheries management, DoF i s also responsible for promoting aquaculture or culture fisheries as well as controlling processing, trade, and export activities for fishproducts. 145, Aquaculture, especially rice-fish farming systems, offers an opportunityfor household- based increased fish production. Currently, aquaculture i s limited to specific activities such as holding captured fish, including some fattening, to achieve better market prices; small-scale ponds for home consumption; and raising specific aquatic products such as crocodiles, eels, and Aquaculture often requires comparatively large investments ininfrastructure and working capital and runs a relatively highrisk, which demands sophisticated management slulls to control losses from disease or natural disaster. In terms o f future growth, over the short term, marine aquaculture i s not expected to provide a significant contribution in Cambodia. Shrimp farming has been developed along Cambodia's coastline by Thai businesses, although most farms have been abandoned due to low profitability caused by various factors, including poor management combined with shrimp disease pandemics in the region. However, a local form o f aquaculture practiced more widely i s rice-fish culture with trap ponds, which requires little investment and provides incomes that can exceed incomes from rice cultivation alone.68Output i s often higher in irrigated areas when farmers have greater control over water supply, especially during the dry season. This fact shows that small-scale irrigation development not only can improve agricultural outputs but also can produce higher fish yields from the same area under cultivation. Moreover, integratedrice-fish culture requires the use o f less pesticide and chemical fertilizer to produce the same rice yields. However, rice-fish culture needs to be designed and managed carefully to reduce the risk to fish o f the use of agrochemicals inrice paddies. 146. Addressing inefficiencies of marketing and trade channels to increase value added and overall performance of the sector. Inrecent years, official exports o f fish from Cambodia have ranged between 30,000 to 100,000 tons (approximately 10 percent-25 percent o f the total catch), comprising predominantly unprocessed freshwater fish exported to Vietnam. Meanwhile, unofficial exports also have been growing. At the same time, significant fish losses to spoilage occur due to lack o f effective marketing channels including cooling facilities. The reasons for this lie in the dysfunctional institutional framework in fish marketing, which has resulted in missed opportunities for increasing domestic valve added, and a significant proportion o f the value o f Productionis recorded at 15,000 tons of fish and some 25,000 crocodiles (NIS 2001). Annual fishproduction is usually in the order of 200-400 kgha, or 4-8 times higher than that o f capture fisheries. 53 fresh-fish exports being lost through spoilage due to marketing delays and inadequate storage. The marketing system needs to either be able to quickly move perishable produce to the point o f sale, or develop freezing and processing, cold storage, or ice supply facilities to preserve freshness. Meanwhile, as many fishers are small scale and unable to catch fish in sufficient quantities to reach feasible marketing volumes, a complex product assembly system has evolved with collection points, distributors, and brokers. With an improvement in marketing channels, including transport, icing, freezing, and other processing for domestic consumption and export, the value o f the harvest and economic performance o f the sector likely would rise. To effectively address inefficiencies in the marketing and trade o f fish products, the coordination o f several agencies (Customs, Fisheries, Commerce) also will be required. 147. On the policy side, some progress has been made to liberalize the sector, but transaction costs are high and trade facilitation inefficient. KAMFIMEX, a state-owned company operating under the jurisdiction o f MAFF, had a monopoly in the export o f fish until end-2001. Since then, more than 20 other companies have been licensed to export, and the role o f KAMFIMEX has declined rapidly. However, the market is still riddled with unofficial payments and some official fees that appear to serve little purpose. All the official and unofficial fees squeeze margins on fish trade and ultimately lower pricesreceivedby fishers.69 148. The fish marketing sector also suffers from acute under-investment by the private sector in storagefacilities, processingfacilities, and transportation. The fisheries credit system i s dominated by private money lenders who operate outside the formal financial system and charge significantly higher interest rates. It i s unclear why larger firms that are able to access cheaper sources o f credit have not made significant investments inprocessing or storage facilities. There i s some production o f fish paste and fish sauce, although on a relatively small-scale and more at the household level than commercially. In addition, significant investment i s needed in up-grading quality food safety standards, introducing HACCP certification and other food hygiene standards, to allow access to high-value external markets (EUor USA). Rubber 149. Restructuring the rubber sector will be critical for Cambodia to maintain its competitiveness on world markets, while the development of dynamic smallholder rubber production couldprovide alternative income opportunitiesfor producers. Long-termprojections for natural rubber (NR) prices are favorable." With its favorable agro-ecological conditions for rubber cultivation, substantial land availability, and low labor costs, Cambodia, together with other regional rubber producing countries, such as Indonesia or Vietnam, shares an increasing comparative advantage in rubber production over large rubber-producing countries, such as 69 A study o f fee payments identified 27 different fee payments to 15 different institutions in 16 places along the marketing chain for exports o f fresh fish to Thailand (CDRI 2003). Many of the official fees are underpaid: traders negotiate a fee based on an understated quantity o f fish and pay an additional unofficial payment. Under-reporting can be as much as 90 percent. This allows traders to avoid the 10 percent export tax that i s levied on all fish exports. Other official taxes include a "distributor" fee o f 4 percent o f all fish transported through a province en route to export. Licenses for the "distributors" who collect these fees are granted through a competitive bidding process; however, "distributors" do not provide any service to the fishsector. 'O The analysis of long-term trends for NR demand and production points to a likely shortage of NR. International NR prices started to recover in 2002 and reached US$1.2/kg by end-2003. With NR accounting for 35 percent40 percent o f the total rubber market, prices are expected to continue to increase and stabilize at approximately US$2/kg after 2010 ("Economic growth and the Future o f Natural Rubber," Burger and Smit, Yamoussoukro, November 2001). 54 Malaysia, which are reducing planted rubber area as labor and land costs rise steeply. However, Cambodian rubber suffers from low yields, the lack o f internationally recognized quality . certification, and lack o f transparency and competition in marketing processes. These inefficiencies in production and marketing adversely affect the income o f rubber plantation^.^^ The situation has improved slightly as a consequence o f restructuring initiated under the first ADB Agricultural Sector Loan with the divestment of the main seven rubber plantations under control o f MAFF and their transformation into independent public enterprises. However, the process must be deepened to make the sector more able to compete, to absorb increasing employment, and to contribute to increasedagricultural growth (ADB 2002). 150. Cambodian rubber prices are discounted 20 percent-30 percent due to the lack of internationally recognized certification. Based on current prices and production costs at approximately US$O.S/ton, the country's totzl potential revenues from rubber are estimated at approximately US$180 milliodyear, representing a net income o f US$90 milliodyear. For smallholders, the return from labor i s estimated at US$4-5/day, that is, 4 to 5 times their daily wage for agriculture, thus explaining farmers' interest inrubber. 151. The government has set an ambitious goal of expanding rubber cultivation areas to reach 300,000 ha. The expansion o f private industrial estates has been encouraged by the government, inparallel to efforts to develop smallholder rubber production. The effectiveness and competitiveness o f smallholder production system has been demonstrated inother countries inthe region. Since 1999, the Agence Franqaise de nkveloppement (AFD) has been financing a pilot smallholder rubber development project, while the World Bank has been supporting smallholder rubber research. Both interventions were designed to confirm the potential for possible future larger scale smallholder rubber development. Preliminary results have demonstrated farmers' interest in rubber cultivation and Cambodia's suitability for rubber development. The country's potential area for rubber development (estates and smallholders) i s estimated to be approximately 150,000 ha, representing a total productionpotential o f 180,000 tons.72 152. However, the success of any future smallholder rubber development program is expected to depend on the improvement of transparency and competitiveness of the overall sector. Unless smallholders feel secure in their land rights and are confident that their products could be marketed competitively, investment will be slow. The restructuring and eventual privatization o f the state rubber enterprises would pave the way for a more efficient rubber sector and improve the environment for smallholders (ADB 2002). At the same time, the establishment o f private sector processing facilities, independent o f the large rubber plantations and combined with the liberalization o f rubber marketing, would create favorable conditions to stimulate smallholder rubber development. "TherubbersectorisdominatedbysevenStateRubberPlantations: Chup,Krek,Memot ,Snoul, Chamcar Andoung, Boeng Ket, and Peam Chaing). In2001, o f the total concession area o f 68,709 ha, approximately 90% were under the control o f the 7 state companies; approximately 1.5 percent (1,033 ha) belong to the Rubber Research Institute of Cambodia (IRCC); and the remaining 8.5 percent to the private sector in Takeo and Rattanakiri. Interms o f exploited area, the 7 state companies owned approximately 84 percent o f the total area of 36,402 ha in2001. Profits and return on assets are low and may be insufficient to attract investors. 72Based on a conservative low average yield o f 1.2 tonha. 55 Other cash crops and nicheproducts 153. Constraints to production and marketing of other agricultural products needs to be better analyzed. Recently, a number of studies have been initiated to assess Cambodia's comparative advantage in the production of non-rice crops (such as feed crops) and niche products (spices, essential oils), and existing and future demand on intemational markets. However, as discussed above, diversification i s risky in the current environment in which Cambodian farmers operate. The capacity of Cambodian farmers to capture these opportunities will dependon progress insecuring their economic environment (improved infiastructure, access to ,finance, access to market information, land tenure security), and greater integration of rural producers with national and intemational markets. A better understanding o f production and marketing constraints as perceived by smallholder farmers i s needed. RecommendedPriorityActions for the AgriculturalSector Priority area #1 Strengthen agricultural sector management to increase efficiency and impact of resource use Strengthen sector management to increase the efficiency and impact on currently weakly coordinatedsupport programs inagriculture and guide the development o f future programs: Formulate an agricultural development program, focusing on rural household incomes and recognizing the diversity o f local situations and the needs of different groups o f farmers, in consultation with key partners and sta olders. As a first priority, the govemment's strategy for agricultural development needs e clarified, and general priorities translated into specific programs, which would ha ority for resource allocation. To that effect, use venues for donor c~ordination'~,and consuhative forums with private sector and other stakeholders. An urgent and special effort should be directed toward (1) redefining the role of thepublic sector in agriculture, andfostering the development of theprivate sector and its involvement in theprovision of agriculture support services, (2) reviewing the role and responsibilities of key public institutions at central and local levels, starting with MAFF and its provincial departments and district offices (functional review), and (3) completing ongoing privatizations. Progressively align resources with agreed programmatic priorities and improve public finance management inthe agriculture sector; Priority area # 2 Facilitatetechnical andmarket support services to allow transition to diversified, market-orie Strengthen core support services to the sector, selectively focusing public resources on public goods: > Further develop the national agricultural research and extension system into a pluralistic, cost-efficient, demand-driven system in the client services mode, based on a review of different farmers' group needs and demand and the possible response b lic, nongovernmental and privateproviders o f services. Move away form purely technic ce. 73As a first step, ajoint government-donors technical working group on agriculture and water was formally established in2004. 56 Strengthen the capacity o f MAFF to develop and implement, in collaboration with other relevant institutions and stakeholders, food safety and quality stan , tailored to the country's resources and capacity and to the constraints of smallholder ruralproducers. Study constraints to the development of emerging rural producers ' organizations. These groups have the potential to inform agricultural strategy development and to contribute to the definition and implementation of cross-sectoral policies and agendas that affect the capacity of rural producers to respond to markets signals (the constraints include investment climate, infrastructure services development, finance services development, etc.). Strengthen epidemiology surveillance systems (both for plants and animals) as well as early warning systems to monitor climatic changes (floods, drought) to allow for increased preparednessand mitigation o f negative impacts. Priority area #3 Develop integrated programs to improve the performance of core sub-sectors of importance for ruralincomes Address specijk constraints faced by agricultural sub-sectors and proactively promote a coordinated public/private stakeholder responseto identified sub-sector constraints: 9 Rice: J Developa clear strategy for the rice sector, articulated aroundthe dual objectives of food security, particularly for subsistence producers, and increased export competitiveness. J Collaborate with the private sector, farmers, and other line agencies to address constraints to the competitiveness of Cambodian rice. 9 Livestock: Focus on increasing revenues and value-added from the smallholder livestock sector through J Encouragingtherapidexpansionofprivatevillage veterinary servicesnationwide. J Strengthening animalhealthinformationsystems (above). J Reviewing value-chain analysis and study transactions financing inmarkets for live animals and animal products, to allow the definition o f further support actions (policy and investments). P Maximize value-added of fish products J Include rice-fish farming system in programs to support the diversification of agriculture. J Study options to facilitate private sector investments instorageandprocessing offish products. J Address identifiedconstraints to fishexports to high-value marketsandinefficiencies intrade facilitation. 9 Restructurethe rubber szctor J Accelerate and complete the restructuring and privatization of the rubber state enterprises. J Establishaninternationallyrecognizedrubberquality certification scheme. J Liberalizerubbermarketing. J Allow the establishment ofprivate sectorprocessingfacilities independent from large rubber plantations. J Implementaprogramto developsmallholderrubberproduction. 9 Increase focus onother cashcrops anduicheproducts J Further analyze constraints fwed by farmers to further diver into higher value- products in different regions (for example, constraints faced by feed crop producers in the Plain regions, h i t produsers inthe Northwest, vegetable producers inperi- 57 urban areas), and elaborate a program to address those constraints in consultation withkey stakeholders. Bridging thegap in access to supportingservices and infrastructure Infrastructure services development in rural areas 154. Rural areas are undersewed by infrastructure sewices. Rural infrastructure was severely damaged and/or neglected during the years o f war. Despite improvements in recent years, Cambodia still has a very long way to go to improve infrastructure services to levels comparable with neighboring countries, and thereby improving rural dwellers' access to key services (Part I). Surveys o f rural households indicate that improving access to infrastructure, particularly roads and water,74 ranks high among farmers' perceived priorities. Among infrastructure services, micro-enterprises operating in rural areas identify improved access to transportation, communication, and energy services as priorities. Substantial work to address the specific constraints in each o f these sub-sectors i s underway, in particular, as part o f the preparation or implementation o f donor-financed projects. 155. Progress is being made on a rural road policy framework and institutional responsibilities.The NPRS identifies the inadequate road system as a major bottleneck to social and economic development. Inparticular, the lack o f all-weather access roads and other transport infrastructure and services inrural areas i s seen as an impediment to improved quality o f life and reduced poverty inrural areas. The SEDP I1further evidences the lack o f strategic positioning o f the transport sector to contribute effectively to the country's poverty reduction strategy. The focus during the past few years o f reconstruction has been on the primary network and some o f the main urban roads. Some attention also has been given, through the Seila program and others, to community-based infrastructure. In general, however, less attention has been given to the secondary and tertiary networks, which are essential to link gaps inthe network. 156. Institutional responsibilityfor the rural transport network is shared by the Ministry o f Public Works and Transport (MPWT) and the Ministryo f Rural Development (MRD). MPWT i s responsible for overall management and development o f the roads and transport sector, including primary and secondary roads. MRD i s responsible for tertiary and other rural roads. A Roads Act i s being draftedthat will clarify the two ministries' respective responsibilities. Currently, MRD i s responsible for roads with fewer than 50 vehicles per day; however, this i s not a very workable definition since there i s no systematic way to hand over roads to MPWT when they reach 51 vpd.) The Roads Act will help to define which roads belong to which ministry based onfunction rather than volume. 157. The transport sector lacks a coherent overall road and transport sector policy that articulates the goals of the sector and the manner in which these goals are to be achieved. However, in 2002 the MRD adopted a Policy for Rural Roads, which aims to increase rural access by giving priority to cost-effective maintenance and rehabilitation o f rural roads. This policy also promotes the use o f labor-based appropriate technology (LBAT) with the involvement of the local private sector (small and medium-sized contractors) inthe execution o f the works. In addition, the policy provides guidelines for the delegation o f responsibilities for rural roads, from l4 provision The o f water supply and sanitation services is discussedunder the Water Management section. 58 the central ministry (MRD)to the provincial departments to the communes. Although it could be improved, in many respects, it i s a reasonable policy and provides a framework for managing rural roads. Thus, thefocus of future work on rural roads should be on how best to implement the policy, that is, how to overcome knowledge, technical, and financial constraints. 158. The developmentof roads and transport services is hindered by both a lack of effective planning and management and of a budgetingprocess to ensure that adequatefunds are made availablefor construction and maintenance. The Fundfor the Repair and Maintenance o f Roads (FRMR) allocates funds ad hoc mainly for road rehabilitation, with no clear criteria in the selection o f projects or coherent strategy for the allocation o f resources. Even with greater clarity, the own-funding constraints o f the FRMR limit its ability to fund adequate levels o f maintenance, especially at the lower levels o f the network. Since 2002, the responsibility for commune-level infrastructure has been decentralized to the newly elected Commune Councils, which are financing the construction and rehabilitation o f commune-level roads, with technical assistance provided by the Provincial Departments o f Rural Development. An intergovernmental fiscal transfer mechanism, the Commune/Sangkat Fund, has been established to provide core financing for this and other responsibilities o f the Commune Council. However, these funds are limited. Other donor and NGO funding goes to a wide variety o f projects and programs focused at the village or commune level. These projects are loosely coordinated with the provincial and commune-level efforts through District Integration Workshops. Financing the local network remains a problem, since it i s doubtful that these disparate efforts can form the basis for national scaling-up. 159. Energy and telecommunication scwices basically are available only in urban and large township areas. Cambodia has the lowest electrification ratio among East Asian countries, as low as 5 percent inrural areas. As for telecommunication, fixed-line penetration for the entire country i s only 0.27 per 100 households, while mobile penetration was 1.27 per 100 in 2000. Fixed-line coverage i s even lower in rural areas, in which expansion would require massive investments, while mobile services have extended to some rural areas, albeit with hightariffs. 160. Inthe electricity sector, the institutiaial framework remains weak, andpower supply is unreliable, costly, and limited mostly to urban areas. Villagers fulfill energy needs with simple but high-cost solutions such as batteries. Strengthening institutions is hindered by (a) an acute shortage o f skilled staff; (b) entrenched public-oriented approach toward the management o f public utilities; (c) political interference; and (d) lack o f transparency in financing, with an inefficient tariff structure and prices that rank among the highest in the world. Thus, the expansion o f fixed-line telecommunications into rural areas would require massive investment in the electricity sector. For private mobile service, the incentives for making necessary investment for expanding coverage are limited. 161. There is a need for a more jtrategic approach to rural infrastructure services development. Inrecent years, substantial efforts have been made to improve rural infrastructure, including numerous donor-funded projects to improve the coverage o f rural infrastructure and coherence in planning and management. Several responsible line agencies also have developed policies and strategies. Further investigation i s required to inform potential changes in policy, strategy, and program and project design, particularly as they relate to decentralization to the Commune Councils, and deconcentration o f responsibilities from the central ministries to the provincial departments and district offices. Equally important i s the flow o f funding commensurate with these responsibilities. 59 Recommended Priority Actions to Improve Rural Infrastructure Services Priority area #1 Strengthenstrategicorientationsofinfrastructureinvestments With other partners ' support, develop a strategy for rural infrastructure services development. Accomplishing this would entail a review of existing strategies and policy and institutional arrangements for infrastructure management and financing, particularly, exploring the links between infrastructure and broader rural development. Based on this information, an assessment o f the adequacy of the existing framework for rural infrastructure development could be made, identifyinggaps and implications for resource allocation and management. The assessment would take into account the characteristics o f different types o f infrastructure and the respective roles o f the public and private sectors inthe different sub-sectors. Specifically, the strategy would: 9 Strengthen the consistency of infrastructure developmentplanning with local and regional developmentplanning 9 Strengthen local government capacity to prioritize, plan, and manage local infrastructure and services delivery hance contribution of the private sector in service delivery (through access to credit, surance, ease of gettingpermits) 9 Improve cost recovery in rural infrastructure andservicesfor sustainability. Priority area # 2 Sustainable and strategic development of the rural road network to facilitate integration rural areas with national and regional economies P Ensure that transportpolicies supportpoverty reduction objectives: Formulate, adopt, and implementa national tran ort policy that addressesruralmobility needs Alignnationalpolicywithruralroads strategy. 9 Improverural access through maintaining existingroad assets and enhancingrural mobility: J Prepareruralroadsinventoriesandmapping J Ensureadequatelinks(secondary andtertiaryroads) betweenmainroa local roads J Sustain and improve rural incomes by maintaining rural roads using Labor-based Appropriate Technology (LBAT) J Reviewavailability, affordability, and safety ofrural transport servi and implement recommendations to fill gaps J Involveprivatesectorinprovisionofroad s and transport services. P Provide adequat ingfor road maintenance for the Repair and Mainten nance Priority area # 3 Expandruralpower supply and electricity coverage Improve power supply and electricity coverage 60 9 Develop a rural electrijkation master plan to guide decentralized investments in rural electrification and delineate areas for grid and off-grid electricity service provision 9 Improveaccessto financing, especially for privateruralsuppliers 9 Developconcepts oftransparencyandperformance-basedsubsidies. Expandingfinancial services in rural areas 162. theformal banking sector does not serve rural population^.^^ Of the 24 provinces, 16 have no With the exception of ACLEDA, aformer A~FI'~ recently transformed into a bank, that commercial bank except for ACLEDA branches, and 9 provinces remain unserved by any type o f formal bank. While services are available in the provinces surrounding Phnom Penh, Sihanoukville, and the Tonle Sap area, other provinces in the north and northeast o f the country and K o h Kong remain underserved. Where branches exist, they typically are located inprovincial capitals with virtually no presence at local levels. Access o f rural households to formal financial services remains very limited (Part I). 163. In1998 the Rural DevelopmentBank (RDB) was established by the government with foreign assistance. In 2000 it became a wholesale bank for channeling funds from the international donor community to Cambodian microfinance institutions (MFIs). Through 2002, the RDB had loans outstanding for only US$2.5 million out o f its funding o f more than US$20 million, reflecting the weak capacity o f both the RDB and the MFIs. According to the ADB's Performance Audit Report on the Agricultural Sector Program, this slow disbursement led to the cancellation in 2002 of US$14.8million of its US$20.7 million loan proceeds. Thefuture role of RLIB in a strategy to encouruge the development of rural financial services needs to be reconsidered in view of donors' and MFIs 'recent experienceswith RLIB. 164. The informal and semi-formal financial sector fulfills a crucial role as a provider of credit services in rural areas. The clear market leader i s ACLEDA, which covers 58 percent o f the market inoutstanding loans. ACLEDA started its operations as an NGO, became a specialized bank, and i s currently a commercial bank that provides financial services inrural areas, generally serving micro-entrepreneurs. The top 10 MFOS,~~ which together capture 90 percent o f all outstanding loans and serve 94 percent o f borrowers, have opted for licensing and are driving for sustainability. This trend towards sustainability also means that, in general, other microfinance institutions are shifting toward larger loans. MFIs are reaching up-market, focusing on individual loans rather than on group loans, and increasingly conducting transactions on their premises rather than invillages, to lower costs. Therefore, it i s likely that the most recent developments in the provision o f microfinance services have not benefited primarily rural households, poorer households inparticular. 165, The microfinance sector benefitsfrom a relativelyfavorable regulatoryframework, but a recent review of the sector identified three areas of action to support ruraljinance services development. Licensing regulations introduced under the L a w on Banking and Financial Institutions have beenregarded by the main microfinance providers as a positive step to guarantee 75 Microfinance institutions (MFIs) refer to institutions that focus on the provision o f financial services, while microfinance organizations (MFOs) typically offer a broader range o f services. 76This section draws fromthe work conducted by Olga Torres, Microfinance and the Rural Finance Sector in Cambodia, 2004. "ACLEDABank,PCA,EMT,TPC, CEB,Se;lanAhih, HathaKaksekar,AMK,CREDIT,andVisionFund Cambodia. 61 the protection o f deposits and to enable their growth. Supervision i s provided by the National Bank o f Cambodia W C ) , whose capacity i s being strengthenedthrough donor-funded programs. Expanding the provision o f financial services inrural areas needs to address two major concerns: (1) increasing the confidence o f households in financial institutions, and (2) decreasing the costs to MFIs of serving rural populations. Actions to address these concerns include: a. A change o f paradigm from a credit-driven sector to one that offers a full range o f microfinance services. Most MFIsMFOs in Cambodia are still focusing on the provision o f credit. OtherJinancial services,particularly savings, are of crucial importance to the rural poor to help them deal with vulnerability. The lack o f savings services reflects both general reluctance to maintain deposits inthe formalhemi-formal financial sector and the high costs o f mobilizing deposits in rural areas. Long-term credit is also virtually nonexistent. A pilot rural health insurance scheme has been launched by an NGO (GRET)inprovincesaroundPhnomPenh. b. Maintaining a conducive environment for microfinance operators, micro-entrepreneurs, and the private sector alike by reducing distorting costs o f operations: most notably, corruption, weakness o f thejudiciary, and lack o f physicalinfrastructure. C. Improving overall understanding about how rural households make decisions regarding sources and uses o f income. MFIs face the same structural constraints as micro- entrepreneurs and small businesses in rural areas, including high transportation costs, high communication costs, and an overall weak business environment. In addition, a number o f constraints specific to the sector add to the cost o f operations, such as the lack o f information exchange on clients, tax burden on MFIs, and currency risks. d. Increasing transparency and professionalism in microfinance operations, specifically in those unlicensed smaller credit providers not supervised by the NEE or monitored by donors or Cambodian government bodies. RecommendedPriorityActionsto Supportthe Developmentof RuralFinance Priority area #1 Reduce the costs of microfinance operations, which eventually will reducecosts of credit to borrowers 9 Reducethecosts icroflnance operations, thx-oughthe following options: J Create a national credit bureau to exchange information and monitor clients' over- indebtedness J Reduce currency exchange risks for MFOs, because most funding for MFIs is available in US$, which increases the risks o f serving rural populations with riel- denominated products J Promote NBC's plans to transfer money among provinces inriel and to expand the services o f its central check clearinghouse to the provinces J Promotethe emergingAssociationo fMFIs J Amendthe influential shareholder liabilityrequirements'* J Continue efforts to build capacity the sector, including that of NBC and M F 1 s m o s . ''Under the law, the NBC can require "influential shareholders"-those who hold more than 20 percent o f the capital in an MFI-to increase their capital contribu:ion. `This law i s deterring potential investors from formalizing their commitments. 62 9 Increase the transparency andprofessionalism of smaller creditproviders by continuing to increase the supervision department o f NBC, raising awareness o f donors and government agencies on microfinance issues, and developing information campaigns on good practices in microfinance services. Priority area #2 Facilitate the development of new finance services 9 Support the development of a wider range ofjinance services. To promote client confidence in the financial sector, strengthen deposit mobilization, and encourage local savings by further exploring the possibility to: J Establisha deposit guarantee fundor institutionto guarantee the payment of deposits andsafeguardthe interests o fdepositors J Simplify the tax burden of MFIs to foster lending to SMEs and the development o f savings services for small depositors. > Improve the overall understanding of rural households' sources of income and coping strategies, particularly to facilitate the expansion o frural finance services: J Further assess financial services demandby SMEs, micro-enterprises, farms andrural households, and existing supply, to underpin efforts to stimulate rural banking operations and the deepening ofrural financial markets. J Analyze coping mechanisms and cash-flows of rural households to design tailored microfinance services for ruralpopulations, including specific groups.79 Ensuring access to and quality of rural social services Rural education 166. Education is a key component of rural development. It i s essential that (a) ensuring broad-based access inrural areas to education and (b) ensuring its quality should be two integral components o f any strategy for rural development. Education i s linked to rural development in two main ways. First, there i s a general link through literacy programs, especially functional literacy programs, targeted at rural communities. Education helps to improve health and nutrition in rural communities and to integrate.remote and disadvantaged rural areas into society as a whole. Second, there i s a direct link between levels of education and skills development to the ability o f people in rural areas to increase farm productivity and to participate in non-farm employment opportunities as they arise. Studies worldwide show that, other factors held constant, farmers with more educationproduce greaterfarm yields. Additional education also significantly increases an individual's chance ofjinding off-farm employment. 167. Thefirst link mentioned above-between literacy programs and rural development-is very important at this stage of Cambodia's development. Overall literacy rates are very low. Only 67 percent o f the adult population i s functionally literate. Literacy drops even lower inrural areas: 35 percent o f all adults and over 46 percent o f female adults inrural areas are not literate. The level o f illiteracy increases in upland areas among highlands peoples. Literacy programs often lack practical application and relevance to the lives o f many rural people. 79 According to different sources, more than 75 percent of microcredit clients are women. 63 168. The specific issues of access to and quality of basic education in rural areas are recognized in the government's comprehensive education sector strategy. The vision for nationwide education development i s set out in the government's Education Strategic Plan, currently under revision. To support the implementation o f the strategy, the Ministry o f Education, Youth and Sport (MOEYS) has adopted a rolling Education Sector Support Program (ESSP), financed in collaboration with international docors and NGOs.The ESSP has adopted an ambitious pro-poor agenda aimed at (1) increasing access to basic education (grades 1-9) for all school-age children by 2010; (2) improving the quality and relevance o f schooling; and (3) enhancing the management and efficiency o f educational services. The ESSP i s also strongly committed to decentralization in education and includes provisions for the delegation o f responsibilities to districts, school clusters, and communes. 169. Access to different levels of schooling and the quality of schooling varies across regions. Enrollment in both primary and, especially, secondary schools i s lower in Cambodia than in other countries in the Westem Pacific Region. The situation i s particularly bleak in rural areas, especially for girls and children from disadvantaged groups. In rural areas, the poorest quintile has a net primary enrollment rate o f 50 percent and fewer than 5 percent o f children aged 12-14 are enrolled in lower secondary schools. The average duration o f formal education for rural adults is 4.4 years for males and 2.2 years for females, which i s lower than the national average o f 6 years. According to a CDIU study, the percentage o f workers who never attended school i s higher among rice field workers, at approximately 51percent. Only 46 percent o f rural villages have a primary school. 170. Quality of education is an issue. Inaddition, schools inrural areas seldom provide full- day schooling, due inparticular to lack o f human and financial resources, and there i s widespread concern about the quality o f education in these schools. In part, these problems are related to deficiencies in teacher training, as most primary and secondary teachers do not possess minimum qualifications. These deficiencies are compounded by low teacher salaries, which leads to teachers' shortening the school day to take a second job. Overcrowding o f facilities also forces a reduction o f classroom hours to rundouble or even triple shifts. 171. Schools in rural areas rarely are located close to where children live. Consequently, children walk long distances to school or attend schools that do not offer the complete cycle o f primary schooling. Not surprisingly, these difficulties o f access lead to high levels o f drop-out and repetition inrural areas. 172. Informal fees for schooling also affect access to schooling. Beyond the direct cost o f schooling to rural families, the opportunity cost i s also very high. Many families pull their children out o f school either to work or take care o f their younger siblings. 173. The following actions are recommended as priorities to support rural development: ed Priority Actions fo RuralEducation P Enable equitable access to rural education. Means include increasing investment in school ' fi-astructure, equipment, books, and other sup in poor and underserved areas; supporting demand-side interventions and policies t rease participation in schooling; and lowering the cost o f attendance by elimination of informal fees. 64 Improve quality of rural education. Means include strengthening decentralized education planning and administration and decentralized school quality improvement planning; enhancing teacher professional development (salaries, housing, and career path) and improving the quality o f teacher training (particularly training o f teachers to speak local languages); and establishing a quality assurance and monitoring system. School curricula should be enhanced and should include topics o f relevance to rural communities, such as agriculture, forestry, health and nutrition, and environmental studies. Revise literacyprograms. There i s a needto renew the content o f the literacy programs and to make the content more relevant to the rural communities. Increased relevancy could be accomplished by moving from simple literacy courses to programs with a greater functional content targeted to rural and agricultural communities inwhich literacy rates are low. Better target disadvantaged groups. Rural children who do not enroll or who drop out o f school early tend to come from the most disadvantaged parts o f society: the poor, ethnic minorities, and girls. This apparent bias can be counteracted by improving access to schooling in rural areas: building more and better equipped schools located closer to children's homes, andtraining teachers to speak locallanguages. Rural healthcare 174. The government's Health Sector Strategic Plan recognizes the speciflc challenges of access to heath services in rural areas. Since 1996, the Ministry o f Health has pursued a comprehensive reform o f the health sector based on the fundamental principles o f equity in accessibility to quality basic health services and protection o f the poor. T o support the pursuit o f these goals, the ministry has launched a sector-wide management reform initiative to improve performance through the formulation o f a sector strategy plan and annual operational plans, and the enhancement o f health sector management capacity. The Health Sector Strategic Plan for 2003-2007 has been adopted. It supports the decentralization o f health services; strengthens provincial and district health administrations; and emphasizes the need for increased coverage and accessibility (including affordability), attention to quality, the importance o f primary healthcare, and the needto develop sustainable sources o f financing. 175. Nonetheless, most of the rural poor livefar from health facilities. Healthcare facilities are confined mostly to larger urban centers leaving rural areas almost totally unserved. At the same time, rural health status i s generally poor, with extremely high incidences o f water- and insect-borne diseases. Infant and maternity mortality rates also are high.Health crises are the first source o f income loss o f rural households (Helmers and others 2003) and one o f the major causes o f distress sales o f land, leading to increasing landlessness. Improving access to rural health services and their affordability i s an important element to reduce the vulnerability o f rural livelihoods. 176. Quality of health services in rural areas is another issue. In lieu o f access to public healthcare, rural households commonly resort to local drug vendors, who typically are medically unqualified but are relatively 'inexpensive and accessible. Medicines prescribed without any physical examination, tests, or consideration o f possible pharmaceutical contraindications typically are sold ininappropriately small doses without clear medical instructions. 177. I n addition, theprevalence of informal fees for public healthcare and/orfees of private drug vendors place a heavy burden on poor rural households. Numerous household surveys '65 have indicated that healthcare costs are an important element o f the vulnerability of poor rural households and a significant cause o f indebtedness. 178. The major challengefacing the health sector in Cambodia-as in most other countries- is to find the best combination of private and public provision of health services. What i s needed i s a combination that leads to an efficient allocation o f resources, while allowing public provision o f adequate healthcare services to the poor and those in less accessible areas. Expenditures will need to concentrate on the efficiency o f use o f facilities; reorganization o f the public health system throughout the country will be needed; and preventive health programs will need to be strengthened. Above all, policy and expenditure programs will need to improve the access to basic health services o f the rural poor. Priority attention also will need to be given to the persistent problemo f malnutrition particularly among ethnic minorities inthe highlands. 179. The following actions are recommended fat rural healthcare in support o f rural development: RecommendedPriorityActions for RuralHealthcare k Increase accessibility and quality of health services-through continued development of primary health care facilities and first (district) and second (provincial) referral hospitals, by financing rehabilitation and new construction, equipment, and maintenance. This program will require better data on healthcare needs by region, more effective planning, and public xpenditure on healthcare facilities k Improve the affordability of health servicesfor thepoor and under-servedpopulations by strengthening local management capacity and increasing sustainable local hnding. Pricing o f healthcare services should be examined with a view toward reducing fees for public health and preventive care, and developing more effective targeting mechanisms for poorer households. Renewed focus should be on public health and preventive care, which i s significantly more cost effective than tre 9 Promote private sector participation. rovision of health care should be encouraged to develop, where appropriate. There is probably limited scope for private sector involvement in more remote rural areas, and govemment should remain actively engaged there. 66 Part 111: Delivering results and next steps 180. Part II of this Note explored three policy objectives that could be at the core of a comprehensivepro-poor rural development strategy. These include policy, programmatic, and institutional reforms to (1) improve access to and management o f Cambodia's natural resource base, (2) augment agricultural productivity and farm incomes, and (3) provide quality rural infrastructure services and improve rural access to economic and social services (including financial services). In support o f these three objectives, recommendations were proposed that constitute a menu o f priority interventions and other forms o f operational support. The recommendations are to be effectuated through RGCs own resources, supplemented by Bank lending, resources o f other multilateral and bilateral programs, and the activities o f NGOs and the private sector. Moving from this menu o f proposed actions organized around the three policy objectives to definitions o f a more concrete roadmap o f specific actions and targets, necessarily will involve other partners, and needs to be fine-tuned and consolidated through consultations with all stakeholders. 181. To deliver results, such an elaborated rural development strategy would need to take into consideration several additional elements that both cut across the rural economy and link it to the rest of the economy.These elements are raised next, inturn: (1) horizontal links to other national agendas; (2) institution21 capacity constraints that suggest concentrating public sector attention on key roles; and (3) pursuit o f selective coordinationneeds, including of donor support. To conclude, this Note will suggest next steps. Strengthen links to supportive cross-sectoral agendas 182. Progress on agricultural and rural development depends not only on addressing issues specific to these domains but also on progress on important agendas that cut horizontally across sectors. The National Poverty Reduction Strategy (NPRS 2003-2005) and the second five- year Socioeconomic Development Plan (SEDP I12001-2005) identify the most important o f these. The national development objectives expressed in these documents focus on economic growth that i s broad enough to include the sectors from which the poor draw their livelihoods, social and cultural development, and the sustainable use o f natural resources and sound environmental management. While agricultural and rural development are 2 o f the 4 priority sectors identified, sectoral progress i s recognized to depend on parallel progress regarding 3 aspects o f improving governance: public resources management, decentralization, and local govemance. In addition, there i s the horizontal agenda o f private sector development that underpins the ago-processing value chains and the non-farm rural economy more broadly. 183. Such issues define the enabling environment for rural development and are key elements to get right for rural development to proceed at the pace needed to bring welfare improvements to rural people. Inlarge measure, the control over, and the main responsibility for, defining and driving the core reform directions on such issues will reside outside the agencies responsible for agriculture and rural development. Nevertheless, passive engagement on their part would be a mistake. First, to be effective, broad directions o f reform will need to take root in sectoral agendas, and alignment o f sectoral agendas will put these rural-focused agencies in the vanguard o f benefiting from change. Sector agencies can gain by engaging constructively but, to do so, will needto improve their institutional capacity. Second, in some areas, through working to overcome constraints, agencies in rural development are defining solutions able to contribute to broader agendas. Examples in the context o f the recent decentralization reforms include 67 improvements to intergovernmental financial transfers and to local development planning and implementation that are more transparent and accountable. Public resources management 184. Public expenditure management has improved since 1999, but remains problematic in several areas. Much more progress i s needed. Several issues challenge the realization o f the country's development objectives, particularly: a. Improvingresource mobilization to ensure fiscal sustainability b. Reforming budget execution to reduce the riskto public funds c. Improving cash management and public financial control systems d. Rationalizing public expenditure policy and management to cany out the SEDP 11and NPRS e. Undertaking a comprehensive civil service reform to deliver poverty-reducing services (IFAPER2003). 185. Civil service reform is urgently needed to improve public service delivery. Past experience in the sector has showed that the low level o f official staff salaries i s a major issue impedingprogress with reforms andthe effectiveness o f service delivery. As a temporary solution to permit effective project implementation, most donors/projects provide supplementary allowances. While this practice has provided incentive for the remunerated staff to work more diligently, it also has created distortions affecting implementation o f broader government programs by promoting rent-seeking behaviors and, combined with nontransparent staff recruitment and promotion practices, prevented retention o f the most qualified and motivated staff in key positions not financed through external sources. Staff retention problems have also underminedthe effectiveness o f capacity buildingprograms in several agencies, with trained staff leaving the public sector when projects terminate. Furthermore, skilled staff i s concentrated in agencies in Phnom Penh, and due to the low salary level and absence o f other economic opportunities inprovinces and districts, there is no incentive for young graduates andor qualified staff to seek positions at provincial and district level offices.*' Therefore, implementation of a suficiently far-reaching pay and employment policy for the civil service, while needing to be de@& and driven more comprehensively thanfrom only an agricultural and rural development perspective, will be critical to the delivery of public goods and services to rural people and producers. 186. Aligning resources with sector policy and investmentpriorities. The matrix attached to this Note's executive summary summarizes key priority actions o f the rural agenda for the short, medium, and long terms (Part 11). It also indicates where resources already are identified and available, and priority areas for which additional resourcesneed to be identified and more focus i s required-in particular in the short run. However, as a first step, there needs to be a clear and broad agreement among the government and its partners on the proposedpriority framework. One difficulty impeding further prioritization o fpublic investments inCambodia is the lack o f reliable data, other than anecdotal, on the payoffs to public investments. There are examples from other Asian countries (table 7), but similar research remains to be conducted inCambodia. Meanwhile, strengthening o f the local planning process, consultation, and dialogue with different stakeholders to increase the responsiveness o f rural sector agencies to local demand, combined with a review of existing data on the impact o f past investments in different regions, can be used to further prioritize public investments at the provincial and local level. For example, more than 50 percent ofMAFF staff at these levels are unqualified (IFAPER 2003). 68 Table 7. Returns of agricultural public investments and impacts on poverty reduction in ChinaandIndia IIEducation Roads I8.83 15.31 13.22 I123.8 18.68 I1.39 18.80 141.0 11 Povertyloan n.a. 1.09 1.13 17.8 Decentralization and local governance 187. Decentralization and deconcentration reforms are at the core of management reforms in the rural sector. Followingthe Commune Council elections inFebruary 2002, the government has engaged in a broad program o f decentralization. The National Committee to Support Commune Sangkat Councils (NCSC) i s in charge o f the decentralization reforms. The Seila Program provided substantial lessons for the design o f the decentralization reforms from the experience with local development planning, budgeting, and implementation under its earlier pilot phase, and the Seila Task Force Secretariat (the implementationarm o f the Seila Task Force) coordinates donor funding to implementation o f the decentralization reform,*l and hence represents an important aspect o f the decentralization reform. 188. Two complementary approaches are being employed in Cambodia to advance the decentralization agenda. First i s a normative approach starting from a conceptual framework on the nature o f the state as a basis for an organic law. Second i s a more pragmatic approach based on experimentation through pilots focused on incremental change buildingto a set o f options or models that will serve as the bases for future legislation. Each approach has its own strengths and weaknesses, and they are potentially rnxh more powerful when used in combination. The normative approach runs the risk that a single one-size-fits-all model will not work, and allowance has to be made for the particularities o f different public functions. Inother words, what may work well for the delivery o f educational or health services may not be suitable or most efficient for agricultural or business advisory services. Similarly, the incremental approach i s hampered by the lack o f legislation embodying a set o f overarching principles needed to expedite more far-reaching reforms inthe field. The scope for innovation and reform could be limited until new legislation resolves underlying issues concerning the assignment o f authority and responsibility between the center andthe province. 81Donors supportingthe Seila programare DFID, SIDA, UNDP, IFAD, DANIDA, UNICEF,World Bank, WHO, andAusAID. 69 189. The Council of Administrative Reform (CAR) is responsible to take the lead on the deconcentration reforms,82the intended focus o f which i s on transfer o f administrative powers and functions to provincial govemors and the provincial and district administrations. Despite increasing donor interest and political will, there has been a lack o f progress in establishing a policy and strategy for deconcentration. There are two distinct, but related, aspects to the deconcentration of administrative powers and functions. The first aspect involves the obvious complementarities between decentralization and deconcentration, and the related role o f the governor and the provincial and district administrations in providing support to the Commune/Sangkat Councils. On this aspect, there has been good progress, as the role o f the govemor has been defined by the NCSC within the decentralization regulatory framework through a ~ r a k a s ,and~ ~ a recent instructiong4.by the Seila Task Force provides interim arrangements for the structure o f provincial level support through the PRDC to the Commune/Sangkat Councils. 190. However, there has not been good progress on the second aspect, which involves the role o f the govemor and the provincial and district administration in provision o f sectoral services at the provincial level, through provincial departments o f line ministries. The Organic Law on Deconcentration i s intended to provide the legal foundation for the latter aspects o f the deconcentration reforms, but it i s still in early stages o f discussion, and there i s not yet agreement on its underlying principles. The deconcentration legislation likely also will supersede the sub- decrees and prakas that allowed provincial bodies, such as PRDC and its Executive committee (ExCom) under the Seila Program, to operate. 191. Currently,provincial departments of central line ministries do not have authority to design and implement developmentinitiatives within theirprovinces, except in the special cases of pilot activities, such as the Provincial Investmed Fund and pilots o f deconcentrated national sectoral programs under the Seila Program. In the agricultural sector, for example, deconcentration i s piloted under the IFAD-finacsed ADESS project, which operates in the northwest, involving MAFF and Provincial Departments o f Agriculture (PDAFFs) in support o f participatory agricultural development for poverty red~ction.'~These activities give MAFF the experience and expertise to engage with the Seila Task Force and its Secretariat in policy dialogue to develop policy for deconcentration in the agricultural sector. MAFF has assigned these responsibilities to the ADESS Project Support Unit and a MAFF-Seila Working Group. Yet, this unit in MAFF has limited "legitimacy," that is, its roles and functions are not officially established nor recognized. It i s merely part o f a project. Thus, MAFF has not taken ownership ofh-esponsibility for it. In MLMUF'C, land titling i s being deconcentrated to provincial and district level land offices. The Cadastral Commissions responsible for dispute resolution are under the responsibility o f the local government. Finally, in MOWRAM, under APIP, alignment '2 CAR, with its Secretariat General, has an inter-ministerial working group collaborating with working groups o f 11 ministries o n decentralization and deconcentration issues. The 11 ministries are Health, Education, Public Works, Social Works Rural Development, Planning, Economy and Finance, Land Management, Industry, Interior, and Agriculture. It i s expected that more ministries will join this working group as decentralization and deconcentration move forward. 83Prakas on Delegation o f Powers to ProvinciaVMunicipal Governors in Support o f Commune/Sangkat Councils. 84Prakas on Establishment o f Structure, Roles and Responsibilities o f the ProvinciaVMunicipal Rural Development Committee o f the Seila Program. 85Banteay Meanchey, Battambang, Siem Reap, and Pursat. Two additional provinces subsequently were included: Otdar Meanchey and Pailin. 70 o f the planning process to rehabilitate small-scale irrigation schemes with the local planning process has been encouraged.86 192. Thus, to inform the ongoing work on the Organic Law, it is important that the pragmatic pilot approaches to deconcentration continue to move forward. Government agencies and donors should continue to pilot sector-tailored approaches to deconcentration and to document lessons learned regarding key aspects o f provincial management and administration. These key aspects include the role o f the governor; the relationships among the Governor, provincial departments, and their parent ministries; the allocation o f funds betweenthe center and the provinces; responsibility for staffing; accountability to local constituents; and the role o f districts and communes. 193. Three inter-ministerial bodies-NCSC, CAR and STF-and two key ministries-the Ministry o f Interior (MOI) and the Ministry o f Economics and Finance (MEF)-have been assigned responsibility for decentralization and deconcentration. Better coordination across these bodies and agencies is essential. As a positive step inthis direction, an internal task force inMOI has completed a three-volume report on decentralizatioddeconcentration. As a preliminary step toward drafting an Organic Law on Provincial Management and Administration, this task force also i s expected to organize a series o f discussions on specific issues that would draw heavily on the lessons o f experience to date. The government-donor working group should engage proactively to ensure adequate coordination. Also critical to ensure the success o f ongoing reforms i s further engagement in snd support to the decentralization and deconcentration process bythe keyrural sector agencies, such as MAFFandMOWRAM. Legal and judicial reform, and fighting corruption 194. Corruption adds to costsfor farmers and threatens the competitivenessof Cambodia's ruralproducers. Cambodia may not be unusual inthe ways that its rural producers face informal passage fees in transporting their farm products, informal access fees to sell at public markets, and unauthorized "administration" costs in getting access to public services. However, the country is notable for the apparent heavy'burden of these informal fees. Value-chain analysis o f rice marketing indicates that such informal charges add the equivalent o f US$14 per ton (10 percent-15 percent) to the cost o f milled rice reaching market. Recent research conducted by CDRIalso quantified the cost of unofficial fees paid by fish exporters, as well as the numerous fees and institutions involved (CDRI 2003). For farmers, these charges directly reduce incomes fi-om marketing and reinforce opting for semi-subsistence. Many o f these practices persist through the tolerance and culture o f local politics. Developing dynamic rural producer organizations can prove an important counterbalance by worlung with local governments to identify and address the most onerous of these practices. 195. Non-farm rural informal firms identi& similar practices as their main constraint, but that it i s a less severe constraint than it i s reported to be for formal firms. These typically micro and small enterprises appear to avoid many o f the problems and costs that are confronted by more formal operations that have regular interactions with the government. The Investment Climate Assessment data show rural firms (for example, rural water and rural electricity providers) as consistently less constrained by bribes than more traditionally urban sectors such as garments or tourism. If corruption at the level currently existing inthe urban sector were inflicted on farmers, they would not be able to operate. The type o f bribes paid by the garment sector (over $1,000 per 86 The Ministry of Rural Development is a slightly different case: it has a specific mandate for local-level rural development. 71 container) would exceed the profit margin o f many agricultural commodities. The bribes plus the numerous administrative measures that enable them combine to keep the rural sector informal. The situation merits attention, therefore, so that small-scale informal activity does not forego opportunitiesfor scale-up because ofperceived costs of becoming more visible. 196. Improvements in ineffective judicial enforcement and rule of law would benefit critical areasfor the rural economy.As discussed above, weaknesses o f thejudicial and legal system are perceived by banks as the main constraint to expansion of service coverage, both geographically- inrural areas-and in terms o f nature of their clients (SMEs and micro-enterprises). The lack o f rule of law and judicial enforcement contributes to investors' perception o f an unfavorable business climate. The draft Investment Climate Assessment shows that, o f a number o f public institutions and agencies rated for their integrity, the judiciary rated lowest. As the economy grows and formalizes, the judiciary will become more important as a means to protect economic rights o fbusinesses and uphold contracts. 197. Furthermore, with three-fourths o f the populationdepending on natural resources for their livelihoods, conflicts often evolve around the use o f natural resources. However, these conflicts cannot be resolved because o f lack of clear and enforceable laws, and because the gains from bending the implementation of the laws can be so great to people in positions o f authority. The swings ingovernmentpolicy on allocation o f fishingand forestry concessions are evidence o f the economic and political powers at play, so far to the detriment o f more broadly based and equitable economic growth. Moving forward, more transparency inthe formulation o f policy, and in the design and application of implementation mechanisms, will be important to securing property rights, as will progress withjudicial enforcement to protect these rights. 198. Progress is being made in legal andjudicia reform, but much remains to be done to respond to the diverse needs of the rural sector. A Government's Legal and Judicial Reform Strategy was adopted by the COM in June 2003, and work i s ongoing to prioritize the Legal and Judicial Reform Action Plan interventions to implement the strategy. More efforts are needed to complement these developments. As an example, contract farming inevitably raises the broader issue in Cambodia o f the prevailing lack o f predictability o f contracts, a condition for the enhancement o f Cambodia's rural investment climate and the empowerment o f Cambodia's rural poor; Requirements for the improvement o f predictability o f contracts will involve a complex set o f actions (box 6). 199.More research and analysis i s needed to define the reform programs that would give appropriate weight not only to the "supply side" o f services (including the law-making process, dispute resolution services, and registry office services) but also to the demand for services, including civil society consultations, support for legal aid and civil rights groups, and access to justice. Especially with respect to "demand side" initiatives, it will be important to know, for instance, much more about traditional Cambodian forms o f dispute resolution inrural settings, as well as the degree to which rural communities are, or can be, organized to provide input on initiatives and are seen as capablehnterested inproviding input. Obviously, Cambodia's laws and rights will remain meaningless if Cambodians cannot realize, enforce, and enjoy them through actual access to justice. Appropriate weight also must be given to initiatives that, to some extent, straddle both supply and demand aspects and may be termed elements o f the "enabling environment." These elements include rural/public education on matters o f civil and property rightsandthe provision o flegal aid services inland-related and other noncriminal cases. 72 Box 7. Improving the predictabilityof contracts 1. An established contract law is needed. This law would include rules that Cambodian society accepts because the public has hadthe opportunity to participate inshaping them regarding which matters must be contained ina contract to make it valid and which matters cannot be the subject o f contract. W h l e Contract L a w no. 36 o f 1988 sets out a broadly appropriate framework, in the 17 years since, no provision of this law has ever been interpreted by Cambodia's courts. Furthermore, the 1988 law i s to be superseded by the enactment o f a civil code, the draft o f which still needs to be widely shared with civil society and the private sector for review and comment. 2. The law o f contract must beproperly published and widely disseminated. However, the publication o f any law in Cambodia remains problematic, as does wide dissemination. 3. This law must be widely understood and applied, first and foremost by legal advisers andjudges, and, second, by all those interested in contracting. However, the teaching o f Cambodian law remains rudimentary to practicing legal advisors and judges, let alone to those who are interested in contracting, including inrespect o f farming. 4. When breaches o f contracts and o f the law o f contract occur, these contracts and this law must be applied in a consistent and impartial fashion by competent courts or other dispute resolution entities. 5. The judgments o f the courts in these matters must be based on the law, written, available for wide publication, and, subject to possible appeal on the question of the lower court's application of the law, strictly and eficiently enforced. Judgments inCambodian civil cases typically are not reasoned(that is, rarely make explicit reference to how the law applies to the facts), are not standardized, do not follow precedent, are not published, and often are nsver enforced. Thus, in practice, contract enforcement rests largely on ensuring that all parties receive suficient benejts so that it is in their mutual interest to uvhold all contractual terms. Private sector development and the non-farm rural economy 200. There is growing recc?grzitwn of the role of the non-farm economy in the rural development of Cambodia. Rapid growth in the manufacturing sector has not been very successful in creating new jobs. Most o f the 0.25 million people being added to the labor force annually are being absorbed into agriculture and the informal sector, in which labor productivity and income levels already are lower than inthe manufacturing and services sectors. Although it i s important to capitalize on the potential for productivity growth and diversification in farming; in the long run, the agricultural sector increasingly will face limitations in its capacity for employment generation. Therefore, the creation of off-farm employment opportunities is a key avenuefor reducing bothpoverty and the growing rural-urban income gap in Cambodia. 201. Non-farm employment opportunities inthe rural sector likely will come from: 0 Commercialization o f inputsint the agriculture, forestry, and fishing sectors 0 Development o f the processing, storage, transport, and marketing chain from the farm-gate to the point o f domestic or export sale 0 Development o f labor-intensive rural manufacturing and services industries. 202. Exemplifying the cross4xtting nature o f this development challenge are the: 0 Diversity in sectoral sources o f non-farm rural income 73 0 Breadth o f the agenda that will successfully address the constraints facing more rapid development o fthe non-farmrural enterprises. 0 Array o fRGC agencies with a mandate that impinges on some portion o f this agenda, 203. Recent researchreveals that this transition to non-farm based livelihoods is already well underway, even with the present limited opportunities, challenging the traditional view o f rural incomes being dominated by agriculture. Furthermore, there will be pressure for the non-farm economy to play an even larger role in view o f increasing levels of rural landlessness and land- poor households. 204. Despite the importance of non-farm incomes, little is known about the exact nature of these activities. Currently, much o f wage labor opportunities are in the informal sector and, therefore, are difficult to both measure and categorize. However, what i s clear i s the diversity in employment sources and types o f micro-enterprise. The approximately one-third o f wage income that i s agriculturally based (Helmers and others 2003) i s also highly seasonal. Construction i s the next largest source (approximately 20 percent) with the remainder made up o f activities in transportation, factory work, services (unspecified), and government work. For micro-businesses, the picture i s equally diverse. Preparing processed foods for sale and providing services (unspecified) jointly make up approximately half o f the businesses. The remainder comprises petty trading in agricultural produce, fish, and livestock; and malung and trading manufactured goods. 205. The main constraints to the development of non-farm rural businesses depend on their size and location, and need to be better analyzed. Cambodia should be in a good position to develop labor-intensive activities, but several forms o f public policy bias are working against the development of these activities. A distinction exists between small and medium enterprises, with salaried employees, operating mostly in small rural towns,87 and village-level micro-enterprises that tend to be seasonal and informal. The distinction i s important when considering the development of the sector, because research has shown that the two types o f enterprise have markedly different constraints. The ongoing research on the investment climate in Cambodia sheds some light on the constraints to conducting formal SME business in rural parts o f the country. 206. Apart from the governance-related constraints discussed previously, other important constraints are criminal theft and disorder, economic policy uncertainty, macroeconomic instability, and, anticompetitive or unfair practices. Surprisingly, access to electricity, transportation, and access to financial services were not mentioned by many survey respondents as severe constraints.88 More frequently, weak marketing systems, including transport infrastructure and transportation services, andthe large (unmet) demand for credit for productive purposes in rural areas, particularly in villages, are identified as important. Generally, marketing systems in rural areas are characterized by l o w levels o f market integration; competition in specific sectors i s often fragmented with a risk o f local monopolies; and marketing and transaction costs are high. Research also has revealed the importance o f proximity to (road) transportation as a determinant o f the size arid prominence of non-farm activities in rural household incomes. This finding suggests that, while transport constraints may not be perceived as an immediate priority constraint to activities, wage labor opportunities andor business ''However, these, too, are very small-scale with over 80 percent employing fewer than 10 employees, and all providing goods and services for the domestic market only. ''One explanation is that existing, established businesses de facto are involved in activities less dependent on these factors. 74 opportunities are related to access to enterprises or markets beyond the immediate vicinity o f villages. The majority (81 percent) o f business activities conducted by village households i s located within the village or commune, and half o f wage labor i s located within the same village or commune. Inother words, the remaining 50 percent requires commuting/ migration elsewhere within the district, province, or country (and occasionally inneighboringcountries). 207. Government has no clear policy topromote of rural non-farm enterprise and industry. Rural non-farm enterprise i s not mentioned in the second Socioeconomic Development Plan, and there i s only passing mention in the National Poverty Reduction Strategy. Policymakers have given limited attention to the non-farm sector. This lack o f attention has prevented a holistic government response to the challenges o f the sector. Instead, various initiatives tackle different elements o f the issues, but each by itself i s unlikely to contribute significantly to non-farm rural development. Recent work conducted by donors in partnership with government, such as the "Investment Climate Assessment and Reform Strategy"8g, have highlighted the need for a coherent private sector development strategy, including the needs of rural areas, and allowed to define a common agenda for private sector development, which should also benefit rural entrepreneurs. 208. The specific case of agribusiness warrants further analysis. While Cambodian agribusiness should benefit from a comparative advantage based on l o w labor costs and availability o f natural resources and productive land, the subsistence nature o f agriculture, characterized by low productivity and limited marketed surplus, constrains the potential for value-added processing in the sector. The constraints to agribusiness development are garnering attention, both ingovernment and among donors, inview o f the potential limitations, this implies for the rural economy. In addition to general business climate constraints, initial studies point to lack o f access to finance (for example, for technology upgrades), lack o f information about market demand, and lack o f basic business skills. Due to its potential impact on rural household incomes, more research i s neededto better analyze the specific needs o fthe sector. 209. A Cambodia Private Sector Strategy (and a government action plan to implement that strategy) has been prepared to address general actions needed to support the development o f the private sector. Implementation o f this strategy will be helpful, with adequate inclusion of the needs o f rural enterprises (for example, finance, infrastructure, skill) to begin clarifying the diagnostic foundation to priority actions that need to begin emerging inparallel. A beneficial next step may be to undertake technical assistance with supporting studies, to design action plan(s) that canfoster a more supportive rural business environment and address technology upgrading, business and technical skills, and marketing, product acquisition and financing difficulties as well as location-specific issues. 89World BankGroup, 2004. 75 Table 8. Areas inwhich cross-sectoral reforms affect the rural economy: Selected examples Civil service Decentralization and Legal and Fighting corruption Investment climate reform deconcentration judicial reform improvement Improved land Improvedland office Improvedland office services services dispute resolution Sustainability o f Improvedland-use planning Contracts accountability o f enforcement land agencies administration Fisheries Better trained and Improvedlocal and Enforcement o f Reduction o f Private investments paid fisheries community management o f fisheries law and fisheries conflicts instorage, cooling, officers fisheries resources regulations Enforcement o f law andprocessing Improved fisheries Access to and regulations facilities administration resources for Access to resources Competitiveness of communities for communities fish exports Agriculture sector management Improved Improvedregional and local Development o f Improvedroyalties Agribusiness resources agricultural development contract-farming collection development allocation planning Access to rural Improvedpublic credit services Agriculture services Demand-driven services Opportunities for Improved service Private sector contracting o f delivery provisiono f services agriculture services Agricultural trade Efficient trade Contracts Improved Private investments facilitation enforcement competitiveness of inmarketing agencies Access to credit Cambodia products channels Ruralfinance services Improved access Contracts Reduced costs o f Economic Tailored-products enforcement doing business opportunities Infrastructure services Increase Improved local Contracts Lower costs o f Private investments efficiency and planning/maintenance enforcement doing business accountability Concentrate on keypublic sector roles 210. A challenge for the government is selectivity in its focus of building capacity for fulfilling roles in guiding economic development for efficient and equitable growth. The govemment already largely has shed activities that still burden the public sector in neighboring countries, such as direct involvement inproduction and state domination of market institutions. It still faces enormous tasks to provide public goods, address market failures, and provide useful services that the private sector i s likely to find unprofitable. Additional roles include creating consensus on, implementing, and coordinating sector policies that involve conflicting goals. In addition, with the importance of donors in funding support for public investments, there i s the additional challenge of coordinating these donor activities, so that they are aligned with national priorities. 211. Limited capacities in the govemment agencies put a premium on selectivity even in the provision of various services that will be important to rural producers as they seek to diversify activities and orient more to market opportunities. For agricultural extension, for example, there may be quicker impacts to the govemment seeking partners in a coordinated, multi-provider 76 approach to service deliver than to aim to build extensive capacity within the public sector. Working in partnership with the government, NGOs, agricultural technical schools, and private providers can add capacity for provision o f extension services. Similarly, animal health services may more rapidly scale up if a private provider model i s pursued, even if, for public vaccination campaigns against communicable animal diseases, public resources contract these services for provision to small-scale farmers. 212. I n the effort topromote crop and market diversification as one of the drivers of rural income growth, the government will need to pay attention to product quality and standards issues. The role o f the public sector i s shifting in this domain, particularly where export markets or supermarket-based procurement chains are gaining prominence. Inthese two growth markets, quality and standards norms increasingly are being determined by private procurement channels, with specifications often out in front o f public norms definitions. As markets evolve in this direction, the government will be less effective in concentrating on public norm-setting. It also will be more challenged to work for favorable social outcomes by worlung with small farmers and their organizations to provide them market information and production techniques that enable them to meet the requirements o f these emerging market opportunities. 213. The government faces enormous challenges in a role only it can perform, that of putting inplace the array of linked elementsneeded to enable a socially beneficial allocation of natural resources currently vested in the State. As argued above, achieving progress inthis area i s one o f the most important challenges to achieving rural growth sufficient to reduce rural poverty. Proactivity by the government will be an essential ingredient inalmost all components o f the system that needs to be built.Components include will defining technical and social bounds to the scope and location of reallocation, establishing criteria for beneficiary eligibility, ensuring complementary supportive measures, buildingpublic consensus behind this package o f choices, and effective use o f sanctions in which individuals subvert implementation o f these public choices. 214. Finally, in the role of addressing perceived market failure, one area in which the government may consider assessing its current approach is in improving access to financial credit and saving services by rural producers, whetherfarmers or small entrepreneurs. Direct provision o f capital through govemment program credits targeting rural beneficiaries should be avoided, as it contributes little to building sustainable institutions capable o f extending access to financial services to unserved rural populations. Nor i s such use o f the government's limited resources likely any time soon to be a viable solution to addressing the sizable unmet rural demand for financial services. Creating the enabling environment that promotes improved financial institutional development and financial intermediation o f rural savings into rural investment i s more tenable public sector focus. Coordination needs, including of donor support 215. The "multiple agencies'' issue. Many line agencies are involved in agriculture and rural development. Responsibilities and resources for agriculture and rural development (ARD) are spread between the Ministry o f Agriculture, Forestry and Fisheries (MAFF), the Ministry o f Water Resources and Meteorology (MOWRAM), the Ministry o f Rural Development (MRD), and the Ministry of Land Management, Urban Planning and Construction (MLMUPC), resulting in an oversized public administration for agriculture and rural development. Overlapping mandates and weak coordinatior. affect the performance o f these institutions, which remain dependent on donor support. Additional ministries such as the Environment (MOE), Veterans and 77 Women Affairs (MOVWA), Commerce (MOC), and Industry, Mines and Energy (MIME) also play lesser roles in agriculture and rural development. Improved capacity for coordinating strategies and actions for ARD i s critical and deserves attention. Formally, the existing inter- ministerial Council for Agriculture and Rural Development, chaired by the Prime Minister, i s a vehicle for such coordination, but it appears to exist mostly on paper, rarely meets, and has yet to become effective. 216. Donor coordination in ARD is a critical issueatoraid effectiveness but remains limited. The highlevel o f external assistance to the rural sector over the last decade contrast sharply with the lack o f progress in reducing rural poverty and average performance o f the rural economy, questioning the overall effectiveness o f past efforts. The significant level o f external assistance going to the ARD the multiplicity o f sources, and the important share o f off-budget grant funding (approximately 45 percent o f external assistance to the sector in2002 according to CDC data) mean that any efforts to improve alignment o f budgets with policy priorities will be dependent on improved donor coordination. 217. More effective interaction among donors, and between donors and RGC, will be critical for a more strategic and coordinated response to the sector's many challenges. Recent reviews o f external assistance found that many projects appear to be implemented without sufficient coordination either with each other or with Cambodian undertakings. Project and strategy proliferation exists with donors delivering activities that are uncoordinated, lack national ownership, and impose diverse donor procedures and objectives on government. There is little information sharing, leading to development assistance in the rural sector being characterized by multiplicity, both interms o f donors and their approaches. The quality o f donor inputs into policy processes i s uneven. Little empirical evidence based or, field experience or research i s brought to policy considerations, and there i s a dearth o f comprehensive, consistent, rigorous assessment o f project impact. However, there are a number o f successful experiences that could be up-scaled (box 8). ~ Data on ODA flows are from CDC and are used with the caveat that these data need improving, for example, to address classification issues, such as road projects with rural components, which escape identification and inclusion. CDC data indicate that donors disbursed approximately US$66 million for ARD in2002; disbursement from the government's budget amounted approximately to US$23 million in 2001. O f the 2002 ODA, bilateral assistance included support from Japan (16 percent o f all ODA disbursements), Australia, Denmark, France, and Germany. Multilateral agency support to ARD includes the World Bank (approximately 22 percent of 2002 disbursements), ADB (14 percent), EU (13 percent), IFAD (5 percent), andUNagencies (4 percent) (IFAPER 2003). 78 Box 8. Lessons from recent reviews of external assistance Working through government procedures. For maximumefficiency, project implementation should follow existing procedures wherever possible rather than establishing parallel systems. To the extent possible, donors should follow the new government financial and project implementation procedures introduced following the election o f the commune councils and the establishment o f the CommuneISangkat Fund (CISF) . Complementarity with other partners. Cambodia still needs multisector interventions to tackle the causes o f widespread rural poverty and to improve household food and income security. To avoid complex projects, which are difficult to implement with weak institutional capacity, donors should engage in partnerships with other programs and projects to provide complementary services to the rural poor to achieve common objectives. Flexibility andphasing. Projects andprograms design should be flexible to allow for uncertainties and risks duringproject implementationandto allow for adjustment as experience i s gained. Local institutions. At present, central ministries, provincial departments, their district staff, and commune councils have limited capacity. With a lack o f financial incentives and low staff morale, payment o f staff allowances i s necessary to ensure full-time worlung. However, these should be linked to responsibility and accountability for the work output o f the staff concerned. For a coherent approach to development, the provincial rural development committees (PRDCs) or their eventual successor should coordinate project activities at provincial level as part o f their wider role o f coordinating all rural development activities inthe province. Participation and sustainability. Members o f rural communities should be fully involved in planning and implementing programmed activities to ensure their sustainability and ownership. Rural communities and the commune councils should contribute to the investments costs and assume responsibility for O&M of small-scale commune infrastructure investments. Development approach. Experience has shown that the livelihoods o f the poor can be significantly improved by providing (1) direct financial assistance; (2) access to technology, financial services, and markets; and (3) intensive capacity building. Proven technology. Proven crop and livestock technology and appropriate extension approaches are available in the national extension guidelines and generally appropriate to local conditions and specific to the technical constraints to be addressed. Economic viability of irrigation. Several projects indicate the doubtful economic viability and financial sustainability o f large and medium-scale irrigation schemes in Cambodia. Donors should take a cautious approach to investment insuch schemes. 218. There has been a recent openingfor Better sharing of experiences and improving the effectiveness of external assistancefor agricultural and rural development.In2003 an initiative to coordinate donor policy and support led to the creation o f several joint govemment-donors technical working groups (TWGs): forums for RGC, donors, and others to work together to reduce 'poverty through agricultural and rural development and promote: (1) pro-poor sector policy, (2) coordination and information sharing; and (3) transparency around the use and mobilization o f limited resources. While this i s a positive development, an additional issue i s that donors' assistance i s still being earmarked to institutions. To ensure that sector policies and implementation strategies are appropriately comprehensive, recent reviews o f external assistance recommended that donors support a shift from "budgeting for institutions" to "budgeting for programs" and such working groups could assess whether this i s a timely agenda for Cambodia- donor partnership. 219. Current efforts for coordination in ARD will be most effective if accompanied by stronger government leadership. An active Council on Agriculture and Rural Development would be one option for this, perhaps with the support o f a small but standing secretariat, also chaired by RGC; perhaps with pooled grant support from donors to cover a modest routine budget and work program aimed at improving the procedures and content o f consultation and coordination. The experience inthe land sector shows the progress that can be made when there i s 79 an agreed strategic framework and strong government leadership pushing for efficient, sector- wide coordination. Nextsteps 220. Reaching consensus among development partners and setting relative priorities. Moving from the elements o f a rural development strategy proposed in this Note to a robustly integrated and prioritized agenda clearly will take additional work and dialogue. The extent to which such work and dialogue should be pursued depends to a great extent on resources-the government, donors, NGOs, private sector-available for agriculture and rural development. Furthermore, discussions and review o f existing/future available resources are needed to assess existing gaps in resources, and within each area, define possible targets. The eventual reform agenda necessarily will be broad-based and comprehensive. It would consist o f a portfolio o f actions and reforms targeted to catalyze needed improvements in production and general rural productivity; create gainful employment for the growing numbers o f rural poor including women; and replace the over-exploitation o f the country's natural resources with sustainable community- based uses. 221. For the most part, these actions will bear h i t in the medium term, although some will have an immediate salutary effect on rural incomes and will ease rural poverty. For these benefits to accrue, however, steps to prepare and implement the agenda should begin now, before Cambodia's rural economy options become totally hostage to the neutralizing impact of its rural population dynamics. The broad outlines o f most o f the proposed reforms already are well known, and the cost o f further delay could be substantial, especially to the rural poor. Moving forward with sector the rural reform agenda i s an obligation that both the government and the donor community owe to Cambodia's legion o f rural residents, who continue to live perilously close to the margin o f subsistence. 222. This Note will serve as a contribution to the government's efforts to define its agenda to develop rural areas in the short to medium term in collaboration with other partners. The Note does not purport at this stage to present a comprehensive strategy, since important information gaps and limited engagement with the government in its formulation leave significant work for subsequent stages. Further consultations, during the preparation o f the National Strategic Development Plan 2006-2010, in the short term, and through ongoing dialogue within forums such as the government-donors TWGs, in the medium term, would aim to clarify with the government strategic directions, priority sub-sectors on which to focus, linkages and information gaps needing further assessment, and specific areas inwhich enough i s already known to embark on implementing concrete agendas. The World Bank stands prepared to support this subsequent phase of work inagreement with the government. 80 81 82 Annex 1. Cambodia's Millennium Development Goals Selected indicators Baseyear 12015 M D G l : Eradicate extremepoverty and hunger Halveproportion ofpeople who sufler f.om hunger (%) Proportiono fpeople whose income i s less than the 39 (1993) 19.5 national poverty line Share o f the poorest quintile innational consumption 7.4 (1993) 11 Prevalence o funderweight children under 5 yrs old 45.2 (2000) 22.6 Prevalence o f stunted childrenunder 5 yrs old 15 (2000) 9 MDG2: Achieve universal nine-year basic education Ensure all children complete basic schooling Net admission rate 59 (1997) 100 Net enrolment rate inprimary education 78 (1997) 100 Net enrolment rate insecondary education 14 (1997) 75 MDG 3: Promote gender equality and empower women Reduce gender disparities in all level of education Ratio o f girls to boys inupper secondary educatioli 47 (2002) 100 Rationof girls to boys intertiary education 19 (1997) 85 Proportiono f seats heldby women innational assembly 6% (1993) 30% MDG4: Reduce child mortality Reduce the under-five mortality rate Under-fivemortality rate (per 1,000 livebirths) 124 (2000) 65 Infant mortality rate (per 1,000 live births) 95 (1997) 50 Proportionof children under 1yr immunized against 41% (2000) 90% measles MDG.5: Improve maternal health Reduce maternal mortality ratio Maternal mortality ratio (per 100,000 live births) 437 (2000) 140 Proportiono f births attended by skilled healthpersonnel 32% (2000) 80% MDG6: Combat HIVIAIDS, malaria and other diseases Decrease the spread of HIV/AIDS, malaria, OF, and TB HIVprevalence rate among adults aged 1549 2.6 (2002) 1.8 Malaria case fatality rate reportedby public health 0.4 (2000) 0.1 sector MDG7: Ensure environmental sustainability Achieve various standard targets to ensure environmental sustainability PA) Forest coverage as a percentage o ftotal area 61 (2002) 60 Proportiono f rural population with access to safe water 24 (1998) 40 source Proportion o f rural population with access to improved 8.6 (1998) 30 sanitation MDG8: Forge a global partnershipfor development 83 84 Annex 2. Farming systems 1. Cambodia is characterized by a great diversity of farming systems, which can be classified in7 major groups": 4 rice-based farming systems, 2 chamcar-crops-based farming systems (see point 3 below), and 1 more limited, industrial production system. These systems differ in their potential for intensification, diversification, and commercialization. However, terrace rain-fed rice farming systems, characterized by l o w productivity, employs approximately 70 percent o f the rural population and represents 80 percent o f the rice cropping areas. These figures explain Cambodia's low aggregate agricultural perfonnance. 2. The 4 major types of rice farming systems include (a) type found in non-irrigated terrace zones, characterized by poorly productive and rainfall-dependent seasonal rice cropping, and frequently associated with sugar palm. This system i s the most common among Cambodian farmers (table A2.1). Recent changes include the introduction o f double-cropping. (b) flood recession zones, inwhich water control allows intensive rice cropping. With good water and soil fertility control, evolution can be rapid either toward specialization in intensive rice farming-with land concentration and development o f a salaried workforce-or tovard the diversification o f production. (c) floating rice in large flooded fields. In this type, the extensive nature o f farming practices allows good labor productivity but hydraulic risks are higher. These systems are regressing and evolving into either flood recessionrice or irrigated double-cropping; and (d) upland rice-based systems involving slash-and-burn land preparation, located mainly in less densely populated areas o f the North-Eastern provinces. These systems are less and less rice based, with increased population inflows and the development o f cash crops by migrants. 3. Chamcar cropping refers to widely diversi3edfarming systems in which rice cropping is most often found but in which "dry" cropping is prevalent. There are two groups o f chamcar systems: (1) river bank farming systems, dominated by diversified cropping systems following the annual flooding cycle, witha highdevelopment potential. Landprices are high, and land concentration induces the emergence o f larger farms with mechanization and use o f a smaller workforce; and (2) red and black soils upland farming systems, in which rubber farming i s concentrated and other cash crops are developing fast. The future o f these systems depends on the restructuring o f the rubber industryand o n the development o f annual crops, notably, maize, soybeans, and other tree crops such as cashews or bananas. 4. The last system is the modern, capital-intensive one found mostly near cities, whether inriverbank zones (around Phnom Penh) or in a combiiation o f riverbanks and terraces (Battambang, Siem Reap). This system includes intensive'market garden cropping, industrial chicken farming, and orchards. The evolution o f this system will depend on the expansion o f urban markets, labor costs, and development o f alternative uses for capital inother economic sectors, as well as o n the evolution o f external markets for the main export commodities (oil palm, soybean, cashew). 91APIP/GRET-IRAM-CEDAC 2001. 85 Relativeimportanceof mainfarming systems, 2000 Source: APIPIGRETstudy. Note: a. 3-year average, tonha. 5. Options for intensification and diversification in rain-jied terrace areas. Rain-fed rice cropping i s especially important in the two areas in w h c h the majority o f the population are concentrated: the Plain provinces in the Southeast (Prey Veng, Svay Rieng, Takeo, Kampot, and south o f Kompong Cham) and the Northwest provinces in the Tonle Sap region (Battambang, Siem Reap, Banteay Maenchey). Irrigated double cropping has developed primarily in the Southeast provinces around PhnomPenh (Kandal, Takeo, Prey Veng, Kompong Cham, Kompong Speu, Kampot). 6. Water constraints and low soil fertility are the main constraints to further intensificationo f this system, and irrigation combined with the used o f improved varieties o f early rice the main option for intensification, provided the ratio o f rice prices to input prices evolves favorably (including the price o f fuel for water pumping) and significant support is provided in terms o f decentralized research and extension, farmer training, and availability o f credit and quality inputs. Among possible opportunities, the development of small-scale fish farming is the most promising or, when markets exist, the development of dry-season vegetable production. However, the capacity o f these systems to absorb additional population in the coming years i s limited, as indicated by the l o w cultivated area available per household: less than 1ha in the Southeast," where no more land is available, and less than 1.5 ha inthe Northwest. The balance o f these systems is also highly dependent on the development o f off- farm income opportunities. Given current yields, it takes 0.9 ha o f paddy to meet the food needs o f a family o f 5. Most farm households rely o n off-farm incomes and non-rice farming activities-fishing, palm sugar fabrication, woodcutting, charcoal fabrication, and seasonal migrations to the cities-for more than 50 percent o ftheir incomes. 7. Expansion of receding rice farming systems. Receding rice systems have been expanding rapidly (although from a smaller surface base), both through the clearing o f remaining flooded forests and by the transformation o f floating rice systems, with the development o f water control investments, adoption o f early maturing (IR) varieties, and increasing use o f fertilizer^^^. Receding rice systems are labor and input intensive and yields up to 3 t/ha can be obtained without additional fertilizers; if irrigation i s mastered and with adequate pest control and fertilizer management, yields up to 6-7 t/ha are observed. These systems are less dependent o n off-farm incomes, and a significant share o f farm production is marketed. Land prices have raised rapidly in these areas and land concentration to the benefits o f the wealthiest, best equipped farmers is observed. K e y determinants for future 92 Thirty years ago, these average surface areas were twice as large. 93 The system is the one for which the recommendations formulated by national research and extension services best fit farmers' constraints and strategies. 86 intensification and development o f these systems include the evolution o f paddylinput price ratiosg4, availability of agricultural extension services addressing these milieus' specific constraints, availability of labor (or adoption o f different varieties-direct sowing species-less dependent o n labor), and government's actions to preserve the remaining flooded forest. Floating rice system, which are highly vulnerable to flooding, are gradually being transformed into receding rice systems, with investments in improved varieties and small-scale irrigation (motor pumps, tube wells). Riverbanks farming systems include intensive, diversified poly-cropping and animal rearing systems, or crop-fish and crop-animal- fish farming systems, and households usually get involved in a wider range o f activities depending on local opportunities (fishing, fiiel wood sales, small business, temporary or permanent job in Phnom Penh o f a family member, etc.). Under increasing populationpressure, clearing o f flooded forest-as the only remaining land reserve-is occurring, as well as land concentration to the benefit o f farmers who managed to accumulate assets (motor pumps, tractors, transport means, etc.). The evolution o f river bank farming systems, which have had a marked commercial orientation for a long time due to easier access to towns, will be linked to the development o f the second and tertiary sector and expansion o f urban food markets. 8. Diversification and development of chamcar farming systems. Slash and burn and red and black soils upland farming systems extend inan area including Rattanahi and Mondulkiriprovinces, and parts o f Kompong Cham, Kratie, and Kompong Thom provinces. Slash and burn agriculture i s mainly practiced by ethnic groups (approximately 14,000 households) in less densely populated areas, and collection o f forest products i s an importact source o f revenues for households in addition to agricultural production (rice, legumes, cassava, bananas, spices, vegetables). Recent trends include the development o f cashew nut orchards, and sedentarization closer to main roads. In-migration is important in these areasg5and has resulted in the introduction o f commercially oriented production o f coffee, rubber, cashew trees and soybean. Future agricultural development will depend on government policy regarding local development, inparticular the options that will be chosen for allocation o f land offering the greatest potential (red soil platem area to develop cash crops or shallow water areas for rice production), as well as the availability o f agricultural support services able to promote the development o f sustainable farming systems under the current increase in population. Further diversification into smallholder rubber plantations and other perennial crops (cashew, banana, etc.) will depend on improvements in land tenure security, development o f infrastructure, credit and extension services, and in the case o f rubber, restructuring o f the sector and improvement in the marketing environment. 9. Conclusion. K e y determinants o f future evolution o f fanning systems, and subsequently o f their capacity to provide remunerative employment for the fast growing population, depend o n a number o f factors, some of them exogenous to the rural space, in particular, the development o f employment opportunities inthe secondary and tertiary sectors inurban areas. However, future trends will to a great extend depend on government policy choices for rural areas as regards: (1) Land management and tenure security, especially in the Plateau and less densely populated areas o f the Northwest; (2) Priorities for investments in irrigation and water management; (3) Addressing marketing and trade constraints for a number of key commodities (rice, fish, livestock, rubber, etc.); (4) Re-orientation o f the research and extension system to respond to the needs of diversified farming systems; and (5) Infrastructure development, inparticular inmore remote areas less connected to markets and towns. 94The current trend is to diversify into other crops; such as mungbean. 95According to the 1998 Census, 25 percent o f the population o f Rattanakiri was made up o f migrants from other provinces and neighboring countries. 87 Annex 3. Maps 1.Geographicalregions 2. Cambodia MDGscomposite index byprovince 3. 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