1. Introduction		CONTENT

The RGC has identified public finance as one of the key areas of reform in Cambodia. Public finance is one of the five crosscutting reform areas in the GAP. Two most important sub-categories of public finance reform in Cambodia are revenue collection and public expenditure reform. In Cambodia, the revenue collection to GDP ratio is very low, about 12% of GDP, comparing with other ASEAN countries. The low revenue collection means that the government of Cambodia does not have sufficient money to spend on necessary services for the people. Furthermore, the expenditure is not effective and efficient. The funds do not reach public service providers and the financial mechanisms are not efficient. 

The following are the three main public finance issues which the GAP addresses: 

1. Weak revenue raising capacity

• Inadequate implementation of the law on taxation and delay in introducing VAT

• Generous tax exemptions granted under law on investment

• Ad-hoc tax and custom duty exemptions

• Limited capacity in tax and customs administration

2. Inefficient management of public expenditure

Two key questions addressed to the design of expenditure reform:

• What are the best tactics to deliver money to meet urgent needs on the ground?

• What are the best strategies to overhaul the institutional arrangements for public expenditure to address the current disbursement problems?

3. Lack of independent accountability institution

“Lack of an independent audit authority with powers to carry out external audit of the government” 

Further reform plans introduced for the year 2002: 

The following is a summary of the key points in the Memorandum on Financial Reform between the Royal Government of Cambodia and the International Monetary Fund (IMF): 

Main revenue measures affecting the 2002 budget:

A. Revenue measures introduced in second half of 2001

• Increase selected excise rates in the context of tariff restructuring

• Introduction of a tax stamp system for cigarettes

• Introduction of stickers for increased revenue collection from visas

• Treating all diesel sales as final sales for VAT purposes

• Establishing a large taxpayers unit (LTU)

B. New Revenue measures under the 2002 budget

1. New tax measures

• Expand the coverage of real regime to five additional provinces

• Increase excise tax on beer from 10 percent to 20 percent

• Collect VAT on airport departure fees

• Implement 2 cents per liter excise tax on gasoline and 4 cents per liter on diesel as specified in the financial law

• Conduct a joint review by the tax department and the customs and excise department of all aspects of taxation of motorcycle and motor vehicle parts

2. Non-tax Measures

• Intensify efforts to collect arrears on telecommunication services and lease of state assets

• Introduce increased royalty fees for casinos based on estimated turnover

• Increase the share of garment quotas to be auctioned from 10 percent to at least 20 percent

• Renegotiate contract with Sokha Hotel, the managing company for the Angkor monument complex, after the threshold of 200,000 tourists is reached

3. Tax and customs administration improvement

• Strengthen tax auditing strategy and capabilities

• Improve coordination between the customs and tax department, especially regarding to exchanging information pertaining to large taxpayers

• Intensify monitoring, enforcement, and collection of taxes for the largest tax payers

• Strengthen the anti-smuggling unit within the customs department

• Identify the 50 largest accounts in the large tax payer unit, complete an analysis of the arrears, and establish an action plan with collection targets and report on performance

Main government expenditure and budget management measures in 2002:

• Issue Prakas detailing a specific format for cash management procedures and establishing a better coordination between the National Treasury and the Foreign Currency Unit by end of 2002

• Reduce the number of government deposit accounts by integrating revenue accounts held by line ministries into the Treasury’s single account by end March 2002

• Provide daily information on transaction in the government accounts to NBC and FTB

• Allow tax payments by transfer and check to the treasury single account with NBC, especially for the largest tax payers

• Develop internal auditing capacities within key spending ministries (i.e., Ministry of Economy and Finance, Education, Health, Agriculture and Rural Development)

• Strengthen budgetary procedures for the ministries under the PAP to meet the social expenditure targets set forth under the poverty reduction strategy

• Establish a working group to prepare standardized accounting procedures and methodology for the public sector in line with international standards. The final report of the working group would be submitted by end of 2002

• Finalize a revised chart of government accounts meeting international standards for implementation from January 1, 2003

• Enhance budget preparation by improving macro-economic and budget revenue expenditure analysis

Institutional arrangement:

Unlike administrative reform, which is coordinated through a unit in the Council of Ministers, the public finance reform is administered under a Secretariat in the Ministry of Economy and Finance (MEF).  The Technical Cooperation Action Plan (TCAP) is a secretariat of reform coordinating all reforms in four departments of the ministry –the Budget and Financial Affairs Department, the Customs Department, the Taxation Department, and the National Treasury Department. 

The reform of three departments in the Ministry of Economy and Finance are addressed in the GAP. Two departments are related to revenue collection, namely the Taxation and Customs departments, and one is related expenditure management, namely the Budget and Financial Affairs Department. 

2. Summary of Progress

CONTENT

The following summary of progress was prepared in February-March 2002 as the basis for further NGO discussions on the reforms. 

Many of the financial reforms are very difficult for the government to implement, due to the vested interests of government staff in lucrative sectors such as customs and public procurement. 

Customs administration 

There is no notable progress in customs administration. The reform is going very slow and there is much resistance. Without enforcement and proper monitoring, the reform would not be achieved in the short term as well as in the medium term. 

Short-term

There is little progress in customs administration. The new customs code is in the process of preparation and needs time and commitment to be finalized.  The plan for streamlining customs administration has met much resistance and needs political commitment from high-ranking officials.  The anti-smuggling taskforce is being strengthened, but the task force has been created for years and is still not effective. It needs some procedures to deal with smugglers as well as custom officials with whom they collude.  Computer consultants have been recruited to improve the existing software. The enforcement of pre-shipment inspection has been achieved. 

Medium-term 

The comprehensive plan to develop a modern administration is a long way off, with resistance coming from the existing staff in the department. 

Tax administration 

There is notable progress in taxation reform. In the short term, many items of reform have been achieved. In the medium term, the progress was slow compared to the plan. 

Short-term 

There are no exemptions granted outside the legal text being dealt with VAT. The encouragement of business to maintain appropriate accounting procedures as a basis for tax assessment is now crucial. The government does not have any clear procedures for monitoring accounting. The backlog of refunds for VAT following the approval of the refund request is administered by Prakas No 006 MEF date 27 April 2001. The system for information exchange has been improved through Prakas issued in February 2001. However, the amendment of the investment law is still under discussion. 

Medium-term 

A modern taxation system is not expected to be achieved in the medium term. It needs more studies and public consultation with the civil society and other stakeholders. 

Budget management

There is notable progress comparing to the plan in the GAP. However, the social sector ministries are still not receiving their full allocation. The Priority Action Plan for the Ministries of Education and health was a positive step and money for the first trench reached its target, but transfer of the subsequent tranches ran into difficulties. 

Short-term 

The Prakas on monthly spending plans is now issued every three months, but the problem is that it is not accurate.  The Economic and Financial Bulletin has published disbursements to central and provincial governments on a monthly basis, as required by the plan. The ADD report is not available for the public. The General Auditor has been appointed by the National Assembly. 

Medium-term 

The Budgetary Strategy and Enforcement Center (BSEC) is an ongoing entity but it still lacks clear procedures and regulations to administer the process of disbursement. However, it has simplified the process of disbursements, and the disbursements are reaching priority ministries more than in the past. In the new Budget Law 2002, the National Audit Authority has a separate budget from MEF. Training has been given to many officials within MEF, but monitoring is needed to ensure that what has been learnt is implemented. Preparation of the Medium Term Expenditure Framework has started very slowly, and more technical assistance is needed. 

Further details of progress 

The progress report in the matrix below was prepared by the General-Secretariat of the Council for Administrative Reform (CAR) GAP monitoring unit in December 2001. The CAR received information on all reform areas in the GAP and summarized its findings in the progress report. The NGO Forum has made additional comments (in italics) to update the GAP progress report through interviews with donors, experts and technical persons in the field. Below is a summary of the progress. 

2.1 Progress in Public Finance -Custom Administration*

* Source: Council for Administrative Reform (December 11, 2001), “GAP Progress Report”
** Information in italics has been added, based on interviews or reviewing official documents/report. 

2.2 Progress in Public Finance -Tax administration*

* Source: Council for Administrative Reform (December 11, 2001), “GAP Progress Report”
** Information in italics has been added, based on interviews or reviewing official documents/report.

2.3 Progress in Public Finance -Budget management*

* Source: Council for Administrative Reform (December 11, 2001), “GAP Progress Report”
** Information in italics has been added, based on interviews or reviewing official documents/report 

3. Summary of NGO Involvement in the Sector

CONTENT

Many NGOs work closely with government institutions, at the central ministry level, provincial level, and district and local levels.  They are therefore in a good position to observe the final impact of public finance reforms on the delivery of government services. 

The two largest sectors of government-NGO collaboration are the health and education sectors.  MEDICAM is an alliance of NGOs working closely with government counterparts in the health sector in Cambodia. It gathers inputs from its members and provides practical recommendations to the Ministry of Health (MOH). MEDICAM has been in a good position to observe the impact of the Priority Action Plan (PAP) on health-sector financing.  The NGO Education Partnership (NEP) is an alliance of NGOs working in the education sector, and has played an important role in contributing to education policy.  EDUCAM is a wider alliance for exchange of information between all development institutions in the education sector. 

Economic and public finance policies have a big impact on Cambodian society and on poor people. Some impacts are negative, and many normal Cambodian people do not understand the roots of these impacts.  There is a need for NGOs to pay attention to these issues, and to link these policy issues to the problems they witness at the local level. 

4. Issues Raised by NGOs

CONTENT

• Lack of public consultation on public finance reforms
  There is a tendency to consider public finance reforms to be entirely technical in nature and not worthy of civil society input.  The social implications of public finance reforms are not sufficiently recognized.  Public finance is the only reform area in which NGOs are never invited to join the relevant donor/government working group discussions in order to be informed of the current status of the reforms and to give their input. There is a lack of wider public discussion about public finance reforms and its implications.  Issues not being discussed include: the lack of public awareness raising on the reasons and need to increased revenues; the poverty impact of public finance reforms; the choices to be made concerning progressive and regressive taxes and non-tax revenue raising measures; and the observed impact of public finance reforms on the ability of government institutions to deliver services at the local level.  There has been no NGO or wider public input to the Memorandum of Understanding agreed between the government and the IMF.  Much information about public finance is still considered confidential or is hard to obtain, and new laws are not sufficiently disseminated.

• Problems in the implementation of the Priority Action Plan
  The Priority Action Plan (PAP) is the key budget management mechanism for improving the process of disbursement to the social sectors in a number of provinces.  By contrast, the Accelerated District Development (ADD) plan is being phased out.  The PAP is a post audit disbursement mechanism that requires district level planning.  The PAP has been greeted as a welcome advance by those involved in district-level health and education services, but significant problems remain.  The first tranche was successfully disbursed and mostly used for materials and supplies.  However, the subsequent tranches were generally late, non-existent or did not match planned allocations.  Provincial PAP disbursements for the health sector stood at 83% of budget allocation as of 31 December 2001.   In the education sector, by April 2002, an average of 65% of the 2001 PAP funds had been disbursed to schools and about 50% to tertiary education.  PAP disbursements for the health sector ran into difficulty in the first four months of 2002, with only 3% of the PAP disbursed (compared to 25% for the first three months of 2001).  There has been some suggestion that PAP disbursements have been affected by cash flow problems in the Treasury, despite the assurance in the GAP that, through the PAP, “budgetary allocations for priority sectors will be protected regardless of the status of overall public revenues.”  The system of reconciliation for each tranche is also overly complicated, causing difficulties for district offices and unnecessary delays.  District offices still lack sufficient capacity to manage these new financial procedures.

• Disbursements are unpredictable and less than budgeted allocations
  While PAP disbursements fell short of budgeted allocations, other budget disbursements fell even shorter.  For example, in the health sector, as of 31 December, provincial level Chapter 11 health expenditures were only 56% of budget.  Over the first four months of 2002, close to 0% of the Chapter 11 (running costs) budget for the health sector had been disbursed. Uncertainty regarding the receipt of funds and payment of salaries makes planning and implementation of government services near to impossible.

• Problems in disbursement mechanisms to the provinces
  The absence of a National Bank network in the provinces has meant that the budget has had to be literally disbursed by trucks that carry cash to provinces.  This system is problematic and ends up in late or non-existent payments, paralyzing the delivery of government services.  While in the medium term the National Bank network has to be extended, a short-term measure could be the temporary use of micro-finance institutions to improve disbursement of budget to provincial governments.

• Problems in the introduction of user fees
  Low government revenues have necessitated the introduction of user fees in the health sector.  There is concern among NGOs that exemption schemes for the poor are not effective, as health centers know that allowing exemptions will reduce their revenue.  Equity funding is needed to cover the cost of exemptions.  NGOs are happy to note that in the education sector the elimination of entry fees has led to an increase in enrolments.  However, unofficial fees still dominate the education system, leading to high dropout rates.

• Small budget allocation for salaries
  Increases in the budget allocation for the education and health sectors have been most welcome, and have enabled the purchase of much needed materials and supplies.  However, the most chronic problem and cause of poor service delivery – ridiculously low salaries – has barely changed.

• Weak revenue collection
  The low level of revenue collection is still a critical issue in public finance, even there has been some improvement. NGOs are concerned about corruption in the process of revenue collection.  For example, some customs officials are known to have bought many large villas in Phnom Penh, suggesting that their meager salaries have been supplemented by large-scale corruption.  Low revenue collection is partly due to lack of clear management and monitoring processes. There is a lack of transparency and accountability, which are crucial for the implementation and operation of a revenue raising system.

• Problems caused by reforms of private bank sector
  Although not mentioned in the GAP, the reform of private banks is an important component of the reforms agreed between the government and the IMF.   The closure of a number of private banks following an increase in the minimum capital requirement led to many depositors losing all or part of their savings.  No safety net was provided to support those affected, and there was a delay of many months before depositors could access even a small portion of their savings.  Among those affected were urban poor savings schemes run by NGOs.

5. NGO Recommendations

CONTENT

Recommendations to Government:

• Invite civil society institutions to participate in discussions about public finance reform, and take more steps to inform the public about new financial reforms and procedures.

• Promote public discussion on the need and means to raise public revenues.  The impact of broadening VAT on the poor should be examined, and additional forms of taxation that target the rich (e.g. capital gains tax) should be discussed.

• As funds allow, expand the PAP system to other provinces and other social sector ministries.

• Simplify the system for reconciling PAP disbursements, and reduce the number of steps involved.

• Provide additional capacity building for district level staff in planning and financial management to ensure the smooth operation of the PAP.

• Improve the system of disbursements in all parts of the budget, so that ministries can make plans based on a predictable flow of cash.

• As a short-term measure, consider the temporary use of micro-finance institutions to disburse the budget to provincial governments.

• With the assistance of donors, provide district health centers with equity funding to offset the cost of fee exemptions for the poor.

• Create a better balance between running costs and staff compensations, especially in the social sectors.  For example, it is suggested that public health workers and teachers who agree to work in remote areas be given an additional allowance.  Performance bonuses should be paid to those who perform well, with a transparent assessment process and an independent monitoring system ensuring that bonuses go the most worthy individuals.

• Improve transparency in tax collection and customs administration.  Introduce clear methods of assessing accounting standards of businesses. Tax officers should not be allowed to work as accountants or auditors for the organizations they tax.  Corruption among tax and customs officers should be punished.

• Reduce leakage of funds in disbursement processes, through enforcing available anti-corruption measures. Enforce the procurement sub-decree.  Ensure proper competitive bidding procedures on all concessions.

• Publish cash flow figures in a financial bulletin every month and report the balance of treasuries at both central and provincial levels.

Recommendations to Donors:

• Encourage NGO involvement in public finance discussions, and invite NGOs to attend working group meetings involving public finance reforms.

• Encourage the wider dissemination of information on and promote public discussion on public finance reforms.

• Provide research, from a variety of sources and perspectives, on the expected impact of various financial reforms, with a focus on impact on the poor.

• Closely monitor the financial reforms, with particular attention to those reforms that are critical for immediate poverty reduction, such as disbursements to the social sectors.  Specify improvements in anti-corruption measures and procurement procedures as a condition for continued assistance.

• Provide capacity building at the district level to improve financial management capacity.

• Assist the government in providing equity funding for user fees exemptions for the poor.

• Assist the government to expand and to improve the administration of the PAP scheme.

Recommendations to NGOs:

• Build capacity of NGO to understand the public finance reforms, and engage in discussion with the government and donors on the social dimensions of these reforms.

• Monitor the impact of public finance reforms at the local level.