Government vows to seize control over revenues, tame corruption

The National Assembly on December 28 unanimously adopted a budget and groundbreaking

new financial laws which will allow the central government to seize control of the

nation's arcane and fragmented economic structures.

Now dominated by corruption, mismanagement, autonomous ministries and provinces,

and an underground economy that together denies millions of dollars to government

coffers, the new laws introduce a framework for Cambodia's financial structures that

could help the country emerge from the disastrous policies that have left the nation

one of the poorest in the world.

The new financial laws and budget won high praise from international economic planners

who say that it is a beginning that sets the stage for a sound economic policy that

will reassure investors and international donors as the Royal Government seeks support

for hundreds of millions of dollars in reconstruction assistance in coming months.

"This is a revolution-people do not realize I think how far reaching it is,"

Minister of Finance and Economy Sam Rainsy said in an interview after passage of

the bills," With these new laws we can fight dictatorship. It is a silent revolution

that will bring Cambodia to modernity back from the dark ages." Rainsy and his

Ministry were the prime authors of the legislation and budget.

At the crux of the new Financial Structure Law is an attempt to centralize control

over revenues throughout Cambodia, stripping provincial authorities, individual ministries,

and powerful figures of their current power of independent tax collection that analysts

say allows for widespread abuse and hinders the ability of national planning and

efficient implementation of reconstruction aid.

While Rainsy said the new laws were designed to "strengthen national unity"

they also clearly threaten the pocketbooks of powerful fiefdoms throughout the country

that collect millions of dollars in revenues that never reach the public coffers.

A senior official of the United Nations Development Program in Cambodia called the

moves "major reforms on financial structures" and "very positive."

"It brings a clearer understanding of the mandate and responsibility of provincial

government collection of revenues," he said.

"It is just a beginning, but a big step in a new, right direction," a diplomat

said,"With new governors hopefully there will be centralization of provincial

revenues."

The government announced a list of new governors and deputies for each of the provinces

earlier this month. One of the hopes is that the provincial structures will be more

answerable to the directives of the central government in Phnom Penh.

As of Jan. 1, when the law takes effect, revenues will all go, theoretically, to

the national treasury under the control of the ministry of finance. Currently individual

ministries and provinces collect their own taxes and decide their use often without

knowledge or consultation of any central government authority.

"Provincial governors have an unacceptable degree of autonomy," said Robin

Davies, a visiting professor at the Institute of Economics in Phnom Penh, "If

the central government can succeed in bringing them into overall national control,

it is a very healthy move in the right direction."

The transition towards "vertical" control of revenues, will-analysts agree-remain

difficult to implement and threaten the independent power bases of provincial and

ministerial authorities and is sure to meet resistance.

"1994 will be a transitional year. So far the horizontal lines (of revenue control)

are very strong. Some provinces are autonomous. They ask dollars but give none. 1994

will be a mixture of horizontal and vertical. 1995 will see the gaining of power

of vertical lines of control," Rainsy told the Post.

"There are three basic principles for this national budget," Rainsy said,

"First, there should be only one budget for the country. All revenues-without

exception-should come to the state coffer. If this is not achieved you have anarchy.

Secondly, all revenues for the state should be sent to the national treasury totally,

directly, and immediately after revenues are collected. Three, the amount should

not be lowered because people who collect it, want to keep it. 100% should go to

the state."

The new finance laws are designed to create a centralized finance system to eliminate

provincial fiefdoms, ensure a managed national economy, and defend and manage public

assets properly. "This is a first step for a law abiding state,"Rainsy

said."Now we don't even know how much money is spent. This will help analysis,

forecasts, and control of implementation," for long term planning, he said.

The ability to do national analysis and control is key to encouraging foreign assistance

which the Royal Government will be actively seeking at the next International Committee

on Reconstruction of Cambodia (ICORC) meeting in Tokyo in March.

The budget itself offered little surprises but reflects Cambodia's dismal economic

conditions in recent decades, the legacy of war, continuing instability, and empty

coffers. The total budget approved for 1994 was 890 Billion riels. It passed unanimously

with 99 votes, no abstentions and no one opposed. 21 members were absent.

"This is not a reconstruction budget. This is a survival budget," Rainsy

said. "We cannot have a survival budget forever."

Of the 890 billion riel budget, 430 billion riel is provided by international assistance-or

48% of the budget. Of the 430 billion in international assistance, 275 billion is

in grants and 155 billion in loans.

"We rely entirely on international assistance for development and reconstruction.

We rely on international assistance to cover our deficit," Rainsy said. The

current deficit stands at 178 billion Riels.

Other statistics point to Cambodia's continuing fragile economic picture:

• Tax revenues contribute only 6% of the Gross Domestic Product. In a healthy economy

  it should be between 25 and 30%

• The national budget is far smaller than one would expect in a healthy economy.

  Optimally, it should be between 40 and 50% of GDP, whereas in Cambodia it represents

  only 15% of GDP.

• Out of current state income, customs duties account for 54% of total revenue.

  In countries with parallel conditions and healthy economies, it should be 15-20%

• Defense and national security eats up 38% of the current budget. In peacetime,

  these sectors should account for 12-15% of the budget, analysts say.

On the positive side, the finance ministry estimates that inflation will range

between 5 and 10% in 1994, down from 55% in 1993, and fluctuations threatening hyper

inflation in 1992. Some analysts say, however, that the low inflation estimates for

1994 are optimistic.

The government will also concentrate on improvements of tax collection in coming

months. "Our tax system is archaic,"Rainsy said." 6% of GDP in taxes

is very low, but we don't want to frighten off foreign investors. We should tax the

very wealthy local people, based mainly on land. Now there is no income tax, no land

taxes."

"We estimate the underground trade is as big as the official trade. So half

the goods are smuggled,"he said. "" This year we will oblige big companies

to provide accounts."

The new laws also will target public asset management to prevent individual ministries,

provincial authorities, and corrupt officials from selling off state assets.

Procurement of all goods by the government will have to be done by competitive bidding,

according to the law. "Procurement should be published and enforced after requests

to the Finance ministry," Rainsy said.

As well, "Finance Control Officers" from the Finance ministry will be attached

to all ministries and provinces-numbering more than 150 in total-"to control

irregularities" according to Rainsy. They will be charged with monitoring collection

and disbursement of revenues in all sectors.

Observers stress that the ambitious new laws remain on paper only, and that it provides

only a legal framework to work with.

"To bring this to reality will depend on political will. From this day on we

have the weapon of the law,"Rainsy said," Prince Ranariddh and Hun Sen

are in favor. It is thanks to them that these laws passed. Ordinary people will support

us, state employees. And we have the backing of the King. With this new law, from

the first of January, many people will find themselves involved in illegal activity."