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ADB board worried about tattered economy

ADB board worried about tattered economy

T HE Asian Development Bank board, finishing a week long trip to check up on its

planned $275 million in loans to Cambodia, says the tattered economy is only

being propped up by massive infusions of foreign aid.

The board members

expressed concern about Cambodia's pace of privatization, its ability to attract

direct foreign investment and its inability to absorb all of the aid being


"I think it's got a tough slog ahead," said Julian Payne, the

executive director of the ADB for Canada and parts of northern Europe, and the

deputy head of the group visit.

Payne said two key questions are whether

Cambodia will be able to attract foreign investment and whether the government

can raise enough revenues to cover even its small level of


"What's really clear is that even with all this donor

activity there's not going to be enough aid funds to cover all the needs," said


"Somehow you've got to generate some economic


Linda Tsao Yang, the U.S. Ambassador to the ADB, said that the

government officials who met with the board all emphasized the need for direct

foreign investment "to move this country off dead center and start progressing

with jobs."

"But foreign investment will only come in a meaningful way

when they [the potential investors] know what the rules of the game are, that

the rules are clear and predictable. Without this kind of basic legal framework

[then] direct foreign investment, if it comes at all, will end up being very

limited," Yang said.

Despite the concern, the board members interviewed

said that they could see signs of economic progress, and no one raised any

reason why the ADB wouldn't continue with its plans to double its loans to

Cambodia in the next two years.

ADB is Cambodia's biggest lender, with

$120 million in loans outstanding and another $150 million or so in loans in the

pipeline for 1996 and 1997.

The loans are offered on ADB's most lenient

terms - over 40 years at one percent interest, with no payments required for the

first ten years.

The funds cover infrastructure rebuilding and basic

needs, such as education, irrigation and electricity. The bank has laid out

plans in the next two years for rural infrastructure improvement loans for

roads, markets, water supply, airport improvements, as well as urban water

supply and sanitation.

In a rushed schedule that saw them traveling to

Siem Reap, Sihanoukville and Kompong Cham, the seven members of the board, who

represent all the major foreign donor countries to Cambodia, visited a railway

project, the port of Sihanoukville, road and irrigation projects, the airport at

Siem Reap, Tuol Sleng prison, and an agricultural school in Kompong Cham. They

met with the Ministers of Finance, Planning, Education, Public Works, Rural

Development, Commerce, the two prime ministers, and some NGO


Finance Minister Keat Chhon told the board the economy is

expected to grow seven percent this year, inflation is expected to be in single

digits, and the government is doing its best to increase its revenues, both

through tax collection and encouragement of foreign investment.

He asked

the board to set up a local representative office in Phnom Penh, and to consider

lowering from twenty to 10 percent the down payment requirement so that Cambodia

can get its ADB loans.

Yang said the down payment requirement is a

critical component of the loans because it showed Cambodia's own commitment to

the projects.

She said the establishment of a full-time office in Phnom

Penh was an understandable request, but the ADB was very tightfisted about such

administrative spending.

Yang said one thing she would bring up at the

ADB board's next meeting was how to improve donor coordination.

She said

although $2 billion in aid had been pledged to Cambodia, only a third of that

has been disbursed, partly because of the government's inability to absorb so

many projects at once and partly because of the large number of donors and NGOs


"Cambodia is a small country with limited resources, and when

you have to deal with one donor after another it creates quite a strain on a

small ministry," she said.

The board found some examples of overlap in

aid projects, particularly in the power sector, where the Irish, French and

Japanese as well as the World Bank, ADB and others were involved.


inevitable you're going to have some overlap," said Payne. He said he expected

the overlap to "correct itself," but he also said there needed to be better

coordination among donors and NGOs.

Continuing security and crime

problems were hurting Cambodia's image, said Payne.

"The problems of

violence are much less than in the past. But cars get robbed, hijackings, theft,

that sort of thing. None of this encourages investment.

"I think we're

pretty impressed with the government's basic economic policies, its fiscal

policies, its monetary policies and its controls," said Payne.


country is in a really difficult position, even among developing countries. Our

impression is it's really trying to exert some discipline on its expenditure

side, and on its fiscal and monetary policy side. The real challenge is whether

it's going to be able to mobilize the revenues necessary to cover even its

tightened down expenditure."

The pace of privatization was another area

of concern, said Yang.

She criticized the plan to restructure Electricité

du Cambodge, the state-run electric company, by setting up a way to eventually

seek private investors for electricity generation, while leaving the

distribution network in the hands of the government.

"It's not

ideological. It's a matter of reality. Once it is a state owned enterprise, it

will be very difficult to privatize because you will have created a strong

vested interest," she said. "I would find it difficult to tell the taxpayers

back in the United States that we are funneling funds at no interest to a

country where part of the money is going to establish a state-dominated economy,

creating state owned enterprises," she said.

She said that Cambodia had

the opportunity now to create the beginnings of a capital market with its

restructuring of the electric company. "Although investors aren't likely to be

forthcoming right away, once the utility builds a track record of profitability,

there's no reason why its shares couldn't be sold to investors, in particular to

Cambodians who have savings to invest."

Peter McCawley, executive

director of the ADB for Cambodia, said that the purpose of the trip was for the

group to form impressions to take back to their donor countries.

He said

the ADB, whose headquarters are in Manila, keeps a close eye on its projects in

Cambodia, and had at any given time up to ten consultants working


Although the ADB does not get involved in human rights issues, it

had a notion of what it called "good governance," said McCawley. Although the

bank's loans don't necessarily hinge on such issues, it does make its opinion

known about serious human rights issues.

"Any sign of retrogression is

of concern," said Yang. "When you look around the world, when there's more

participation by the people in the governing process, economic development does

get around faster. That means more stability and more prosperity.


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