In June this year the United States Agency for International Development (USAID)

commissioned consultants-Michael M. Calavan and Sergio Diaz Briquets (both from Casals

and Associates) and Jerald O'Brien of USAID, Washington-to investigate and report

on the nature and extent of public sector corruption in Cambodia, and recommend ways

to increase government transparency and accountability.

The report "Cambodia Corruption Assessment" was delivered in August and

released to the media in November.

Edited excerpts from the report:

I. INTRODUCTION

"Following the Paris Accord, Cambodia's former Communist leaders embraced a

hybrid system of predatory market economies and authoritarian control. This system,

with its resultant impunity, along with widespread poverty and a dearth of institutions,

has given rise to an all-encompassing corruption environment. 'Survival' corruption

is a way of life for the poor and a succession of medium and large-scale corrupt

acts are the ticket to wealth for the politically powerful.

"...Through shady deals, state-owned enterprises have been taken over by politicians

or their cronies. These practices continue through granting of concessions in forestry

and other sectors. Since the 1980s, 20-30 percent of the country's land, the main

source of wealth, has passed into the hands of less than one percent of the population.

"...The RGC collects very limited legal revenues, as large sums are lost to

smuggling, bribes and other illegal practices. Further losses are experienced once

revenues enter the state financial system. Informants estimated annual diversions

from government coffers ranging between $300 and $500 million. Grand corruption involving

illegal grants of logging concessions coexists with the nearly universal practice

of small facilitation payments to speed or simply secure service delivery.

"Police and other officials demand small bribes in numerous guises. Students

across the public school system pay unofficial daily fees to supplement salaries

of teachers and administrators, and perhaps fill the pockets of high-level ministry

officials. The same is true in public health, where access to services is often contingent

on supplemental payments to doctors, nurses or other health care personnel.

"As national wealth becomes increasingly concentrated, socioeconomic and political

recovery sputters. Although the international community is well aware of the situation,

it has thus far failed to persuade the RGC to take effective action against corruption.

"...Impunity is the norm. No one with the patronage of the state is punished,

whether for massive pillaging or petty theft. In fact, those most at risk are individuals

and organizations that dare to resist corruption. Most Cambodians regard resistance

as a futile act. Corruption is structured more or less as a pyramid; with petty exactions

meeting the survival needs of policemen, teachers, and health workers, but also shared

with officials higher in the system. Patronage and mutual obligations are the center

of an all-embracing system. Appointment to public office hinges on political connections

or payment of surprisingly large sums, and these payments are recouped through a

widely accepted 'right' to collect bribes.

"A major contributor to this state of affairs is the opaqueness with which public

business is conducted. Regardless of existing laws or expectations of donors or media,

officials regard virtually all documents as privileged. Crucial information is obtained,

if at all, through an inside contact or by bribing a gatekeeper. This lack of transparency

even extends to information the RGC is obligated to make available under agreements

with international organizations. Impediment upon impediment is piled before those

seeking access to public documents. Officials develop ever more intricate, and sometimes

threatening, bureaucratic requirements to 'apply' or release of documents. What information

is appropriate to release is often up to the discretion of functionaries.

"...The situation would be less dire if the press could freely exercise its

oversight function. While outwardly, the press enjoys considerable autonomy, in practice

few media outlets are willing to criticize, or even report on, government excesses.

"...Rounding out the corruption picture is the general underdevelopment and

inefficiency of the Cambodian state. Institutions are weak, and public officials

lack management skills. Even if sufficient political will existed to implement reforms,

results would not be forthcoming quickly.

"...Politicians skillful at resisting and diverting the international development

community are just as capable of controlling a largely rural population through demagoguery,

false promises and intimidation. The raw power of the state, complemented by fear

and the distribution of small gifts and favors at critical junctures, will continue

to provide a veneer of political legitimacy. Under this cloak of legitimacy, were

it to be allowed to persist by the international community, the rapacious exploitation

of Cambodia's economy will continue with unforeseen consequences for the country's

political and socioeconomic development."

II. A CORRUPTION-RIDDEN STATE APPARATUS

Generating Revenues

"...Businesses are routinely assisted in reducing their formal tax burdens or

customs duties after paying bribes. Thus, legal import of petroleum has not increased

over the past 10 years, while the number of vehicles has increased by five-fold.

Just for this one product, a large smuggling industry must necessarily be in place,

providing significant payments into the illicit system. International firms are forced

to take local partners, who provide little more than occasional 'fixer' services

in return or a significant share of the profits. Forestry and mining concessions

are signed behind closed doors. No one outside the system knows what proportion of

earnings go to pay taxes, what proportion go to international businesses as excessive

profits, and what proportion are transferred to foreign accounts.

"...Donor resources, although formally subject to monitoring and auditing, are

routinely diverted or misused in numerous ways. Loans from international financial

institutions (IFIs) flow into the national budget, and then the diversion process

begins as Treasury and other Ministry of Finance officials routinely extract a percentage

of budgeted funds before they are released to line ministries. Employees of ministries

that are ostensibly undertaking reforms regularly receive salary supplements from

donor projects, but in some cases do not perform any work at all. It appears that

virtually all RGC procurements using donor funds elicit bribes from vendors, either

in advance of the award, or as payments are released. Donor-provided commodities

are subject to diversion, e.g., when donated medications are sold at a large profit

in a shop owned by a senior Government leader. Through these diversionary processes,

taxpayers in developed countries are taken advantage of; donors lose their credibility

and ability to exert significant pressure for reform; and ordinary Cambodians do

not receive the quality services and genuine reforms they deserve.

"Ordinary Cambodians are subject to a daunting variety of small and medium exactions,

some paid virtually on a daily basis. Drivers of trucks, cars and motorcycles are

routinely stopped and required to pay specious 'fines.' Children pay small daily

bribes to their teachers. Railway tickets are subject to an informal surcharge. A

visit to the commune office to register a birth, death or marriage requires a significant

bribe. Side payments are required to build a house or start a small business. And

a wide range of examinations can be passed only after a payment of a bribe. Citizens

who work hard, exercise entrepreneurial skills and take good care of their families

are exploited at every turn."

Managing Internal Resources

"Payments go up the system, generally becoming larger as they are passed to

a few senior leaders. Informants argued that some individuals at this level transfer

funds out of the system, presumably to accounts abroad.

"...There is a hierarchy of ministries from the viewpoint of corruption opportunities.

Finance, which signs off on transfer of funds to other ministries, and controls customs

and the tax office, and Agriculture, which controls forest and agricultural concessions,

are at the top of the list. Health and Education are presumably mid-level, with modest

opportunities to manipulate construction contracts and procurements of medications

and textbooks. Education also controls a number of examinations, and thus is in a

position to sell positive results. Even the Ministry of Planning can manipulate contracts

with firms that undertake research projects or surveys."

Relentless Application of Power and Patronage:

"There has been little actual change in the operation of the regime since the

formal end of the Khmer Rouge rule. The government, party and many leaders in power

in 1987 remain in control in 2004. They show few signs they are prepared to surrender

power. The King, often abroad, can do little to moderate regime excesses.

"The RGC manifests many characteristics of a traditional Southeast Asian autocracy:

Power is centralized; officials do not live off their salaries, but are ceded control

over resources they then exploit; most administrators avoid blame by passing decisions

'up the line;' the state monopolizes trade in some sectors, exploits it in others;

ordinary people are 'subjects,' expected to pay and remain quiet; and institutions

are managed through patron/client ties. Some observers view the Government as a single

kh'sae, a traditional Cambodian patron/client network in which 'resources go up,

and come down again.' And power is held tightly at the center. Thus, when there is

land grabbing in remote areas, the only recourse poor people have is to travel to

Phnom Penh and make a direct appeal for redress to Hun Sen.

Corrupt Institutions:

"Large-scale corruption requires broad and diverse support. The RGC has developed

a full array of outside institutions--captive firms, controlled media, party-affiliated

NGOs and unions--as well as the police, military, ministries, judiciary and parliament

to support a corrupt system. It is alleged that the CPP controls 20 companies that

are the 'financial pillars of the system,' and that the Prime Minister writes regularly

to ministers, ordering that contracts be given to favored firms. Benefits can also

accrue to elite leaders' family members and cronies.

"The judiciary, police and customs are all corrupt, but in different ways. Judges

buy their jobs and solicit significant bribes by selling judgements when the state

is indifferent to a result. However, it is generally accepted that when the regime

perceives a threat or opportunity, judicial decisions are dictated by senior regime

leaders. The police are well placed for criminal activities, and some informants

alleged senior policemen are deeply, and profitably, involved in drug smuggling and

distribution. By taxing imports and exports both ''formally'' and ''informally,'

the Customs Department perhaps has more direct impact on the Cambodian business environment

than any other institution."

Dominance of Local Areas:

"The Ministry of Interior appoints provincial governors, district governors,

commune clerks and even village headmen, thus achieving effective control of localities

across the country. This power is used to support CPP-appointed governors, and to

neutralize and frustrate their Funcinpec counterparts. Funcinpec-appointed governors

need support of CPP subordinates to undertake any significant action. In effect,

deputy governors and department heads are often more powerful than Funcinpec governors.

Divert and Distribute:

"In addition to a bewildering range of illegal payments extracted from individuals

and businesses, the system uses a remarkable array of techniques to divert funds

deposited legally in government coffers. The IMF estimates diversions of financial

resources at 5-7 percent of Cambodia's GDP. Funds are routinely diverted while being

transferred from the Treasury to ministries or provinces. Treasury employees collect

a 'fee' (ranging from 1-5 percent) simply for transferring funds, as they are required

to do. Ministry of Finance officials who authorize transfers also take a percentage.

"Beyond this, some budgeted funds are never transferred. One province had an

official 2003 budget of $300,000 for small infrastructure projects. But according

to the governor: 'Actually, we got $100,000, and 40 per cent of that was 'deducted'.'

While underpayments might reflect overall budgetary shortfalls, this phenomenon is

mentioned so frequently, it appears more likely funds simply disappear during transfer.

Other legitimate revenues may be diverted at 'source'. For example, Phnom Penh revenues

are collected mainly in cash, and CPP tax collectors easily underreport receipts

and pocket the cash.

Inefficiency is its Own Reward:

"System leaders seem well aware of a basic principle of corrupt governance:

'Inefficient, opaque procedures create confusion and impatience and encourage firms

and individuals to pay 'speed money' and bribes.' Thus a businessman noted that procedural

mistakes are common in the Customs Department, creating clear invitations to bribe.

Despite a 2001 law requiring environmental and social impact studies before forest

and agricultural concessions are approved, 'inefficiency' in the Ministry of Agriculture

has essentially waived this requirement.

"Inefficiency also helps to limit information resources, maintain Government

control and justify shoddy administrative procedures. Inefficient procedures in the

judiciary ensure reports of investigating judges and trial court judgements are difficult

to access, or are not accessible at all. Inefficiency in passing internal regulations

for parliamentary operations hamstrings opposition parties. Inefficiency of the Ministry

of Finance in carrying out its duty in reviewing major government contracts means

sloppy procedures and overpriced contracts go unquestioned. Inefficiency so extreme

that veterans' pensions aren't paid for three years enables unscrupulous ministry

employees to 'buy' pension rights from their rightful owners.

A Petrified System?:

"Several informants argued Cambodian corruption has become more widespread and

institutionalized over the past decade, one noting that 'Nobody is putting on the

brakes.' In one ministry, a senior official noted his subordinates work only one

or two hours a day. Cambodia is facing real crises, such as the imminent departure

of the garment industry and declining foreign direct investment. But most responses

are inadequate. While there is concern in the Ministry of Commerce about loss of

garment jobs, recalcitrant elements in the Ministries of Commerce and Labor, and

in Customs, continue to solicit bribes that make Cambodian factories non-competitive.

In the notoriously corrupt Customs Department, misbehaving agents are 'suspended'

on the job, and required to sit and write out the professional code of ethics hundreds

of times."

II. RECOMMENDATIONS FOR THE DONOR COMMUNITY

"The environment for enhanced donor coordination in Cambodia is improving. For

example, at a recent meeting the World Bank called for the donor community to speak

with one voice. There is frustration about the very limited results achieved in government

reform over the last several years. Particularly disconcerting is the lack of progress

in judicial reform. ... Some believe more exacting conditionality is required. For

some donors who feel they must work directly with the RGC, and object to confrontation,

the key may be to minimize confrontation by integrating corruption controls within

service delivery sectors, and linking grassroot reforms to objectives shared by donors

and government. Regardless of donors' varied perspectives and operational approaches,

it is apparent to all that the RGC must be pressured to move the reform agenda forward.

"Coordinated donor approaches have been pursued with some success in other countries

that were similarly resistant to reform, and may be applicable in Cambodia. Particularly

relevant was the experience in Central America in 1999 following the destruction

caused by Hurricane Mitch. Donors agreed to impose several conditions on beneficiary

countries in exchange for reconstruction assistance. This strategy was premised on

the notion that a unified donor community could exert far greater leverage than the

countries and agencies could achieve on their own.

"...While is clear to the Team that current conditions in Cambodia are not the

same as those in Central America after Hurricane Mitch, the most important point

is that there is a similar level of urgency.

"...USAID could consider supporting the consultative process by funding establishment

of a small, independent Transparency Secretariat. This unit, headed by an expatriate

and staffed by several Cambodians, could perform a variety of tasks, including: coordinating

activities of sector working groups; convening and managing sector working groups

meetings; providing follow-up support; serving as a public repository for documents

to interested parties, including the media; and producing and distributing, at regular

intervals, newsletters and other documents summarizing successes and difficulties

in implementing reforms."

"Soon after establishment of the Transparency Secretariat, that unit could propose

and support an International Transparency Review Panel to visit Cambodia for two

or three weeks annually. The Panel's primary purpose would be to probe whether the

RGC has sufficient political will to push through on the substance of reforms, or

if it is indulging in its traditional diversionary tactics.'

"The donor community would be well advised to condition continued assistance

on independent audits of all projects. Again, there is a useful model in Central

American. USAID, DFID, Swiss Aid, SIDA, CIDA, the World Bank and the Inter-American

Development Bank jointly funded a specialized, Independent Project Inspectorate.

Initially established to conduct concurrent audits of post-Hurricane Mitch reconstruction

projects, the scope of audits was later revised to focus on compliance with contracting

procedures. The executing entity, Price Waterhouse, was chosen through an international

bidding process conducted under donor supervision. The firm is accountable for auditing

the integrity of procurement processes, using expatriate and local staff. The contract

calls for audit reports to be provided to an oversight committee of donors, civil

society and government. The committee chooses some reports for close scrutiny, can

request clarification and sometimes demands follow-up to specific audit findings.

"...The inspectorate has completed nearly 1,000 project audits. Delays have

been reported in review of audit recommendations, and more particularly, in following

up audit findings by the national audit institutions. Despite these difficulties,

the Project Inspectorate approach has met its objectives; Hundreds of donor-funded

projects are being audited for compliance with procurement procedures embodied in

a national Procurement Law (itself, an objective of the initiative)."