A 10-YEAR review of the state of the Cambodian economy by the World Bank calls on

the government to accelerate private sector investment in export-oriented manufacturing

and agro-business, or face setbacks in the struggle to reduce poverty.

The development challenge, after decades of conflict, embargo and post-war population

growth, is immense, says the 159 page report, which was prepared for the government

by the World Bank after extensive consultation with government and private sector

leaders. The report is titled Seizing the global opportunity: investment climate

assessment and reform strategy. It already has full cabinet-level endorsement and

a commitment to action.

The report is based on an investment climate survey of 800 businesses last year that

identified serious concerns about weak law, bureaucratic costs, bribe-taxes and corruption.

These were conservatively estimated to be costing the manufacturing and services

sectors alone $120 million a year.

The draft report was given to the government in February 2004 for evaluation. The

final report, made public yesterday (August 12), contains government inputs and amendments,

resulting from a series of meetings between the WB and two government groups: the

Special Inter-Ministerial Task Force, then later the Steering Committee for Private

Sector Development, which replaced it.

This report comes on the heels of two other significant developments: Prime Minister

Hun Sen announced he will revive the influential Private Sector Forum, which has

not met for 18 months; and 11 business associations (representing 500 companies employing

over 400,000 people) called on the government to introduce a transparent and fair

taxation structure.

It also follows an International Monetary Fund assessment of the Cambodian economy

that predicted growth will slow from an estimated 4.3 percent this year to 1.9 percent

in 2005.

And it restates concern about the collapse of foreign investment in Cambodia, from

$220 million in 1998 to $50 million in 2002.

The report, written by a cross-agency WB team led by Magdi Amin, praises the government

for adopting an open-market economy and sets three related objectives: enable the

private sector to lead growth, help diversify the economy, and increase the role

of the private sector in public service delivery.

Exports were critical to expanding job opportunities, the report says, but the opportunities

could not be captured if firms faced an uncompetitive domestic business environment.

Overall, the result was a negative cycle in which firms remained small and informal,

denying the government the revenue base needed to produce improved public-sector

performance, which in turn contributed to weaknesses in the investment climate.

"The spectacular performance of the garment manufacturing industry conceals

the fact that this is Cambodia's sole significant exporter, but it employs less than

9 percent of the workforce and the poverty indicators are continuing to worsen.

"Thirty-six percent of the total population still lives on less than 63 cents

per day and 50 percent of all children under the age of five are underweight."

Most observers agreed post-harvest agro-industry could be competitive, but the agro-industrial

sector was unable to trade outside local markets. The key issue appeared to be fragmentation

of markets due to the absence of institutions that reduced the risk and cost of making

formal transactions with distant counterparts.

The report was highly critical of practices that prevented private capital investment

in public infrastructure, including:

* Lack of transparency in negotiation and management of contracts between government

and investors.

* Significant gaps in the legal framework, and persistent by-passing of laws and

processes.

* Planning processes across sectors generally inadequate.

* Little auditing of concessions.

* Unclear allocation of roles and responsibilities between institutions.

The consequences of these problems were unbankable projects, higher than necessary

prices, unavailability of information, and limited protection of the public interest.

"The government will need to make immediate and fundamental changes to the current

regulatory and institutional environment for public participation in infrastructure,

focusing on transparency, predictability, competition and accountability.

"It will need to reinforce government performance risk by using political risk

guarantee instruments to protect foreign investors and lenders, not only against

war, currency transfer and expropriation, but also against government breach-of-contract

risks."