Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: November 2009 Proposed Loan and Asian Development Fund Grant and Administration of Grants and Loan: Kingdom of Cambodia: Tonle Sap Poverty Reduction and Smallholder Development Project

2 CURRENCY EQUIVALENTS (as of 5 November 2009) Currency Unit Cambodian riel (KR) KR1.00 = $ $1.00 = KR4, ABBREVIATIONS ADB Asian Development Bank CARD Council for Agriculture and Rural Development CIP commune investment program DCU development coordination unit FGIA first generation imprest account GDP gross domestic product ICT information and communication technology IFAD International Fund for Agricultural Development LIG livelihood improvement group MAFF Ministry of Agriculture, Forestry and Fisheries M&E monitoring and evaluation MEF Ministry of Economy and Finance MFI microfinance institution MOWRAM Ministry of Water Resources and Meteorology NCDDS National Committee for Sub-National Democratic Development Secretariat NIDA National Information Communications Technology Development Authority NGO nongovernment organization RDB Rural Development Bank SEDP Socioeconomic Development Plan SGIA second generation imprest account TA technical assistance t/ha tons per hectare TSI Tonle Sap initiative UNDP United Nations Development Programme UXO unexploded ordnance

3 NOTES (i) The fiscal year (FY) of the Government of Cambodia and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 31 December (ii) In this report, "$" refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General A. Thapan, Southeast Asia Department (SERD) Director C. Wensley, Officer-in-Charge, Agriculture, Environment, and Natural Resources, SERD Team leader Team members I. Makin, Senior Water Resources Management Specialist, SERD B. Giap, Rural Development Economist, SERD Y. Hirao, Financial Control Specialist, Controller's Department N. Ikemoto, Natural Resources Management Specialist, SERD M. Oka, Budget and Management Services Specialist, Budget, Personnel, and Management Systems Department P. Robertson, Senior Project Management Specialist, Central Operations Services Office C. Salter, Rural Development Specialist, SERD S. Zaidansyah, Counsel, Office of the General Counsel In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page LOAN AND PROJECT SUMMARY i I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 8 A. Impact and Outcome 8 B. Outputs 8 C. Special Features 12 D. Project Investment Plan 12 E. Financing Plan 13 F. Implementation Arrangements 14 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 18 A. Benefits and Impacts 18 B. Social Aspects 19 C. Environmental Aspects 20 D. Risks and Mitigations 20 V. ASSURANCES AND CONDITIONS 21 VI. RECOMMENDATION 23 APPENDIXES 1. Design and Monitoring Framework Sector Analysis External Assistance in the Tonle Sap Region 33 4 Detailed Cost Estimates Implementation Arrangements Project Implementation Schedule Procurement Plan Economic Analyses Summary Poverty Reduction and Social Strategy 58

5 SUPPLEMENTARY APPENDIXES (available upon request) A. Agro-Socioeconomic Assessment Study B. Program for Improvement of Access to Rural Finance C. Commune and Subproject Selection Criteria D. Development of Access to Rural Information and Communication Technology E. Gender Action Plan F. Detailed Cost Estimates G. Terms of Reference of Development Coordination Unit Staff H. Terms of Reference of Provincial, District, and Commune Support Staff I. Summary Consulting Service Schedule J. Consulting Services Outline Terms of Reference K. Economic Analyses L. Procedural Guidelines for Confirming Resettlement Impact M. Initial Environment Examination N. Environment Assessment and Review Framework O. Good Governance Framework

6 LOAN, GRANT AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description Kingdom of Cambodia Targeted intervention Geographic Targeting Classification: Sector: Agriculture and natural resources (agriculture and rural sector development, microfinance, information and communication technology) Themes (subthemes): Economic growth (widening access to markets and economic opportunities; knowledge, science, and technological capacities); social development (other vulnerable groups); capacity development (institutional development) Climate change: Climate change adaptation Location impact: Rural (high impact) Partnerships: International Fund for Agricultural Development (IFAD), Government of Finland Category B. An initial environmental examination was undertaken and an environmental assessment and review framework was prepared. The Tonle Sap Poverty Reduction and Smallholder Development Project will foster community-driven development through investments in productivity improvement, rural infrastructure, and capacity development in 196 communes in the provinces of Banteay Meanchey, Kampong Cham, Kampong Thom, and Siem Reap. The Project will assist the Government in creating (i) rural infrastructure to improve agricultural production, market access, and quality of life in rural communities; (ii) stronger rural financial services extended to resource-poor smallholder farmers; (iii) better agricultural support services, including research, extension, and information delivery services to support increased agricultural productivity by smallholder farmers; (iv) appropriate policies and regulations that support smallholder farming communities; and (v) effective project management that enables timely completion of the project and achievement of project objectives. Rationale Cambodia has achieved gross domestic product growth of 8% 10% a year since 2001, driven largely by an expansion of the construction, garment, and tourism sectors. Agricultural growth has fluctuated because of variations in the performance of the crop sector, especially rice. However, the Government of Cambodia and its development partners are deeply concerned about (i) the narrow base of economic growth, currently threatened by the global economic crisis; and (ii) the persistence of high levels of rural poverty, coupled with the growing income disparity between rural and urban areas. The headcount poverty index of 52.40% for Kampong Thom, 51.84% for Siem Reap, 37.15% for Banteay Meanchey, and

7 ii 37.04% for Kampong Cham can be compared with the national rural poverty level of 39.7%. A recent Asian Development Bank (ADB) study of 20 communes, in six representative agroecological regions in four provinces, found that 15 communes had poverty levels exceeding 60%, two were between 50% and 60%, and two were between 30% and 50%. Only one had poverty a level below 30%. Opportunities for sustainable rural economic growth based on increasing the productivity of resource-poor smallholders were examined. These studies confirmed the need for investment in agricultural productivity improvement, rural infrastructure, and capacity building. The focus should be on commune-led activities to support smallholder production, and key institutional reforms to enable faster agricultural growth. The proposed investments would be in line with ADB's Strategy 2020, the country strategy and program for Cambodia, and the road map for agriculture and natural resources for Cambodia. The investments would also support the International Fund for Agriculture and Development (IFAD) country strategy for Cambodia, and the Government s Rectangular Strategy II. ADB s assistance to Cambodia, especially for agricultural policy development and finance sector reform, has established the base for faster economic growth. Rural roads have strengthened market links and improved mobility; irrigation schemes have created access to water sources to increase agricultural production; and water supply and sanitation works have contributed to better health. With three ongoing projects and supporting technical assistance (TA), the Tonle Sap Initiative is creating assets, infrastructure, and institutional capacity locally, while protecting the environment and natural resources of the Tonle Sap basin. The recently completed commune council buildings are centers for local authorities to better organize and implement service deliveries to communities. To accelerate development and deepen the impact of the past investment and TA projects, additional support to strengthen community-driven development and to enhance household production, income, and access to technology, markets, and credit will be essential. The provision of rural finance will be essential to remove barriers that restrict supply and constrain access to credit by poor households. The segmented nature of the rural credit market, and the absence of properly functioning markets in the segments where the targeted beneficiaries are expected to operate, justifies improving access to rural finance. The Project will support (i) productivity improvement and household income diversification with better risk management; (ii) easier market access with biosecurity and information and communication technology; (iii) institutional strengthening to improve governance and effective service delivery; and (iv) greater access to affordable finance.

8 iii Impact and Outcome Project Investment Plan Financing Plan The impact of the Project will be to improve the livelihoods of approximately 630,000 households in four provinces in the Tonle Sap basin by The Project's outcome will be an increase in agricultural productivity and improve access to markets in 156 communes in four provinces in the Tonle Sap basin. The Project is estimated to cost $55.30 million, including taxes and duties of $4.75 million. ADB will provide $30.70 million, comprising a loan in special drawing rights equivalent to $3.40 million and a grant not exceeding the equivalent of $27.30 million, both from its Special Funds resources. ADB support will finance 55.5% of the project costs. IFAD will provide $13.38 million, comprising a loan in special drawing rights not exceeding the equivalent of $6.69 million and a grant in special drawing rights not exceeding the equivalent of $6.69 million on a joint cofinancing basis. IFAD support will finance 24.2% of the project costs. The Government of Finland will provide a grant in euros not exceeding the equivalent of $5.75 million to finance 10.4% of the project costs, on a cofinancing basis. ADB will administer the cofinancing from the IFAD and the Government of Finland. The Government of Cambodia will contribute $5.47 million to finance recurrent and investment costs, and taxes and duties, accounting for 9.9% of the project costs. The ADB loan portion will have a maturity of 32 years with a grace period of 8 years, and an annual interest rate of 1% during the grace period and 1.5% thereafter. The Government of Cambodia will bear the foreign exchange risk. Interest charges on the loan are to be capitalized. Item Total ($ million) (%) Asian Development Bank Loan Grant International Fund for Agricultural Development Loan Grant Government of Finland Government of Cambodia Total Source: Asian Development Bank estimates. Period of Utilization 1 March 2010 to 28 February 2017 Estimated Project Completion Date Executing Agency 31 August 2017 Ministry of Agriculture, Forestry and Fisheries (MAFF)

9 iv Implementation Arrangements The MAFF will execute the Project and will be an implementing agency. The Project will be managed by the MAFF development coordination unit (DCU) housed in the secretary general s office. The DCU will have the following roles and responsibilities: (i) undertake consolidated planning, budgeting and reporting functions; (ii) open and maintain project accounts; (iii) prepare, in a timely fashion, the necessary withdrawal applications for submission to MEF, and onward to ADB and IFAD, for reimbursement, based on the financial statements and requests from the implementing agencies, in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time); (iv) procure goods and consulting services in cooperation with the implementing agencies following procedures acceptable to the ADB; (v) appoint independent auditors, acceptable to the ADB; (vi) establish, within 6 months of the effective date, a monitoring and evaluation system (including conducting the base line, midterm and project completion reviews); (vii) review and consolidate the project annual work plan and budget prepared by the implementing agencies; (viii) consolidate the progress and financial reports prepared by the implementing agencies; (ix) disseminate project reports to ADB, IFAD and other stakeholders; (x) assist and advise the implementing agencies and the participating provinces on project implementation; and (xi) provide secretariat support to the project steering committee. The Council for Agriculture and Rural Development (CARD) will undertake the functions of the project steering committee and as part of its regular functions. CARD will consider project matters quarterly to (i) provide policy guidance; (ii) review project progress; and (iii) resolve policy issues related to the Project. CARD may receive inputs from the Supreme National Economic Council on policies and regulations that support smallholder farming communities. The Project will have three implementing agencies: (i) MAFF for agricultural policy development; (ii) the National Committee for Sub-National Democratic Development Secretariat (NCDDS) for commune development activities, including small-scale rural infrastructure development; and (iii) the National Information Communications Technology Development Authority for rural information and communication technology investment activities. In the four provinces, commune councils and the provincial and district administrations will participate in the implementation of the Project. The Organic Law, 2009 has been enacted, the provincial and district councils have been elected, and the associated administrative arrangements related to the provinces and districts are being developed. Consequently, the Project s implementation arrangements will require adjustment from time to time to facilitate harmonization with the Government's regulatory framework for decentralization and deconcentration. Initially, project

10 v implementation at the subnational level, including at the commune level, will follow NCDDS systems and operating procedures, including the provisions of the NCDDS decentralization and deconcentration finance and administration manual (2009, as amended from time to time). Procurement Consulting Services Project Benefits and Beneficiaries Prior- and post-review thresholds were discussed and agreed upon with the MAFF and are included in the procurement plan. International procurement is not envisaged under the Project. Commune-level procurement will follow procedures in the NCDDS Commune/Sangkat Fund project implementation manual acceptable to the project financiers. All other goods, works, and services financed by the Project will be procured in accordance with ADB's Procurement Guidelines (2007, as amended from time to time). The Project will require 592 person-months of consulting services, including 76 person-months from international consultants and 516 person-months from national consultants, for project management and expert services. A summary of the consulting service schedule is in Supplementary Appendix I. The outline terms of reference for consultants is in Supplementary Appendix J. Recruitment of the majority of consulting services will be through a firm following the quality- and cost-based selection process, using an 70:30 quality cost ratio. Four person-months of international consulting services and 84 person-months of national consulting services are envisaged independent consultants for special studies. The Project will finance the appointment of 432 person-months of national advisors for implementation of the project at provincial and district administrations. The recruitment of international and national advisors will follow government procedures, acceptable to ADB (main text, footnote 37), to promote maximum alignment of project staffing and procedures with government structures and procedures. Except for the national advisors, recruitment of all consulting services will be in accordance with ADB's Guidelines on the Use of Consultants (2007, as amended from time to time). The Project will cover four provinces in the Tonle Sap basin: Banteay Meanchey Kampong Cham, Kampong Thom, and Siem Reap. It is expected to benefit about 630,000 households (or about 2.5 million people) in 196 communes in these four provinces through investments, training and capacity building, and livelihood field demonstrations and follow-ups. The majority of households in the project communes involved in agricultural production have less than 3.0 hectares of usable agricultural land. Those with 1.0 hectares or less are considered resource-poor smallholders, and they are the focus of the Project.

11 vi Direct project benefits will include (i) incremental gains from higher yields and productivity of crops and other agricultural products through the adoption of appropriate inputs, such as high-quality seeds, appropriately managed land, fertilizers, water, better crop management, and improved extension services; (ii) higher gross margins from improved market access and crop diversification; and higher market prices with reduced risk of food poisoning, particularly in the production of livestock, aquaculture, and vegetables resulting from better post-harvest phyto-sanitary management; (iii) greater access to formal rural financial services for smallholders involved in livelihood improvement groups, which will gain knowledge and graduate to being rated creditworthy; and (iv) better incremental asset accumulation through more alternative livelihood opportunities and risk diversification, higher gross margins from increased productivity, and greater access to markets and affordable finance. In the long run, smallholders will benefit from improved knowledge of household economics, and stronger market consciousness and entrepreneurial mindsets. Additional benefits from better infrastructure, such as rural roads, markets, village-level storage, on-farm irrigation, and water supply and sanitation, will accrue to the communities. The infrastructure will help improve productivity, strengthen market links, reduce the risk of waterborne diseases, and improve product quality after harvest. Costs and time savings from an improvement in rural water supply and sanitation will be significant as the majority of the selected communes do not have adequate access to safe water and appropriate sanitation. Improved knowledge through capacity building, practical training, demonstration activities, and production practices will provide the foundation for smallholders to raise their living standards. The Project will make substantial contributions to reducing rural poverty in the selected provinces. This will help ease pressures to migrate from rural areas to urban centers such as Phnom Penh and Siem Reap. The Project will also contribute significantly to ensuring food security and to easing poverty of wage labor by increasing the availability of rural jobs. This will reduce the social and financial costs of migration to other provinces in search of work.

12 vii In addition, the Project will assist the Government in policy and institutional reform, including drafting key laws and regulations. The Project will also strengthen the capacity of stakeholders in implementing decentralization and deconcentration policies in agriculture and rural development. The economic internal rates of return were calculated for four sample subprojects considered representative of the whole Project. The results indicate an economic internal rate of return of 44% 55% and benefit cost ratios of The robustness of these results was established by sensitivity analyses with respect to an increase in capital and recurrent costs, an implementation delay, and potential input- and output-related risks that would reduce the project benefits. Risks and Assumptions The Government's commitment to faster agricultural growth may diminish in the face of other development priorities over the project implementation period. ADB will monitor the enabling environment during project implementation and assist the Government in addressing priority policy and institutional reforms to support smallholder farming systems. The Project's alignment with the Government's decentralization and deconcentration reforms will improve governance and reduce corruption. The Project assumes this process will continue to support empowerment of subnational government units. Commune councils are responsible for implementation of commune development investments. The Project will strengthen the capacity of provincial and district administrations of line agencies to perform their support functions effectively. Underperforming commune councils will undermine implementation and outcomes.

13 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan, (ii) a proposed grant, (iii) proposed administration of a loan and a grant to be provided by the International Fund for Agricultural Development (IFAD), and (iv) proposed administration of a grant to be provided by the Government of Finland, all to the Kingdom of Cambodia for the Tonle Sap Poverty Reduction and Smallholder Development Project. The design and monitoring framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. Macroeconomic trend. For the decade up to 2008, Cambodia's economy grew steadily and significantly, driven largely by the construction, garment, and tourism sectors. Gross domestic product (GDP) grew at annual rates between 8.0% (2001) and 10.2% (2007). Annual growth rates for agriculture fluctuated between 2.5% and 15.0%. Such fluctuations, especially in paddy production, affect household food security. The slowdown in garment exports and tourist arrivals because of weaker external demand, the appreciation of the riel against the dollar, and a high rate of inflation led the International Monetary Fund to reduce GDP growth projections to 6.50% in 2008 and 2.75% for Rapid inflation caused by rising food and energy prices in early 2008 eased in The annual inflation rate dropped from a high of more than 25% in mid-2008 to 13% in early In January 2009, Cambodian garment exports were about 60% lower than in January More than 50,000 garment workers had lost their jobs by January 2009, with similar losses in supporting services Rural burden of poverty and food insecurity. Despite economic growth that had been robust until recently, the Government and its development partners are concerned about the persistent high levels of rural poverty and the growing income disparity between rural and urban areas. About 80% of the estimated population of 13.4 million in 2008 lived in rural areas. The 2004 data indicated that the poverty rate in rural areas (39.7%) was almost double that in urban areas (20.9%). Data gathered during project preparation showed that 30% 40% of rural households are poor and the rate for remote communities living around Tonle Sap is much higher. 3 Reducing rural poverty and enhancing food security are core policy goals of the Government of Cambodia. The Tonle Sap Initiative (TSI) is designed to assist the Government in managing the natural resources of the Tonle Sap to reduce poverty in the area while conserving resources. Key actions to achieve these goals are (i) accelerating and spreading the benefits of growth in the agriculture and rural sectors, (ii) strengthening weak institutions, (iii) resolving irrigation problems, (iv) reducing farmers' vulnerability to risks, (v) linking national highways to the hinterland, (vi) improving public and private sector efficiency, and (vii) ensuring the preservation of the country's natural resource base. 4. Volatility in global food prices. Almost a third of rural households suffer from some form of food insecurity each year during the wet season (July to November) when alternative International Monetary Fund Press statement at the conclusion of the 2009 Article IV discussions with Cambodia. Washington, D.C. (23 September). NGO Forum on Cambodia Statement on the monitoring of Cambodia Development Cooperation Forum (CDCF) indicators. Phnom Penh (April). A study of 20 communes representing six agroecological regions in the four project provinces found that the poverty level exceeded 60% in 15 communes, was between 50% and 60% in two communes, and exceeded 33% in two communes. More details are in Supplementary Appendix A.

14 2 jobs are limited. 4 The surge in global food prices in early 2008 combined with energy price increases and an economic slowdown worsened poverty. More than 50% of households reportedly suffered from food insecurity in Even communes producing a surplus of paddy have large pockets of hunger. This situation reflects inadequate production by smallholders, low employment and income of households, the sale of crops at low prices immediately after harvest to repay debts, limited access to affordable credit, and a lack of storage and processing facilities. This undermines the country's ability to capture the value of the rice along the market chain. 5. Narrow base of growth and pressure on natural resources. The narrow economic base, the uncertainty surrounding agriculture sector performance, and the global economic environment have put the country's recent impressive growth at risk. The financial crisis may exacerbate an already high rural poverty rate, putting additional pressure on natural resources. B. Analysis of Key Problems and Opportunities 6. About 85% of Cambodians depend on agriculture and non-timber forest extraction for a major part of their livelihoods, although these activities account for only about one-third of GDP. Opportunities in other sectors, while promising, are inadequate to absorb the 250,000 new entrants to the job market each year. The opportunities to improve the productivity and sustainability of activities in the rural sector are significant. With Cambodia at a crossroads, a major effort is needed to focus on agriculture as the main driver of broad-based and pro-poor growth. While food security and better nutrition continue to be core sector development goals, a move toward commercialization is required to create economic opportunities and enable the sector especially small-scale farmers to become a bigger part of the economy. Value chain analyses indicate that large gains in agricultural productivity can be made through post-harvest storage, processing, and marketing. Numerous obstacles make the transition from low-level subsistence agriculture difficult. During extensive consultations with stakeholders government ministries and agencies, other external development agencies, nongovernment organizations (NGOs), and community-based organizations 6 a consensus emerged on the main problems and opportunities. 1. Constraints to Poverty Reduction and Smallholder Development 7. Low factor productivity. One of the main causes of poverty in the Tonle Sap basin is the inefficient use of land, water, labor, and capital, which results in low factor productivity. Cambodia's paddy yield per hectare is one of the lowest in Asia (Appendix 2). Total crop production has grown, and average paddy yields for Cambodia, Lao People's Democratic Republic, Thailand, and Viet Nam have increased from 1.4 tons per hectare (t/ha) in 1961 to 3.4 t/ha in However, Cambodia has continued to fall behind the regional average, with the gap increasing from 0.3 t/ha in 1961 to about 1.0 t/ha in Factor productivity is low in terms of labor (about $170 per worker) and in terms of land ($518 per ha). Five issues are linked to low factor productivity: (i) poor management of land (particularly soil fertility), water 4 Murshid, K.A.S Food Security in an Asian Transitional Economy: The Cambodian Experience. Phnom Penh: Cambodia Resource Development Institute. 5 Asian Development Bank (ADB) Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Asian Development Fund Grant to the Kingdom of Cambodia for the Emergency Food Assistance Project. Manila. 6 ADB Technical Assistance to the Kingdom of Cambodia for Preparing the Tonle Sap Poverty Reduction and Smallholder Development Project. Manila, 7 Food and Agriculture Organization. 2008, FAOSTAT database ( accessed 22 September 2008).

15 3 resources (including on-farm water management), and inputs (including chemical fertilizers); (ii) lack of, or inadequate access to, technology, research, and extension services; (iii) shortage and poor quality of seeds and inputs; (iv) lack of access to capital by smallholders; and (v) inadequate public investment in social and physical infrastructure. 8 Prospects for raising productivity are further constrained by (i) poor health, nutrition, and sanitation conditions in communities; (ii) poor farmer organization; and (iii) inadequate attention to gender development and empowerment. The following activities present an immediate opportunity to boost productivity: increase the availability of seed of high-quality rice varieties, rehabilitate small water control schemes, improve crop storage facilities, and provide training in the safe use of inputs. 8. Lack of access to markets and information. Despite receiving substantial external assistance (Appendix 3), the rural road network is still poor, resulting in high transport costs and restricted access to markets. Improving access to production factors and inputs, as well as to markets and market information (especially for smallholders), is a key to turning agriculture into the driving force of pro-poor growth. Weak links between producers and markets undermine government efforts to encourage more commercialized and diversified smallholder agriculture. Farmers lack information on the opportunities available and the associated technologies, markets, and prices. The Agriculture Sector Development Project 9 assisted the Ministry of Agriculture, Forestry and Fisheries (MAFF) in improving traditional extension delivery services to about 56,000 farmers in selected provinces, in addition to promoting nontraditional outreach through broadcast media. Information and communication technology (ICT) offers new opportunities to improve access to information for farmers and the rural population. Investment in ICT infrastructure and training through a public private community partnership in rural e- development will help strengthen market links and promote the diversification and commercialization of Cambodian agriculture, building on a pilot application of these technologies. 10 The Project will promote more private sector participation in the provision of technical services, infrastructure building, application of ICT for rural development, training and skill development, marketing, and rural finance. 9. Inadequate storage and processing capacities for producers and traders, poor quality packaging and labeling, and inadequate transport and market infrastructure constrain access of smallholder products to domestic and international markets. Post-harvest losses in Cambodia are typically 15% 20% in weight and 10% 30% in value in the market. 11 The International Rice Research Institute has demonstrated that losses can be significantly reduced and income from rice harvests increased if farmers and processors use better post-harvest management technologies, such as mechanized harvesters, crop dryers, hermetic storage systems, and improved milling practices. Up-to-date market information will enable farmers to gain more from their production. 8 Agrifood Consulting International and CamConsult Diagnostic Study, Phase 1 of Design, Agricultural Program, Cambodia, Program concept document final report prepared for the Australian Agency for International Development. 9 ADB Report and Recommendation of the President to the Board of Directors on Proposed Loans and Technical Assistance Grant to the Kingdom of Cambodia for the Agriculture Sector Development Program. Manila. Loan 2022 for SDR million was a program loan, and Loan 2023 for SDR3.287 million was a project loan. They were approved on 26 November. 10 ADB Technical Assistance to the Kingdom of Cambodia for Tonle Sap Technology Demonstrations and Productivity Enhancement. Manila (TA 7035-CAM for $3.65 million, approved 10 June, cofinanced by the Government of Finland and the Republic of Korea e-asia and Knowledge Partnership Fund). 11 International Rice Research Institute Participatory Impact Pathway and Project Planning Workshop Siem Reap, Cambodia December (funded by ADB through Japan Fund for Poverty Reduction JFPR 9036: Improving Poor Farmers Livelihoods through Improved Rice Postharvest Technology).

16 4 10. Weak rural financial services. Capacity building and training can prepare individuals and groups to adopt new on-farm and off-farm enterprises. However, without access to appropriate financial services, the rural poor are unable to act on opportunities that can increase household income. With numerous microfinance institutions (MFIs) operating in the Tonle Sap area, it is unnecessary to set up a new financial organization 12 to provide financial services (including savings; credits for micro, small, and medium-sized borrowers; remittances; and money transfers). Many MFIs tend to specialize in restricted areas in a few provinces, so outreach is limited in more remote rural regions. This results in poor delivery of financial services, and unrealized potential in agriculture and the rural economy. An agro-socioeconomic study (Supplementary Appendix A) financed by the Asian Development Bank (ADB) found that the main sources of credit are moneylenders (14.2%), relatives and/or friends (11.0%), and MFIs (7.5%). While lending by MFIs has expanded rapidly in recent years, access to and use of these formal financial services remains limited in rural areas. Difficulty in accessing formal credit providers and high interest rates 13 charged by informal lenders constrain the use of more advanced farming techniques, new markets, and business opportunities (Supplementary Appendix B). These constraints need to be addressed by (i) supporting community-based credit institutions, (ii) delivering services to community-based institutions, (iii) increasing the outreach capacity of lending institutions, and (iv) improving borrower training and capacity. 11. Need to deepen policy reforms and strengthening institutions. Since the 1990s, ADB has supported policy and institutional reforms in agriculture (footnote 9), water resources, 14 and finance. 15 The Government has strengthened significantly the policy environment for agriculture with the approval of legislation and institutional reforms necessary to accelerate agricultural growth and poverty reduction. The immediate priorities are to further the policy initiatives initiated in relation to Agriculture Sector Development Program (footnote 9) including (i) the adoption of sub-decrees and supporting regulations for the Seed Law, 16 (ii) the development of policies to promote good agricultural practices, and (iii) the development of subdecrees for farmer associations based on the Royal Decree. 12. Unexploded ordnance. Although the regime of Pol Pot ended in 1979, armed conflict and the placing of mines continued in parts of Cambodia until According to the Mine/Unexploded Ordnance (UXO) Victim Information System, the four project provinces are among the 10 provinces most affected by land mines and explosive remnants of war. Therefore, all development projects must be cognizant of the threats, and provide mechanisms to deal with UXO in affected communities. The number of casualties nationally and in the four provinces has declined significantly in recent years. However, appropriate management and mitigation measures must be included in projects. 12 Commercial banks and licensed MFIs are expanding their branch networks in provincial and district centers, making access less difficult for rural communities. 13 Interest rates of 5.10 to 7.33% per month are charged by money lenders and traders source: Agri-business Institute of Cambodia Draft Report Special Agro-socio-economic Study. Phnom Penh. 14 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Stung Chinit Irrigation and Rural Infrastructure Project. Manila (Loan 1753-CAM, approved 5 September, for $16.0 million); ADB Report and Recommendation of the President to the Board of Directors on Proposed Loan to the Kingdom of Cambodia for the Northwest Irrigation Sector. Manila (Loan 2035-CAM, approved 9 December, for $18.0 million). 15 ADB Technical Assistance to the Kingdom of Cambodia for Strengthening National Program Budgeting for the Agriculture Sector. Manila (TA 4428-CAM, approved 8 November, for $250,000). 16 Royal Government of Cambodia Law on Managing Seed and Hybrid Plant Authorization. Phnom Penh (approved on 8 April).

17 5 2. The Government s Response 13. Improvements in agriculture and rural development have been prioritized in the Government's development plans the Socioeconomic Development Plan (SEDP), ; the SEDP II, ; the Strategy for Agriculture and Water, ; the National Poverty Reduction Strategy; and the 2004 Rectangular Strategy for Growth, Employment, Equity, and Efficiency. The first growth priority of the Rectangular Strategy was agriculture productivity, diversification, and competitiveness with the complementary priority of the rehabilitation and construction of physical infrastructure (including rural roads and water resources infrastructure). The Rectangular Strategy II (2008) highlights the Government s resolve to strengthen the management of natural resources as the base for food security and to promote poverty reduction. 17 The National Strategic Development Plan, emphasizes improvements in agriculture as the key to poverty reduction. The main elements of the approach are intensifying crop production to increase yields and rural incomes, diversifying crop production, improving fisheries management, ensuring the sustainable management of forestry and conservation of the natural environment, and providing secure land tenure for the poor. Since 2002, the commune councils have had an important role in building small-scale rural infrastructure, such as rural roads, small market places, village drinking water and sanitation facilities, minor irrigation structures, schools, and health buildings. Under the ongoing decentralization and deconcentration reforms, commune councils are using Government funds and development partners earmarked funds for investment in activities that will improve the livelihoods of the local population. The Government continues to emphasize the need to expand the availability of rural credit, enhance access to rural credit, and reduce interest rates. 3. ADB s Sector Objectives and Strategies 14. ADB s sector strategy, 18 which is consistent with national strategies and other external assistance, focuses on (i) improving farmers ability to raise productivity, diversify toward highervalue products, and connect to markets; (ii) improving the market environment for private agriculture-based enterprise growth; and (iii) strengthening institutional capacity for competitive agricultural commercialization. The TSI and the associated Tonle Sap Basin Strategy 19 form a core element of ADB's sector strategy. The TSI is an integrated program of technical assistance (TA) and investments to overcome binding constraints on poverty reduction, while protecting vital ecosystem services in the basin. It also gives a geographical focus to ADB s country operations and business plan for Cambodia, The TSI is a 15-year program that supports (i) capacity development for environmental protection and development management; (ii) strengthening of environmental protection by the Government, line agencies, and people living in the basin; and (iii) investments in infrastructure to open new opportunities that bring sustainable and inclusive growth to some of the poorest communities of one of the poorest countries in the region The country strategy and program midterm review identified the need for a sharper focus on agricultural and rural development, private-sector-led growth, and intensified risk 17 Royal Government of Cambodia. 25 September, Political Platform of the Royal Government of Cambodia of the Fourth Legislature of the National Assembly. Phnom Penh. 18 ADB Country Strategy and Program ( ): Kingdom of Cambodia. Manila. 19 ADB From Strategy to Practice: The Tonle Sap Initiative. Manila. 20 ADB Country Operations Business Plan ( ): Cambodia. Manila (October). 21 United Nations Development Programme (UNDP) Human Development Report. (accessed 29 October 2009).

18 6 management. 22 These refinements are consistent with the Government s reform priorities as elaborated in the Rectangular Strategy and implemented through the National Strategic Development Plan, Agriculture remains a source of productivity improvement, seasonal employment, and income growth, especially when connected to urban, industrial, and export markets. Therefore, support for agriculture and rural development is an underlying component of the inclusive growth strategy. ADB's Strategy directs its support for agriculture and rural development to be provided mainly through infrastructure for rural transport, irrigation and water systems, and microfinance. 4. Other Development Partner Assistance 16. Several development agencies are providing external assistance to the agriculture sector (Appendix 3). The World Bank s involvement in agriculture and rural development has been closely linked to building the capacity of MAFF through its agricultural productivity improvement project (in cooperation with the IFAD). The World Bank, with additional funding from German development cooperation through GTZ and the Government of Finland, is also helping Cambodia to improve land management and land tenure security through land titling. The European Union has facilitated rural development in six provinces around Phnom Penh through rice seed improvement, irrigation development, microfinance, and rural infrastructure development. In cooperation with local NGOs, it is engaged in small-scale food security projects. In 2005, the European Union began a multi-component program in northwestern Cambodia and provided a grant to the livestock subsector. The Australian Agency for International Development supports building the capacity at MAFF s Department of Agricultural Extension and the Cambodia Agricultural Research and Development Institute, and is also engaged in improving rice seed quality and post-harvest handling of rice through its agricultural quality improvement project. 17. Since 1996, the IFAD has provided $48.59 million in grants and loans for five projects in partnership with other development agencies. 24 The IFAD country strategy for Cambodia, has two strategic objectives: (i) sustainable livelihood opportunities for poor rural men and women in the project areas through better access to assets and productive rural services, rural infrastructure, and markets; and (ii) the promotion of pro-poor decentralization, deconcentration, and local governance for agricultural and rural development through institutional support and evidenced-based policy making. IFAD has assisted the rural poor to improve agricultural productivity, increase off-farm incomes, and provide small-scale rural infrastructure using a common interest group approach. The IFAD has followed systems, structures, and procedures for project planning, financing, and implementation that are in line with those of the Government and other development agencies in nine provinces, including Banteay Meanchey, Kampong Thom, and Siem Reap. The IFAD supports improving agricultural productivity through microfinance and extension services in northwestern Cambodia. 5. Lessons Identified 18. The experience of ADB, IFAD, and other development partner projects around the Tonle Sap Lake underscores the need to complement investments with sustained capacity development interventions aligned with the Government's decentralization and deconcentration 22 ADB Country Strategy and Program Midterm Review ( ): Cambodia. Manila. 23 ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila. 24 These include the Australian Agency for International Development, GTZ, UNDP, the World Bank, and the World Food Programme.

19 7 reforms (Appendix 2). The institutional arrangements to manage the provision of services to the people by each level of government are evolving as new regulations, systems, and procedures are introduced. To ensure alignment and harmonization, the Project will support strengthening these evolving structures, including their administrative and financial management systems and procedures in provinces, districts, and communes consistent with the Organic Law, The Project draws on lessons from the ADB TSI 25 and IFAD projects in Cambodia, including the following: (i) (ii) (iii) (iv) Service delivery. Better delivery of rural services, including agricultural and social services, is needed to reduce rural poverty. This will include decentralizing the provision of services by public and private providers, and improving their responsiveness to the priorities of farmers based on market demands. The private sector providers of agricultural extension services, including village animal health workers and village extension workers, can be effective in transferring technology, disseminating information, and linking villagers and their products with markets. In general, the formal banking sector in Cambodia has not provided the financial services that the poor need (para. 10), but group revolving funds 26 have been able to do so. Therefore, mechanisms need to be developed to expand group revolving funds and link participants to the formal rural financial services sector. Identification of service providers. The Tonle Sap Sustainable Livelihoods Project (footnote 25) has piloted the mobilization of service providers, including NGOs and the private sector, to accelerate community-based development. Some commune councils have had difficulty finding enough service providers to provide technical and financial proposals for commune-led activities because of inadequate dissemination of information about project activities. Use of the media and workshops to publicize the projects service requirements and future opportunities is being tested. Social mobilization and empowerment. Social mobilization and empowerment are keys to the effective participation of the poor in economic development. Empowerment of the poor, through village-based organizations and farmers associations, is the basis for ensuring the impact and sustainability of rural povertyreduction initiatives. Capacity of subnational implementation teams. The level of understanding of commune livelihood fund procedures for the Tonle Sap Sustainable Livelihoods Project varies between commune teams. The understanding of the guidelines, required technical expertise, and performance also vary. Effective subnational implementation requires (i) developing clear terms of reference to define the roles and responsibilities of project staff, (ii) matching technical expertise with the project 25 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Tonle Sap Environmental Management Project. Manila; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Tonle Sap Sustainable Livelihoods Project. Manila; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Tonle Sap Lowlands Rural Development Project. Manila; ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Tonle Sap Water Supply and Sanitation Sector Project. Manila. 26 The group revolving fund (GRF) is a source of money managed by a community group from which loans are made to individuals for development projects. For this project the initial loans will be in the form of agricultural inputs with repayments in cash to form the GRF. Subsequent loans from the GRF will be individual cash loans to members of the group.

20 8 requirements, (iii) improving the quality and impact of training, and (iv) cross-learning between projects. (v) (vi) Project design and implementation. Community-based development projects need to be flexible and able to adapt to changes during project implementation, as the policy and institutional framework for decentralization and deconcentration evolves under the new Organic Law. Investments in rural infrastructure. Including irrigation schemes and rural roads, rural infrastructure projects in Cambodia carry a high risk of poor performance and premature failure. This risk arises largely from weak capacities in the Ministry of Water Resources and Meteorology, Ministry of Rural Development, and the commune councils to develop and manage these productive assets. Effective quality control at all stages is essential. III. THE PROPOSED PROJECT A. Impact and Outcome 19. The impact of the Project will be to improve the livelihoods of approximately 630,000 households in four provinces (Banteay Meanchey, Kampong Cham, Kampong Thom, and Siem Reap) 27 in the Tonle Sap basin by The outcome of the Project will be increased agricultural productivity and improved access to markets in 196 communes in 28 districts of four provinces in the Tonle Sap basin. This will be the result of better rural infrastructure, improved agricultural support and rural financial services, greater diversification of household economic activities, and the creation of on- and off-farm livelihood opportunities. The Project communes, identified in accordance with the selection criteria (Supplementary Appendix C), are less developed, but have potential for growth and diversification. 21. The Project will assist communities in establishing livelihood improvement strategies for resource-poor 28 farming households with assets that give them the potential to increase their farm-based income by scaling up interventions developed and tested through earlier TSI investments (footnote 25). The Project benefits will be founded on higher productivity and diversified crop production by helping communities to adopt integrated rice-based farming systems. The Project is designed to trigger broad-based development with direct participation of beneficiaries in planning and executing growth and poverty-reduction initiatives and by strengthening agricultural support services for use by the beneficiaries at the commune and district levels. The Project will finance eligible investments in physical assets and capacity development activities that the commune councils have included in their development plans and related annual investment plans. B. Outputs 22. The Project will assist the Government in (i) developing rural infrastructure to support 27 The Government requested the project preparatory TA to focus on the four provinces north of the Tonle Sap Lake as these have generally received less assistance than the provinces south of the lake 28 Households in the project communes involved in agricultural production with less than 1.0 hectare of usable agricultural land are considered resource-poor smallholders. Project communes are selected on the basis of poverty score in commune database, agricultural potential, and excluding urban communes.