Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 38558 September 2010

Proposed Loans, Grant, Technical Assistance Grant, and Administration of Loan and Technical Assistance Grants Kingdom of Cambodia: Water Resources Management Sector Development Program

CURRENCY EQUIVALENTS (as of 15 August 2010)

Currency Unit – riel (KR)

KR1.00 = $0.000236

$1.00 = KR4,239

ABBREVIATIONS ADB – Asian Development Bank ADF – Asian Development Fund AusAID – Australian Agency for International Development CDTA – capacity development technical assistance CNMC – Cambodia National Mekong Committee COM – Council of Ministers FWUC – farmer water users community ha – hectares IWRM – integrated water resources management ITC – Institut de Technologie du Cambodge MEF – Ministry of Economy and Finance MAFF – Ministry of Agriculture, Forestry and Fisheries MEF – Ministry of Economy and Finance MIME – Ministry of Industry, Mines and Energy MOE – Ministry of Environment MOH – Ministry of Health MLMUPC Ministry of Land Management, Urban Planning and Construction MOWRAM – Ministry of Water Resources and Meteorology MPWT – Ministry of Public Works and Transport MRD – Ministry of Rural Development NCDM – National Committee for Disaster Management NDF – Nordic Development Fund NSDP – National Strategic Development Plan OFID – OPEC Fund for International Development PAM – project administration manual PDA – Provincial Department of Agriculture PDWRAM – Provincial Department of Water Resources and Meteorology SAW – Strategy on Agriculture and Water TSA – Tonle Sap Authority TSC – Technical Services Centre of MOWRAM

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., FY2010 ends on 31 December 2010.

(ii) In this report, "$" refers to US dollars unless otherwise stated.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Mir, Agriculture, Environment, and Natural Resources, SERD Team leader C. Wensley, Lead Professional (Water Resources), SERD Team members L. Adams, Social Development Specialist, SERD N. Ikemoto, Senior Natural Resources Management Specialist, SERD C. Razon, Associate Project Analyst, SERD K. Watanabe, Water Resources Management Specialist, SERD S. Zaidansyah, Counsel, Office of the General Counsel Peer reviewer W. Lincklaen Arriens, Lead Professional (Water Resources

Management), Regional and Sustainable Development Department 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.

CONTENTS

Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE SECTOR DEVELOPMENT PROGRAM 1 Rationale 1 Impact and Outcome 4 Outputs 4 Program Costs and Financing 4 Project Costs and Financing 5 Implementation Arrangements 6 III. TECHNICAL ASSISTANCE 6 IV. DUE DILIGENCE 7 Economic and Financial 7 Governance 8 Poverty and Social 8 Safeguards 9 Risks and Mitigating Measures 9 V. ASSURANCES 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 3. Development Policy Letter 15 4. Policy Matrix 20

1. Project Name: Water Resources Management Sector Development Program 2. Project Number: 38558

3. Country: Cambodia 4. Department/ Division:

5. Sector Classification Primary

6. Thematic Classification Primary

6a. Climate Change Impact: 6b. Gender Mainstreaming

7. Targeting Classification: 8. Location Impact:

9. Complex

10. Safeguard Categorization:

11. ADB Financing:

Amount

($million)38558-02-3 20.038558-01-3 10.038558-02-2 1.038558-03-2 2.8

33.8

12. Cofinancing:

Project Number38558-02-338558-01-338558-02-2

38558-03-2

13. Counterpart Financing:

Government (including contributions of beneficiaries) and sponsors

14. Aid Effectiveness

NoYes

BC

Southeast Asia DepartmentAgriculture, Environment and Natural Resources Division

and regional)

business environmentPromoting economic efficiency and enablingInstitutional development

Public administration (national, decentralized,

Organizational development

Subthemes

Some gender benefits

Subsectors

Irrigation, drainage and flood protection

Effective gender mainstreaming

Gender equity theme

Natural resources conservation

Involuntary ResettlementIndigenous People

Geographic dimensions of

inclusive growth

Millennium Development

Goals

Income poverty at household

level

Sectors

Agriculture and natural resources

Themes

Environmental sustainabilityCapacity development

Economic growth

Governance

RuralTargeted Intervention

No gender elements

Project Risk Categorization:

Environment B

General Intervention

UrbanNational

HighLowHigh

Sector development program (project loan) Asian Dev't. FundSector development program (program loan) Asian Dev't. Fund

Capacity development technical assistance TASF-IVProject Grant Asian Dev't. Fund

PROJECT AT A GLANCE

Project Number Sovereign/Nonsovereign Modality Source

Adaptation

Mitigation

Medium

Medium

Regional

Parallel project implementation unitProgram-based approach

SovereignSovereignSovereignSovereign

Project Grant

Sector development program (program loan)Sector development program (project loan)

Source Amount ($million)8.9

Modality CofinancingNo cofinancing available.OPEC Fund for International Development

Total

No cofinancing available.Nordic Development Fund (NDF)Australian Agency for International Development (AusAid)Capacity development technical assistance

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) two proposed loans, (ii) a proposed grant, (iii) proposed administration of a loan to be provided by the OPEC Fund for International Development (OFID), all to the Kingdom of Cambodia for the Water Resources Management Sector Development Program, and (iv) proposed administration of (a) a portion of technical assistance (TA) to be provided by the Government of Australia, and (b) a portion of TA to be provided by the Nordic Development Fund, both to the Kingdom of Cambodia for Supporting Policy and Institutional Reforms and Capacity Development in the Water Sector. If the Board approves the proposed loans, grant, and administration of loan and TA, I, acting under the authority delegated to me by the Board, will approve ADB providing the balance of the TA.

2. The sector development program1 comprises (i) a program to address national water resources management and irrigation policy issues in Cambodia; (ii) a project to assist the Ministry of Water Resources and Meteorology (MOWRAM) to rehabilitate small- to medium-scale irrigation systems and deliver irrigation services within the Tonle Sap basin; and (iii) supporting capacity development technical assistance (CDTA). The sector development program is included in ADB’s country operations business plan for Cambodia, 2009–2012.2,3

3. The design of the sector development program and the focus of the proposed activities in the Tonle Sap basin are based on TA feasibility studies from 2007 to 2009.4 They also take account of lessons learned from the ongoing and recently completed ADB- and Agence Française de Développement (AFD)-financed Northwest Irrigation Sector5 and Stung Chinit Irrigation Projects,6 investments under the Tonle Sap Initiative,7 and ADB’s country and sector assistance program evaluations.8 Extensive stakeholder consultations were conducted during the program design process in 2009–2010 and through the Government’s Technical Working Group on Agriculture and Water. Recognizing the ongoing dialogue with the government on water sector policy issues addressed under the sector development program, the program period is considered to have begun in May 2008 (footnote 4).

II. THE SECTOR DEVELOPMENT PROGRAM

4. Rationale. Cambodia’s economy is highly dependent on water. Its importance for food production, rural livelihoods and economic development is recognized in the Government’s

1 ADB. 2003. Sector Development Programs. Operations Manual. OM D5. Manila. 2 ADB. 2009. Country Operations Business Plan: Cambodia, 2009–2012. Manila. 3 The sector development program contributes to ADB Strategy 2020 core operations through the provision of rural

infrastructure, promotion of environmentally sustainable growth (improved water management and adaptation to climate change) and education, as well as supporting non-core operations in agriculture.

4 ADB. 2006. Technical Assistance to the Kingdom of Cambodia to Prepare the Water Resources Management (Sector) Project. Manila (TA 4848-CAM, approved for $1.3 million on 16 October 2006). The Water Resources Management Sector Development Program was initially proposed as a sector project and loan fact finding was first conducted in December 2007. Additional TA studies were initiated on institutional capacity and to strengthen investment project aspects in May 2008. Because of concerns about ongoing projects and recognition of the need to address sector-wide policy issues, processing was deferred to 2010 and a sector development program approach was adopted. A major change in TA scope was prepared in 2009 to refocus the TA. Preparation of the sector development program began in March 2009.

5 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom of Cambodia for the Northwest Irrigation Sector Project. Manila (Loan 2035-CAM).

6 ADB. 2000. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom of Cambodia for Stung Chinit Irrigation and Rural Infrastructure Project. Manila (Loan 1753-CAM).

7 ADB. The Tonle Sap Initiative. http://www.adb.org/Projects/Tonle_Sap/initiative.asp 8 ADB. 2009. Country Assistance Program Evaluation: Cambodia—Growth and Sector Reform, Manila; ADB. 2009.

Sector Assistance Program Evaluation: Agriculture and Rural Development Sector in Cambodia. Manila.

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Rectangular Strategy on Growth, Employment, Equity and Efficiency (Phase 2, 2008), the National Strategic Development Plan (NSDP, 2006–2013), and the Strategy for Agriculture and Water Resources (SAW, 2009–2013). Rainfall distribution and river discharges are highly seasonal, variable and unpredictable, with a natural pattern of wet and dry seasons, typhoons, floods and droughts. Coupled with this, the annual rise and fall of the Mekong River9 has both positive and negative effects—sustaining the critical water cycles of the Tonle Sap Lake and Lower Mekong delta necessary for agriculture and fisheries production, but with the potential to cause major flooding and damage to infrastructure and crops, and loss of life. It is anticipated that climate change will increase the challenges of water management; less rainfall is anticipated during the dry season and more during the wet season, with more frequent extreme weather events and potentially worse seasonal water shortages and floods.

5. The sector development program supports the process of (i) strengthening national water sector policy, regulatory and the institutional environment; (ii) improving integrated water resources management (IWRM) performance in river basins, focusing on the Tonle Sap basin and the Strung Sen sub-basin; and (iii) strengthening irrigation services in a selected area of the Tonle Sap basin. These are the three main thrusts of ADB’s Water for All policy.

6. The Law on Water Resources Management, 2007 (the Water Law) is the basis of the enabling environment, which aims to manage water resources using an IWRM approach.10 MOWRAM, headed by the minister for water resources, has the lead responsibility for water resources management. The minister also chairs the Cambodia National Mekong Committee which represents Cambodia on the Mekong River Commission and the Tonle Sap Authority which was recently established to coordinate development activities in the Tonle Sap basin. Other ministries and agencies involved in water resource use and management include the Ministries of Agriculture, Forestry and Fisheries (MAFF), Environment (MOE), Health (MOH); Industry Mines and Energy (MIME), Rural Development (MRD), and Public Works and Transport (MPWT) and the National Committee for Disaster Management (NCDM). Instituting an effective IWRM regime requires that these agencies and relevant stakeholders work together and in a coordinated manner, on the formulation and implementation of policy, strategies and priorities.

7. Although provided for under the Water Law, there is currently no regular mechanism for broad intersectoral coordination to address critical water resource development and management such as: (i) the balance between fisheries, irrigated agriculture, hydro-electric power generation, urban, industrial and rural water supply, and tourism; (ii) the development on tributary rivers and the balance of upstream and downstream benefits; (iii) the operation of dams, and the storage and diversion of water; and (iv) the management of water quality and maintenance of ecosystems.

8. The government plans to review and strengthen inter-ministerial arrangements for national water resources management either by elevating existing coordination structures or by establishing a new, high-level inter-ministerial mechanism to determine national policy relating to water.11 At the river basin level, the government will pilot activities in the Stung Sen sub-basin to develop coordination mechanisms for river basin management that can then be applied 9 About 86% of Cambodia lies within the Mekong basin, about 20% of which is in Cambodia. 10 IWRM is described by the Global Water Partnership Technical Advisory Committee (2006) as “a process that

promotes the coordinated development and management of water, land and related resources in order to maximize the resultant economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystems.” See feasibility studies conducted under the TA cited in footnote 4 for a discussion of IWRM issues in Cambodia.

11 This will be supported through the establishment of working groups, comprising government staff from key agencies, sector stakeholders from the private sector and academic institutions, supported under the CDTA, to advise the government on appropriate coordination mechanisms. This process will be used for all policy activities.

3

nationwide, building on existing provincial rural development council structures. A committee representing provinces, sectors, and stakeholders (including water users and civil society) at the river basin level will be established. National and local level organizational development and capacity building is needed for sound water resource planning, mainstreaming IWRM; improving data management and flood and drought forecasting; and strengthening coordination for climate change adaptation.

9. Previous ADB projects have assisted the government to develop the Water Law, but the necessary sub-decrees and implementing regulations have not yet been finalized or approved. Sub-decrees for water allocation and licensing, river basin management, establishment of farmer water user communities (FWUCs), and water quality are prioritized under the SAW. In particular, legislation is needed for FWUCs to (i) ensure farmers have sufficient autonomy to undertake activities corporately, and (ii) assign responsibility and rights for the infrastructure from the government to the FWUCs to enhance local ownership and responsibility for operation and maintenance (O&M). Institutional capacity is also needed to implement the regulations.

10. MOWRAM is responsible for providing irrigation services, including the development of all irrigation infrastructure (large, medium and small), O&M, and support for farmers to manage irrigation schemes.12 MOWRAM has the capacity to oversee and manage investment projects with external assistance, but needs capacity strengthening and resources at national and provincial levels to improve irrigation operations. A clearer demarcation is needed of the roles and responsibilities of MOWRAM, the provincial departments of water resources management and meteorology (PDWRAMs), and FWUCs, as well as their links with MAFF’s provincial departments of agriculture.13 Engineering and project management human resource capacity and competences for irrigation and drainage O&M need to be upgraded and strengthened. Improvements in administration, financial and business processes are needed in line with the government's public financial management reform program.14 To support long-term O&M, a national asset management system is being developed to identify O&M costs, benchmarks and budgets.

11. The sustainability of irrigation services is highly dependent on the capabilities and responsibilities of farmers. A national program to strengthen their ability to manage minor irrigation schemes through FWUCs has been in progress since 1999. Additional investments are needed (i) to expand FWUCs and training of farmers, including on-farm water management and O&M of irrigation systems and (ii) for putting in place legal mechanisms to enable farmers, through elected FWUCs, to cover the costs of O&M independently, with appropriate incentives. Vocational and on-the-job training needs to be extended to FWUCs, with matching grants for FWUCs so they can access funds for works and capacity building.

12. Cambodia needs more engineers, agronomists, economists, and social and environmental specialists to promote IWRM and irrigation services. In particular, MOWRAM needs to recruit and retain more qualified engineers. The Institut de Technologie du Cambodge (ITC) has a Rural Engineering Department, and MOWRAM has its own technical services centre. Tertiary training in water resource management, irrigation engineering, on-farm water management and hydrology needs to be strengthened and expanded; and vocational and on-the-job training in irrigation O&M needs to be extended for MOWRAM staff and farmers.

12 MOWRAM’s Strategic Development Plan (2009) identifies 2,403 irrigation schemes with a total wet season

irrigated area of 773,188 ha, and total dry season area of 347,058 ha; for a total area of 1,120,246 ha. 13 Reflecting ADB’s Water Policy, the program has been designed to assist MOWRAM to distinguish between its role

of “service provider” and that of “regulator”, and develop appropriate institutional mechanisms and capacities. 14 Also supported under: ADB. 2008. Report and Recommendation of the President to the Board of Directors:

Proposed Grant to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila (Grants 0132/1033-CAM).

4

13. To support Cambodia to meet its food security, poverty reduction, and economic development targets under the NSDP, and to strengthen the delivery of irrigation services, the government plans to rehabilitate about 15,000 ha of small- and medium-scale irrigation schemes in three provinces in the Tonle Sap basin, building on Northwest Irrigation Sector Project investments.

14. Impact and outcome. The impact of the proposed sector development program will be enhanced food security. The outcome will be improved management of water resources and more efficient and sustainable irrigation services in the project area.

15. Outputs. The sector development program has three key outputs with the objective of improving the management of water resources in Cambodia by enhancing the capacity of (a) the government to manage water resources; and (b) MOWRAM to manage and deliver irrigation services, as detailed in the design and monitoring framework (Appendix 1) and project administration manual (PAM).15 Outputs A and B are outputs related to the program, whereas output C is related to the project.

16. Output A: Enhanced capacity for sustainable water resources management. The sector development program will strengthen (i) the enabling policy, regulatory and institutional environment to coordinate and collaborate on water resources management; (ii) strengthen MOWRAM's capacity to promote IWRM in river basins; and (iii) ensure adequate human resources are available for carrying this out.

17. Output B: Enhanced capacity of MOWRAM to manage and deliver irrigation services. The sector development program will support MOWRAM to implement activities identified under the SAW and to improve its organization and financial management at national, provincial and local levels by (i) supporting implementation of the SAW; (ii) strengthening the organization, administration and technical capacity of MOWRAM, PDWRAMs, and district offices; (iii) providing adequate budgets for O&M; and (iv) developing the capacity of government staff and farmers to carry out sustainable O&M.

18. Output C: Sustainable rehabilitation of small- and medium-scale irrigation schemes in the Tonle Sap basin. The sector development program will assist the government to deliver its national development goals under the NSDP through investment in (i) strengthening provincial and district administrative capacity; (ii) rehabilitating and improving the irrigation infrastructure of approximately 15,000 hectares of existing small- and medium-scale irrigation schemes in the Tonle Sap basin within the provinces of Kampong Thom, Banteay Meanchey, and Siem Reap, building on lessons learned during the implementation of Northwest Irrigation Sector Project; (iii) enhancing technical skills, livelihood opportunities and capacity for FWUCS and farmers;16 and (iv) project management.

19. Program costs and financing. The program loan will provide budget support to the government to finance outputs A and B of the sector development program through counterpart funds as outlined in the government's development policy letter and policy matrix (Appendixes 3 and 4). The government has requested a loan in various currencies equivalent to SDR13,207,000 ($20 million equivalent) from ADB’s Special Funds resources to help finance the program. The loan will have a 24-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan agreement. The proposed loan of $20 million

15 Project Administration Manual (Appendix 2). 16 This activity will also provide ongoing support for irrigation schemes financed under the NWISP and the Stung

Chinit Irrigation Project following completion of the loan projects (located in Kampong Thom, Pursat, Battambang, Banteay Meanchey, and Siem Reap Provinces).

5

equivalent in two tranches will assist the government to finance a portion of the adjustment costs for the policy and institutional reforms and investments under the program.17 The SAW estimated the investment requirements for the agriculture and water sector over the period 2010–2013 at $501 million. The first tranche of $10 million equivalent will be available for release upon full compliance with the first-tranche conditions. The second tranche of $10 million equivalent will be released about 24 months later, subject to the government’s full compliance with second-tranche conditions. 18

20. Project costs and financing. The project is estimated to cost $31.92 million equivalent, as indicated in Tables 1 and 2. A sector approach to finance output C will be followed. Detailed cost estimates are in the PAM.

Table 1: Project Investment Plan ($ million)

Item Amounta

A. Base Costb 1. Strengthen provincial and district administration capacity 0.51 2. Rehabilitate and improve irrigation infrastructure 15.51 3. Enhance skills and capacity of farmer water user communities and farmers 3.53 4. Carry out effective project management 6.83 Subtotal (A) 26.38B. Contingenciesc 3.67C. Financing Charges During Implementationd 1.87 Total (A+B+C) 31.92a Includes taxes and duties of $3.23 million to be financed by ADB and government resources. b In mid-2010 prices. c Physical contingencies computed at 5% for consulting services. Price contingencies computed at 1.5%, reducing to 0.5% on foreign exchange costs and 5% on local currency costs (World Bank projections as of 20 August 2009). This includes provision for exchange rate fluctuations assuming purchasing power parity exchange rate. d Includes interest charges. Source: Asian Development Bank estimates.

Table 2: Project Financing Plan Source Total % Asian Development Bank ADF Loan 10.00 31 Asian Development Bank ADF Grant 2.80 9 OPEC Fund for International Developmenta 12.00 38 Government 6.36 20 Beneficiaries 0.76 2 Total 31.92 100

a Administered by ADB. ADF = Asian Development Fund. Source: ADB estimates.

21. The government has requested a loan in various currencies equivalent to SDR6,603,000 ($10.00 million equivalent) from ADB’s Special Funds resources to help finance the project.19 The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft financing agreement. The government has requested a grant not exceeding $2.80 million from ADB’s Special Funds resources to help finance the project. The government has requested a $12.00 million loan from OPEC Fund for International Development (OFID) to jointly finance the project, to be administered by ADB. The OFID loan

17 Program Actions and Associated Adjustment Costs (Appendix 2).

18 There will be retroactive financing for expenditures incurred by the government under the program for up to 180 days prior to loan effectiveness.

19 ADB will finance a portion of the taxes and duties under this project. The taxes and duties to be financed by ADB represent a small share of the project investment plan (3.4%) and apply only to ADB-financed expenditures. The financing of the taxes and duties is considered material and relevant to the success of the project to ensure timely procurement of goods and services.

6

will have a 20-year maturity, including a 5-year grace period, a 1.5% interest charge and a 1% service charge per annum. The government will contribute $6.36 million equivalent, including both in-kind expenditure (as well as priority operating costs)20 and a portion of taxes and duties. Contributions from beneficiaries will take the form of payment of fees for irrigation services.

22. Implementation Arrangements: MOWRAM will be the executing agency for the program and project. A program steering committee (PSC) will be established for overall program coordination, and will be chaired by the minister of MOWRAM, with the secretary of state of MOWRAM as permanent vice chair. The PSC will include high level representatives of MAFF, Ministry of Economy and Finance (MEF), MOE, MRD, MOH, MPWT, MIME, Ministry of Land Management, Urban Planning and Construction, Ministry of Planning, Ministry of Women’s’ Affairs, and the NCDM.21 A program management office (PMO) will be established in MOWRAM to manage the program and ensure policy actions are implemented. It will be supported by (i) a water resources program support unit in the Department of Water Resources Management of MOWRAM to coordinate activities under output A, and (ii) an irrigation services program support unit in the Department of Irrigated Agriculture of MOWRAM to coordinate activities under output B. The detailed implementation arrangements for the program are described in the PAM. The implementation period for the program is May 2008 to December 2012, and the loan closing date is June 2013 (para. 3).

23. Implementation arrangements for the project are summarized in Table 3 and described in detail in the PAM. These arrangements are fully aligned with the Government’s standard operating procedures.22

III. TECHNICAL ASSISTANCE

24. Grant-financed CDTA, Supporting Policy and Institutional Reforms and Capacity Development in the Water Sector, will support the implementation of the program (as reflected under outputs A and B). The expected outcome of the CDTA is better management of water resources and irrigation services through enhanced planning, policy, legislation, organizational development and enhanced human resources capacity. The CDTA will provide direct assistance to ITC to support undergraduate and post-graduate degrees in water resources and irrigation management and technical assistance to MOWRAM to support the expansion of vocational and on-the-job training for staff and farmers through its technical services centre. The CDTA will support the PMO to implement the agreed actions under the policy matrix and to monitor the progress of policy reforms.

25. The cost of the CDTA is estimated at $11.16 million equivalent over a 5-year period. The CDTA will be cofinanced on a grant basis by: ADB’s TA funding program for $1.0 million (from TASF-IV); the Government of Australia (AusAID), will provide support of A$5 million ($4.55 million equivalent);23 and the Nordic Development Fund (NDF), will provide support of €3.0 million ($3.75 million equivalent). The CDTA will be jointly cofinanced, and ADB will administer it. The balance of the local currency cost, amounting to $1.86 million equivalent, will be met by the government to cover office accommodation, counterpart staff support, facilities for seminars and meetings, and other administrative expenses. The executing agency for the CDTA will be MOWRAM, and its activities will be monitored by the PSC (for which purpose ITC will be invited to join the PSC). ADB will select and engage an international firm in association with a national

20 Priority operating costs are government incentives paid to staff to achieve agreed outputs of development activities. 21 ADB, AusAID, NDF and OFID will be invited as observers to the PSC meetings. 22 Ministry of Economy and Finance. 2005. Standard Operating Procedures for Externally Financed Project/Programs

in Cambodia. Phnom Penh (August), including financial and procurement manuals. 23 The TA will specifically coordinate with AusAID’s ongoing programs in agriculture and with the Mekong River

Commission in Cambodia.

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firm and individual consultants to provide approximately 119 international and 251 national person-months of consulting inputs to support outputs A and B at a cost of about $3.72 million. Consultants will be engaged under ADB's quality and cost based selection (80:20). ITC, MOWRAM and ADB will sign a memorandum of understanding (MOU) on the scope of TA activities to provide undergraduate and postgraduate degrees in water resources and irrigation management. The MOU will be the basis for financing TA activities in accordance with procedures acceptable to ADB, AusAID, NDF, and the government. Details of the CDTA are in the linked document listed in Appendix 2.

Table 3: Project Implementation Arrangements Aspects Arrangements Implementation period December 2010 to December 2017 Estimated loan closing date June 2018 Project management (i) Oversight body Program Steering Committee

Chair: Minister, Ministry of Water Resources and Meteorology Members: high level representatives of Ministry of Agriculture, Forestry and Fisheries; Ministry of Economy and Finance; Ministry of Environment; Ministry of Rural Development; Ministry of Health; Ministry of Public Works and Transport; Ministry of Industry, Mines and Energy; Ministry of Land Management, Urban Planning and Construction; Ministry of Planning; Ministry of Women’s’ Affairs; National Committee for Disaster Management A program management office will be set up within the Ministry of Water Resources and Meteorology to support the program steering committee, which will be responsible for overall management, monitoring and coordination of the sector development program.

(ii) Executing agency Ministry of Water Resources and Meteorology (MOWRAM) (iii) Key implementing agencies Provincial departments of water resources and meteorology of Kampong Thom,

Banteay Meanchey, and Siem Reap provinces. a (iv) Program support and project

implementation units Project support unit within MOWRAM's Department of Engineering Project implementation units in each province National competitive bidding Multiple contracts $15.8 million Procurementb Shopping Multiple contracts $0.3 million

Consulting services QCBS (80:20) + individual 501 person-months $3.3 million least cost selection Multiple contracts $0.09 million Retroactive financing and/or advance contracting

Advance recruitment of project management consultants, and advance procurement of vehicles and equipment

Disbursement As per ADB’s Loan Disbursement Handbook unless otherwise stated in the project administration manual

QCBS = quality and cost based selection. a Two additional implementing agencies may be added to include PIUs in Battambang and Pursat Provinces to

enable the continuation of capacity strengthening activities for FWUCs and agriculture under the NWISP and Stung Chinit Projects following the closure of these loans.

b All procurement shall be undertaken in conformity with ADB’s Procurement Guidelines (April 2010, as amended from time to time) and all engagement of consultants shall be undertaken in conformity with ADB’s Guidelines on the Use of Consultants (April 2010, as amended from time to time). Should there be any discrepancy between the government’s standard operating procedures (footnote 22) and ADB's guidelines, ADB's guidelines shall prevail.

Source: ADB estimates.

IV. DUE DILIGENCE

26. Economic and financial. The major economic benefits of the program will include (i) improved management of water resources to increase water and food security, enhance livelihoods and ecosystem services, reduced incidence of floods and droughts, and greater resilience to climate change; and (ii) improved productivity of irrigated agricultural production and cost savings arising from increased system efficiency.

27. The project adopts a sector approach, under which the entire scope of project activities is not firmly identified at the project preparation stage. The core subprojects were analyzed as

8

representative of the project’s economic viability and financial sustainability. 24 These core subprojects covered an irrigated area of 6,634 ha (about 24% of the area covered by the subprojects). From a financial perspective, the project will help project beneficiaries to raise farm productivity by increasing the timeliness and reliability of irrigation, improving on-farm management of water and soils, and introducing better irrigated agriculture practices. The outcomes will be greater household incomes and more food for household consumption. For the core subprojects, the average additional value added per farm was found to range from $205 to $423 per annum. Based on the incremental increase in this household income, investment in these subprojects was found to yield a financial internal rate of return of 7.4%–14.4%.25

28. From an economic perspective, the project will yield tangible and intangible economic benefits to the national economy. The major tangible benefits will be an incremental increase in farm production and productivity, contributing to sustained growth of the agricultural sector. The intangible benefits will be improved health of project beneficiaries as a result of the better food supply, improved productivity of project beneficiaries, increased water availability for domestic consumption, and more efficient use of soil and water. For the core subprojects, the project investment was found to yield an economic internal rate of return of 13.9%–24.3%.26

29. Governance. The sector development program is designed to assist the government to address priority policy, legislative, and institutional reforms in the water sector. ADB will monitor the sector development program during its implementation through regular program reporting and its review missions. Project implementation, procurement and financial management will be aligned with the government's standard operating procedures (Table 3, footnote a). The sector development program's alignment with the government's public financial management reform process and its decentralization and deconcentration initiatives will improve governance and reduce corruption. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the MEF and MOWRAM for both the program and project elements. The specific policy requirements and supplementary measures of the project are described in the PAM. A good governance framework has been prepared.27

30. Poverty and social impacts. The policy reforms and project investment activities included in the sector development program are expected to reduce the poverty of the program beneficiaries directly through increased food security and rural job creation. The program will promote gender mainstreaming. Better water sector management will improve water use and management by MOWRAM, PDWRAMs and water users. The current poor agricultural productivity and consequent food shortages and out-migration are expected to decrease with better management of local water resources. The establishment and support of FWUCs will provide opportunities for beneficiaries to manage their local water resources and assume responsibility for maintaining the structures. Beneficiaries, especially women and households headed by women, will be empowered when they secure land entitlements and gain greater security over natural resource management as a basis for future investments. MOWRAM’s greater capacity for IWRM, irrigation O&M, climate change adaptation, flood and drought forecasting, and dissemination of information to communities will help farmers to plan for and respond to natural disasters, buffering the shock and limiting crop losses.28

24 The three core subprojects and 24 potential subprojects, with a total area of 27,489 ha, were identified for possible

inclusion based on MOWRAM and PDWRAM priorities in each province. Subproject profiles were prepared for each scheme under the PPTA, and selection criteria for further screening are in the PAM (Appendix 2).

25 ADB. 2008 (updated in 2010). Phase A feasibility study. Consultant’s report. Manila (TA 4848-CAM). 26 Economic and Financial Analysis (Appendix 2). 27 Attached to the Project Administration Manual (Appendix 2).

28 Summary Poverty Reduction and Social Strategy (Appendix 2)

9

31. Gender. A gender action plan29 will support MOWRAM's strategy of promoting greater involvement of women and encouraging equality of opportunity in all aspects of water resources management, irrigation services, rehabilitation of irrigation systems, and agricultural production. ADB classifies the sector development program as “effective gender mainstreaming.”

32. Social safeguards: resettlement and indigenous peoples (categories B and C, respectively). Limited involuntary resettlement is foreseen under the sector development program. For the project loan, subproject selection criteria limit the inclusion of any activities that would cause significant involuntary resettlement. Rehabilitation of irrigation systems will not cause significant resettlement impacts because the works will be along existing rights of way and will mainly require, if any, the acquisition of minor amounts of land, relocation of persons living in areas to be flooded or inundated (within existing or former reservoir areas), and minor compensation for trees, crops or possibly small buildings. The government has prepared and endorsed a resettlement framework.30 Resettlement costs will be financed by the government.

33. Ethnic minorities, mainly Kouy, live and derive their livelihoods in upland areas of the watersheds. Field studies indicate that they are not likely to be affected or directly benefit from the rehabilitation of irrigation schemes, since they live outside the proposed subproject areas.

34. Social safeguards: environment (category B). An environmental assessment was conducted for the policy and project interventions. It indicates that the proposed policy interventions focusing on improved water resource management and institutional strengthening are likely to have major positive impacts and significantly contribute to water conservation and environmental protection. An initial environmental examination was conducted for a sample subproject to identify potential impacts, appropriate mitigation measures and monitoring mechanisms. It confirmed that the proposed investment component of the sector development program is not likely to cause significant adverse environmental impacts. Subprojects will follow environmental assessment procedures stipulated in the environmental assessment and review framework.31

35. Risks and mitigating measures. Considerable efforts were made during preparation of the sector development program to address the major risks associated with development of the water sector. Mitigating measures are included in the program and project design and indicated in the design and monitoring framework and the risk assessment and risk management plan.32

Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures Policy, institutional and legislative framework Policy actions agreed by government Institutional capacity Policy actions, capacity building activities Human resources capacity Tertiary and vocational education supported Procurement and governance Alignment with standard operating procedures

and good governance framework Climate change and natural resources management

Program design, activities and monitoring arrangements

Source: ADB assessments.

29 Gender Action Plan (Appendix 2). 30 Resettlement Framework (Appendix 2). 31 Environmental Assessment and Review Framework (Appendix 2). 32 Risk Assessment and Risk Management Plan (Appendix 2).

10

V. ASSURANCES

36. The government and MOWRAM have assured ADB that implementation of the program and the project shall conform to all applicable ADB policies, including those on anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. The government and MOWRAM have agreed with ADB on certain covenants for the program and project, which are set forth in the loan and financing agreements, respectively.

37. No withdrawal from the loan and grant accounts shall be made under the project financing agreement until the (a) PSC, (b) PMO, (c) the program and project support units, and (d) the PIUs located within the provinces of Kampong Thom, Banteay Meanchey, and Siem Reap, have been established by the government to the satisfaction of ADB.

VI. RECOMMENDATION

38. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve:

(i) the loan in various currencies equivalent to SDR13,207,000 to the Kingdom of Cambodia for the Water Resources Management Sector Development Program from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board;

(ii) the loan in various currencies equivalent to SDR6,603,000 to the Kingdom of Cambodia for the Water Resources Management Sector Development Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft financing agreement presented to the Board;

(iii) the grant not exceeding $2,800,000 to the Kingdom of Cambodia from ADB’s Special Funds resources for the Water Resources Management Sector Development Project, on terms and conditions that are substantially in accordance with those set forth in the draft financing agreement presented to the Board;

(iv) the administration by ADB of a loan not exceeding the equivalent of $12,000,000 to the Kingdom of Cambodia for the Water Resources Management Sector Development Project, to be provided by the OPEC Fund for International Development, in accordance with the proposal set out in paragraph 21; and

(v) the administration by ADB of (a) a portion of technical assistance not exceeding the equivalent of A$5,000,000 to be provided by the Government of Australia on a grant basis, and (b) a portion of technical assistance not exceeding the equivalent of €3,000,000 to be provided by the Nordic Development Fund on a grant basis, both to the Government of the Kingdom of Cambodia for Supporting Policy and Institutional Reforms and Capacity Development in the Water Sector.

Haruhiko Kuroda President

2 September 2010

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Design

Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact

Enhanced food security

Increased water security for food production, human livelihoods and ecosystem services

Increased resilience to climate change

By 2018 (from 2010 levels):

Number of households in project area with income lower than the poverty line reduced by 30%

Number of households in the project area with insufficient rice production for year-round consumption reduced by 40%

Average incomes in project area derived from agriculture increased by 30%

Government statistics

Provincial statistics

ADB project completion report

ADB sector evaluation studies

ADB country assistance and program evaluation

Project baseline data

Assumptions

Stable political and local security conditions

Damage from natural calamities is effectively managed and rehabilitated in a timely manner

Risks

Changing economic situation and production patterns

Adverse international terms of trade of agriculture products

Adverse global climate changes

Outcome

Improved management of water resources in Cambodia and more efficient and sustainable irrigation systems in the proposed project area

By 2013:

Policy, legal and institutional framework in place to operationalize the Law on Water Resources.

By 2018:

Wet season yield increased from 2010 level of 0.8 t/ha to 1.9 t/ha

Dry season yield increased from 2010 level of 1.7 t/ha to 3.6 t/ha

Cropping intensity increased from 2010 level of 100% to 160%

Government policy and legislation

National, provincial and district statistics

Sector development program progress reports

ADB project and program completion report

ADB sector evaluation studies

ADB country assistance and program evaluation

Project baseline data

Assumptions

Political support to proceed with and sustain water resources sector reforms

Major factors limiting agricultural production are weak water resources and irrigation management

Risks

Climate changes such as prolonged droughts, increased incidence of floods and typhoons

Outputs

A. Enhanced capacity of government to manage water resources

By 2013

Four subdecrees implementing the law on water resources issued by COM, and implementing regulations issued by MOWRAM

National water resources committee established, supported by an inter-ministerial secretariat

River basin committee established in Stung Sen river basin, with replication initiated in at least one other basin

Training plan adopted by ITC offering undergraduate and postgraduate courses in water resources management, with 100 students entering program annually by 2013 (of which 30% are women)

National, provincial and district statistics

Sector development program progress reports

ADB project completion report

ADB country and sector assistance and program evaluation

Project baseline data and benefit monitoring surveys

Assumptions

Political support to proceed with and implement water resources sector reform activities

MOWRAM's commitment to prepare and approve sub-decrees and regulations in a timely manner

Risks

High turnover of staff

Delayed decision-making and implementation of policy actions

12 Appendix 1

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

B. Enhanced capacity of MOWRAM to manage and deliver irrigation services

By 2013 (as indicated in policy matrix):

MOWRAM has assigned rights and responsibilities for irrigation infrastructure to FWUCs within the project area

MOWRAM has completed a review of its organizational structure, capacity, systems and staff resources, and demarcated responsibilities for water resource management and irrigation services

MOWRAM has prepared, adopted and implemented a comprehensive irrigation O&M plan.

MOWRAM has developed and delivered training courses through ITC on on-farm water management and irrigation practices, and maintenance of irrigation works (target: 45% of beneficiaries to be women)

Sector development program progress reports

Mission reviews

Financial records

Feedback from water users

Project baseline data and benefit monitoring surveys

Assumptions

MOWRAM's commitment to implement reforms

MOWRAM commitment to improve its management and planning of service delivery

Enabling environment to maintain an effective and sustainable mechanism of O&M cost recovery

Sound fiscal conditions to sustain O&M revenue and expenditure

Risks

High turnover of staff

C. Sustainable rehabilitation of existing small- and medium-scale irrigation schemes in the Tonle Sap basin

By 2015:

15,000 hectares of irrigation schemes rehabilitated within the provinces of Kampong Thom, Banteay Meanchey, and Siem Reap

FWUC management committees established in all rehabilitated schemes under the project (target: 30% of members to be women)

FWUC members and farmers have received vocational training in irrigation water management and system operations (target: 30% of beneficiaries to be women)

Sector development program progress reports

Mission reviews

Project baseline data and benefit monitoring surveys

Assumptions

Enabling environment to maintain an effective and sustainable mechanism of O&M cost recovery

Sound fiscal conditions to sustain O&M revenue and expenditure

Water users willing to pay for water service delivery

Activities A.1. Strengthening Strategy, Policy and Legal Framework for IWRMa A.1.2 The legal framework for Water Resources finalized and an implementation plan adopted and launched (SAW A.3.1). Tthe legal framework for FWUCs, river basin management, water allocation and water quality approved. Sub-decree(s) and prakas approved and implemented A.1.3 National Water Resources Plan developed and adopted A.2. Improving Coordination and Cooperation Framework for IWRM A.2.1 Ministerial level committee for coordination of national water resources management and an inter-ministerial secretariat established. Coordination and cooperation mechanisms between CNMC, TSA , MOWRAM and river basin forum and committees to clarified A.2.2 Strategic plan for Tonle Sap Authority (TSA) to be developed (SAW E.2.2). A.2.3 Pilot operation of river basin coordination forum or committee established in Stung Sen river basin and water management plan for pilot river basin prepared (SAW E.2.4); river basin coordination and management initiated in at least one other basin A.3 Strengthening capacity of MOWRAM for IWRM and Climate Change Adaptation A.3.1 Water resources assessed at a nationwide scale (SAW E 2.3) A.3.2 Improved water data management plan prepared, approved and implemented (SAW E.1.3) A.3.3 Improved plan for flood and drought forecasting system prepared, approved and implemented (SAW E.1.8) A.3.4 Coordination and cooperation between MOWRAM and MOE improved to mainstream adaptation to climate change in IWRM plans and actions and vice-versa A.4 Human Resources Capacity Development to Promote IWRM A.4.1 Technical skills development – tertiary level training through the Institut de Technologie du Cambodge (SAW C.1.4): training curriculum to be established by 2013; and annual intake of 100 students into program by 2015

Inputs Total program costs = $ 63.0 m

Inputs by Financier ADB—ADF resources $20 million loan (program) $10 million loan (project) $2.8 million grant (project) $1 million grant (TA-TASF) Cofinancing OFID $12 million loan (project) AusAID A$5 million grant (TA) NDF €3 million grant (TA) Government (in-kind, T/D) $6.3 million (project) $1.9 million (TA) Beneficiaries $0.8 million (O&M)

Appendix 1 13

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

B.1. Strengthening Policy, Planning and Legal Framework for Irrigation Management and Service Delivery B.1.1 Government prepares and adopts a plan to develop financially independent farmer user groups to operate and maintain irrigation schemes by 2013 (SAW A.3.2, A.3.3, A.3.4); Government reviews and clarifies legal status of irrigation works, assigns rights to FWUCs by 2013 B.2. Improve Organizational Structures and Administrative and Technical Capacity of MOWRAM, PDWRAMs and District Offices B.2.1. Prepare a plan, adopted by MOWRAM, to strengthen planning, budget and financial management systems in line with the public financial management reform program by 2013 (SAW B.2) B.2.2 Strengthen management information systems for administration and finance at national, provincial, district levels and consolidated at central level (SAW B.3) B.2.3. Strengthen MOWRAM’s internal links between line departments and examine options for reorganization of MOWRAM line departments so they can effectively deliver water resource management and irrigation service delivery B.2.4 Strengthen PDWRAMs, district offices, and links to PDAs (SAW, A.1.2) B.2.5 Create a gender mainstreaming unit in MOWRAM with appropriate resources and staffing; facilitate and advocate recruitment of women in MOWRAM (an assurance in the financing agreement), with a recruitment target of 20% women B.3. Strengthen MOWRAM's Ability to Manage, Operate and Maintain Irrigation Systems B.3.1 MOWRAM to prepare, adopt and implement a comprehensive irrigation O&M Plan (SAW E.3.6) B.3.2 MOWRAM to adopt and operationalize an asset management system to manage, operate and maintain irrigation systems (SAW E.1.1, E.1,2) B.3.3 MOWRAM to establish a sustainable funding mechanism for O&M (SAW E.3.7) B.4. Develop Human Resources Capacity to Manage, Operate and Maintain Irrigation Systems (Government and FWUCs) (SAW E.3.7) B.4.1 HRD plans developed for MOWRAM, PDWRAMs, district offices and FWUCs (SAW B.1.1) B.4.2 Technical skills development — vocational training courses developed and offered at MOWRAM's Technical Services Centre (SAW C1.2 and C1.3) B.4.3 Capacity of FWUCs and PDWRAMs enhanced through timely vocational and on-the-job training (an assurance in the financing agreement), with a target that at least 45% of female staff attend technical skill development C.1 Strengthening Provincial and District Level Administrative Capacity to Support Project Implementation: PDWRAMS and district offices strengthened in provinces and districts targeted for project activities by 2015 C.2 Rehabilitation and Improvement of Irrigation infrastructure: 15,000 hectares of existing small- and medium-scale irrigation systems rehabilitated in the Tonle Sap basin within the provinces of Kampong Thom, Banteay Meanchey, and Siem Reap by 2015 (SAW E.3.3,3.4) C.3 Enhancing Technical Skills, Livelihood Opportunities and Capacity for FWUCS and Farmers within Rehabilitated Irrigation Systems: Capacity building provided to FWUCs for irrigation O&M and financial management (target: one third of FWUCs’ management and board members and one third of recipients to be women); improved irrigation land management and titling (including awareness campaign of procedures and rights targeted to women); provision of agricultural extension services to irrigated farmers in the project area, as well as Northwest Irrigation Sector Project and Stung Chinit Projects, as required (to 2018) C.4 Manage Investment Project Effectively and Efficiently at National, Provincial, District and Project Levels: Project implemented on time and within budget (by 2015)

a Numbering of activities follows numbering in Policy Matrix. Policy actions A.1.1 and B.1.1 have been completed and no further action is needed. ADB = Asian Development Bank, CSIS = Cambodian irrigation scheme information system, COM = Council of Ministers, FWUC= Farmer water user community, HRD = human resources development, ITC = Institut de Technologie du Cambodge, IWRM = integrated water resources management, M&E = monitoring and evaluation, MOWRAM = Ministry of Water Resources and Meteorology, O&M = operation and maintenance, PDA = provincial department of agriculture, PDWRAM = provincial department of water resources and meteorology, RGC = Royal Government of Cambodia, SAW = Strategy on Agriculture and Water, T/D = taxes and duties. Source: Asian Development Bank estimates.

14 Appendix 2

LIST OF LINKED DOCUMENTS

http://www.adb.org/Documents/RRPs/?id=38558-02-3 1. Loan Agreement 2. Financing Agreement 3. Sector Assessment (Summary): Agriculture, Rural Development, and Natural Resources

Sector 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Economic and Financial Analysis 8. Country Economic Indicators 9. International Monetary Fund Assessment Letter 10. Summary Poverty Reduction and Social Strategy 11. Gender Action Plan 12. Environmental Assessment and Review Framework 13. Resettlement Framework 14. Risk Assessment and Risk Management Plan 15. List of Ineligible Items

Supplementary Documents 16. Program Actions and Associated Adjustment Costs 17. Technical Assistance: Supporting Policy and Institutional Reforms and Capacity

Development in the Water Sector

N~;..•;;.;..;~~.....,•.•.MEF/..........,;•..

H.E. Haruhiko Kuroda President Asian Development Bank Manila, Philippines

~:~~~£ZmG~fi'~~ tilli M1MBl t08UUll1l.JUf KINGDOM OF CAMBODIA

Nation Religion King

Phnom Penh, 29 June 2010

Subject: Development Policy Letter -Water Resources Management Sector Development Program

Your Excellency,

1. On behalf of the Royal Government of Cambodia (RGC), I am writing to request a loan from the Special Fund of the Asian Development Bank (ADB) for the Water Resources Management Sector Development Program (WRMSDP). The WRMSDP has been formulated through extensive discussions between ADB and the RGC, and key stakeholders in the water resources sector. We recognize that our national economic growth and development is increasing the complexity of managing the competing demands for water, and we need to ensure that the management of water resources is more effective. In addition, climate change is likely to increase the frequency and intensity of floods and droughts, and with it the need for improved water resources management, to which RGC is firmly committed.

2. This letter is intended to briefly describe the strategy of the RGC for social and economic development, and recent progress in poverty reduction and growth. It notes the importance of the agriculture sector in reducing poverty and improving food security, about 60% of the population depending directly on agriculture for their livelihood, and the critical importance of sustainable management of water resources.

3. The Rectangular Strategy for Growth. Employment, Equity and Efficiency. Phase 2 (RS2), approved in 2008, provides the framework for the country's socio-economic development. It is founded on the platforms of good governance, peace, political stability, social order, macroeconomic stability, partnership and economic integration. The four strategic "growth rectangles" are: enhancement of the agricultural sector, rehabilitation and construction of physical infrastructure, private sector development and employment generation, and capacity development and human resource development.

4. The updated National Strategic Development Plan (NSDP), 2009-2013, which was approved by the National Assembly on 31 May 2010, will serve to ope rationalize RS2 with the overall aim of poverty reduction, and act as the guiding document for implementation of RS2. The NSDP draws on the National Poverty Reduction Strategy, the National Population Policy and other sector policies and strategies aimed to ensure Cambodia's rapid progress towards achieving the Cambodia Millennium Development Goals and other socio-economic goals. The NSDP directs 62.4% of resources to rural areas, with increased attention to production activities including agriculture and rural development, and to health and education for human capital development.

5. Between 2004 and 2008, Cambodia's economic growth rate averaged an impressive 10% per year, owing to the maintenance of macroeconomic stability and sustained high growth of the garments, tourism, and construction sectors. The agricultural sector also contributed, but with a high degree of volatility, mostly reflecting uneven climactic conditions. This high rate of growth has resulted in a decline in the incidence of poverty, from 35% in 2004 to 30% in 2007 .

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The global economic crisis, which began in the second half of 2008 and came on top of the food and oil price shocks suffered in the earlier part of the year, has severely impacted three of the four key drivers of growth in 2009. More specifically, garment exports contracted from much lower external demand from the main U.S. market; construction slowed sharply from much lower construction-related FDI inflows, including from the Republic of Korea which was invested heavily in the sector; and tourism activity was very subdued. Agricultural output however, is estimated to have expanded by 5.4% and acted as the traditional safety net for retrenched garment, tourism, and construction workers.

6. To help mitigate the adverse impact of the crisis on growth and on the most vulnerable, the RGC took a series of measures, including an accommodating monetary policy, an expansionary fiscal policy, and an acceleration of some key structural reforms. In particular, the minimum reserve requirement imposed on commercial banks was reduced to 12% in February 2009, and the Government provided some temporary taxation relief to the tourism and garment industries; increased spending on rural infrastructure, including on irrigation; eliminated tariffs on fertilizers and imports of agricultural machinery; provided $18 million (0.2% of GDP) to rice millers to help them expand capacity and purchase rice for processing and export; and provided $10 million in funds for retraining laid-off garment workers. The RGC also took measures to facilitate transport and trade with neighboring countries.

7. Recognizing the importance of agriculture and water resources, a Government­Development Partner Technical Working Group for Agriculture and Water (TWGAW) was established in 2006 to develop a Strategy on Agriculture and Water (SAW), which was approved by the RGC in March 2007. The TWGAW identified and prioritized activities, policies and institutional reforms through a consultative process with a wide range of stakeholders. The Strategy represents a shared agenda of actions to improve effectiveness; it includes improved management of water resources following an integrated water resources management (IWRM) approach. Most development partner-supported activities in the sector have addressed policy and institutional reforms for agriculture related activities, to which the RGC remains firmly committed. I am now asking ADB to support improvements in critical water resources management through the WRMSDP.

8. The WRMSDP will support the RGC in addressing two areas we recognize as critical: (i) enhancing our capacity to manage water resources, and (ii) enhancing our capacity to deliver irrigation services.

9. The basis for water management in Cambodia is the Law on Water Resources Management of 2007, which states (Article 4) that water resources will be managed using an integrated water resource management approach (lWRM). The Law appoints the Ministry of Water Resources and Meteorology (I\IIOWRAM) as having the lead responsibility for water resources management in Cambodia, in consultation with other line ministries. The Cambodia National Mekong Committee (CNMC), reporting to the Minister for Water Resources, was set up to liaise between the RGC and the Mekong River Commission (MRC); it is responsible for linking water management in the Mekong region with the water resources of Cambodia. The Tonie Sap Authority (TSA) , chaired by the Minister for Water Resources, coordinates development activities in the Tonie sap basin, in close coordination with MOWRAM and CNMC.

10. Other ministries with important roles in water resources management include the Ministry of Environment (environmental flows, water quality and adaptation to climate change); the Ministry of Health; the Ministry of Industry Mines and Energy (hydropower development and urban water supply); and the Ministry of Rural Development (rural water supply). The National Committee for Disaster Management (NCDM) has an important link with water resources in its response role to droughts and floods. The activities of the Ministry of Agriculture, Forestry and Fisheries (MAFF) are closely linked to water resources management, both with respect to rain fed agriculture and watershed management, and with respect to inland fisheries. The Ministry of Public Works and Transport is responsible for inland water navigation, highways and waste water and drainage management.

·2­

11. The RGC recognizes however, that while coordination mechanisms exist for certain issues, there is no regular mechanism for broad inter-sectoral coordination of water issues at the national level, or at the river basin level. With increasing growth and national development, it will become more pressing for the RGC to take decisions and actions on critical areas such as: (i) the balance between competing economic activities of fisheries, irrigated agriculture, hydro-electric power generation, urban, industrial and rural water supply, and tourism development, (ii) the extent of development on tributary rivers and the balance of upstream and downstream benefits, (iii) the operation of major dams, and storage and diversion of water, and (iv) the management of water quality and maintenance of ecosystem services. With 86% of Cambodia falling within the Mekong River Basin, close cooperation and coordination, through the CNMC, is essential to ensure consistency between national and regional water resources management planning and management.

12. The RGC will thus review and strengthen existing inter-ministerial arrangements for coordination of national water resources management, proceeding either (a) to reformulate and elevate existing coordination structures or (b) to establish a new, high level inter-ministerial committee. This committee will be chaired at the highest level of RGC and include Ministers from relevant ministries as members, and supported by an inter-ministerial secretariat. This national water resources management committee will help determine national policy and decide matters of national significance relating to water.

13. To start the process, we plan to hold a national seminar to explore the mandate, modalities and operations of the proposed national water resources management committee, and then form inter-ministerial working groups to further develop and finalize this. WRMSDP will provide support for this and in preparing necessary sub-decrees and regulations, and in the formation and capacity development of the inter-ministerial secretariat.

14. One of the first activities of the national water resources management committee will be to assess water resources at a nationwide scale, and initiate the preparation of a National Water Resources Plan as called for in Article 9 of the Law on Water Resources Management. It will promote and mainstream integrated water resources management (IWRM), improve data management and flood and drought forecasting, and improve coordination on adaptation to climate change.

15. The RGC also intends to improve coordination at the river basin level. We recognize that water follows basin boundaries and not provincial or district boundaries, and thus should be managed accordingly, as recognized in the Law on Water Resources Management (Article 10). We also recognize that river basin management needs to involve all relevant stakeholders at this level, both governmental and civil SOCiety and private sector.

16. We also plan to strengthen MOWRAM's capacity for planning and operating at the river basin level and thus the RGC has agreed to establish a pilot activity in the Stung Sen River Basin, with the support of WRMSDP, to develop coordination mechanisms at the river basin level and good practices for river basin management to be applied across Cambodia. This pilot activity will build on existing provincial rural development council (PRDC) structures and the Organic Law, and include the development of a committee representing inter-provincial, inter­sectoral and multi-stakeholders representatives at the river basin level. The pilot activity will support programs in water resources assessment, planning and development. WRMSDP will help MOWRAM hold national consultations on the implementing Prakas for the Sub-decrees for the Law on Water Resources Management, develop guidelines and support the development of the Stung Sen committee (involving Kampong Thom and Preah Vihear Provinces), and support and develop capacity for river basin planning and management in the basin. This will be a precursor of development of river basin water management plans.

17. The Law on Water Resources Management establishes the legal framework for water resources management but necessary sub-decrees and implementing regulations have not yet

-3­

been finalized and approved. The need to complete the legislative framework is identified in the SAW and is a priority for MOWRAM. I am thus requesting that the WRMSDP also supports the continuing development of legislation and implementing regulations for the sub-decrees in water allocation and licensing, river basin management and farmer water user community (FWUC) establishment and water quality. Legislative aspects needed for FWUCs include: (i) ensuring that the FWUC legislation provides sufficient autonomy for farmers to undertake activities corporately, and (ii) assigning both responsibility and rights for the infrastructure to the farmer corporate body (FWUC). We plan to explore legal options to provide farmers with rights concerning the irrigation works for which they are responsible for managing. Such rights would divest the works from the full responsibility of the government to enhance the sense of local ownership and responsibility for operation and maintenance.

18. MOWRAM is also responsible for the management and delivery of irrigation services and we are thus also requesting assistance not just in strengthening MOWRAM's capabilities in water resources management at a national and river basin level, but also in service delivery. MOWRAM is responsible for the development of irrigation infrastructure (new works and rehabilitation of existing works), for the operation and maintenance of irrigation scheme works, and for supporting farmers in managing minor irrigation schemes and works. MOWRAM has the capacity to oversee and develop new investment projects (dams and irrigation works, including rehabilitation) with external funds and assistance. However, we plan to further strengthen MOW RAM's and provincial departments of water resources and meteorology (PDWRAM) capacity and resources for irrigation operations and water management, with a clearer demarcation of responsibilities between MOWRAM, PDWRAMs and FWUCs, and improved linkages with MAFF provincial department of agriculture staff. Staff qualifications in engineering for irrigation and drainage works operation and maintenance, and project management, need to be strengthened. We thus seek assistance in supporting improvements in administration, financial accounts and business processes in line with the Government's overall PFM reform program, and support for the extension of medium-term expenditure framework (MTEF) within MOW RAM.

19. We recognize also that Cambodia as a nation needs more engineers in specific fields relevant to water resources management and irrigation. MOWRAM faces many challenges in engaging and retaining appropriately qualified engineering staff, and requires an active approach to recruitment and placement of qualified engineers. The Institut de Technologie du Cambodge (lTC) has a Rural Engineering Department and MOWRAM has its own Technical Services Centre (TSC). We plan to strengthen the Rural Engineering Department of lTC, reviewing its current engineering courses and providing for specializations in water resource management, irrigation engineering, on-farm water management and hydrology. Training in irrigation operation and management will continue through the TSC and Department of Farmer Water User Communities for staff of MOW RAM, members of FWUCs and irrigators. This training will include on-farm water management and irrigation practices, and maintenance of major and minor irrigation works. These activities will be coordinated with MAFF extension services in agriculture.

20. We recognize that maintenance of irrigation infrastructure is essential. Many old schemes are being rehabilitated and many new schemes are being built, all of which require attention to ongoing maintenance to ensure sustainable operation over the long term. We plan to develop a national asset management inventory and plan for operation and management for irrigation works and other water works of MOWRAM, identify 10-20 year operation and management costs and performance indicators, and assign increased operating budgets for irrigation works maintenance in line with the asset management plan.

21. The operation of irrigation systems is very dependent on the capabilities and responsibilities of farmer organizations. A national program to strengthen the ability of farmers to manage minor irrigation works has been in progress since the promulgation of Circular No 1/1999 which provides for establishing FWUCs. To establish these FWUCs and other water

user groups requires considerable attention and a long-term program. As noted above, we plan to conduct an inventory of irrigation works and to determine MOWRAM's and/or water users' responsibility for operation and maintenance for each scheme. For works designated as water users' responsibility, we recognize that two types of support are needed, and thus we are requesting WRMSDP support for: (i) capacity development that includes the existing programs of FUWC development and training of farmers, but expanded to cover training in on-farm water management and operation and maintenance of irrigation works and (ii) assistance in developing legal mechanisms to enable farmers, through their elected FWUC, to cover the costs of operation and maintenance independently. with appropriate incentive mechanisms. Vocational training will be extended to FWUCs, and on-the-job training will be provided in pilot irrigation schemes. We also plan to establish a matching grants program for FWUCs to access funds for works and capacity building for irrigation scheme management and maintenance.

22. We are also seeking assistance under WRMSDP to rehabilitate and further develop approximately 15,000 hectares of existing small- and medium-scale irrigation schemes in the Tonie Sap basin within the provinces of Kampong Thom, Banteay Meanchey, and Siem Reap. The rehabilitation designs will build on lessons learned during the identification and selection process developed under the ongoing ADB- and Agence Fram;aise de Developpment-financed Northwest Irrigation Sector Project.

23. We believe that successful implementation of the WRMSDP will help in making these rehabilitation investments effective and worthwhile. Success will also help create a sound basis for future development and investment in the water and agriculture sectors.

Please accept, Your Excellency, the assurance of our highest consideration.~

KeatChhon Deputy Prime Minister Minister of Economy and Finance

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20 A

ppendix 4

POLICY MATRIX Output (A): Enhanced Capacity of the Government to Manage Water Resources Policy Initiative/Objective Measures Prior to the First Tranche Release1 Measures Prior to the Second Tranche Release2 A.1. Strengthening Strategy, Policy and Legal Framework for IWRM A.1.1. Strengthen overall strategy and policy framework

(i) The Government will have launched the Rectangular Strategy on Growth, Employment, Equity and Efficiency (Phase 2), which includes agriculture development and water resources management among its priorities. (ii) The Government will have adopted the National Strategic Development Plan (NSDP) update (2009-2013) with water sector investment included as key focus. (iii) The Government through the Ministers of MOWRAM and MAFF will have endorsed the Program of the Strategy on Agriculture and Water (SAW) for the period 2010-2013.

A.1.2. Strengthen Legal Framework for IWRM [The Strategy on Agriculture and Water (SAW) A.3.1] 3

The Government through MOWRAM will have submitted the sub-decree on the establishment of the farmer water user communities (FWUCs) to the Council of Ministers (COM) for endorsement.

The Government will have issued either sub-decrees or Prakas on: (a) the procedures for the establishment of FWUCs; (b) river basin management, (c) water allocation and licensing; and (d) water quality.

A.1.3. Implement National Water Resources Policy

The Government through the ministerial level committee for coordination of water resources management shall have (a) commissioned a review of the natural water resources plan (2009-2013); and (b) issued recommendation for the preparation of the national water resources plan (2014 – 2018).

A.2 Improving Coordination and Cooperation Framework for IWRM A.2.1 Improve National Coordination and Collaboration on Water Resources Management

The Government through the MOWRAM will have (a) established an inter-ministerial working group on the development of the ministerial level committee for national coordination of water

(i) The Government will have established and operationalized a ministerial level committee for national coordination of water resources management to be chaired at the highest level of

1 The Water Resources Management Sector Development Program was initiated in May 2008. 2 The references highlighted in bold refer to “core” actions required for the release of the tranches of the Program loan. The other actions are included as non-core

actions which are nevertheless important and included to monitor progress of the program. 3 The numeric references to [SAW x.xx] indicate the item within the harmonized program of the Strategy on Agriculture and Water (SAW).

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Policy Initiative/Objective Measures Prior to the First Tranche Release1 Measures Prior to the Second Tranche Release2 resources management, and (b) ensured that the working group has held its first meeting.

Government and include relevant Ministers as members, and supported by an inter-ministerial secretariat. (ii) The Government will have created an inter-ministerial secretariat for the ministerial level committee. (iii) The Government through the ministerial level committee for national coordination of water resources management will have issued a policy that will clarify the coordination and cooperation mechanisms between CNMC, TSA, MOWRAM and river basin committees.

A.2.2 Support Tonle Sap Basin Coordination and Collaboration [SAW E.2.2]

The Government will have issued a Royal Decree to (a) establish the Tonle Sap Authority (TSA), (b) appoint the senior Management of the TSA, and (c) define the organizational structure of the TSA.

The Government through TSA will have approved and begun implementation of the Tonle Sap Strategic Plan.

A.2.3 Pilot Test Mechanisms for River Basin Level Coordination and Collaboration [SAW E.2.4]

(i) The Government through MOWRAM will have commenced the pilot activity in the Stung Sen River Basin and one other basin. (ii) The Government through MOWRAM will have established the Stung Sen River Basin committee.

A.3 Strengthening MOWRAM's Technical Capacity to Promote IWRM and Climate Change Adaptation A.3.1 Water resources are assessed at a nationwide scale [SAW E.2.3]

The Government through MOWRAM will have prepared and approved a national water resources profile.

A.3.2 Water data management is improved [SAW E.1.3]

The Government through MOWRAM will have prepared and begun implementation of the improved water data management plan.

A.3.3 Improve flood and drought forecasting [SAW E.1.8]

The Government through MOWRAM will have developed and adopted, in consultation with NCDM, CNMC, and other relevant stakeholders, plans for improved flood and drought forecasting taking into account climate change.

A.3.4 Mainstream IWRM and adaptation to climate change

The Government through the ministerial level committee for national coordination of water resources management will have established

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Policy Initiative/Objective Measures Prior to the First Tranche Release1 Measures Prior to the Second Tranche Release2 procedures to mainstream (a) IWRM in the national water resources plan; (b) climate change adaptation in IWRM plans and actions, and (c) IWRM in climate change adaptation plans and actions.

A.4. Human Resources Capacity Development to Promote IWRM A.4.1 Technical Skills Development (tertiary) at Institut de Technologie du Cambodge (ITC) [SAW C.1.4]

The Government through MOWRAM and ITC will have appointed the working group to develop a time-bound plan for ITC to deliver bachelor and post-graduate engineering degree courses in water resources management.

The Government through MEF will have commenced implementation of the plan developed by ITC and MOWRAM for effective delivery of bachelor and post-graduate engineering degree courses in water resources management.

Output (B): Enhanced Capacity of MOWRAM to Manage and Deliver Irrigation Services Policy Initiative/Objective Measures Prior to the First Tranche Release Measures Prior to the Second Tranche Release B.1. Strengthening Policy, Planning and Legal Framework for Irrigation Management and Service Delivery B.1.1 Legal status of irrigation works - improve security of water users (farmers) access to irrigation scheme assets in the long term through some form of ownership or community stewardship [SAW A.3.2 – A.3.4]

The Government through MOWRAM will have (a) adopted guidelines for division of asset responsibility between the government and water users, and (b) assigned appropriate responsibilities and rights for irrigation infrastructure to respective FWUCs within the WRMSDP Project area.

B.2. Improve Organizational Structures and Administrative and Technical Capacity of MOWRAM, PDWRAMs and District Offices B.2.1 Improve the planning, budget and financial management processes, in line with the PFM reform program. [SAW B.2]

The Government through MOWRAM will have (a) aligned its planning, budget and financial management systems with the PFM for rural development program (PFMRD), (b) extended the Strategic Budget Planning (SBP) Framework in all its departments, and trained staff in BSP process, and (c) aligned its budgets with the government Chart of Accounts in accordance with the Ministerial Action Plan under PFMRD.

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Policy Initiative/Objective Measures Prior to the First Tranche Release Measures Prior to the Second Tranche Release B.2.2 Strengthen management information systems (MIS) for administration and finance at national, provincial, district levels and consolidated at central level [SAW B.3]

The Government through MOWRAM and PDWRAMs will have reviewed MIS for administration and finance and have completed a time-related development plan.

B.2.3. Strengthen MOWRAM’s internal linkages between line departments

The Government through MOWRAM will have appointed a working group to provide guidance on the strengthening of MOWRAM line departments.4

The Government through MOWRAM will have (a) completed the review of the organizational structure, capacity, systems and staff resources of MOWRAM, and (b) defined the appropriate demarcation of responsibilities within MOWRAM for water resources management and irrigation service delivery.

B.2.4 Strengthen PDWRAMs, District Offices, and linkages to PDAs [SAW A.1.2]

The Government through MOWRAM and MAFF will have (a) completed the review of PDWRAM capacity, systems and staff resources and defined the demarcation of responsibilities for operation and maintenance of irrigation infrastructure between MOWRAM and PDWRAM, and (b) completed the review of roles of District Agricultural Offices in irrigation and water resource management.

B.3. Strengthen MOWRAM's Ability to Manage, Operate and Maintain Irrigation Systems B.3.1 Strengthen MOWRAM's O&M planning processes. [SAW E.3.6]

The Government through MOWRAM will have prepared, adopted and implemented a comprehensive irrigation O&M Plan.

B.3.2 adoption of an asset management system to manage, operate and maintain irrigation systems [SAW E.1.1, E.1,2]

The Government through MOWRAM will have established the Cambodian Irrigation Scheme Information System (CISIS) as an asset management system.

The Government through MOWRAM will have operationalized the CISIS for asset management and maintenance planning and developed appropriate audit controls.

B.3.3 Sustainable Funding Mechanisms for O&M [SAW E.3.7]

The Government through MOWRAM will have (a) assigned FWUCs with the responsibility to collect water fees in accordance with the prevailing regulations on FWUCs, and (b) refined the management of the irrigation maintenance fund.

B.4. Develop Human Resources Capacity to Manage, Operate and Maintain Irrigation Systems (Government and FWUCs) [SAW E.3.7] B.4.1 Human resources development (HRD) planning for MOWRAM, PDWRAMs, District offices and FWUCs [SAW B.1.1]

The Government through MOWRAM will have appointed a working group to develop a training needs assessment (TNA) and prepare a human resources development plan.

The Government through MOWRAM will have initiated implementation of the agreed recommendations of its training needs assessment and HRD training plan.

4 The working group established herein will be the same working group to be established under the first tranche action for Policy Initiative/Objective B.4.1.

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Policy Initiative/Objective Measures Prior to the First Tranche Release Measures Prior to the Second Tranche Release B.4.2 Technical skills development (vocational training) – [SAW C.1.2 and C.1.3]

. The Government through MOWRAM will have (a) developed and delivered training courses through TSC to include on-farm water management and irrigation practices, and maintenance of major and minor irrigation works, and (b) harmonized the training curriculum between the FWUC Department and TSC.

CISIS = Cambodian Irrigation Scheme Information System, CNMC = Cambodia National Mekong Committee, COM = Council of Ministers, FWUC = farmer water user community, HRD = human resources development, ITC = Institut de Technologie du Cambodge, IWRM = integrated water resources management, MAFF = Ministry of Agriculture, Forestry and Fisheries, MOE = Ministry of the Environment, MOWRAM = Ministry of Water Resources and Meteorology, MTEF = Medium Term Expenditure Framework, NCDM = National Committee for Disaster Management, NSDP = National Strategic Development Plan, O&M = operation and maintenance, PDA = Provincial Department of Agriculture, PDWRAM = Provincial Department of Water Resources and Meteorology, PFM = Public Financial Management, SAW = Strategy on Agriculture and Water, SBP = Strategic Budget Planning Framework, SOP = Standard Operating Procedures for Externally Financed Projects/Programs in Cambodia, TSA = Tonle Sap Authority, TSC = Technical Services Centre of MOWRAM, TWGAW = Technical Working Group on Agriculture and Water, UNFCCC = United Nations Framework Convention on Climate Change.