OUR ANTI-CORRUPTION STRATEGY AND THE MCC: CAN WE

UNCLAS SECTION 01 OF 03 PHNOM PENH 000679

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR D, P, EB AND EAP/MLS
DEPARTMENT PASS USAID/ANE

E.O. 12958: N/A
TAGS: ECON PHUM EAID CB
SUBJECT: OUR ANTI-CORRUPTION STRATEGY AND THE MCC: CAN WE
HELP PREVENT CAMBODIA FROM BECOMING THE NIGERIA OF S.E.
ASIA?



1. (U) This message contains an action request. See
paragraph 11.


2. (SBU) Summary. Corruption in Cambodia is systemic and
pervasive, and one of the country's key challenges to
surmount if its economic profile is to continue to grow in a
positive manner. Transparency International ranked Cambodia
151 out of 163 countries on its corruption scale in 2006,
placing Cambodia behind its other S.E. Asian neighbors save
for Burma. The discovery of extractable resources, not only
oil and gas, but gold, bauxite and other minerals presents an
opportunity to create a management regime that is transparent
and assist the Cambodian people to a better life -- but only
if we and other donors can press the Cambodian government
(RGC) to take ownership of the anti-corruption issue. The
Mission has a multi-dimensional strategy for fighting
corruption and our technical assistance has brought the draft
anti-corruption law closer into line with international
standards, forged a coalition of NGOs involved in the issue,
and trained journalists in investigative journalism. In the
second phase (2007-2010),we will seek ways to support policy
and regulatory reform to prevent the "oil curse," instituting
measures to ensure greater transparency of information. In
order to convince the Cambodian leadership that it is in
their interest to eliminate graft, we want to demonstrate
that there will be rewards if they adopt reform measures.
The Millennium Challenge Corporation (MCC) is one possible
carrot that would appeal to reform-minded RGC leaders and
those seeking stronger ties with the United States; the
Ambassador strongly supports an MCC visit to Cambodia to
brief senior RGC leaders on the MCC's threshold program. End
Summary.

The Nature of Corruption in Cambodia
--------------


3. (U) Corruption in Cambodia is systemic and pervasive.
Every Cambodian and most foreigners have to deal with it on a
daily basis and every person who is a part of the
political/economic system cannot escape participating in
corruption. Participation ranges from the student paying his
teacher for lessons and sometimes to pass a course to paying
off policemen on the street for real or imagined traffic
offenses, paying the fire department to put out a fire, to
paying a judge for a favorable legal verdict. Private
businesses are required to pay unofficial fees often related
to "inspections" of the businesses by various government
ministries and agencies, which are usually simple pretexts
for demanding money. A USAID-commissioned survey conducted
by the Economic Institute of Cambodia (EIC) in 2006 found
that in the previous year, enterprises that were surveyed
paid about 2.8 percent of their annual turnover in
"unofficial fees", or a total of approximately $330 million
paid by firms in the private sector. This amounted to about
six percent of Cambodia's GDP in 2005. The high rate of
unofficial fees paid to government officials also affected
tax collection severely. The EIC study determined that the
Tax Department collected only about 25% of potential taxes in
2005, representing a loss of about $400 million to the
national budget.


4. (U) Corruption is aided by the lack of transparency in
government. For example, many ministries are currently in
the process of selling the valuable government land in the
middle of Phnom Penh and moving to cheaper sites on the
outskirts of the city. However, there is little public
discussion of these moves, no public tender, nor is there
publicly available information on the profits being made or
the destination of those profits. This lack of transparency
has contributed to the damage that Cambodia's reputation has
suffered as a result of corruption. Transparency
International ranked Cambodia 151 out of 163 countries on its
2006 scale of the prevalence of corruption in the perceptions
of business people and analysts. Ranking Cambodia's
competitiveness, the World Economic Forum placed Cambodia at
112 of 117 countries in its 2005 survey. Eighty percent of
respondents cited corruption as the principal reason for low
ranking Cambodia. The prevalence of corruption and
especially its effect on the legal system has without a doubt
inhibited foreign investment in Cambodia. U.S. investment,
despite the government's adoption of measures to attract
investors, has lagged behind other countries. The U.S. was
the tenth largest investor in Cambodia in 2005 (about $5
million) and the sixth largest in 2006 ($62 million).

Extractive Industries: More Resources for Corruption
-------------- --------------

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5. (U) Cambodia's relatively low GDP ($6.5 billion in 2006)
has restricted the scale of corruption somewhat in past
years. However, its growing economy (averaging over 10% in
GDP growth since 2004) and the recent discovery of
extractable resources will increase Cambodia's revenues by at
least one order of magnitude in coming years. Chevron is
likely to begin pumping oil and gas in about 2010 or 2011,
while foreign mining firms will begin extracting gold and
bauxite from the ground in roughly the same time frame. Not
only are there other blocks of potential oil and gas in the
Gulf of Thailand, there are other mining projects, including
coal, iron and gems, that could develop into large-scale
enterprises. The challenge will be to find ways to channel
the revenues into programs that help the Cambodian people and
reduce poverty. A starting point would be Cambodia's signing
on to the Extractive Industries Transparency Initiative.
Donors are working to reform other areas of government,
including financial management, so that the RGC will be
better able to handle the new revenue.

The Challenges as We See Them
--------------


6. (U) Recognizing that eliminating the culture of
corruption is a task that will span a generation, we have
focused on a limited number of key objectives. Despite
occasional pro forma declarations, the RGC has clearly
demonstrated that it lacks the political will to attack
corruption. Therefore, a key task will be getting the RGC to
take ownership of the issue in a serious way. Related to
this is obtaining greater transparency in governmental
decision-making. The other major focus must be on creating
an atmosphere in which systemic corruption is no longer
tolerated. This requires increasing public awareness of what
constitutes corruption, the cost of corruption, and increased
public dialogue on the costs and damage that corruption
inflicts on Cambodian society. (A recent poll indicated that
83% of Cambodians believe that they lose less than $1 a month
to corruption.)

What We Have Been Doing
--------------


7. (SBU) We have raised our concerns about corruption in
general and the "oil curse" in particular at all levels of
government, including with the PM, that Cambodia could well
become a Nigeria-like country if it does not now begin to
implement the needed mechanisms and reforms. The PM has
begun to publicly warn against Cambodia becoming "the next
Nigeria," but has taken no practical steps to ensure this
does not occur.


8. (U) In the first phase (2005-2006) of our
anti-corruption program, we provided technical assistance to
bring the draft anti-corruption law in line with
international standards. From a starting point in which
virtually no one in civil society dared to publicly address
corruption issues, we have helped to create a nationwide
coalition of civil society organizations (CSOs) involved in
anti-corruption efforts. The Embassy has also worked to
build donor consensus on maintaining corruption as a high
profile issue that the RGC must address. We launched the
"Clean Hand" campaign to raise awareness; 75% of Cambodians
now recognize the brand as an anti-corruption symbol. We
trained 12 journalists in investigative journalism so that
they would be capable of reporting on corruption in an
objective manner. They have published 21 exposes of
corruption and are mentoring students at the University of
Phnom Penh. We encouraged Transparency International to
include Cambodia in its rankings; prior to 2005 Cambodia was
not listed.

Anti-Corruption Second Phase (2007-2010)
--------------


9. (U) The second phase will continue multi-pronged tactics
to address corruption. A strong focus will remain on getting
the RGC to accept responsibility for the issue. Efforts will
continue to inform the public about the cost of corruption
and to obtain passage of the anti-corruption law. The
Mission will seek ways to support policy and regulatory
reform to prevent the oil curse. With the end of
restrictions on direct assistance to the government, this
will include strengthening of ministries, such as Health and
Education, that should be recipients of oil revenue so that
they will be better prepared to manage the inflow of

PHNOM PENH 00000679 003 OF 003


increased revenue. We are launching a strong effort to
engage the private sector, local business and multi-national
corporations. We will begin working to reduce corruption on
a sector-by-sector basis, starting with the easiest sector in
order to create a model for other sectors.

Rewards for Good Behavior
--------------


10. (SBU) One of the key challenges is to convince the
Cambodian leadership, which profits most from corruption,
that it is in their long-term interest to eliminate graft.
The argument can be made that increased foreign investment as
a result of a more hospitable environment will create a
larger pie that will raise the incomes of all Cambodians and
that this would burnish Cambodia's international reputation.
It would encourage Cambodians to this way of thinking if they
were aware that there could be other rewards for Cambodia if
it cleaned house. Specifically, it would be helpful if
Cambodian leaders were aware of the Millennium Challenge
Corporation's Threshold Program, which Cambodia might qualify
for in a few years. We have raised the issue broadly with
the Prime Minister, and in greater detail with the Deputy PM,
as well as with one of the PM's key economic advisors, but
the Cambodian leadership has not followed up. While the
Cambodian Embassy in Washington might be utilized to gather
information, the Cambodian Ambassador to the U.S. is not a
key political player whose views are accorded great weight.
What is needed is a visit by representatives of the
Millennium Challenge Corporation to brief senior Cambodian
leaders on the Threshold Program. The RGC places great value
on Washington visitors and we believe that the reform-minded
members of the Prime Minister's economic team would consider
an MCC visit a boost to their own efforts in public sector
financial reform.


11. (U) ACTION REQUEST: Post requests that the Department
urge the Millennium Challenge Corporation (MCC) to send
representatives of the corporation to Cambodia in order to
introduce the Threshold Program to senior Cambodian
officials. This visit could be concurrent with a visit to
the region by MCC for other purposes. At the same time, we
will also encourage senior Ministry of Economics and Finance
(MEF) officials to consider a Washington visit that might
include meetings with the MCC. From the point of view of RGC
optics, however, an MCC visit to Cambodia would carry far
greater weight. The stakes for Cambodia and for donor
countries are enormous. If Cambodia fails to prepare
properly for its oil windfall, the already disturbing chasm
between haves and have-nots will profoundly deepen. This in
turn will likely lead to greater social and political
instability. And we, like other donor states, will continue
to expend hundreds of millions of dollars annually to provide
basic services to Cambodia's poor, while hundreds of millions
of oil revenue dollars are siphoned off by powerful elites.
MUSSOMELI