VZCZCXRO6472
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0679/01 1360709
ZNR UUUUU ZZH
O 160709Z MAY 07
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8430
INFO RUCNASE/ASEAN MEMBER COLLECTIVE

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 
--------------------------------------------- ------- 
 
PHNOM PENH 00000679  002 OF 003 
 
 
 
¶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