58840 REV Towards A Private Sector -Led Growth Strategy for Cambodia Volume 1: Value Chain Analysis Prepared for Prepared by The World Bank Global Development Solutions, LLC Private Sector Development Yasuo Konishi East Asia and Pacific Region June 2003 Towards A Private Sector -Led Growth Strategy for Cambodia Global Development Solutions, LLC 11921 Freedom Drive Suite 550 Reston, VA.20190 U.S.A. Tel +1 703 904 4373 Fax +1 703 435 -1824 E-mail mail@GDS -LLC.COM The World Bank, Private Sector Development, East Asia and Pacific Region 2 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Content Executive S ummary 4 1. Project objectives 4 2. Issues and findings 5 3. Opportunity costs associated with market and administrative distortions 7 I. Introduction 13 1. Market structure 14 II. Channel Mapping Methodology 16 1. Creating a product value chain 16 2. Value chain analysis for Cambodia 17 III. Value Chain Analysis 18 Rice: Potential for Rural Development Linkage 18 1. Production 21 2. Post-Harvest 23 3. Benchmarking the competitiveness of Cambodian rice production 26 4. Transport/shipping/customs clearance charges 26 5. Benchmarking post-harvest costs for rice in Cambodia 28 Cotton, Fiber and Textile Production: Potential Integration With the Garment Industry 32 1. Cotton value chain 32 2. Textile value chain 38 3. Transport and customs clearance charges 34 Tobacco: Cambodia's First Integrated Supply Chain 48 1. Snapshot of a modern tobacco farm in Cambodia 48 2. A brief introduction to cigarette production in Cambodia 54 3. Value chain analysis of administrative and transport costs associated with the production and export of tobacco in Cambodia 55 Garments: Core Historical Growth Industry 60 1. Reliance on the GSP quota system 60 2. Crucial competitiveness issues 61 3. Benchmarking Cambodia's transport and import clearance charges 62 4. Undocumented administrative costs 63 5. Administrative interventions during production 64 6. Benchmarking Cambodia's transport and export clearance charges 67 7. Summary of administrative costs associated with the garment industry 70 Motorcycle Industry: Potential for Integrated Regional Production 73 1. Market challenges 73 2. Administrative and legal barriers 74 3. Local production and assembly potential 78 Canned Milk: Local Investments Dampened by High Inflow of Contraband Products 80 1. Transporting canned milk 80 2. Illegal imports and customs 81 IV. Sources of Administrative Distortions 86 V. Recommendations and Action Plan The World Bank, Private Sector Development, East Asia and Pacific Region 3 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Executive Summary 1. Project Objectives Poverty reduction is a central theme and objective of the Government in Cambodia. In this context, economic growth and competitiveness is synonymous to poverty reduction and rural employment. While it is widely known that a variety of administrative and market-based barriers impede the development of the private sector in Cambodia, very little baseline data currently exists, particularly regarding the performance of the private sector, to help guide the Government in making sound policy decisions. The objective of this project is to identify specific administrative and market- based barriers to growth, quantify the impact of these barriers on the competitiveness of companies operating in Cambodia, and to shed light on possible policy options to help remove distortions that impede the development of the economy. Private sector led economic growth in Cambodia faces a number of formidable challenges. These challenges can be broadly categorized into four issue areas: · Strengthening the business environment and improving good governance; · Deepening the supply chain; · Improving the competitiveness of infrastructure services; and · Improving firm level productivity. To address these issues, the Royal Cambodian Government is developing a private sector growth strategy, anchored in the process of accession to the World Trade Organization. WTO accession will result in substantially improved market access for Cambodian producers; yet it is clear to the RGC that opportunities afforded by WTO will not result in growth of productive employment unless business environment constraints are removed and market-supporting institutions built. The RGC has asked the World Bank Group, including the World Bank, Mekong Project Development Facility and International Finance Corporation, to support the development of this strategy, and the Bank has agreed to provide analytical inputs to the strategy in three volumes: (1) a Value Chain analysis; (2) an Investment Climate Assessment based on a survey of 502 firms, also incorporating special focus on smaller and rural enterprises; and (3) support to improve the regulatory and institutional arrangements for private provision of public services. The following is volume 1, the Value Chain Analysis. In volume 1, channel mapping exercise was undertaken to develop a value-chain analysis that help quantify both production and administrative costs associated with operating a business in Cambodia. The use of this technique resulted in a detailed breakdown of both administrative and production costs which were then selectively benchmarked against costs incurred in similar enterprises operating in other countries. The administrative barriers identified through this process were then matched against specific laws and regulations to help focus the attention of the Government in introducing policy reform initiatives. The exercise yielded detailed information that point to the need for substantial policy reform, investments in support services, and strengthening public-private partnership. Key issues impeding competitiveness among enterprises operating in Cambodia include: · Lack of enforcement of existing regulations; · Poor infrastructure and support services; The World Bank, Private Sector Development, East Asia and Pacific Region 4 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia · High official and unofficial public sector administrative costs; · Limited availability and high cost of inputs including energy and finance; · Weak legal framework, particularly to safeguard rural businesses; · Poor or non-existent public services; · Quasi-monopolies and high public sector administrative costs discourage natural evolution of forward and backward market linkages; · Closed agreements between public and private discourage investments in support services; and · Poor labour skills. These distortions have resulted in high operating costs, and a volatile and unpredictable market that force enterprises in Cambodia to take short-term views on their business strategy. Such behaviour has hindered the competitive potential of medium and large enterprises. This also has translated to limiting opportunities for small and rural businesses, including farmers, from being integrated into the supply chain of medium and large companies with access to domestic and export markets. Equally importantly, however, is that these distortions have discouraged new investments from taking place to expand existing operations, as well as to dampen investments in the development of support industries. 2. Issues/Findings A channel mapping exercises was conducted for six distinct products/commodities. The selection of products and commodities, and the criteria for their selection are as follows: Rice: Potential for rural development linkage Garments: Exhibited historical growth and is currently the leading export industry Cotton/Textiles : Possible integration with the garment industry Motorcycles : Potential for integrated regional production Tobacco: Cambodia's first integrated supply chain Canned milk: An example of the impact of smuggling on foreign direct investment The channel mapping exercise, is companied by a custom clearance `roadmap' which shows the complexity of the existing custom clearance procedure. Furthermore, taking into account the focus placed on determining the impact of high administrative costs associated with operating in Cambodia, interviews were conducted to derive at an itemized list of undocumented fees imposed on enterprises operating in Cambodia according to ministries and activities. The channel mapping exercise, corresponding customs clearance maps, and an itemized list of undocumented fees provide hard statistical evidence which points to the need for a range of government reforms. In addition, the following governance and market constraints were identified (Table 1). The World Bank, Private Sector Development, East Asia and Pacific Region 5 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 1 Principal Constraints to Private Sector Growth: Examples from Selected Commoditie s Commodities Governance Issues Market Constraints Rice · Lack of regulatory discipline · High fuel costs resulting in forgone public sector · High electricity costs revenue from illegal traded paddy · High cost of capital · High customs clearance charges to · Low per hectare yield due to poor import fertilizer and export rice quality fertilizer sold by local · Complex customs clearance traders procedures · Lack of reliability and trust in the · Strong incentive to remain informal local bank system to avoid regulatory burden · Lack of legal infrastructure to support commercial credit beyond microcredit · Dependence on informal moneylenders who "lend" in-kind (fertilizer, seeds) Garments · High import clearance charges for · High electricity costs input material · Lack of vertical integration · Disruptive and costly on-site inspections prior to packing and loading containers for shipment · High export documentation and customs clearance charges · High GSP quota fee for exports to the U.S. Motorcycles · Lack of regulatory discipline · High fuel costs resulting in large volume of · High electricity costs unregistered used and new motorcycles entering the market · Absence of differentiated tax categories for CKD, IKD and CBU · Absence of tax codes for selected input material required for production of motorcycle subcomponents · High import tax · Complex customs clearance procedures Textiles (including · High customs clearance charges · High cost of imported seeds ­ cotton production) · High overweight charges limited local capacity to produce · Complex customs clearance local seed varieties procedures · Poor quality fertilizer · High fuel costs · High electricity costs · High cost of importing chemicals · High shipping costs due to limited frequency and availability Tobacco · Complex customs clearance · Poor quality fertilizer procedures · High electricity costs · High customs clearance and permit · High fuel costs charges The World Bank, Private Sector Development, East Asia and Pacific Region 6 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia charges · High cost of capital · High social contributions assessed by · Limited reliability and trust in the provincial government officials local banking system · High import tax on ancillary products Canned Milk · Complex and slow customs clearance · Underdeveloped freight transfer procedures system ­ load and reloading · High customs clearance charges trucks at border check points · High SGS inspection charges · High fuel costs negotiated by the Ministry of Finance · Large volume of illegal imports from Thailand · Slow repayment of VAT · Disruptive and costly government inspections for contraband products · Poor road conditions 3. Opportunity Costs Associated with Market and Administrative Di stortions It is often argued that undocumented administrative charges are a necessary evil in a country where civil service salaries are not competitive with private sector wages. What is not apparent, however, is the high opportunity cost of an opaque system of governance on short and long term capital flow to both the public and private sector. To shed light on the magnitude of the opportunity cost of market and administrative distortions in Cambodia, data from the value chain analysis of the six products and commodities were used to make preliminary estimates of potential losses in GDP contribution and public sector revenue. The following table provides a summary of these findings (Table 2). Table 2 Potential Losses in Annual GDP Contribution and Publi c Sector Revenue GDP Contribution Public Sector Revenue Rice $69.7 million1 $4.8 million Tobacco $60 million2 $9 million Garments (trousers) $3.8 million* $0.73 million Motorcycle $62.5 million $10.4 million Canned Milk $30 million $3 million Cotton NA NA TOTAL $226 million $27.93 million * in the form of GSP quota As the above table suggests, formalizing business transactions could contribute substantially to short- term capital flow for the public sector that include administrative fees and tax revenue. And the medium and long-term impact on public sector revenue flows would include increased GDP contributions, and increase in investment flows, which in turn would feed back into additional short- term revenues. 1 Calculation based on 450,000 tons of paddy sold illegally. This figure can be as high as $731 million if calculations are based on the gap between production and milling capacity. 2 Calculation based on 2 billion illegal cigarettes sold at an average cost of $0.3/box of 20 cigarettes. The World Bank, Private Sector Development, East Asia and Pacific Region 7 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Transparency and openness in the market would in turn improve the competitiveness of private sector enterprises, while at the same time stimulate forward and backward market linkages that help to integrate small businesses and rural farmers into the domestic and export oriented supply chain. In theory, strengthening the business environment, stimulating development of the supply chain, improving infrastructure support services and introducing productivity gains would lead to both market and corporate competitiveness. But the current reality facing the Cambodia market will require a stronger and more transparent public-private partnerships, as well as a coordinated effort between the privates and public sector and the donor community to systematically tackle selected market and administrative distortions strategic to stimulating growth and competitiveness in the economy. The following matrices provides a summary of actions required to help reduce administrative barriers and market distortions to enhance the competitiveness of enterprises operating in Cambodia (Table 3 and 4). The World Bank, Private Sector Development, East Asia and Pacific Region 8 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 3 Reducing Administrative Barriers to Enhance Competitiveness For Enterprises Operating in Cambodia Principal Removal of Administrative Barriers Regional Tax Improving Utility and Fuel Objective Harmonization and Pricing Structure Introduction of New Codes Programme Customs and Port Clearance Tax Codes Tariffs Categories Support Streamlining Standardize & Transparency GSP quota fee Standardize & Introduce Regional Electricity & Activities administrative restructure & reduction restructure new tax harmonization fuel pricing procedures payment accountability payment codes of tax codes procedures procedures Principal Market Constraints Lack of X X X X regulatory discipline High X X X X X X X administrative fees Complex X X X X X X import & export procedures Costly rent X X X X X seeking activities Disruptive X X X X inspection regime Inadequate tax X X X X regime Uncompetitive X X X X X X X pricing structure for public service The World Bank, Private Sector Development, East Asia and Pacific Region 9 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Public-private X X X X X collusion Examples of Reduce the Approximately Improve Improve the Approximately Strengthen Help reduce Improve the Potential number of 50% of the transparency financial 50% of the the input costs of competitiveness Impact signatures customs and performance customs investment imported of export and stamps clearance fees accountability and clearance fees environment material to products by required, for charged are particularly in competitiveness charged are by strengthen the reducing local import/ unofficial, and areas such as of local unofficial, and introducing competitiveness electricity costs export these are border checks enterprise in the these are new tax of export where prices are clearance principally where, for garment principally categories products in the between 125 ­ which not cash example, the industry which cash for raw food and light 592% higher in only reduces transactions Government currently pay as transactions material industries Cambodia than the time during a period suffers as much as 60%of during a period such as in the region. required to when a much as $4.8 profits on GSP when a polymers process container is million in lost quota fees to container is required for clearance being moved. revenue in the being moved developing documents, illegal paddy Government the plastics but also trading. industry to opportunities support the for rent development seeking of light activities to industry occur. Currently, some enterprises must process as many as 37documents and 15 signatures and stamps per container. The World Bank, Private Sector Development, East Asia and Pacific Region 10 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 4 Actions for Enhancing Competitiveness and Expanding Markets for Enterprises Operating in Cambodia Principal Enhancing Competitiveness Market Expansion Objectives Programme Institution Capacity Building Financial and Administrative Market Linkages Categories Support Support Skills Technology & Channel Management Regional Strategy New Industry Out Grower Activities Development Know-How Financing Support Formulation Development Schemes Transfer Principal Market Constraints High cost of X X X X X capital Low X X X X productivity Lack of X X X X X X X reliable support services Lack of X X X X X market access Low quality X X X X X X awareness Examples of Improve farming Introduce new Expand Expand and Public-private Link with regional Expand out grower Potential techniques and tobacco curing opportunity to improve partnerships to sourcing strategy to and supplier support Impact skills to enhance barn technology invest in performance of support regional develop light programmes within labor productivity to improve wet- irrigation out grower sourcing manufacturing such the agricultural by 50% in par to-dry leaf systems and programmes by strategies in light as plastics, sector, food with China in the conversion ratio equipment to 20 - 30%, and manufacturing packaging, casting processing, and in rice sector from 8:1 to 6:1 improve per help SMEs/SSF and forging light manufacturing hectare yield by gain access to industries. industries 20 ­ 30% markets The World Bank, Private Sector Development, East Asia and Pacific Region 11 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia I Introduction and Market Structure Upon a request from the Minister of cost of production against local and regional Commerce, H.E. Cham Prasidh for an overall competitors producing similar products. support on PSD strategy, and guidance from Furthermore, the output from this exercise is the Secretary of State for Commerce, H.E. expected to enable the Government to Sok Siphana and CDC Secretary General Sok identify specific departments within each Chenda Sophea to develop terms of reference ministry, and sections of law responsible for for the value chain analysis, The World Bank administrative distortions that contribute to Group engaged in preparing a Country reducing the competitiveness of Cambodian Assistance Strategy for Cambodia to better industry. understand constraints facing the domestic private sector. However, the stock of current During the first mission undertaken in literature does not provide an adequate December 2002, a number of strategic understanding of the structure and constraints products/commodities were identified for the faced by the domestic private sector, including proposed channel mapping exercise. But rural entrepreneurs. In this regard, two following discussions with various local missions were fielded by the World Bank led institutions and government organizations, by Magdi Amin from the World Bank, and changes were introduced in the selection of supported by Yasuo Konishi, a supply chain products/commodities to be targeted for expert from Global Development Solutions, review. In addition, preliminary findings LLC (GDS), to conduct a channel mapping during the first mission in December exercise to develop a value chain analysis for suggested that substantial administrative several strategic products/commodities. barriers such as customs and port clearance, and government inspections were dampening The project used a technique based on a private sector growth. Consequently, the channel mapping model to perform value second mission undertaken between January chain analysis for a number of strategic and February 2003 placed emphasis on products. The channel mapping exercise was conducting channel mapping exercises for a instrumental in developing indicative data at wider range of products/commodities, which the product level to determine specific areas placed emphasis a mapping administrative where policy and administrative reforms procedures associated with customs and port would have the greatest impact on improving clearances, and the identification of an the competitiveness of Cambodian products. itemized list of unofficial administrative costs Secondly, production cost information to determine whether complex and costly resulting from the channel mapping exercise administrative procedures are a root cause will be used to determine whether Cambodian prohibiting private sector growth in enterprises can be integrated into a much Cambodia. larger regional supply chain. The second mission focused on conducting Using the channel mapping technique, the channel mapping exercises for six mission team measured the cost of products/commodities: rice, garments, administrative interventions and production motorcycles, textile (including the production costs along the entire value chain of selected of cotton, yarn and fabric), tobacco, and products. This technique help capture the canned milk. In addition to the channel cost of administrative distortion on mapping exercise, the mission team compiled competitiveness as well as to benchmark the a schematic of custom clearance procedures The World Bank, Private Sector Development, East Asia and Pacific Region 13 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia which corresponds to each channel map to value chain analysis will begin in Section II show the complexity of the existing customs with a brief description of the channel and port clearance procedures. Furthermore, mapping methodology, followed by a detailed taking into account the focus placed on value chain analysis for all six determining the impact of high administrative products/commodities in Section III. Based costs associated with operating in Cambodia, on the value chain analysis of six interviews were conducted to derive at an products/commodities, the report will itemized list of undocumented fees imposed highlight the principal constraints to on enterprises operating in Cambodia competitiveness and growth faced by according to ministries and activities. Cambodian enterprises. Section IV will review sources of administrative distortions by The channel mapping exercise, corresponding reviewing a number of current laws and customs clearance maps, and an itemized list regulations, and identify priority areas and of undocumented fees provide hard statistical recommended action to address critical evidence which points to the need for at least competitiveness and growth issues. two types of government reforms. First, high distortion costs associated with administrative 1. Market Structure procedures suggest that the government will need to work towards reducing both official Cambodia has a population of approximately and unofficial costs associated with operating 11.5 million people. People under 20 years of a business in Cambodia. Secondly, the age represent 55 percent of the overall complexity of the custom clearance process population, and the workforce is growing at a suggests that procedural streamlining is rate of 3.2% per annum with 228,000 required to help reduce the number of workers entering the market each year. These opportunities for undocumented fees to be figures suggests that the Government will be collected, as well as to bring down the cost of under tremendous pressure to help stimulate having to utilize the services of customs the creation of new jobs in the following two clearance agents to help maneuver through the decades. complex web of stamps and signatures required in the customs clearance process. Currently, 80 percent of the workforce is employed in agriculture, and the agricultural Having identified a number of administrative sector accounts for 36% of the country's constraints inhibiting the growth of the GDP. It is estimated that 84 percent of private sector, additional interviews were households live in rural areas where the conducted to scope out various means of average per capital income is estimated to be expanding production in the private sector, about $238. For most to these households, particularly to enhance the integration of rice production is a critical source of income small and medium enterprises (SMEs) and and nutrition. Similarly, rice dominates 90% small shareholder farmers (SSFs) into of cultivated land. domestic and export production. In this context, the team also documented a number While agriculture continues to be a driving of effective out-grower schemes currently force for the Cambodian economy, garments employed by a number of local enterprises. and tourism offer additional sources of Based on existing out-grower schemes, employment and income generating recommendations will be made on how to opportunities. Specifically, garments is the expand these schemes to help increase the leading manufacturing activity in Cambodia volume of production and participation by accounting for 12.4% of GDP and creating SMEs and SSFs, particularly in export employment opportunities for some 220,000 oriented market activities. workers. However, with WTO provisions coming into effect, diversifying into The report will begin with a brief overview of alternative sources of economic activities will the Cambodian market in Section I. The The World Bank, Private Sector Development, East Asia and Pacific Region 14 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia be crucial for keep rising unemployment investments in a country. Consequently, figures at bay. while promoting and targeting investments in strategic industries will be crucial to stimulate More broadly, 85% of the workforce is self market growth in Cambodia, equally employed, which suggests that the important will be policy and market based Cambodian market consists mostly of incentives to build and strengthen a market subsistence level, and micro enterprise structure represented by an organized supply activities. This indicates that the absence of a chain that integrates local SMEs into both the tiered supply chain market structure, a crucial local and regional market demand. factor for attracting and retaining foreign The World Bank, Private Sector Development, East Asia and Pacific Region 15 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia II Channel Mapping Methodology associate with a product. Although a value Channel mapping is a process of tracing a chain analysis is usually employed at a product product flow through an entire channel from level, output from such an analysis provides the point of product concept to the point of useful indicative data on production and consumption. This process highlights the operational costs associated with a specific underlying patterns of inputs, constraints and market. competitive advantage that a producer has. It also traces the path of all value adding and 1. Creating a Product Value Chain non-value adding activities associated with the production of a good and approximates costs An important point of departure for involved at each stage. conducting a value chain analysis is to understand how to breakdown and categorize When applied correctly, a channel mapping various activities associated with the methodology provides opportunities to production of a good to be analyzed. A value benchmark one producer against another, as chain analysis can be used for everything from well as benchmark production activities across agricultural commodities to complex regions and countries. Similarly, this engineered products. But the effectiveness of methodology is an ideal tool for measuring a value chain analysis is principally a function and quantifying the cost of administrative of whether an analysis is conducted using distortions that hinder competitiveness of categorization of value adding and non-value products and industries. Consequently, adding activities associated with a product. channel mapping can also be used as an effective tool to identify discrete areas for Creating a value chain requires products to be policy reform. defined and categorized according to various production processes and procedures that One of the principal ways in which a channel capture all value adding and non-value adding mapping methodology is applied is through a activities associated with a final product. value chain analysis. A value chain analysis Depending on the complexity of the product provides a detailed breakdown of each stage of and the level of detail required for an analysis, production, estimates the cost at each stage, as the number of categories along a value chain well as to calculate the relative significance of can range from as few as 5 and as many as 25 these costs to the overall value of an end or more categories of activities. For example, product. a value chain for rice can have as many as 18 process categories clustered under three major While more traditional methods of product value adding activities, namely rice and market analysis isolate operational costs production, post-harvest activities; and along various stages of production, a value transport/shipping/customs clearance. A chain analysis is a much more comprehensive sample of the process segmentation along a tool, particularly as it takes into account an rice value chain is presented below (Table 5). entire spectrum of activities and inputs The World Bank, Private Sector Development, East Asia and Pacific Region 16 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 5 An Example of a Value Chain for Rice Production Host-Harvest Transport/Shipping/Customs Clearance Land preparation Drying Transportation Seeds Milling Port charges Transplanting Interest Vessel loading Fertilizer/manure Packaging Customs clearance Agrochemicals Porter fees Shipping Harvesting Market fees Levies/service Each of the process segmentations represent important value adding and non-value adding activities relevant for tracing a product from its very beginning until it reaches the final consumer. 2. Value Chain Analysis for Cambodia Principal challenge for developing creditable industry and product level market analysis in Cambodia is the acute absence of reliable baseline data. As a result, much of the raw data required to analyze industries and markets must be compiled through individual in-depth firm level interviews. Consequently, the value chain analysis executed for this mission offers indicative data for various product groups and industries, but may require further work in the future to analysis a larger sample size of firms. To ensure that the value chain analysis is adjusted for any data uncharacteristic of the market, emphasis was placed on cross checking all firm level data against other similar enterprises to help ensure that data used for the value chain analysis mirrors realities facing local enterprises. A unique outcome of the value chain analysis for Cambodia was that firms faced substantial administrative interventions that cost companies time and money, but most of these interventions took place when inputs were imported and when final goods were exported, and very little administrative interventions were experienced during production. The World Bank, Private Sector Development, East Asia and Pacific Region 17 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia III Value Chain Analysis Rice: Potential For Rural Development Linkage particular example, rice farmers have a Official records suggest that Cambodia contract with a miller to sell 100% of exported approximately 60,000 tons of rice in production. In return, farmers are provided 2001. At the same time, however, it is with high quality seeds as well as on-farm estimated that unofficially traded paddy technical assistance. during the same period was nearly 450,000 tons, principally going to Vietnam and At approximately 1.98 tons per hectare, Thailand. Given current cost estimates, if Cambodia has the lowest rice yield rate among 450,000 tons of paddy were directed through all Mekong River countries, while at the same formal market channels in Cambodia, it time, Cambodia has the highest fertilizer use would be equivalent to approximately $69.7 (Table 6). Specifically, the yield rate per million in GDP contribution to for the hectare of Neang Mali used for the value country. In addition, based on both official chain analysis was approximately 1.87 tons and unofficial administrative costs, forgone per hectare. According to most millers, while public sector revenue resulting from the they would like to see their farmers achieve unofficial sales of 450,000 tons of paddy is yield rates as high as 3 tons per hectare, a estimated to be approximately $4.8 million. more realistic expectation is around 2 tons per hectare. Nearly 58% of all rice grown in To develop a comprehensive value chain for Cambodia relies on rain fed agriculture, and rice, a local high value export variety called 32% of the overall rice planted in Cambodia Neang Mali was chosen. Specifically, the are planted near flood prone areas along the analysis traced a value chain for Neang Mali Mekong. from a farm in Kampong Speu to a milling facility in Kandal Province and a finished product delivered to Hong Kong. In this Table 6 Rice Producti on and Yield Comparison for Selected Asian Countries Cambodia Vietnam Thailand Lao PDR Myanmar Fertilizer N P2 K2O N P2 K2O N P2 K2O N P2 K2O N P2 K2O (kg/ha) O5 O5 O5 O5 O5 Low range 100 0 70 0 0 0 0 0 0 Na Na Na 0 0 0 High range 100 100 70 90 30 30 100 75 75 Na Na Na 44 8 0 Yield (tons/ha) Low range 1.8 2.6 1.3 Na Na High range 2.4 4.6 4.0 2.5 3.2 Average yield 1.98 4.26 2.57 3.06 3.17 Harvest Area 1.924 6.766 9.020 0.560 6.144 (million ha) Irrigated (%) 8% 54% 22% 7% 18% Rainfed (%) 58% 29% 75% 57% 68% Upland (%) 2% 5% 1% 36% 4% Flood prone 32% 11% 1% 0% 10% (%) Source: Better Crops International. Vol. 15, Special Supplement, May 2002; FAOSTAT, 2001 The World Bank, Private Sector Development, East Asia and Pacific Region 18 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia The value chain for rice was broken down into three major categories per ton to grow, process and ship Neang Mali rice from Cambodia to and 18 sub categories (Table 7). The three major categories include: Hong Kong. The value chain analysis highlights that fertilizer/manure production; post harvest; and transport/shipment and customs. (18%), transplanting (13.9%) and customs (10.6%) constitute highest According to the value chain analysis, it costs approximately $144.02 costs associated with export oriented rice: Table 7 Value Chain for Neang Mali Rice (Dollars/ton) Dollars/Ton Production (50.3%) Post-Harvest (16.1%) Transport/Shipping/Customs (33.6%) Land Fertilizer/ Ag- Porter Market Levies/ Port Vessel Value Preparation Seed Transplanting manure chemicals Harvesting Drying Milling Interest Packaging Fees Fees Service Transport Charges Loading Customs Shipping TOTAL Unit Cost $14.19 $4.15 $20.09 $26.00 $ $8.03 $ 3.35 $12.23 $2.06 $2.16 $0.72 $1.44 $1.27 $6.51 $10.23 $1.40 $15.30 $14.88 $144.02 % of Total 9.9% 2.9% 13.9% 18.0% 0.0% 5.6% 2.3% 8.5% 1.4% 1.5% 0.5% 1.0% 0.9% 4.5% 7.1% 1.0% 10.6% 10.3% 100.0% Source: Based on interviews conducted by Global Development Solutions, LLC The World Bank, Private Sector Development, East Asia and Pacific Region 19 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 1. Production activities are segmented into 6 areas: land preparation; seed; transplanting; Production of rice constitutes approximately fertilizer/manure; ag chemicals; and harvesting 50% of the overall value adding activity. Such (Table 8): Table 8 Estimated Production Cost for Neang Mali in Kampong Speu Per Ton Labor Input Riel Total $ Total % Total Land preparation 56,776 56,776 $ 14.19 16% Seed - 16,604 16,604 $ 4.15 5% Transplanting 80,343 - 80,343 $ 20.09 22% Fertilizers/manure 9,641 94,339 103,980 $ 26.00 29% Ag chemicals - - - $ - 0% Harvesting 32,137 - 32,137 $ 8.03 9% Drying 13,390 - 13,390 $ 3.35 4% Milling 3,320 45,600 48,920 $ 12.23 14% Interest payments - 8,227 8,227 $ 2.06 2% Total 138,832 221,546 360,377 $ 90.09 100% % of Input 39% 61% Source: Based on interviews by Global Development Solutions, LLC As Table 8 indicates, fertilizer and manure and sold to local farmers3. It is estimated that account for the highest cost during the nearly 70 percent of all fertilizers sold by local production phase. As evident from the traders are diluted. Random sample tests were import procedure faced by fertilizer importers taken to investigate this issue. In one test, 15- (Chart 1), custom clearance process is 15-15 fertilizer imported from Thailand had complex. According to fertilizer traders, only one-third of the required concentrate of import costs and customs clearance charges nitrogen, phosphorus, and potassium. In another associated with importing contributes to the test, 15-15-15 fertilizer imported from Vietnam high cost paid by local farmers. had approximately 27 percent less nitrogen, phosphorus, and potassium than was originally For premium fertilizer, farmers must pay certified when the fertilizer was imported to approximately 1,000 Riels/kg. On the other Cambodia. hand, cheaper variety of fertilizers are also readily available through local traders costing Currently there are only 5 major fertilizer anywhere from 700 ­ 800 Riels/kg. importers with localize distribution network Interviews with farmers suggest that cheaper that have effectively created a distribution fertilizers tend to be relatively ineffective and monopoly for fertilizer in Cambodia. The maybe contributing to anywhere from 25 ­ 35 sub-decree on Standards and Management of percent reduction in yield per hectare. Agricultural Material under the Ministry of Agriculture, Forestry, and Fisheries require Further investigation of this issues suggests that all transactions associated with the sales that while fertilizers purchased in bulk and brought into Cambodia are certified by the 3 Ministry of Agriculture, local traders often A random spot check of fertilizer quality was dilute the fertilizer before being repackaged conducted, where two types of loose fertilizers (16-20-0 and 15-15-15) from Vietnam and Thailand sold by traders in Phnom Penh were tested for quality. The World Bank, Private Sector Development, East Asia and Pacific Region 21 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia and distribution of agricultural material, lower than anticipated when farmers use the including pesticides and fertilizer, must be prescribed amount of fertilizer for the Neang registered with the Ministry. At the same Mali variety. Consequently, farmers are either time, however, currently only 5 ­ 6 firms are having to pay premium prices for reliable known to be registered. Thus, between the fertilizer, or are applying larger volume of less distributional monopoly and illegal inflow of expensive fertilizer to achieve per hectare yield fertilizer, the small holder farmers face a targets prescribed by rice millers. formidable challenge in acquiring affordable high quality fertilizer. If farmers had access to high quality fertilizer, this would contribute a savings of about $15 As a result of poor quality fertilizer used by per ton, which would translate to a 31% farmers, per hectare yield rates are consistently increase in profits for small holder farmers. Chart 1 Import and Customs Clearance Procedure for Loose Cargo Load Ministry of Finance Wholesale Contract Facilitate Customs: Phnom Penh Company customs Customs Clearance Agent customs clearance application Evaluate Assessed Price Prepare: agent process Confirmation & Customs Invoice Application : Issue Packing list Sealed customs Application document Draft B/L document Certificate of origin B/L Sealed customs document Deliver customs Freight Forwarding/Trucking document Shipment delivery Customs Ministry of Finance invoice Customs: Sihanoukville TC scanning Cash Calculate import duty Payment Calculate penalty fee Cam (7% of invoice value) Control VAT calculations survey & Road AZ inspection toll Group s fee Shipment release On-site LoLo inspection charges fee Ministry of Ministry of Transport Commerce Roads Cam Control Ministry of Ministry of Finance Transport Mobile Customs/ Port Authority Economic Police Source: Based on interviews by Global Development Solutions, LLC Transplanting continues to be done by hand reach of an average farmer. In addition, the as automated equipment is far beyond the plot size of many farmers are so small that it The World Bank, Private Sector Development, East Asia and Pacific Region 22 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia would not warrant mechanization. This has remained relatively low when compared to means that farmers are dependent on regional competitors (Table 9). Low labour temporary labour to complete the productivity can be partly attributed to the transplanting. It is estimated that absence of training and support institutions to transplanting takes 25 men/hectare with an assist farmers, as well as poor access to average wage rate of approximately 6,000 financing that enable farmers to access proper Riels/worker/day. farming implements and install irrigation system. While farm labour continues to be inexpensive in Cambodia, labour productivity . Table 9 Benchmarking Labour Productivity in the Rice Sector Between Cambodia, Vietnam and Thailand Cambodia Thailand Productivity Kampong Speu Central Differential Yield/hectare (tons)* 1.87 2.91 Labour input (person days/ha) 43 47 Labour productivity (kg/worker) 43.49 62.35 -43% *Thailand: Total labour input equal to $155.5/ha using a wage rate of $3.33/day The third highest production cost associated The only alternative left for a farmer to with growing Neang Mali is land preparation. prepare land properly is to purchase an oxen Most farmers do not own a tractor, much less to plow the soil. However, according to one an ox to help plow the land. To achieve high farmer, accessing financing through local yield rates possible through the use of high micro-credit institutions is prohibitive. For quality seeds, proper land preparation is example, for a 12 month, 100,000 Riel loan, paramount. As most small and medium farmers are required to pay 12,000 farmers do not have their own tractors, they Riel/month for the first 11 months and must hire tractors from local service providers. 10,000 Riel on the 12th month. This is On average, farmers must pay 50,000 Riel/ha equivalent to 42 percent annualized interest (approximately $12.5) to a local service rate. Consequently, when a head of cattle cost provider for land preparation. In addition, one million Riel (approximately $250), it is proper land preparation require the services of nearly impossible for small and sometime a tractor twice. Consequently, farmers are medium farmers to borrow from local lending required to pay on average approximately institutions. $25/ha to an outside service provider to assist in the preparation of land. 2. Post Harvest In addition, rising fuel costs has had a Post harvest activities are divided into 7 areas: substantial impact on the cost of land drying, milling, interest, packaging, porter preparation. For the Neang Mali variety, land fees, market fees, and levies and services. preparation costs constitute nearly 16 percent Once a farmer has harvested his crop, it is of the total cost of farming. dried and then brought to the milling facility where the paddy is graded and weighed. For Neang Mali, local millers generally rely on The World Bank, Private Sector Development, East Asia and Pacific Region 23 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia three variables to grade paddy: moisture paddy grading system is presented below content, mixture with non-Neang Mali and (Table 10). impurity such as disease and straw. A typical Table 10 Paddy Grading System Moisture Mixture Impurity Moisture Deduction Mixture Deduction Impurity Deduction content (%) (%) (%) (%) (%) (%) 15% 0% 1% 0% 1% 0% 16% 1.5% 2% 1% 2% 1% 17% 3% 3% 2% 3% 2% 18% 4.5% 4% 3% 4% 3% 19% 6.0% 5% 4% 5% 4% 20% 7.5% 6% 5% 6% 5% 21% 9.0% 7% 6% 7% 6% 22% 10.5% 8% 7% 8% 7% 23% 12.0% 9% 8% 9% 8% Source: Based on interviews by Global Development Solutions, LLC During the 2002 harvest season, farmers were used by subsistence level farmers where a mill offered a farm gate price of 620 Riel/kg. can facility between 45 ­ 60 families, and Depending on the score that a farmer received payments are made according to meal and for his harvest, deductions are made from the husk, or on a cash basis. Two types of mills farm gate price. In addition, the cost of seeds are used at the village level: a steel huller and which the farmer received at the beginning of polisher that removes the husk and polishes the season is deducted. the rice in a single operation; and a second type which uses a rubber roller to remove the In general, there are at least two types of husk and steel polishers to remove the bran millers in Cambodia: village millers and and polish the rice. commercial millers. Village mills are generally Small commercial mills can mill between 0.5 ­ 2.5 tons/hour, but have a relatively high energy consumption rate of approximately 10 ­ 15 Khw. An Example of Equipment Used by a Medium Size Village Level Mill The World Bank, Private Sector Development, East Asia and Pacific Region 24 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Furthermore, smaller commercial mills tend Table 11 to have a relatively low paddy to rice conversion rate (usually less than 55%). Paddy to Milled Rice Conversion Rate Conversion Large commercial mills geared towards Rate exports have milling capacity of as much as 120 tons/day, and utilize technology intensive Lao PDR 0.60 equipment to mill, husk and sort rice where Myanmar 0.62 conversion losses are relatively low (paddy to Cambodia 0.63 rice conversion rate can range between 60 ­ Vietnam 0.65 65 percent). Thailand 0.66 China, PR 0.70 Taiwan, China 0.73 Japan 0.73 Based on the general consensus that about 4.12 million tons of paddy is produced in Cambodia each year, the total milling capacity in the country is estimated to be only 1.31 tons4 - a deficit in milling capacity in the country of nearly 2.81 million tons. Hypothetically, if the un-milled paddy is a premium variety, the lack of investments in commercial standard milling capacity is contributing to a potential loss in export revenue equally $731 million. An Example of Equipment Used by a Large Scale Commercial Mill Whether for a village level or commercial mill, the largest cost associated with post-harvest As Table 11 indicates, the paddy to milled rice activities is milling, specifically, the cost of conversation ratio in Cambodia is well below electricity (more than 58% of all post-harvest some of the major rice exporting countries, costs are associated with milling, most of and only slightly above Lao PDR and which is the cost of electricity). On the grid, Myanmar. electricity cost can be as high as $0.50/Kwh. Consequently, millers must generate their The low conversion rate can, in part, be own electricity. In such instances, the cost of attributed to poor post-harvest labour skills, as electricity range between $0.12 - $0.18/Kwh.5 well as limited availability of high quality commercial milling facility. 4 Commercial milling capacity: 648,450 tons; Village mills: 663,129 tons. 5 Comparative electricity costs (off-peak tariff for industry and % more expensive in Cambodia): Thailand ($0.08/Kwh ­ 125%); Vietnam ($0.0467/Kwh ­ 291%); and Lao PDR ($0.0265/Kwh ­ 592%); Myanmar ($0.08/Kwh ­ 125%). The World Bank, Private Sector Development, East Asia and Pacific Region 25 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia As evident from the value chain analysis, there 3. Benchmarking the Competitiveness of is very few, if any government interventions Cambodian Rice Production during the post-harvest stage. This, in part, can be attributed to the fact that there are very When the cost of producing Neang Mali rice few laws and regulations in place to monitor in Cambodia is compared with the average and regulate company operations. cost of high quality rice production in Consequently, very few opportunities are Thailand, the overall cost of production tends available for government officials to come into to be about 40 percent higher in Thailand, contact with local enterprises. This but Thai farmers achieve approximately 12% phenomenon was the case not only in the rice higher per hectare yield rates. With this said, milling industry, but in all other industries, as however, in the context of cost per ton of laws and regulations dictating company production, Cambodian farmers achieve a cost operations is still at an embryonic stage. of $89.9/ton while their Thai counterparts achieve a cost of $113.3/ton (Table 13). Table 13 Benchmarking Rice Production Costs Between Cambodia and T hailand (per Hectare) Cambodia Thailand Cost $/hectare % of Total $/hectare % of Total Differential 1 Land preparation $ 26.50 16% $ 26.09 11% 2% 2 Seed $ 7.75 5% $ 6.02 3% 22% 3 Transplanting $ 37.50 22% $ 63.36 27% -59% 4 Fertilizer/manure $ 48.53 29% $ 15.77 7% 208% 5 Ag chemicals 0% $ 2.48 1% 6 Harvesting $ 15.00 9% $ 61.94 26% -24% 7 Drying $ 6.25 4% $ 8.48 4% -74% 8 Milling $ 22.83 14% $ 33.04 14% -69% 9 Interest payment $ 3.84 2% $ 3.38 1% 12% 10 Rent $ - 0% $ 16.32 7% TOTAL $ 168.20 100% $ 236.87 100% Yield/hectare (tons) 1.87 2.09 These figures suggest that cost of production competitiveness of the rice industry. These of premium rice in Cambodian can be issues include: cost of seeds, fertilizer costs, competitive against major rice exporting labour productivity, cost of electricity, country like Thailand. At the same time, improving milling equipment and technology however, a number of farming and processing to reduce losses, while increasing the paddy to issues require support to help enhance milled rice conversation ratio. 4. Transport/Shipping/Customs Clearance is transport, shipping and customs clearance Charges charges, specifically, customs clearance charges. According to the value chain The second largest cost associated with analysis, custom clearance charges constitute producing and exporting rice from Cambodia nearly 10.6% of the total cost of producing The World Bank, Private Sector Development, East Asia and Pacific Region 26 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia and exporting rice. In this respect, direct revenue from one ton of paddy rice (Table administrative costs account for nearly 12% of 14). Table 14 Transport, Shipping and Custom Clearance Charges for Exporting Neang Mali Ric e to Hong Kong (20 foot container) Total Cost Fee payment 1 Mill - Sihanoukville $ 140.00 % of Total Cost($)/ton Road (NR4) $ 6.51 12% Transport company inclusive of toll 2 Customs/Camcontrol/Police inspections $ 329.03 Cost($)/ton Customs clearance $ 5.58 11% Customs (MoF) Customs permit $ 4.65 9% Customs (MoF) Camcontrol quality certificate & analysis $ 4.65 9% Camcontrol (MoC) Camcontrol survey $ 0.42 1% Camcontrol (MoC) 29% 3 Vessel Loading fee $ 30.00 Cost($)/ton Lift empty & laden at factory $ 1.40 3% Shipping company 4 Port Charges $ 220.00 Cost($)/ton Terminal handling charge $ 3.26 6% Shipping company Documentation fee $ 0.70 1% Shipping company Banker adjustment factor $ 1.16 2% Shipping company Fumigation $ 0.93 2% Private contractor Phytosanitary certification $ 2.79 5% MoA Lift empty $ 1.40 3% Shipping company 19% 5 Shipping charges $ 320.00 Cost($)/ton Sihanoukville - Hong Kong (low quote) $ 14.88 Sihanoukville - Hong Kong (high quote) $ 19.53 37% Sihanoukville - Shanghai $ 30.23 6 TOTAL $ 52.98 100% $ 1,039.03 Source: Based on interviews conducted by Global Development Solutions, LLC As rice is a major export commodity, it is not bureaucratic and administrative interventions unusual to find a number of high level imposed on them. This is evident from the government officials with financial interest in limited number of administrative procedures rice milling companies. Consequently, when required for customs clearance, and the compared with enterprises in other industries, limited and relatively low administrative fees milling companies tended to have less incurred by local millers (Chart 2). The World Bank, Private Sector Development, East Asia and Pacific Region 27 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 2 Export Clearance Procedure for Neang Mali Rice Rice Processor Contract Freight Invoice Forwarder Freight Forwarder Customs Ministry of Finance Packing list Application Customs: Phnom Penh B/L Process Evaluate assessed price Cargo Load Confirmation & customs Document application: Clearance Application document Certification of origin Fumigation/ B/L Phytosanitary Certification Document, Price List, Customs Document Ministry of Invoice Agriculture Ministry of Finance Custom Customs: Sihanoukville Invoice B/L Shipping Load Company Cargo Check for Delivery Ship Customer Loading Source: Based on interviews conducted by Global Development Solutions, LLC According to one miller which has a high clearance and customs permits under the government official on its board, the customs Ministry of Finance. document requirement was limited to a total of 5 documents, 6 stamps and 8 signatures. As 5. Benchmarking Post -Harvest Cost for we will see from other examples, the customs Rice in Cambodia clearance procedures and costs associated with customs clearance for rice millers is only a As evident from the previous sections, post- fraction of the cost incurred by companies in harvest costs are considered high in other industries. Cambodia. Benchmarking post-harvest costs in Cambodia against Myanmar suggests that With this said, however, it should be noted while processing costs such as milling is that the customs clearance charges constitute slightly higher in Cambodia, the biggest 29% of the transport, shipping and custom difference between the two countries point to clearance charges, which is equivalent to $329 high administrative costs associated with per 20 foot container. The highest portion of exporting rice (Table 15). these costs can be attributed to customs The World Bank, Private Sector Development, East Asia and Pacific Region 28 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 15 Benchmarking Post -Harvest Cost for Rice in Cambodia and Myanma r (per Ton) Cambodia Myanmar Cost Sihanoukville Yangon Differential 1 Production cost $ 77.87 $ 67.93 14% 2 Milling $ 12.23 $ 7.38 65% 3 Packaging $ 2.16 $ 8.88 -24% 4 Levies $ 3.43 $ 5.26 -65% 5 Transport $ 6.51 $ 9.47 -69% 6 Port charges $ 10.23 $ 0.42 2,336% 7 Vessel loading $ 1.40 $ 0.76 84% TOTAL $ 113.83 $ 100.10 13% Specifically, port charges and vessel loading the vessel loading charged in Sihanoukville is charges in Cambodia are both substantially 184% of what is charged in Yangon. These higher than in Myanmar. In the case of port figures, however, may not account for charges, costs in Sihanoukville is 24 times subsidies offered by the Government more than at the Port of Yangon. Similarly, Myanmar regarding port charges. The World Bank, Private Sector Development, East Asia and Pacific Region 29 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 3 Value Chain for the Production of Neang Mali Rice in Cambodia High Cost of Diesel Fuel Low on-farm Phnom Penh: $0.42/litre labour skills Bangkok: $0.32/litre Labour Productivity in Rice Saigon: $0.30.litre Farming Kg/worker Poor access to Labour Cambodia 43.49 farming 100% Thailand 62.35 equipment Cambodian farmers are 43% less productive than Thai Low irrigated Land Seeding Transplant farming Prep farmers 37% 11% 52% Planting Fertilizing Harvest Milling Package Market Transport Port/Custom Shipping Drying Interest Levies Charges 26.7% 18% 7.9% 8.5% 2.9% 2.4% 4.5% 19.7% 10.3% Labour Fertilizer 9% 91% Port Cam Customs Fumigation Other Charges Control Clearance Phyto- Charges Sanitary 25% 18.8% 38% 0.3% 17.9% Fertilizer Use/Yield Rate Fert. Use Yield/ha (tons) Cambodia $48/ha 1.85 High fertilizer price due to high import cost Thailand $15/ha 2.09 Lack of competition in the fertilizer distribution sector 70% of fertilizer sold in Cambodia is diluted to 1/3 ­ 1/2 of actual concentration The World Bank, Private Sector Development, East Asia and Pacific Region 30 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia The value chain analysis suggests that the continues to dampen the overall premium rice sector in Cambodia has the competitiveness of rice in the export market. potential to be competitive against Thailand, a While these administrative barriers are not major rice exporter in the world market unique to the rice sector, the potential for (Chart 3). At the same time, however, a expanding the foreign exchange earning number of market based and administrative capability to support the development of the barriers to competitiveness continue to hinder Cambodian economy will hinge on a range of the development of the sector, particularly in administrative reforms to help reduce overall the context of attracting adequate investments competitiveness of export quality rice. in the commercially milling sector. In this context, the critical bottleneck is in the Administrative and market barriers to processing rather than production side of the competitiveness faced by the rice exporting rice value chain. sector can be summarized as follows (Table 16). In addition, administrative costs associated with importing inputs and exporting rice Table 16 Administrative and Market Barriers to Competitiveness Critical Issues Impact Business High import clearance High cost of fertilizer Environment charges Large unofficial outflow of paddy to Lack of regulatory Vietnam and Thailand enforcement High production costs, low yield rates, poor Poor access to finance quality or inadequate use of agricultural High export clearance charges inputs Reduce the competitiveness of export rice Discourage investments in expanding milling capacity Supply Chain Lack of investment in Deficit in milling capacity commercial milling capacity High cost of support services Absence of business and Poor on-farm labour skills technical support infrastructure Infrastructure Uncompetitive energy pricing High milling cost policy High transplanting cost and high milling High cost of electricity cost for self-generating electricity High cost of diesel The World Bank, Private Sector Development, East Asia and Pacific Region 31 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Cotton, Fiber and Textile Production: Potential Integration With the Garment Industry yarn and fabric. Consequently, the number of The textile and garment industry accounts cotton growers continues to remain relatively for nearly 200,000 jobs, and garment exports small. A value chain analysis that stretches account for over 77 percent of the country's from cotton production to yarn spinning, and export revenue. At the same time, however, finally textile fabric production reveals the Cambodia's garment industry is entirely number of barriers that continues to make dependent on imported material. Specifically, cotton farming, yarn spinning and textile imported raw material accounts for nearly 63 fabric production less than competitive. percent of the cost of production for the garment industry. While WTO provisions While it is useful to compare costs across the should be a concern to the Cambodian entire value chain from cotton production, garment industry, what is equally troubling is processing and transport/customs clearance, how the industry will continue to be the disproportionate costs between the three competitive in the global market where the value adding activities distorts the analysis industry is dependent entirely on imported within each stage of production. material and such costs constitute an Consequently, the report will segment cotton overwhelming percentage of the cost of to textile production process into three production. separate value chains to help identify and analyze factors inhibiting the overall Black soil area in Andoek Hep and competitiveness of the textile industry in Battambang Province, and numerous areas Cambodia. within Cambodia with basaltic red soil lend themselves well to growing cotton. This was 1. Cotton Value Chain evident during the 1960s when nearly 20,000 hectares of cotton was grown in Cambodia. Currently there are very few integrated cotton But following the war, food shortages pushed to textile production facilities operating in farmers into subsistence level farming that Cambodia. Consequently, cotton farming favored rice over cotton. and related market transactions still lack structure and organization. In addition, rice A number of cotton pilot projects were farming continues to dominate the market, sponsored by the Soviets during the 1980s, particularly as there is clear demand and but security problems combined with market for rice either through the domestic increased production and access to cotton market or through sales to Vietnamese and from regional markets never stimulate the re- Thai rice traders. As a result, farmers are development of cotton farming in Cambodia. reluctant to shift from rice to cotton farming. Now, in the eve of Cambodia becoming a member of the WTO, the engagement of Cotton farms currently operating in WTO provisions in 2005, and the rising cost Cambodia range in size from 0.5 hectares to of raw material inputs for the garment over 65 hectares, where most farmers enjoy industry is yet again provoking debate over two growing seasons. With the exception of a whether Cambodia should re-introduce few large cotton farms, majority of farmers do cotton into the basket of high value added not have irrigation systems in place and thus cash crops to be targeted to help stimulate the rely on rain fed agricultural practices6. As the agricultural and industrial sectors. 6 Currently, less than a hand full of enterprises It is estimated that approximately $100 - $200 are actively involved in processing cotton into is required to purchase a pump and pipes adequate to irrigate 3 hectares of cotton. The World Bank, Private Sector Development, East Asia and Pacific Region 32 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia case with most farming communities, nearly available to increase farm level income. In one out of ten cotton farmers are illiterate. As this context, `pro-active' response to market a result, introducing new farming techniques opportunities is often not possible, and thus to improve yield and maintaining a structured bound farmers to behave in a `re-active' pest management programme continues to be manner where they must be sought out by a challenge. In addition, as most smaller intermediary processors willing to sponsor cotton farms are located in rural areas, if not them. Consequently, the process of scouting in remote locations, access to capital to and mobilizing farmers to shift to cotton purchase proper farming equipment and to farming has proven to be a costly endeavor for expand plot size is proving to be a formidable cotton processors. challenge for increasing cotton production. A value chain analysis of cotton farms in In the absence of access to affordable working Cambodia revealed that the average total value capital, unless an intermediary processor added for producing seed cotton is provides all of the necessary inputs such as approximately $346 per ton (Table 17). To high quality seeds, fertilizers, and sprays, small derive at this figure, cotton production was shareholder farmers (SSFs) have no means of segmented into 9 different value adding shifting production from one crop, like rice, activities. to cotton, even if market opportunities are Table 17 Cotton Value Chain for Cambodia Land Preparation Planting Seeding Thinning Stamping Weeding Spraying Fertilizing Harvesting TOTAL Value $20.52 $9.17 $143.13 $4.17 $12.50 $30.00 $26.71 $50.42 $50.00 $346.60 % of Total 6% 3% 41% 1% 4% 9% 8% 15% 14% 100% Source: Based on interviews conducted by Global Development Solutions, LLC Seeding: As evident from the value chain, 10 percent of the prescribed amount (lack of nearly one-half of the cost associated with financing is an overwhelming factor for the cotton production originates from the cost of inadequate application of fertilizer). This seeds. As very little cotton is grown in translate to an estimated 0.9 ton/hectare field Cambodia today, high quality cotton seeds are loss in production. currently imported. According to a leading cotton processors in Cambodia, cotton seeds As a result of these factor, Cambodian cotton imported from China have performed growers and processors predict that it will be relatively well. 7 With this said, however, a another three to five years before seed varieties number of seed varieties are still being tested. and farming practices can be adapted to In China, for example, per hectare yield may achieve yield rates matching those enjoyed in reach as high as 2.5 tons per hectare, but China. currently, the same seed variety yields only 1.2 tons per hectare in Cambodia. Another factor It is anticipated that as farming practices using that contributes to the low yield rate is that high quality seed varieties are adapted to soil only 2 percent of the farmers can actually and climatic conditions, producers will resort afford to purchase fertilizer, and of this 2 to production of local seed varieties to help percent, a majority of these farmers apply only reduce the cost of cotton production. At the same time, however, cost of importing seeds 7 The price of high quality cotton seeds from continues to remain high. As evident from China is estimated to cost approximately $10/kg the complex import procedures associated plus freight. The prescribed volume of seeds with imported fertilizer, importing cotton required is approximately 15kg/ha. seeds also face similar barriers to entry. The World Bank, Private Sector Development, East Asia and Pacific Region 33 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Consequently, streamlining import cost of producing cotton. As evident from the procedures is expected to play an important cotton value chain, fertilizer costs constitute role in encouraging the development of the 15 percent of the overall cost of production. cotton industry during its early days. Interviews suggest that what little fertilizer used by farmers is both expensive and of poor Fertilizer: Like most other agricultural crops, quality (similar situation faced by rice farmers cost of fertilizer is prominent in the overall ­ Table 18). Table 18 Fertilizer Price and Application by Cotton Farmers in Cambodia Price (Riel) Fertilizer Riel/kg $/kg Riel/ton $/Ton DAP 1,100 $ 0.28 1,100,000 $ 275.00 KCL 1,300 $ 0.33 1,300,000 $ 325.00 Urea 700 $ 0.18 700,000 $ 175.00 Average Fertilizer Application Fertilizer kg/ha Riel/ha $/ha DAP 100 110,000 $ 27.50 KCL 50 65,000 $ 16.25 Urea 50 35,000 $ 8.75 Total 200 210,000 $ 52.50 Source: Based on interviews conducted by Global Development Solutions, LLC According to cotton processors, the prescribed use mechanized equipment such as picking amount of fertilizer required to achieve and stripping equipment, but even larger maximum yield per hectare is estimated to be farmers are unable to afford mechanized about 200kg/ha, which must be applied twice. equipment to harvest cotton. As a result This translates to approximately $53/ha. cotton harvesting is all done manually. While the cost of labour is inexpensive, compared to Harvesting: The average daily wage for a Chinese workers, labour productivity among farm hand on a cotton farm in Cambodia is Cambodian cotton pickers is estimated to be approximately $1.00/day. Given a relatively about 50% below that of Chinese workers. As low wage rate, some questions arise regarding a result, in Cambodia 60 man-days of labour the relatively high cost of harvesting. is required to harvest 1 hectare of cotton (Table 19). Most cotton farms are relatively small. Consequently, not only is it uneconomical to The World Bank, Private Sector Development, East Asia and Pacific Region 34 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 19 Labour Input Requirements for Cotton Production in Cambodia Labour Costs/ha # of Days Wage/day Total Riel % of Total Land preparation 25 4,000 98,500 13% Planting 11 4,000 44,000 6% Seed 24 4,000 96,000 12% Thinning 5 4,000 20,000 3% Stamping 15 4,000 60,000 8% Weeding (3 times/season) 36 4,000 144,000 18% Chemical spraying (4 times/season) 12 4,000 48,000 6% Fertilizing (2 times/season) 8 4,000 32,000 4% Harvesting 60 4,000 240,000 31% Total 196 782,500 100% Source: Based on interviews conducted by Global Development Solutions, LLC According to a cotton processor, access to improved equipment and training would improve labour productivity and thus contribute to reducing the overall cost of production. But as no training institution or organized activity to promote and support the development of the cotton industry is available in Cambodia, resources required for on-farm training and support to improve worker productivity remains as a hidden cost to an integrated textile company that sources cotton from local farmers. As the summary value chain in Chart 3 indicates, the areas with the highest cost associated with cotton production is somewhat similar to the product cost for rice in that imported inputs such as seeds and fertilizer, and labour productivity are prominent components in the value chain. What is surprising, however, is that cotton producers in China, particularly in the Yellow River Valley, rely heavily on intensive use of fertilizer in their production regime. The World Bank, Private Sector Development, East Asia and Pacific Region 35 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 4 Value Chain for Cotton Production in Cambodia Only 2% of farmers can afford to purchase High import Expenditure on seeds Expenditure on Fertilizers fertilizer cost: $10/kg Cambodia: $171.75/ha Cambodia: $60.50/ha plus freight China: $54.41/ha China: $253.03/ha Inadequate use of Cambodian farmers spend Cambodia spends less than one- fertilizers due to Absence of 3.1 times more on seeds fourth on fertilizers than China cost local sources Distribution monopoly Labour Inputs Labour Fertilizer 14% 86% 13% 87% Land Planting Seed Thinning Stamping Weeding Chemical Fertilizing Harvesting Prep Spray 6% 3% 41% 1% 4% 9% 8% 15% 14% On-farm labour is estimated Labour to be 50% less productive 100% than Chinese farmers The World Bank, Private Sector Development, East Asia and Pacific Region 36 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Benchmarking cotton production costs in vertical integration into the textile and Cambodia against Yellow River Valley in garment industry, as well as to exploit regional Chain indicates that while cotton production export markets, particularly to China where in Cambodia is still at its `experimental' stage, market growth in the garment sector is achieved yield rates per hectare is virtually anticipated. In this context, further identical with China, while the cost of investigation is required to determine the producing cotton in Cambodia is 55% less commercial viability of targeted support to than in China on a per hectare basis. As expand cotton production in Cambodia. As evident from Table 20 below, labour input with the production of premium rice, costs in China is 4 times more than in deepening the supply chain to integrate Cambodia, while at the same time Chinese farming activities into a broader export market farmers rely heavily on a chemical regime, presents an opportunity to not only address particularly the use of chemical sprays and critical economic growth issues, but is fertilizers, to achieve the per hectare yield rates expected to also help bridge the gap between comparable to Cambodia. rural poverty to economic growth. These figures suggest that conditions in Cambodia may be ripe to produce cotton for Table 20 Benchmarking Cotton Production Cost Between Cambodia and China Cambodia China Cost Kampong Speu Yellow River Valley Differential Cost $ % of Total Cost $ % of Total 1 Land preparation $ 24.63 6% $ 54.42 7% -45% 2 Planting $ 11.00 3% $ 61.67 8% -0.18% 3 Seed $ 171.75 41% $ 54.41 7% 316% 4 Thinning $ 5.00 1% $ 9.07 1% -55% 5 Stamping $ 15.00 4% $ 18.41 2% -81% 6 Weeding (3 times/season) $ 36.00 9% $ 48.97 7% -74% 7 Chemical spraying (4 times/season) $ 32.05 8% $ 143.89 19% -22% 8 Fertilizing (2 times/season) $ 60.50 15% $ 253.02 34% -24% 9 Harvesting $ 60.00 14% $ 108.83 14% -55% 10 Total $ 415.93 100% $ 752.69 100% Yield/hectare (tons) 1.2 1.275 The World Bank, Private Sector Development, East Asia and Pacific Region 37 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 2. Textile Value Chain Once cotton is harvested, it is dried and sorted before the ginning process begins. To capture value adding activities following the cotton harvest, the textile value chain will include ginning to yarn production, weaving and knitting for fabric production, and finally cutting and sewing to complete a finished product. These activities are categorized into three areas: yarn production; fabric manufacturing; and finished goods processing. With available technology in Cambodia As there is insufficient volume of locally today, the process of transforming cotton into produced cotton to meet the production yarn yields a conversion lose of approximately needs of textile factories in Cambodia, the 10 percent. This means that for every ton of value chain analysis focused on the use of lint cotton, the production process yields imported cotton as a source of raw material. 900kg of yarn. Furthermore, the value chain analysis traced the cost of producing bed sheets, a product The process of transforming cotton into yarn currently produced in Cambodia and is capital intensive. A large portion of the exported widely to both the United States and equipment currently used in Cambodia is Europe. used equipment from China The type of cotton used for bed sheets is referred to as CWC Ne40/1. The imported price for such cotton is approximately $350/bale. This translates to about $1,112.17/ton. Currently, CWC Ne40/1 is imported from China, and as with all other imported commodities, custom clearance procedures are cumbersome and time consuming. Once baled cotton arrives at the factory, it is ginned using imported Chinese equipment. On average, ginning and lint handling equipment used in Cambodia are about 20­ and other Southeast Asian countries. But for 30 years old, but in good working condition.8 the most part, the volume of production Once lint cotton is ready, the process of yarn currently realized in Cambodia does not production begins. Here again, the warrant further capital investments to upgrade equipment used is relatively old, but in good equipment. working condition. As evident from the value chain analysis, substantial resources are The yarn is then either woven or knitted into dedicated to maintenance and other overhead fabric. Here again, used equipment, charges. principally from China is used. Even while using second hand equipment, the conversion waste from yarn to fabric is only about 2 percent. 8 Given existing equipment available in Once the fabric is completed, it must be sized Cambodia, one ton of seed cotton yields and bleached before it can be used. It is approximately 380kg of lint cotton. The World Bank, Private Sector Development, East Asia and Pacific Region 38 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia estimated that bleaching waste is approximately 2 percent. Following the bleaching process, the fabric is now ready to be cut and sewn. In the case of bed sheet production, it is estimated that processing waste resulting from cutting and sewn is also around 2 percent. The World Bank, Private Sector Development, East Asia and Pacific Region 39 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia The value chain for textiles immediately points to that fact that raw value chain below suggests, the initial cost of imported cotton has a material input costs are extremely high (Table 21). As discussed earlier, substantial impact on the cost of production, particularly the cost of this is partly due to the high cost of using imported cotton. For raw material input at each stage of production. example imported cotton is estimated to cost over $1,112/ton. As the Table 21 Textiles Value Chain for Cambodia Yarn Fabric Finished Good Other Raw Other Raw Material Utilities Labour Inputs Material Utilities Labour Chemicals Rent Bleaching Raw Material Labour Accessories Inputs TOTAL Value $ 1,112.17 $ 287.01 $ 143.51 $ 251.14 $1,125 $ 180 $ 270 $ 112.50 $ 225 $ 600 $ 2,117.78 $ 28.24 $ 28.24 $187.78 $6,668.37 % of Total 16.7% 4.3% 2.2% 3.8% 16.9% 2.7% 4.0% 1.7% 3.4% 9.0% 31.8% 0.4% 0.4% 2.8% 100.0% Source: Based on interviews conducted by Global Development Solutions, LLC At the same time, however, locally grown cotton, even at a yield rate of textile manufacturers must generate their own electricity. Taking into 1.2 tons of seed cotton per hectare can cost as little as $346/ton. account that yarn production is capital intensive, substantial amount of Taking into account the relatively low yield rate of 1.2 tons per hector electricity is required. For an integrated textile factory with 1,500 of seed cotton, and a seed to lint cotton conversion ratio of 1:0.38, the workers, working 30 days per month, producing approximately cost of sourcing local cotton would be approximately $910/ton of lint 600,000 yards of woven fabric and 50 tons of knitted fabric per month, cotton, a savings of $201/ton (18% decrease in the cost of production). the average electricity requirement is nearly 700,000 Kwh/month. Assuming that in the near future cotton growers in Cambodia can According to one textile manufacturer, the price of fuel oil in 2002 was achieve yield rates as high as 2 tons/ha of seed cotton, this action alone approximately $0.19/litre. But by first quarter 2003, the same fuel oil can reduce costs incurred by the textile industry by nearly 32%. cost $0.26/litre, a 36 percent increase in less than one year. In the Philippines, for example the same fuel is priced at $0.18/litre, a 44 In addition to imported raw material, imported chemicals, specifically, percent disadvantage imposed on Cambodian manufacturers. bleach, is a heavy cost associated with textile production. Currently, Currently, the average cost of electricity incurred by a textile producers the bleaching process costs approximately $0.12/yard, which is is approximately $0.16/Kwh, while a similar producer in China is equivalent to nearly $600/ton of fabric. Here again, the high cost of paying approximately $0.07/Kwh. Here again, a Cambodian textile bleach is associated with the import clear procedures. manufacturers faces a 128% comparative disadvantage against its Chinese competitors. Utilities was found to be the third highest cost associate with textile production. As with most manufacturing enterprises in Cambodia, The World Bank, Private Sector Development, East Asia and Pacific Region 40 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia As indicated by the value chain map in Chart deepening the supply chain to integrate cotton 3, the highest cost associated with textile production into export oriented textile and production is the material cost. As mentioned garment sectors in Cambodia will be, in part, in the previous section on cotton production, a function of the level of investments made to while locally produced cotton costs strengthen the human capital of the country. approximately $346.60/ton, due to lack of volume and consistency, textile mills must The third highest cost associated with textile import cotton at a cost of nearly production is the cost of chemicals. As the $1,928.85/ton ($350/bale). While the value chain map indicates, majority of the finished products continues to be competitive costs are incurred during fabric production in the export market, reducing material input and the principal cost involves the use of costs by 5.6 time can have a dramatic impact imported bleach. As with all other imported on the overall competitiveness of the textile inputs, the cost of importing is high and the industry and niche markets in the garment absence of locally available supplier continues sector. to hinder the competitive potential of the textile industry. The second highest cost in textile production is labour. As evident from the value chain map, the final stage of production consisting of cutting, sewing, finishing and packaging is labour intensive. While the level of labour input at the finished goods production stage is often high, the challenge faced by textile manufacturers in Cambodia is the low quality of labour skills among semi-skilled labour force. As there are no local training institutions providing technical training support to the textile industry,9 companies must resort to their own resources to train and to introduce multi-skilling among its workers. In addition, the pool of qualified shopfloor supervisors and managerial staff are also at a great deficit in Cambodia. Consequently, some manufacturers are relying on expatriate workers from China where there continues to be a `glut' of qualified supervisory and management level workers in the textile industry. The analysis of the rice and cotton value chains both suggest that as we move up the value chain into increasingly higher value added activities, Cambodia suffers from increasing deficit of qualified workers. This points the lack of investment in human capital, particularly in semi-skilled and skilled labour. In this context, the ability to 9 JICA has provided some technical assistance in this area, particularly targeted towards skills development in the garment industry, but the project is coming to an end in 2003. The World Bank, Private Sector Development, East Asia and Pacific Region 42 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 5 Value Chain for Textile Production in Cambodia Expenditure on Fabric High cost of imported Imported cotton: $350/bale cotton Conversion waste Imported: $1,928.85/ton Cotton to yarn: 10% Local: $346.60/ton Yarn to fabric: 2% Textile mill must pay 5.6 High import Fabric to finished good: 2% Expenditure on Chemical times more to import Imported bleach costs Beaching waste: 2% cotton $0.12/yrd = $600/ton Absence of local source Yarn Fabric Finished Yarn Fabric Finished Good Good 25% 26% 49% <1% 99% <1% Raw Utilities Labour Chemicals Accessories Other Material Inputs 62% 7% 11% 10% <1% 10% Absence of local support Yarn Fabric Finished institutions for technical skills Good development 19% 36% 45% Absence of skilled supervisors and shopfloor managers The World Bank, Private Sector Development, East Asia and Pacific Region 43 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 3. Transport and Customs Clearance approximately 22 tons and is transported from Charges a factory in Kampong Speu to Sihanoukville, loaded on to a ship bound for the United The cost of transport and customs clearance States. The value chain analysis suggests that charges were evaluated based on a 40 foot on average a shipment of a 40 foot container container carrying 26,000 pieces of finished costs approximately $178.45 per ton for the bed sheets. The container weighs entire process (Table 21). Table 21 Transport and Customs Clearance Value Chain for Textile Products in Cambodia Transport Port Charges Vessel Loading Customs Shipping TOTAL Value $14.72 $6.50 $0.91 $15.13 $141.19 $178.45 % of Total 8.2% 3.6% 0.5% 8.5% 79.1% 100.0% Source: Based on interviews conducted by Global Development Solutions, LLC According to a textile processor, the high cost Even taking into account the high cost of of shipping was partly a function of the lack of shipping, customs clearance charges is a frequency and volume of ship traffic between prominent cost to textile producers. It is Cambodia and the U.S. and other major estimated that custom clearances charges export destinations. Further analysis is account for approximately 8.2% of the overall required to evaluate and compare the relative transport and customs clearance charges or cost of shipping between Cambodia and its $15.13/ton. But this is not inclusive of regional competitors to major export unofficial charges. Specifically, destinations. undocumented government administrative charges, accounted for an additional 2.9% or $5.28/ton. Table 22 Transport and Administrative Charges for Exporting 40 Foot Container of Bed Sheets from Cambodia 1 Transport: Factory to Sihanoukville Total Cost ($) $/ton % of Total Trucking $ 270.00 $ 12.27 6.7% Freight forwarder Toll $ 13.86 $ 0.63 0.3% MoT (Port Authority) Road fee $ 40.00 $ 1.82 1.0% MoT (Port Authority) Total $ 323.86 $ 14.72 8.0% 2 Port Charges LoLo $ 20.00 $ 1.00 0.5% MoT (Port Authority) Overweight doc $ 80.00 $ 4.00 2.2% MoT (Port Authority) Overweight $ 30.00 $ 1.50 0.8% MoT (Port Authority) Total $ 130.00 $ 6.50 3.5% 3 Vessel Loading LoLo $ 23.00 $ 1.05 0.6% MoT (Port Authority) Total $ 23.00 $ 1.05 0.6% 4 Customs Customs clearance $ 260.00 $ 11.82 6.4% MoF (Customs) Camcontrol $ 48.62 $ 2.21 1.2% MoC (Camcontrol) The World Bank, Private Sector Development, East Asia and Pacific Region 44 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia VAT $ 11.00 $ 0.50 0.3% MoF (Customs) Certification of quantity $ 12.00 $ 0.60 0.3% MoI (CPO) Total $ 331.62 $ 15.13 8.2% 5 Shipping Shipping $ 3,106.18 $ 141.19 76.8% Shipping company Total $ 3,106.18 $ 141.19 76.8% 6 Unaccounted Costs (no receipts) Certification of process $ 40.00 $ 1.82 1.0% Camcontrol Labour compliance $ 200.00 $ 0.30 0.2% MoL Environmental compliance $ 500.00 $ 0.76 0.4% MoE (1) Fire extinguisher inspection $ 150.00 $ 0.23 0.1% MoInt (2) Fire extinguisher sticker fee $ 187.50 $ 0.28 0.2% MoInt (3) Police donations $ 150.00 $ 0.23 0.1% MoInt (4) Local officials $ 1,000.00 $ 1.52 0.8% Provincial government (5) Military police $ 100.00 $ 0.15 0.1% MoD (6) Total $ 2,327.50 $ 5.28 2.9% GRAND TOTAL $ 6,242.16 $ 183.87 100.0% Source: Based on interviews conducted by Global Development Solutions, LLC Notes: The company import and export approximately 30 containers/year. Each container weighs approximately 22 tons. Thus, to derive at a per ton rate some figures in the unaccounted costs are divided by 660 tons. 1. Two inspections/year paying $250/visit. Threaten with brining several reporters to the factory 2. Two inspections/year paying $75/visit 3. Two inspections/year paying 2,000 Riels/extinguisher - 150 extinguishers on the premise 4. Three donation/year paying $50/donation 5. Two donations/year paying $500/donation 6. Donation on an irregular basis A close scrutiny of the customs clearance in transporting goods from factory to port, charges suggests that over 78 percent of the but the high cost also reflects the administrative charges paid to the undocumented payments which it must make Government is accounted for by the customs to government administrators. In the case of department. textiles, it is estimated that the undocumented cost for trucking a 40 foot container from In addition to relatively high administrative Phnom Penh to Sihanoukville is costs, transport costs are also high. The value approximately 35 percent of the freight chain analysis suggest that nearly 8% of the forwarder charges. This is after deducting overall cost or $14.72/ton, majority of which trucking costs and a 15% profit margin. is paid to freight forwarders, is accounted for Other evidence suggests that document costs by transport costs. Further analysis points to may range anywhere from 35 ­ 50 percent of costs incurred by freight forwarders, not only the freight forward's invoice. The World Bank, Private Sector Development, East Asia and Pacific Region 45 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 6 Value Chain for Transport and Customs Clearance for Textiles Export Uncompetitive High cost of diesel fuel energy pricing policy Phnom Penh: $0.42/litre Bangkok: $0.32/litre Poor infrastructure Saigon: $0.30/litre maintenance Cambodian truckers pay 31% ­ 40% higher fuel cost Collusion between freight companies and customs Trucking Toll Road fee 83% 4% 23% Limited number of scheduled vessels Transport Port Vessel Customs Shipping Charge Loading 8.2% 3.6% 0.5% 8.5% 79.1% Customs Cam VAT Cert. Of Clearance Control Quantity 78% 15% 3% 4% Complex customs Merits of clearance procedure inspections unclear High official and High official and unofficial charges unofficial charges Disruptive The value chain map for transport and available in an entire container. This also customs clearance associated with textiles results in a higher per unit cost of shipping. suggests that shipping, customs and transport costs are the highest costs. While further Customs clearance and Cam Control charges investigations is necessary, according to local also contribute to the cost burden of exporting companies, given the limited export volume textile products from Cambodia. Specifically, from Sihanoukville, the traffic of scheduled export procedures tend to be long and ships to major export destinations is limited. complex, and official and unofficial charges Consequently, costs tend to be higher as are also high. As this problem is a cross- shipments must often be transshipped via a cutting issue across all export industry, but second port in Asia. Secondly, as the volume one particularly problematic in the garment of a single shipment is sometimes small, industry, an in-depth-analysis of these issues companies are not able to utilizing space The World Bank, Private Sector Development, East Asia and Pacific Region 46 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia will be presented in the garment value chain into account both fuel and electricity pricing analysis section. is expected to play a critical role in improving the competitiveness and export potential of Yet another cross-cutting issue is the cost of enterprises operating in Cambodia. transport, particularly as it relates to high fuel costs. As evident from the value chain map, Administrative and market barriers to Cambodian enterprises faces a 31% - 40% competitiveness faced by the cotton higher fuel cost than its regional competitors. production and export oriented textiles In this context, a reconsideration of the industry in Cambodia can be summarized as country's energy pricing policy which takes follows (Table 23). Table 23 Administrative and Market Barriers to Competitiveness in Cotton/Textile Sector Critical Issues Impact Business Poor access to finance Lack of investment in irrigation results in Environment High import clearance charges low per hectare yield rates High export clearance charges Inadequate access to fertilizer resulting in low per hectare yield rate High cost of fertilizer Reduce the competitiveness of export products Discourage investments in integrated cotton and textile facilities Supply Chain Shallow supply chain and High and variable input cost, particularly absence of backward linkages with respect to imported cotton Absence of market structure to Farming practice and crop selection not produce and sell cotton responsive to market opportunities Absence of business and Farmers inability to shift from technical support infrastructure subsistence level rice farming into other Lack of support industries cash crops Little to no investment in human Poor on-farm skills capital Need to import high cost seeds and bleach Low labour mobility and responsiveness to market opportunity Infrastructure Uncompetitive energy pricing High ginning and finished good policy processing costs High cost of electricity High transport costs to transfer finished High cost of diesel goods to port Poor road conditions Reduce the competitiveness of finished Low frequency and high cost of goods shipping The World Bank, Private Sector Development, East Asia and Pacific Region 47 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Tobacco: Cambodia's First Fully Integrated Supply Chain Well over 20,000 hectares of tobacco is Not only is the yield rates differ between grown in areas such as Kampong Cham, traditional and contract tobacco farmers, but Kandal, Prey Veng and Kratie. In particular, also the leaf quality and consequently, the flood plains along the Mekong River is home final price that a farmer receives for cured to some of the best tobacco grown in tobacco differ greatly. For example, Cambodia. While Cambodia's production of traditional farmers tend to receive $0.25 - tobacco account for of only 0.1% of the $0.75/kg for cured tobacco. But contract world's total production, it is a $50 million farmers that have adopted modern farming business, employing over 50,000 people, techniques through participation in out accounting for 2 percent of GDP, and nearly grower programmes receive as much as $0.3 - 30 percent of government tax revenue in $1.25/kg for cured tobacco. This can Cambodia is derived from the tobacco translate to as much as $400 - $450 net profit industry.10 per hectare for a tobacco farmer. Currently, nearly 10 tobacco companies of 1. Snap Shot of a Modern Tobacco Farm varying size and origin operate in Cambodia. in Cambodia Principal players in the market include: British American Tobacco Cambodia (50%); As an example, the report focuses on a 3 Viniton (25%); JTI (2%); Reemtsma (<1%); hectare tobacco farm in Kampong Cham and the reminder are sold by numerous local which belongs to a out grower programme producers. Many of these companies have lead by one of the leading cigarette companies financial and market ties to Australia, operating in Cambodia. Set along the flood Singapore, China, France, Malaysia, and plains of the Mekong River, the soil is fertile Japan. It is estimated that nearly 5.5 billion from all of the new top soil that the floods manufactured cigarettes and 2.3 billion hand bring each year. Thanks to this natural soil rolled cigarettes are consumed in Cambodia rotation, very little fertilizer is actually alone. Of this figure, however, nearly 2 required to achieve a robust harvest and billion cigarettes are produced and sold in the rotation farming is not required as the floods illegal market. For example, nearly 42 help to renew soil conditions each year. operators in Kampong Cham produce and sell hand rolled cigarettes, many which violate High quality seeds are distributed to the copyright provisions and produce substandard farmer by the cigarette company with whom quality for local market consumption. the farmer has a 100 percent off take agreement. Such seeds are planted and held Traditional tobacco farmers continue have in a nursery for 40 ­ 50 days before it is yield rates of about 0.7 tons/hectare, while transplanted to the field under 10 ­12 cm of farmers that align themselves with foreign soil. cigarette manufacturers such as BAT are achieving yield rates reaching 2 ­ 2.5 Proper soil preparation is essential for tons/hectare. On average, tobacco farms achieving high yields. In most instances, range in size from 1.5 hectares to 5 hectares. smaller farmers can not afford to purchase tractors, which can cost as much as $1,000 for 10 a small `walk-along' unit, and as much as Current tax on cigarettes is approximately 15% $4,700 for a large 20 ­ 30 horsepower unit. to 20% per pack depending on the type of In order to fulfill conditions for achieving cigarette. The World Bank, Private Sector Development, East Asia and Pacific Region 48 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia high yields, farmers hire local farmers with farmer with 3 hectares of land, the price of tractors to come and help till the land. Such land preparation can be as high as $135 services are readily available, but can cost as (Table 24). much as 180,000 Riel/ha ($45/ha). So, for a Table 24 Estimate of Variable Costs Incurred by Moder n Tobacco Farmers in Cambodia Variable Costs $/3 hectares $/hectare $/ton Labour: seasonal $ 75.00 $ 25.00 $ 12.50 Labour: permanent $ 270.00 $ 90.00 $ 45.00 Tractor hire $ 135.00 $ 45.00 $ 22.50 Irrigation pipe $ 120.00 $ 40.00 $ 20.00 Trucking cured tobacco $ 7.50 $ 2.50 $ 1.25 Jute string/bags $ 5.00 $ 1.67 $ 0.83 Personal protection gear $ 10.25 $ 3.42 $ 1.71 Fertilizer $ - $ - TOTAL $ 622.75 $ 207.58 $ 103.79 Source: Based on interviews conducted by Global Development Solutions, LLC intensive land use requires irrigation systems But it is through such proper land preparation to be in place if farmers expect to achieve high that modern farmers are able to plant as many yield rates. as 16,000 ­ 18,000 plants per hectare. Such Although numerous farms are located on the Consequently, wells must be dug to pump flood plans along the Mekong River, the water for irrigation. It is estimated that in distance from the water to the farming site can order to consistent access to water, a well must be as much as 0.5 ­ 1 km. be 20 ­ 30 meters deep. For such a well to be dug and a pump installed, it is estimated to An Example of a Walk-Along Tractor Used to cost nearly $150. In addition, a motor is Pump Water for Irrigation required to pump the water, which is another $300, and rubberized pipes must be replace each year, which can cost between $60 - $80/100 meters (Table 25). The World Bank, Private Sector Development, East Asia and Pacific Region 49 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 25 Estimate of Fixed Costs Incurred by a Modern Tobacco Farmer in Cambodia Fixed Costs $/3 hectares $/hectare $/ton Well digging/pump $ 150.00 $ 50.00 $ 25.00 Pump motor $ 300.00 $ 100.00 $ 50.00 Curing barn $ 700.00 $ 233.33 $ 116.67 Tractor $ - $ - small $ 1,000.00 $ 333.33 $ 166.67 large $ 4,700.00 $1,566.67 $ 783.33 TOTAL $ 2,150.00 $ 716.67 $ 358.33 Source: Based on interviews conducted by Global Development Solutions, LLC In this context, fixed costs associated with shifting from traditional to modern tobacco farming has a high premium which most farmers are not able to manage unless financial and technical assistance is made available to them by large cigarette manufacturers. Such tobacco yield approximately 20 leaves per plant, that grow to a height of 1 ­ 1.5 meters and achieve yields of 12 tons/hectare of green fresh leaf tobacco, which translates into about 2 tons/hectare of cured leaf tobacco. As chemicals are expensive and difficult to access, Preparing tobacco for curing local resources are used to combat pests and diseases. Both as a cost cutting measure and At the same time, however, a 3 hectare to integrate sustainable agricultural practices, tobacco farm would require an additional local farmers are exposed to integrate pest farmhand to help, not only to manage the management (IPM), which include the use of crop, but also to help oversee seasonal workers a spray formulated from water and crushed required during harvesting. On average, a leaves from locally available Lim Trees combat permanent farmhand would cost about caterpillars and other pest that most often 90,000 Riel/month or $22.5/month. And impact tobacco crops. seasonal workers are paid about 4,000 Riel/day ($1/day). As most small tobacco farmers are operated by a single family or a group of families in a Interviews with farmers and farmhands village, labour costs associated with family suggest that some of the seasonal workers are members are not accounted for in the cost of also rice farmers. Which point to a possible production. opportunity to organize labour force exchange activities between the two sectors. Generally, 3 hectare tobacco farm would hire between 5 ­ 6 seasonal workers, particularly during harvest season. In this context, a tobacco farmer may pay as much as 300,000 Riel/season ($75/season) for seasonal farmhand. The World Bank, Private Sector Development, East Asia and Pacific Region 50 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Once tobacco is harvested, it must be sponsored by a major cigarette company, are prepared for curing. While many tobacco shifting to modern curing techniques. farmers continue to use traditional curing methods, the moisture content and quality of A modern curing technique employed among the cured tobacco does not fetch the highest Cambodian tobacco farmers consist of a 5- price. As a consequence, increasing number tiered drying tower made of mud, bamboo, of tobacco farmers, particularly those who are and a tin roof. Inside a modern curing barn affiliated with an out grower programme Warm Air Jackets Furnace Modern Curing Barn Traditional Curing Barn a network of hot air jackets and pipes are put into place to ensure consistent and even distribution of heat. Using a modern curing barn often requires a 4 stage curing process11 which can take anywhere from 105 ­ 120 hours where maximum temperatures may reach as high as 74C. According to tobacco farmers, the principal fuel used for curing is old rubber trees and trees which they `harvest' from the Mekong River during flood season.12 Generally, such curing barns can cost as much as 2.6 million Riel ($700), where most of the 11 The four stages includes: yellowing; color fixing; lamina drying; and steam drying. 12 It should be noted that BAT, the largest cigarette manufacturer in Cambodia, has engaged an extensive sustainable reforestation programme. Further detail is provided in the annex. The World Bank, Private Sector Development, East Asia and Pacific Region 51 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia costs are incurred for the purchase of steel pipes and tin roofing material. On average, these curing barns can last up to 10 years. While the initial cost of building such a curing barn is high, tobacco farmers are able to achieve a fresh to cured tobacco conversion ratio of 6:1. This means that a 3 hectare tobacco farm producing 36 tons of green fresh leaf, would end up with 6 tons of cured tobacco. Once tobacco is cured, it must be delivered to the cigarette manufacturer where it is graded. In most instances, the curing barn is some distance away from the tobacco `auction floor'. But a number of informal transport services have evolved in villages where there are a cluster of tobacco farmers using modern farming techniques. Specifically, larger farmers able to afford the purchase of a truck are offering to transport cured tobacco to the `auction floor' for about 3,000 Riel/bale.13 So, a 3 hectare tobacco farm that yields a total of six tons of cured tobacco would pay approximately $45 ($7.50/ton) to a local farmer to truck the cured tobacco to the auction house. Depending on the grading, farmers using modern farming techniques can receive as much as $1.25/kg for cured tobacco. In the case of the farmer with 3 hectares which produces 6 tons of cured tobacco, he received a price of $1.00/kg, which translates to a revenue of $6,000 (Table 26). 13 One bale of tobacco weighs approximately 100kg. The World Bank, Private Sector Development, East Asia and Pacific Region 52 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 26 Estimated Revenue for a M odern Tobacco Farmer in Cambodia: An Example from a 3 hectare Farm Revenue Estimates Total land (hectares) 3 Cured tobacco Yield rate (tons/hectare) 2 Total production of cured tobacco leaves(tons) 6 Conversion rate (in weight) for 3 hectare Green fresh leaf 36 Cured tobacco 6 Total production of cured tobacco (kg) 6,000 Price per kg $1.00 Revenue $6,000.00 Source: Based on interviews conducted by Global Development Solutions, LLC Based on these calculations, small shareholder financing support, thus making it possible to farmers such as the one profiled here with a 3 shift from other cash crops such as rice to a hectare tobacco farm can earn between much more lucrative farming enterprise. $3,22714 - $5,37715 profit per season. While there are a number of serious Once the cured tobacco is sold to a cigarette development and ethical issues surrounding manufacturer, it is sent to re-drying plant tobacco farming, some consideration is need where the tobacco goes through at least 8 to take into account the economic conditions processing steps: conditioning; sand facing Cambodia, and the absence of short extraction; quality control; grading; blending and medium term economic options available bin; drier; packing; and storage. Once in to rural farmers. storage at least for six months, the tobacco is ready to head off to the production facility. The value chain for tobacco farming and the cost breakdown of start-up costs indicates that substantial upfront capital investment is required for fixed asset investments in such items as drilling wells, pumps and pump motors, and even a tractor (Chart 7). The volume of initial capital required is usually far beyond the reach of local farmers. At the same time, however, tobacco farmers associated with an out grower programme like the one sponsored by BAT gain access to 14 Assumes an investment in a new well, pump, pumping motor, curing barn, and a small tractor. 15 Assumes no new investments in fixed assets and is required to cover variable costs. The World Bank, Private Sector Development, East Asia and Pacific Region 53 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 7 Need to strengthen technical Requires access to training and on-farm skills affordable sources of development through local medium/ long-term institutions financing Labour Well Tractor Irrigation Pump Curing Trucking Jute string/ Personal Seasonal Digging/ Hire Pipe Motor Barn Cured Bag Protection 4% Pump Tobacco Gear Permanent 8% 8% 7% 17% 39% <1% <1% 1% 15% 2. A Brief Introduction to Cigarette Production in Cambodia Cambodia continues to be competitive within the region. For example, it is estimated that cured tobacco is anywhere from $0.5 - $1.00/kg Tobacco grown in Cambodia is considered a medium grade quality, cheaper to produce in Cambodia than in neighboring Vietnam. At the and is used as `filler/bending tobacco', as opposed to the high quality same time, however, without expanding crop production, particularly `flavor' tobacco grown in other parts of the world such as the United through the introduction of large scale farming, mechanization, and States.16 As such, premium tobacco manufacturers operating in improved production techniques from countries like Thailand, it is Cambodia must import flavor tobacco. Similarly, in the past decade, anticipated that the competitive advantage currently held by Cambodia with the resurgence of the tobacco industry in Cambodia, the country is may quickly dwindle. now beginning to export blending tobacco to a selected number of countries in Asia. For example, BAT Cambodia, exports as much as 400 tons of blending tobacco to its sister operations in Sri Lanka, Malaysia and Singapore. And, now sources over 80 percent of its tobacco from local growers. The level of quality achieved in Cambodia for blending tobacco in recent years is a promising sign for developing a exportable cash crop. According to interviews, the cost structure of the tobacco industry in 16 Principal regional competitors in the blending tobacco market includes Thailand, Vietnam and Indonesia. The World Bank, Private Sector Development, East Asia and Pacific Region 54 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia For the production of premium cigarettes, premium cigarettes is divided into three areas: manufacturers must import wrapping leaf; packaging; and filter, where the input material, including filters, casing, and spare cost ratios is approximately 4:2:1 respectively. parts ­ referred to as WMS. As such costs With this said, however, as the volume of continue to remain relatively high, particularly locally grow tobacco increases, the overall cost taking into account the administrative costs of leaf may go down slightly to help improve associated with importing WMS. In general, the competitiveness of premium cigarettes the production cost structure in Cambodia for produced in Cambodia. 3. Value Chain Analysis of Administrative The cigarette market in Cambodia is divided and Transport Costs Associated with the into manufactured and hand rolled, where Production and Export of Tobacco in hand rolled cigarettes dominate the low end Cambodia market and most manufactured cigarettes attract premium prices. Interviews with tobacco farmers and tobacco processors suggest that there was very little administrative interventions experienced during farming and tobacco processing stages. With this said, however, two administrative interventions were identified during the farming stage. Specifically, tobacco farmers are regularly assessed a `barn tax' amounting to $21.98/year by district authorities. Similarly, the tobacco processor are regularly requested to make annual `social A large producer like BAT operate a highly contributions' by the provincial government automated production facility using which is equivalent to about $198. equipment such as Molins Mark 8 cigarette maker, Protos from Hauni which can process In addition to the barn tax and social as many as 7,000 cigarettes per minute. contributions, administrative charges associated with the import of WMS and flavor Among the premium brand producers, tobacco accounted for 48.7%, transport equipment currently being used in Cambodia charges 10.5% and export of cured tobacco include AMF machines that can pack 125 accounted for 40% of all administrative packs per minute (PPM), and GDX1 machine charges (Table 27). which can operate at 370 PPM. With such highly automated equipment currently operating in the market, there is ample capacity for cigarettes to become a major export commodity for Cambodia The World Bank, Private Sector Development, East Asia and Pacific Region 55 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 27 Administrative Interventions and Transport Costs Associ ated With the Production and Export of a 40 Foot Container of Tobacco from Cambodia Pre-Production Production Post-Production TOTAL % of Total Material Import Curing Transport Production Export Processing District Authorities Barn tax $ 21.98 $ 21.98 0.9% Transport tax $ 59.40 $ 59.40 2.4% Provincial Government Misc. Social Contribution $ 198.00 $ 198.00 8.0% Ministry of Finance $ 627.00 25.5% Import permit $ 80.00 $ 80.00 3.3% Customs Permit $ 113.00 $ 200.00 $ 313.00 12.7% Customs Clearance $ 15.00 $ 199.00 $ 214.00 8.7% Treasury $ 20.00 $ 20.00 0.8% CDC $ 80.00 $ 80.00 3.3% Ministry of Commerce $ - Cam Control $ 91.25 $ 30.00 $ 121.25 4.9% Ministry of Transport $ 229.06 9.3% Port Authority $ 135.00 $ 80.00 $ 215.00 8.7% Roads $ 14.06 $ 14.06 0.6% Ministry of Interior Police $ 5.00 $ 5.00 0.2% Ministry of Agriculture Phytosanitary $ 115.00 $ 115.00 4.7% KAMSAB $ 10.00 $ 10.00 0.4% PME Charges $ 283.00 11.5% Customs permit $ 80.00 $ 80.00 3.3% Clearance costs $ 203.00 $ 203.00 8.3% AZ Group $ 80.00 $ 80.00 3.3% Transport Company $ 285.00 $ 345.00 $ 630.00 25.6% TOTAL $ 1,197.25 $ 21.98 $ 257.40 $ - $ 983.06 $ 2,459.69 100.0% % of Total 48.7% 0.9% 10.5% 0.0% 40.0% 100.0% Source: Based on interviews conducted by Global Development Solutions, LLC Most inputs required for the production of for a 40 foot container. A standard 40 foot cigarettes are imported via Sihanoukville port container can hold as much as 19.8 tons of and other inputs required for leaf production cured tobacco. from Thailand using trucks towing 40 foot containers. Transport arrangements are Costs associated with importing inputs and principally handled through Thai freight the export of cured tobacco, and the forwarders that arrange for the transport of transporting costs constituted 25.5% and goods, usually from Bangkok to Poipet where 25.6% respectively. In particular, costs both export and import clearance take place. associated with customs clearance accounted for over 12% of all costs. Part of the reason According to the breakdown of administrative why transport costs were high was because this and transport costs, the import of inputs and cost also reflects administrative costs which export of cured tobacco costs nearly $2,459 the trucking companies must pay to The World Bank, Private Sector Development, East Asia and Pacific Region 56 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia government official during delivery. extremely complex. The entire clearance Furthermore, as the chart below indicates, process requires as much as 22 separate customs clearance procedures for importing documents to be signed and stamped (Chart input material for the tobacco industry is 8). The World Bank, Private Sector Development, East Asia and Pacific Region 57 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 8 Manufacturer of Cigarettes Requiring Imported Inputs Order Request Shipment Offshore Manufacturer: Phnom Penh Arrival Notice Quotation/ pro forma Suppliers invoice RO Pro forma invoice Contract OIA Shipment No. F Customs OIA Shipment Clearance No. Agent SGS Cambodia SGS: Country Inspection of Supplier Document Customs Clearance Customs Agent Document Cash Customs Cash Payment Document Payment LoLo Survey/ TC Scan Customs Approval Charge Inspection Invoice Document s AZ Group Ministry of Transport Ministry of Commerce Ministry of Finance Ministry of Finance Port Authority Cam Control Customs (Sihanoukville) Customs (Phnom Penh) Trucking Ministry of Transport Company Shipment Release Roads Toll The World Bank, Private Sector Development, East Asia and Pacific Region 58 Shipment Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia In addition, port clearance charges for the AZ Group, a private contractor to the importing WMS were also high (8.7% of the Port Authority, responsible for providing overall costs). A breakdown of this data security scanning of cargo. suggests that port clearance charges alone accounted for 54% of the total clearance In summary, the biggest challenges faced by charges, and another 37% of the costs were the tobacco industry in Cambodia can be accounted for by TC Scan charges assessed by summarized as follows (Table 28). Table 28 Administrative and Market Barriers Hindering Competitiveness in the Tobacco Industry Critical Issues Impact Business Complex customs clearance Production delays Environment procedures Discourage further investments in out High customs clearance and permit grower schemes to support rural charges farmers High import tax on ancillary Discourage further investments in products expanding production and supporting Uneven implementation of tax stamp local goods and service providers legislation Reduce competitiveness of locally Lack of regulatory enforcement grown tobacco in the export market Disequilibrium between import duty Encourage illegal sales of cigarettes and tax on import of ancillary Encourage import trade rather than products and cigarette manufacturing local production Distributional monopoly High input cost, particularly Absence of support institutions, fertilizers particularly as it relates to on-farm Lack of mobility among farmers in training and skills development response to market opportunity Supply Chain Absences of affordable medium and Discourage farmers from employing long-term financing modern farming practices Lack of mobility among farmers in response to market opportunity Infrastructure Uncompetitive energy policy Discourage further investments in High fuel costs new and existing operations High electricity costs Reduce yield per hectare and thus income earning potential of rural farmers Exacerbate income disparity between small holder farmers and medium size farmers The World Bank, Private Sector Development, East Asia and Pacific Region 59 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Garment Industry: Core Historical Growth Industry garment production remains highly The garment industry is currently one of the competitive among countries such as China, most important industry for Cambodia, Philippines, Sri Lanka and Thailand. The particularly in the context of employment and garment industry in Cambodia is represented foreign exchange generation. Furthermore, predominately by foreign rather than local when considering the membership of investors. Specifically, the largest investments Cambodia to the WTO and the elimination in the industry come from Hong Kong, of the quota system at the end of 2004, much Taiwan, China, Singapore, South Korea and focus has been placed on and written about the U.S. Currently, slightly over 8 percent the garment industry. The intent of this (15 companies) of the companies operating in analysis is to place emphasis on the Cambodia command over 50 percent of total administrative barriers to competitiveness of garment exports. This suggests that the the garment industry as industry have garment industry is highly volatile and identified the heavy handedness of the susceptible to changes in the market government in the industry as the principal environment. barrier to growth. 1. Reliance on the GSP Quota System Cambodia's total export volume is estimated to be about $1.44 billion, of which 77 percent Interviews with industry representatives in or $1.11 billion is represented by the garment Cambodia suggest that the sustained growth industry. In this context, U.S. is the biggest of the garment industry in Cambodia is market for Cambodian garment exports, largely driven by the country's increasing where 71 percent of all garments produced in access to the U.S. market through the Cambodia are exported to the U.S., 27 MFN/GSP. While Cambodia has MFN/GSP percent to the EU, and the remainder relationships with a number of countries in distributed among a range of European and industrialized markets17 and countries with Asian countries. In short, Cambodia's export economies in transition18, the single most industry as well as the garment industry is important export market continues to be the dominated by sales to the U.S. Consequently, U.S. In terms of volume of exports, the elimination of the quota system is bound trousers/pants,19 and women's cotton to have a profound impact on the Cambodian shirts/blouses dominate Cambodian exports to economy. the U.S. As evident from the table below, since 2000 Cambodia has consistently Currently there are over 186 garment factories maximized its quota with the U.S. and has that employ over 200,000 workers in enjoyed ever increasing levels of quota for the Cambodia. As 90 percent of the workers in two largest volume items such as garment factories come from rural areas, the trousers/pants and T-shirts (Table 29). garment industry has a substantial impact on rural poverty and employment creation. 17 While the labour force in the garment Countries include: Australia; Canada; South industry represents a mere 3.7 percent of the Korea; Japan, New Zealand; Norway; total labour force, it also commands over 67 Switzerland; U.S. and EU 18 percent of the labour force in the budding Countries include: Belarus; Bulgaria; Czech manufacturing sector. Republic; Hungary; Poland: and Slovakia 19 Brand names such as Levi Straus, Original, With the average wage rate of approximately Old Navy, Union Day, No Boundaries, Santo, and LA. Jeans are some of the more popular $55/month, the labour component of brands manufactured in Cambodia. The World Bank, Private Sector Development, East Asia and Pacific Region 60 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 29 Cambodian Garment Exports to the U.S. Measured in Dozens 2000 2001 2002 Trousers/pants (% of quota filled) 2,956,500 (83.9%) 3,855,021 (84.5%) 3,071,350 (98.6%) T-shirts (% of quota filled) 3,427,800 (100%) 4,323,388 (76.5%) 3,685,620 (75.7%) Cambodia's exports to the EU primarily productivity improvements were introduced, consist of pullovers and T-shirts. But the that alone would have limited if any impact value of exports to the EU is only 38 percent on the overall competitiveness of Cambodian of what is exported to the U.S. market. The garment exports. Thus, focus must also be heavy dependence of the garment industry on directed at understanding factors that a single market, and a limited number of contribute to reducing material input costs, major investors (15 companies) raises a critical which dominate the overall cost of question regarding whether the industry in production. Cambodia can maintain its competitiveness after 2004, and whether government policies As discussed in an earlier section on cotton are effectively geared to support the transition and textiles production, ample opportunities from a quota based market. exists to develop a robust textile industry in Cambodia. However, as with the case of In addition, very little evidence exist both in imported materials, administrative costs the private sector and within the Government associated with import transactions continue regarding whether enterprises in the garment to place a burden on local manufacturers. industry will or are capable of shifting production to penetrate the non-quota Table 31 markets. Government Administrative Costs 2. Crucial Competitiveness Issues Associated with Manufacturing and Exporting a 40 Foot Container of Denim Taking denim jeans as an example, the basic Jeans cost structure for the production of a high-end Stages of Production Administrative 5 button 10/12 weight denim jeans is as Costs follows (Table 30): Pre-production $448.20 (44%) Table 30 Import clearance Transport Basic Cost Structure for Manufacturing Production $30.83 (3%) Denim Jeans in Cambodia Cutting/layering Cost % of Sewing/assembly Total Finishing $132.08 (13%) Materials and $4.42 65% Finishing accessories Packing/loading Labour $1.02 15% Post Production $406 (40%) Other inputs $1.22 18% Transport Profits $0.14 2% Export document Total Cost $6.80 100% process Export clearance While Cambodia's competitive labour costs is Total $1,017.37 a critical selling point for attracting and Source: Based on interviews conducted by retaining investments in the country, the cost Global Development Solutions, LLC of labour constitutes a mere 15% of the total input. Consequently, even if dramatic labour The World Bank, Private Sector Development, East Asia and Pacific Region 61 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia More broadly, based on a value chain analysis reveals that administrative costs associated with importing denim material and accessories, producing and exporting denim jeans in a 40 foot container may cost as much as $1,017.37 before transport costs and GSP quota fees20 (Table 31). 3. Benchmarking Cambodia's Transport and Import Clearance Charges To assess the relative cost of transport and import clearance charges incurred by enterprises operating in Cambodia, the following table provides a benchmark of costs based on import of a standard 40 foot container (FCL)21. The combined transport and import clearance charges for Cambodia, excluding costs associated with Cam Control was estimated to be $858 (Table 32). Charges incurred by enterprises operating in Cambodia were 55% higher than Hong Kong, and 2.8 times the cost incurred by similar operations in Malaysia. The only area where Cambodia was consistently lower than other Asian countries was in the area of terminal handling charges.22 20 A 40 foot container can carry approximately 2,250 dozen trousers. 21 FCL (full container load). 22 No reasonable explanation was found to explain this anomaly. The World Bank, Private Sector Development, East Asia and Pacific Region 62 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 32 Benchmarking Transport and Import Clearance Charges Between Cambodia and Selected Countries (40 Foot Container) Cambodia Hong Kong Malaysia Sri Lanka Madagascar Trucking $ 160 $ 210 $ 130 $ 71 $ - Customs $ 285 $ - $ - $ 4 $ 50 Lifting $ 118 $ - $ - $ 73 $ 25 Terminal handling charges $ 100 $ 330 $ 166 $ 285 $ 247 Documentation $ 15 $ 15 $ 13 $ - $ 35 Container scanning $ 80 $ - $ - $ 30 $ - Other expenses $ 100 $ - $ - $ 21 $ 10 TOTAL $ 858 $ 555 $ 309 $ 484 $ 367 Cam Control 0.10% 0 0 0 0 4. Undocumented Administrative Costs A wide range of interviews with local and As the garment industry continues to lead the international freight forwarding companies export sector in Cambodia, it is common to help shed light on the magnitude of hear allegations of high undocumented undocumented administrative costs incurred administrative costs that enterprises operating by local enterprise. As an example, data on in Cambodia must incur. What has not been import of a consolidated 40 foot container clear is the extent and magnitude of charges containing textile material was collected imposed on local companies. (Table 33). Interviews indicate that nearly all invoices issued by freight forwarder to its clients are consolidated and offer no itemized listing of charges incurred by the freight forwarder. While there is indication that collusion is taking place between government officials, particularly in customs, and a number of freight forwarding companies, virtually nothing has been documented on undocumented administrative costs.23 23 Interviews suggest that some freight forwarding companies have two forms of payment to government officials. First, a lump sum payment ranging from $25,000 to as much as $100,000 is made to one or more government usually marginal but required, and another officials who then distribute this sum to others payment made to supervisors with authority to collaborators in the `network'. This form of sign or stamp a clearance document. As payment allows freight forwarders free entry of numerous documents, stamps and signatures cargo without inspections. These costs are then required, the second form of payment is often past on to its clients using a consolidated much more time consuming and labour invoice. The second form of payment is much intensive. Consequently, such informal barriers more cumbersome and is based on individual encourage freight forwarders to enter into a lump shipment. Under this scheme, payments must be sum type payment agreement with government made to both low level inspector, which are officials. The World Bank, Private Sector Development, East Asia and Pacific Region 63 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 33 Undocumented Administrative Charges for Import of a 40 Foot Container Customs/Camcontrol: Phnom Penh Riel $ Ministry 1 Declaration & document control 65,000 $ 16.25 Min. of Finance: Customs 2 Tax accountant 30,000 $ 7.50 Min. of Finance: Customs 3 Accountant for income bill/tax receipt 15,000 $ 3.75 Min. of Finance: Customs 4 Office & branch stamp 10,000 $ 2.50 Min. of Finance: Customs 5 Customs control (SGS) 280,000 $ 70.00 Min. of Finance: Customs 6 Other expenses 80,000 $ 20.00 Min. of Finance: Customs 7 Chief/Vice Chief of Customs Office 60,000 $ 15.00 Min. of Finance: Customs 8 Customs Director 80,000 $ 20.00 Min. of Finance: Customs 9 Camcontrol Inspector 80,000 $ 20.00 Min. of Commerce: Camcontrol 10 Economic police/border police 40,000 $ 10.00 Min. of Interior: Police 11 TC Scan clearance 200,000 $ 50.00 AZ Group 12 Customs fee 40,000 $ 10.00 Min. of Finance: Customs 13 TOTAL 980,000 $ 245.00 Camcontrol: Phnom Penh Riel $ 1 Camcontrol tax 108,800 $ 27.20 Min. of Commerce: Camcontrol 2 Camcontrol communication charges $ 20.00 Min. of Commerce: Camcontrol 3 Other expenses 8,500 $ 2.13 Min. of Commerce: Camcontrol 4 TOTAL 117,300 $ 49.33 Customs/Camcontrol/Port Authority: Sihanoukville 1 Kamsap change bill of goods 12,000 $ 3.00 2 Port bill 16,000 $ 4.00 Min. of Transport: Port Authority 3 LOLO: station chief 6,000 $ 1.50 Min. of Transport: Port Authority 4 Camcontrol 4,000 $ 1.00 Min. of Commerce: Camcontrol 5 Border police/port security 16,000 $ 4.00 Min. of Interior: Police 6 Truck entry/exit fee 12,000 $ 3.00 Min. of Transport: Port Authority 7 National Road Security 40,000 $ 10.00 Min. of Transport: Roads 8 LOLO/Storage fee $ 235.00 Min. of Transport: Port Authority 9 TOTAL 106,000 $ 261.50 GRAND TOTAL $ 555.83 These figures suggest that undocumented In addition, the high undocumented administrative charges incurred by local administrative costs associated with the enterprises, particularly in the garment sector, Ministry of Transport is largely due to delays range anywhere from 54% - 64% of the in customs clearance and reflects excess consolidated invoice that local enterprises storage costs associated with this delay (Chart receive from freight forwarders. What is 9). Consequently, in absence of these charges, interesting to note, is when undocumented these figures suggest that the highest administrative charges as indicated above is undocumented administrative charges are discounted from the transport and import assessed by the Ministry of Finance and the clearance charges used to benchmark Ministry of Commerce. Cambodia against other prominent garment producing countries, the actual administrative costs come into alignment with other competing countries. The World Bank, Private Sector Development, East Asia and Pacific Region 64 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 5. Administrative Interventions During Finance/Customs, during packing and loading Production finished goods were often cited by factory managers as disruptive and unnecessary. In Much of the administrative costs are incurred some cases, government inspectors would during import and exporting stages of arrive late for inspections while containers production. Specifically, very little were already being loaded to meet a shipping administrative interventions tends to take deadline. In such instances, loaders are place during production as very few laws and required to unload the already filled container regulations controlling production and to allow inspectors to check the cargo. In manufacturing are currently in place in another instance, inspectors come to the Cambodia. As a result, interaction between factory site merely to inspect the quality of the government officials and factory mangers are boxes in which the finished goods are being limited and thus provide little opportunity for packed. Such disruptions are contributing to direct rent seeking opportunities. investor frustration, as well as costly delays, both resulting from overtime payments for At the same time, however, government factory workers and inspectors, and sometime interventions, particularly by the Ministry of even missing shipments. Commerce/Cam Control and Ministry of Chart 9 Undocumented Administrative Charges Others 4% Mininistry of Finance Mininistry of Finance AZ Group 30% Ministry of Commerce 9% Ministry of Transport Ministry of Ministry of AZ Group Transport Commerce Others 44% 13% The World Bank, Private Sector Development, East Asia and Pacific Region 65 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 34 Denim Jeans Production and Export to U.S.: Administrative Cost Matrix for 40 Foot Container Pre-Production Production Finishing Post-Production Export Export Import Cutting/ Sewing/ Packing/ Doc Clearance/ Total % of Clearance Transport Layering Assembly Finishing Loading Transport Processing Checking Cost Total CDC $ 0.83 $ 0.83 0% MoT 23% Port Auth $ 187.93 $ 21.00 $ 208.93 21% Roads $ 14.00 $ 14.00 $ 28.00 3% MoC 30% Cam Control $ 30.51 $ 110.00 $ 104.00 $ 244.51 24% GSP $ 10.00 $ 53.00 $ - $ 63.00 6% MoF: Customs $ 125.00 $ 15.00 $ 33.00 $ 135.25 $ 308.25 30% MoInt: Police $ 10.76 $ 15.00 $ 25.76 3% MoL $ 10.00 $ 10.00 1% MoInd: CPO $ 10.00 $ 31.00 $ 41.00 4% MoE $ 7.08 $ 7.08 1% MoFA $ - 0% AZ Group $ 80.00 $ 80.00 8% Total Administrative Cost $ 434.20 $ 14.00 $ 20.00 $ 10.83 $ 7.08 $ 125.00 $ 14.00 $ 117.00 $ 275.25 $1,017.37 100% % of Total 43% 1% 2% 1% 1% 12% 1% 12% 27% MoC GSP Quota Fee* $2,812.50 Total Freight Charge (import and export freight charges) $ 280.00 Total Administrative Cost including Freight Charges $1,297.37 Grand Total including GSP Quota Fee $4,109.87 NOTES: Quota fee for 347 to U.S./dozen ($) 1.25 # of dozens/40 ft container 2,250 Source: Based on interviews conducted by Global Development Solutions, LLC The World Bank, Private Sector Development, East Asia and Pacific Region 66 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia As evident from Table 34, problems denim jeans occurred during these two phases surrounding administrative costs associated of the value chain. with government interventions occur principally during import clearance and Further analysis of these areas of export clearance/checking procedures. administrative interventions revealed that a Specifically, 70 percent of administrative costs number of factors contribute to the high associated with importing and exporting administrative costs (Table 35). Table 35 Three Highest Costs Associated With Import and Export Clearance for Denim Jeans Import Clearance Costs Export Clearance/Check Costs Load-on/Load-off charges (MoT: Port Authority) $118 Customs inspection (MoF: Customs) $60 Import permit (MoF: Customs) $50 Cam inspections (MoC: Cam Control) $50 Document processing fee (MoF: Customs) $50 Cam control (MoC: Cam Control) $40 In addition to high administrative costs, import clearance procedures were also found 6. Benchmarking Cambodia's Transport to be time consuming and cumbersome. and Export Clearance Char ges Shipments used by the garment industry often contain a number of different materials and The benchmarking of Cambodia's transport accessories in a 40 foot container. and import clearance charges revealed a Consequently, the shipment falls under what substantial difference between administrative is often referred to as a loose cargo. Such costs incurred by enterprises operating in cargo is subject to much more cumbersome Cambodia when compared to other custom clearance procedures than a prominent garment producing countries. consolidated cargo which contains a single What is even more dramatic, however, is a item. In some instances, import clearance similar comparison between the cost of may require as many as 24 separate transport and export clearance charges for a documents, and 15 or more signatures. 40 foot FCL with the same garment producing countries. Ample opportunities exists to reduce and consolidate the number of steps required for As the Table 36 indicates, transport and import clearance, not only to help reduce the export clearance charges incurred by time and resources required to process all of enterprises in Cambodia are as much as 2.2 the required documents, but also to reduce times higher than Sri Lanka, and 4.4 times the number of opportunities where rent more than Hong Kong. seeking opportunities can take place. Table 36 Benchmarking Export Clearance Charges Between Cambodia and Selected Countries (40 Foot Container) Cambodia Hong Kong Malaysia Sri Lanka Madagascar Trucking $ 200 $ 210 $ 85 $ 71 $ 50 Customs $ 280 $ - $ - $ 68 $ 25 Lifting $ 21 $ - $ - $ 29 $ 50 Inspection (at factory) $ 100 $ - $ - $ - $ - Overtime charges $ 230 $ - $ - $ 6 $ 247 The World Bank, Private Sector Development, East Asia and Pacific Region 67 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Terminal handling charges $ 100 $ 30 $ 176 $ 285 $ 35 Documentation $ 15 $ 15 $ 13 $ - $ - Customs inspection fee $ 150 $ - $ - $ 30 $ 10 Misc. charges $ 30 $ - $ - $ 16 TOTAL $ 1,126 $ 255 $ 274 $ 505 $ 417 Deepening the supply chain to integrate Administrative costs: $1,017.37 cotton and textile production with the Freight charges: $280.00 garment industry may offer a solution to GSP Quota fees: $2,812.50 reduce overall cost of production, and thus Total: $4,109.87 enhance the competitiveness of finished products in the garment and textile industry. It should be noted that the total But the exorbitant transport and export administrative cost, including freight and GSP clearance charges when compared with other quota fee is equivalent to the 2 percent profit prominent garment producing country is margin that many garment manufacture are likelihood to hinder the competitiveness of left with after the transaction. garment exports, even when productivity improvements and reduction in inputs costs are realized. Yet another alarming factor contributing to expenses associated with operating a garment factory in Cambodia is the payment of GSP quota fees to the Government. Specifically, the current quota fee for the U.S. is set at $1.25/dozen for exports to the U.S. and $0.35/dozen to the EU. Such fees are collected by the Ministry of Commerce and is said to be directly transferred to the Treasury.24 According to interviews, the GSP quota fee for a 40 foot container of denim jeans shipped to the U.S. would be approximately $2,812.50. In short, the total administrative cost associate with exporting 2,250 dozen denim jeans from Cambodia to the U.S. in a 40 foot container is approximately $4,109.87: 24 Based on a quota fee of $2,812.50/40 ft. container of trousers, revenue from GSP quota collected by the Government in 2002 should be, at minimum $3,839,187. In addition, revenue from government administrative charges in 2003 (including packing/loading, transport, export documentation, and export clearance) for the export of trousers should be approximately $725,156. The World Bank, Private Sector Development, East Asia and Pacific Region 68 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 7. Summary of the Administrative Costs High Export Clearance Charges Associated with the Garment Industry High diesel fuel price and overhead time associated with delays caused by government Although imported inputs continues to be inspections constitute over 56% of the cost high, Cambodia's garment industry continues incurred by enterprises operating in to be competitive. However, as evident from Cambodia. Delays caused by inspections and the discussions to this point, import and clearance procedure at the port is known to export clearance costs play a prominent role in delay cargo, sometime requiring personnel contributing to the overall cost of garment from the exporting company to be present to exports. Specifically, import of inputs, export ensure that delivery time is met. clearance charges, export document processing, and packing and loading impose Export Documentati on and Packing and the highest cost to garment manufacturers in Loading Costs Cambodia. According to interviews, inspectors from Cam Control and Ministry of Industry come onto Input Imports the shopfloor of the factory to inspect packing Administrative cost analysis suggests that and loading of finished goods. At times when trucking, customs and `other' costs constitute goods are already packed, inspectors require over 66% of the imported input costs. the exporting company to unload a container `Other' costs principally represents late and unpack boxes for inspection. Such charges imposed by government inspectors. unnecessary inspections have been the cause of For example, government inspectors charge substantial frustration and cost to enterprises `after hours' inspection costs as a means of in the garment industry. generating additional personal revenue. As a result, input materials do not arrive on time to the factory to begin production. This often places unnecessary pressure at the factory to speed up production at a cost of sacrificing quality of output. Trucking The price of diesel fuel and more broadly, the energy pricing policy of the country requires reconsideration as fuel and electricity costs continues to be a cross-cutting issue for numerous industries that contributes to discounting the competitiveness of value- added Cambodian products in the international market. Customs Clearance Charges All imported inputs face a relatively high import clearance charge. In the case of garments, 80% of the clearance charges incurred by local enterprises reflects the cost of import permit and document processing costs. As discussed in a previous section, unofficial costs continue to be high and discount the competitiveness of finished products as well as to discourage new investments, both local and foreign. The World Bank, Private Sector Development, East Asia and Pacific Region 70 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chart 10 Administrative Interventions Analysis for the Production and Export of 40 Foot Container of Denim Jeans to the United States Packing/Loading Trucking Quality certificate: 48% High fuel costs CP inspection: 40% Phnom Penh: $0.42/litre CO inspection: 12% Bangkok: $0.32/litre Saigon: $0.30/litre Customs Clearance Import permit: 40% Including late Export Document Process Document process: 40% CP application: 26% Chief inspector signature: 8% charge assessed by CO application: 28% Document check: 8% Visa: 45% Customs stamp: 4% government inspectors Trucking Customs Lifting Terminal Document Container Cam Other* Handling Scanning Control 19% 15% 14% 6% 2% 9% 4% 32% Input Transport Cutting Sewing Finishing Packing Transport Export Doc Export Import Layering Assembly Loading Process Clearance 43% 1% 2% 1% 1% 12% 1% 12% 27% Trucking Customs Lifting Inspection Overhead Terminal Documents Customs Misc. Time Handling Inspection 26% 15% 3% 16% 30% 17% 1% 14% 4% Late charge assessed by government inspectors The World Bank, Private Sector Development, East Asia and Pacific Region 71 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Administrative and market barriers to exporting sector can be summarized as competitiveness faced by the garment follows. Table 37 Administrative and Market Barriers to Competitiveness Critical Issues Impact Business Industry is dependent on high cost Inability to remain competitiveness Environment imported material, partly due to high in the export market, particularly import administrative charges with WTO accession Unnecessary in-factory inspections High undocumented administrative High export clearance charges charges, which increases non- Cumbersome export procedure transferable costs Delays in shipment, increased production costs and contribute to unpredictability of getting goods to market Supply Chain Over 50% of the exports are Highly volatile market with limited dependent on a small number of number of medium and large scale foreign companies, all of which have enterprises to support an efficient virtually no vertical market linkage supply chain structure Absence of support industries No incentive to invest in non-quota Quota dependent industry items and to introduce product Lack of incentives and support for diversity backwards linkage to deepen the supply chain Infrastructure Uncompetitive energy pricing policy High transfer of goods and operating High cost of electricity cost High cost of diesel Discourage investments in diversification The World Bank, Private Sector Development, East Asia and Pacific Region 72 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Motorcycle Industry: Potential for Regional Integrated Production fraction of the total demand for motorcycles As in many poor Asian countries, in Cambodia, but is playing an important role motorcycles is one of the principal form of in defining the relevance of market transportation for both individuals, families segmentation, brand image, industrial design, and commerce. As such it is common to find and other market drivers otherwise not large volumes of motorcycles in both rural and prominent in the industry. urban areas. In Cambodia, however, not only are motorcycles an important mode of Even within the region, product segmentation transportation, but the potential to produce is evolving. For example, in Thailand and spare parts locally and the consequent Vietnam, seats on motorcycles are short where development of the motorcycle industry has the principal role of the motorcycle is to the potential for acting as a springboard for facilitate the travel needs of an individual. On the evolution a light and medium industry. the other hand, nearly all models sold in Cambodia feature long seats that can Currently, motorcycles from Japan, Korea and accommodate several family members as well China are available in the Cambodian market, as for the transport of goods. where it is estimated that approximately 20,000 new motorcycles and over 100,000 Currently, only two Japanese manufacturers, used motorcycles are sold. The most popular Honda and Suzuki, assemble motorcycles in motorcycles are those made by Japanese Cambodia. Otherwise, most motorcycles, manufacturers, which on average costs about particularly the 100 cc model which are the $1,200. Similarly, Chinese imports are selling most popular in Cambodia, are imported for as little as $500 - $600. Given the from Thailand and Vietnam where a number intensive and wide ranging use of motorcycles of major motorcycle manufacturing and in Cambodia, the average lifecycle of a assemble plants are located. Larger 125 ­ Japanese motorcycle is approximately 5 ­ 6 500 cc motorcycles are primarily imported years, which retains a resale value of nearly from Japan. 50%. On the other hand, the cheaper Chinese models are said to develop 1. M arket Challenges mechanical and structural problems after only 6 ­ 9 months of intensive use. According to motorcycle manufacturers operating in Cambodia, due to wage As the Cambodian economy continues to differences and a number of other factors, the grow and its exposure to industrialized cost of motorcycle assembly is 1.3 ­ 1.5 times countries intensifies, two separate consumer higher in Vietnam when compared with the markets are beginning to emerge. First, the current cost of assembly in Cambodia. And traditional market, where the motorcycle yet, the development of motorcycle assembly serves as a workhorse for family and in Cambodia continues to be limited. commerce, and the second and relatively new market is the youth segment. With the For companies that assemble motorcycles in development of an affluent social sector, Cambodia, the cost of electricity and fuel children of the current generation who are costs continue to be high. As with many fashion conscious and seek out new trends, are companies, motorcycle assemblers gain access creating demand for new motor cycle models to electricity off the grid, principally relying and designs, where a new motorcycle is bought and sold within 1 ­ 2 years period. Such purchasing behaviour represent only a The World Bank, Private Sector Development, East Asia and Pacific Region 73 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia on their own on-site generators.25 earning him $150, nearly twice the monthly Consequently, the high cost of fuel oil was salary of a factory worker in one evening. also raised as a critical market barrier to expanding operations in Cambodia. Equally problematic to the development of the motorcycle industry is the smuggling of Other factors contribute to the slow evolution second hand motorcycles. Current estimates of the motorcycle industry in Cambodia, but suggest that sales of smuggled second hand the principal factor is the high level of motorcycles outpace the sales of new smuggling that takes place in the market. For motorcycles by 5 to 1. According to local example, due to high VAT and other import motorcycle dealers, second hand motorcycles duties on motorcycles, a 100cc motorcycle can be purchased for as little as $50 and up to sold legally in the market would cost about $1,200 for larger engine models. approximately $900, while a smuggled motorcycles are sold for less than $600. In a Some estimates suggest that illegal motorcycle market where a well paying assembly job pays sales, both new and used, may account for as a wage of $80 per month, consumer price much as $62.5 million in lost GDP sensitive for motorcycles is estimated to be contribution, and a loss in public sector about $50. As a result, market for income from administrative charges and motorcycles sold legally have very little import tax equally $10.4 million per year. opportunity for growth.26 In fact, it estimated that after paying both official and While these are staggering figures, equally undocumented fees to Government official, important is the impact that illegal sales of local motorcycle dealership are left with a motorcycles has on companies already profit margin of less than 1 percent. operating in Cambodia. All the while production costs are increasing in Thailand Given the porous borders between Cambodia and Vietnam, the unfavorable business and Thailand and with Vietnam, a regular and operating environment in Cambodia has done systematic motorcycle smuggling operation little to win the confidence of companies continues to flourish. A manager from one considering possible investments in spare part manufacturer recently visited a Thai- production in Cambodia. In addition, in the Cambodian border where in a single night he absence of investments in spare part witnessed nearly 200 motorcycles being production, the evolution of support smuggled into Cambodia. In such instance, a industries and light manufacturing will Thai driver drives a motorcycle across the continue elude the Cambodian economy. boarder into Cambodia where there is a waiting truck. The driver is paid $30 per 2. Administrative and Legal Barriers motorcycle and returns to Thailand where he picks up another motorcycle to drive into In addition to a host of market based Cambodia. It is estimated that a single driver problems, a wide range of administrative and can makes as many as 5 trips per evening, legal barriers plague the motorcycle industry in Cambodia. Generally, CKD kits arrive 25 Usually, the cost of electricity for from Thailand by sea freight in 40 foot manufacturers with their own generators are containers, which can hold as many as 60 above $0.18/kwh. complete kits. So, in order to understand 26 Survey's conducted by motorcycle administrative and assembly costs associate manufacturers found that while consumers tend with operating a motorcycle assembly to favor purchasing motorcycles in the legal operation in Cambodia, a value chain analysis market so that ownership and registration as well was conducted on a shipment of eight 40 foot as license documents are current, given the low containers holding 100cc motorcycle from average income level, price difference of more Bangkok to Phnom Penh. Preliminary data than $50 dollars is enough to impact consumer from the analysis suggest that administrative purchasing decision in favor of smuggled costs associated with importing CKDs motorcycles. The World Bank, Private Sector Development, East Asia and Pacific Region 74 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia represent more than 15 percent of the FOB value of a motorcycle (not inclusive of VAT). Table 38 Breakdown of Import and Assembly Charges Per Motorcycle in Cambodia Pre-Assembly Assembly Import Total % of Administrative Costs ClearanceTransport Assembly Cost ($) Total MoT 2% Port Authority $ 1.96 $ 1.96 2% Roads $ 0.42 $ 0.42 0% MoC Cam Control $ 0.60 $ 0.60 1% MoF: Customs $ 100.17 $ 100.17 96% AZ Group $ 1.33 $ 1.33 1% ADMINSTRATIVE COSTS $ 104.07 $ 0.42 $ 104.49 100% FREIGHT/SHIPPING CHARGES Freight Forward (Thailand) $ 1.70 7% Import Agent $ 1.33 6% Shipping Company $ 16.78 72% Trucking (SIH-PP) $ 3.48 15% FREIGHT/SHIPPING CHARGES $ 23.30 100% % of Total Operating Costs Labour $ 12.30 1% Fuel/Utilities $ 3.68 0% Over head $ 38.49 4% Value/unit CKD (FOB Bangkok) $ 683.22 79% OPERATING COSTS $ 714.77 100% TOTAL COST $ 104.07 $ 23.71 $ 737.69 $ 865.47 % of Total 12% 2.7% 85.2% 100% Source: Based on interviews conducted by Global Development Solutions, LLC A closer analysis of the administrative costs Consequently, to avoid facing losses, some revealed that import tax and custom clearance importers informally negotiate payments to charges made up more than 99 percent of the customs official so that tax rates are reduced to total administrative cost (Table 38). 30 ­ 50 percent of the value of the Interviews with motorcycle importers suggest motorcycle. that taxes are high, particularly for 125 ­ 250 cc class motorcycles, where taxes can be as To help reduce administrative charges high as 94% of the value of the motorcycle. associated with importing motorcycles into In one instance, high administrative and Cambodia, a group of foreign companies import tax forced one motorcycle importer to operating in Cambodia signed agreements face a loss of over $900 per unit. with the Ministry of Finance to obtain `SGS- The World Bank, Private Sector Development, East Asia and Pacific Region 75 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia free status', where each enterprise is required companies perform assembly of complete to pay between $15,000 - $25,000 to the knock- down (CKD) motorcycle units in Ministry of Finance to bypass SGS Cambodia. While tax regulations exists for certification on all shipments. Currently, the CKD assembly, the market is absent of similar official tax rate assessed by customs for regulations for other types of partial assembly shipments without a SGS stamp is 83.43 and local production such as complete built- percent, plus 7 percent penalty against the up (CBU) and incomplete knock-down value of each shipment. (IKD). As a result, companies are not encouraged to explore further investment and In addition to the high administrative cost value-added activities in Cambodia. associated with importing CKD kits, it was noted that the complexity of the import Finally, according to interviews, a number of procedure and the number of signatures and motorcycle manufacturers operating in stamps required continues to be problematic Cambodia are requested to donate as much as (Chart 11). Specifically, a review of shipping $10,000 per year to customs official during documents from motorcycle assemblers holiday seasons, particularly during 5 major suggests that for each container load of 60 holidays. These unofficial charges are in CKD units, 13 separate signatures and 7 addition to other non-receipt payments which stamps spread over 15 documents were companies must make to government officials required. While the actual process of clearing in conjunction with importing CKD units. shipment once it arrived in Sihanoukville Port is about 10 days, document preparation prior to clearance is said to be cumbersome. Once a CKD unit arrives and is assembled and sold in the market, other administrative issues continue to dampen the competitiveness of the motorcycle industry. With increasing demand for new models and shorter periods between design changes, copyright infringement and violation of intellectual property rights have become a major issue for the motorcycle industry in Cambodia. According to local motorcycle dealers, once a new design is introduced into the Cambodian market, within three weeks, an exact copy is available in the market through Chinese manufacturers for a fraction of the cost and quality. Such incidents are on a rise, and given the weak legal framework and enforcement history in Cambodia, limited if any recourse is available for businesses trying to operate a legitimate business. These incidents not only discourage existing operators from considering further investments in the industry, but also contributes to weakening the image of the country as a favorable investment site. As the manufacturing sector in Cambodia begins to develop, yet another challenge is beginning to appear. Currently, two The World Bank, Private Sector Development, East Asia and Pacific Region 76 Global Development Solutions, LLC Customs Clearance Map for a Motorcycle Assembler Operating in Cambodia with a Bounded Warehouse in Thailand Chart 11 Towards A Private Sector -Led Growth Strategy for Cambodia Order request 1 2 Assembler/Cambodia LoLo Freight Forwarder Cargo loading at Manufacturer/Thailand Chang Mai (Thailand) Bonded Warehouse 14 3 4 Shipping Company Shipment Sihanoukville Port 5 Deliver customs document Freight Forwarder Shipment delivery 7 6 11 10 9 Customs invoice Ministry of Finance TC Customs: Sihanoukville Cam Control scanning survey & 8 inspections Cash LoLo Calculate import duty Payment VAT calculations charges AZ Group Ministry of Commerce Cam Control Ministry of Transport Ministry of Transport Roads Shipment Port Authority release 13 12 Road Trucking toll Company fee The World Bank, Private Sector Development, East Asia and Pacific Region 77 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia 3. Local Production and Assembly Potential After taking into account both market and synthetic material and re-shipped to administrative barriers that confront Cambodia before manufacturing of companies in the motorcycle industry in rubberized components can begin. The same Cambodia, there continues to be possible could be said with the production of plastic options for expanding the current market parts. In short, the absence of support activities to include further value-added industries would effectively eliminated the production and assembly in the country. competitive advantage that Cambodia can Assuming that the Government is responsive potentially offer. to the removal of some market and administrative barriers raised above, some While some manufacturers currently manufacturers interviewed suggested that they operating in Cambodia would consider would consider a phased introduction to expanding local value-added activities to value-added production of spare parts and include spare parts production and possibly sub-assembly in Cambodia. sub-assembly activities, interviews suggest that substantial support is required to help upgrade In such a scenario, a two phased approach is labor skills. Specifically, strengthening envisaged by some manufacturers. First, is to technical shopfloor skills such as mechanical explore opportunities for local spare parts and engineering capability associated with production. Specifically, the production of a metal working, plastic fabrication and number of non-strategic components such as equipment repair and maintenance, as well as rubberized parts (handle bar cover and foot soft business skills such as management, rest); plastic parts (fenders and mud and wind accounting, booking, and human resources guard); light frame welding; and paint were management. mentioned. Once spare parts production is established, manufacturers would explore the All things considered, manufacturers currently possibility of shifting from CKD to partial operating in Cambodia estimate that given local production. improved labour skills and access to technology and equipment, locally produced In addition to the market and administrative spare parts can compete effectively with barriers already mentioned, another barrier Chinese products, particularly with respect to inhibiting the growth of the motorcycle quality. At the same time, however, prevailing industry is the absence of local support market and administrative barriers preclude industries. For example, while Cambodia is any possibility of locally produced products endowed with a rich source of natural rubber, competing with Chinese products on the basis the type of rubberized products used for of cost. manufacturing motorcycle parts require a mixture of natural rubber and synthetic Administrative and market barriers to material, which Cambodia does not have. competitiveness faced by the motorcycle Consequently, given the current situation in industry can be summarized as follows (Table the market, manufacturers would need to 39). export natural rubber, have it mixed with The World Bank, Private Sector Development, East Asia and Pacific Region 78 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 39 Administrative and Market Barriers to Competitiveness Critical Issues Impact Business Lack of regulatory High level of illegal sales is discouraging Environment enforcement, particularly as companies from aggressively exploring it relates to customs investment opportunities in spare parts Complex and costly import production clearance procedure Discourage companies from exploring High unofficial expanding operations in IKD and CBU administrative charges assembly Dampen growth opportunities among local companies as higher costs incurred by importers are past on to local merchants Supply Chain Complete absence of support High cost of imported spare parts encourage industries the growth of the informal markets Lack of access to equipment Discourage investments in spare parts and technology production Lack of access to long-term Encourage trading rather than production financing based market growth Absence of training Lack of technically competent skilled labour institutions discourage development of support industries and vertical market integration Infrastructure Uncompetitive energy High cost of assembly discourage companies pricing policy from exploring investments in IKD and CBU High cost of electricity assembly High cost of diesel Discourage investments In short, a number of key elements were · Introducing competitive electricity identified as essential to stimulate growth and pricing; development of the motorcycle industry as · Improving the cost of fuel for power well as other light manufacturing industries in generation and transport; Cambodia include the following: · Strengthen local training institutions to deliver technical and business training; · Administrative reform, particularly with · Provide incentives to stimulate growth of respect to reducing the cost and support industries relevant to the complexity of customs clearance; development of the manufacturing sector, · Strengthening the enforcement of and more specifically relevant to the intellectual property, trade mark and motorcycle industry. copyright regulation; · Strengthening the enforcement of border patrol to curtail smuggling; The World Bank, Private Sector Development, East Asia and Pacific Region 79 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Canned Milk: Local Investments Dampened by High Inflow of Contraband Products 1. Transporting Canned Milk The consumption of milk, while relatively small compared to other Asian countries (3 Canned milk is usually transported in a 20 kg/day), has become an important dietary foot container, which can hold up to 800 component for Cambodians, particularly cases of canned milk.28 All importers and among the urban population. It is estimated distributors of canned milk outsource their that nearly 3 million cans of canned milk and transport needs to local and regional trucking 1.3 million cans of condense milk is sold each companies. In the case of canned produced in month in Cambodia. Thailand, it is trucked from Bangkok to Phnom Penh via Poipet. According to local sources, the potential consumer base for milk in Cambodia is Cases of milk are loaded on to a container in estimated to be approximately 3.5 million Bangkok using a wooden pallet. But once in people. Of this population, a growing Poipet, the cases are unloaded from the truck population of consumers consume and reloaded without pallets onto a truck approximately 2 cans of milk each day. When operated by a Cambodian trucking company. purchased by the case, each can of milk costs One explanation given by Cambodian freight approximately 800 Riel ($0.2/can) or 1,000 companies for not using pallets is that freight Riel/can when purchased by the can. Taking companies are paid according to the number into account that rural income, particularly of cases transported rather than by the truck among farmers is no more than about $1/day, load. Current Cambodian law places a weight a large population of consumers are limit on truck cargo, which is equivalent to concentrated in urban areas. approximately 600 cases per 20 foot container. But according to local sources, Until recently, Nestle operated a canned milk some transporters haul as much as 1,000 cases facility in Phnom Penh, however, smuggling per 20 foot container. and other market constraints has forced Nestle to close down its facility and switch to Such violations contribute to further importing from Thailand all of the canned damaging already poor roads that exists milk sold in Cambodia27. Since closing down between Poipet and Phnom Penh. In fact, the the milk processing facility in Phnom Penh, physical distance from Bangkok to Poipet is Nestle, the largest trader of milk and milk approximately 300 km, the same distance products in Cambodia, must now truck milk from Poipet to Phnom Penh. While it takes 6 from Bangkok. But companies like Nestle hours to travel from Bangkok to Poipet, it that import goods from Thailand face a takes Cambodian transporters as much as 3 number of challenges. days to make the journey from Poipet to Phnom Penh. In addition, because trucks are loaded in excess of its capacity without the use of pallets, the cargo damage rate is nearly 8% of each load. This translates to nearly two full truck load of goods which must be disposed of 27 With a processing capacity of 200,000 tons, 28 Nestles' operations in Thailand is the largest Each case of canned milk weighs milk processing facility in the world. approximately 18kg. The World Bank, Private Sector Development, East Asia and Pacific Region 80 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia due to damage occurring during transport Preliminary analysis suggest that for each month. companies like Nestle, administrative and transport costs associated with importing 800 Once a truck arrives at a warehouse in Phnom cases of canned milk using a 20 foot container Penh, as the canned milk is not on pallets, it is approximately $2,091.67. Nearly 51 must be unloaded manually. Consequently, it percent of this cost is reflected in customs takes 20 workers to unload a 20 foot administration charges, principally import tax container and move the contents to a and customs declaration charges. In fact, warehouse. With nearly 6 trucks of cargo import tax constitutes nearly 36 percent of the arriving each day, more productive use of overall cost of importing canned milk.29 human resources is seen as vital to the Taking into account that smugglers of operation. contraband products pay no import duty, this administrative cost alone preclude `legal' 2. Illegal Imports and Customs operators from effectively competing in the Cambodian market (Table 40). According to local sources, 5 ­ 6 truck loads of canned milk enter Cambodia illegally from It is estimated that widespread consumption Thailand, and another 2 ­ 3 truck loads arrive of contraband canned milk in Cambodia, from sources in the Philippines and Malaysia each day. Consequently, companies like is contributing to a minimum of $30 million Nestle compete against their own products, in forgone GDP contribution annually. In which accounts for between 20 ­ 40 percent addition, given current government of all canned milk sold in Cambodia. To administrative charges associations with avoid the sales of contraband products, the customs and Cam Control inspections costs, Customs Department now requires 2 stamps the Government is forgoing approximately $3 per case of canned milk, which cost producers million in public sector revenue on canned approximately 100 Riel/case. milk imports alone. While the initiative to monitor the entry of What is important to note is that the lack of contraband products using a double stamp regulatory enforcement is not only dampening system is commendable, according to local public sector revenue flows from legitimate sources, such stamps are readily available for business transactions, but more importantly, it purchase by local distributors. Furthermore, has discouraged private sector investments in at the local level, customs inspectors have been the economy. Specifically, widespread sales of found to be colluding with local shopkeepers contraband canned milk not only placed a so that unstamped canned milk can be sold at holt to Nestle's investment in local milk a discount. production, but has also discouraged other investments in areas such as packaging and Local sources suggest that a large majority of labeling, and other support industries from contraband products, including canned milk taking place in the economy. In the absence sold in Cambodia are brought into the of good governance, investments that deepen country by selected members of the the supply chain as well as to stimulate Cambodian military which operate an horizontal integration is unlikely to take place. efficient and wide ranging informal trading operation. Some insiders suggest that the military is making a mere $7,000/month on 29 contraband milk, while companies like Nestle According to interviews, the period between forgo as much as $500,000/month in sales filing a claim for repayment of VAT repayment thanks to the sales of contraband Nestle can be as much as 120 days or more. products. Furthermore, import duties and VAT must be paid in advance. Consequently, the opportunity cost of capital for large volume importer like Nestle is substantial. The World Bank, Private Sector Development, East Asia and Pacific Region 81 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Table 40 Administrative and Transport Costs for Import and Sales of Canned Milk Pre-Sales Import Total Cost % of Administrative Costs Clearance Transport ($) Total MoT: Roads Toll $ 16.17 Subtotal $ 16.17 $ 16.17 1% MoC: Cam Control Cam control inspection $ 10.00 Cam control permit $ 55.00 Subotal $ 65.00 $ 65.00 3% MoF: Customs Import tax $ 742.00 Import permit $ 17.50 Customs declaration $ 300.00 Subtotal $1,059.50 $1,059.50 51% Total Administrative Charges Freight/Transfer Charges Freight Forwarder (Thailand) $ 80.00 4% Import Agent $ 210.00 10% Trucking Company (BKK - Poipet) $ 250.00 12% Trucking (Poipet - PP) $ 411.00 20% Total Transport/Transfer Charges $ 741.00 $ 741.00 TOTAL CHARGES $ 1,334.50 $ 757.17 $ 2,091.67 % of Total Value 64% 36% Source: Based on interviews conducted by Global Development Solutions, LLC Companies like Nestle must adhere to length of time required to travel 300 km on international accounting standards. poor roads also contribute to the higher cost. Consequently, dealing with customs, particularly with regarding to undocumented Yet another unsuspecting hidden cost charges continues to pose operational incurred by importer is the high inspection fee challenges. As freight is outsourced to local that the Ministry of Finance had negotiated companies, much of the `hidden' costs are with SGS. Specifically, inspection fees are principally absorbed by trucking companies, charged at 0.8 percent of the value of the and past on to Nestle using consolidated cargo, but importers are assessed a minimum invoices. This is reflected in the fact that fee of $210. Consequently, the minimum trucking costs, both from Bangkok to Poipet, charge of $210 places a premium on and from Poipet to Phnom Penh represent 12 importing products which are bulky or have percent and 20 percent of overall import costs substantial weight. This may also be a respectively. In the case of trucking cost from contributing factor for trucking companies to Poipet the Phnom Penh, fuel costs and the The World Bank, Private Sector Development, East Asia and Pacific Region 82 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia overload their trucks so that they can officials individual import documents for each maximize the value of their cargo. case of canned milk. As there is only one import documents for each 20 foot container As companies like Nestle have substantial containing 800 cases of canned milk, experience and know-how related to importers like Nestle are required to assist importing and transport logistics, the process distributors in compiling import for ordering, clearing and transporting is well documentation for each case of canned milk established. However, customs clearance by its distributor to customs authorities. procedures and document requirements are demanding and time consuming. While the In one instance, for example, a major local administrative clearing map is relatively distributor had its warehouse sealed off by streamlined (Chart 12), it is estimated that as customs official for over a week while the many as 15 documents and equal number of distributor and Nestle were required to signatures are required to import a truck load account for import documents for an entire of canned milk. warehouse of canned milk and other commodities. Rather than developing In addition to the slow and cumbersome counter smuggling measures at the border or custom clearance procedures, the Cambodian through already well known sources, this Government recently instituted a warehouse reactive measure to countering smuggling has inspection procedure. As a response to the created yet another barrier to operating a high volume of contraband products currently business in Cambodia, and further sold in the market, Customs authorities have contributing to tarnish the image of the begun conducting random warehouse checks country as a favorable environment for whereby distributors must present to customs international business. The World Bank, Private Sector Development, East Asia and Pacific Region 83 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Import of Consumer Goods by Truck from Bangkok Chart 12 Order Request Manufacturer: Bangkok Pro Forma Invoice Distributor: Phnom Penh Pro Forma Invoice OIA Shipment No ROF OIA Shipment No. SGS Cambodia SGS Thailand Inspection Document ROF Transport Agent Shipment Delivery Survey/ Cash Inspection Payment Approval Customs Document Document Ministry of Commerce Ministry of Finance Cam Control Phnom Penh The World Bank, Private Sector Development, East Asia and Pacific Region 84 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Administrative and market barriers to industry can be summarized as follows (Table competitiveness faced by the canned milk 41). Table 41 Administrative and Market Barriers to Competitiveness Critical Issues Impact Business Lack of and ineffective regulatory Discourage investments in local Environment enforcement production High import costs Foregone GDP contribution and High import tax public sector revenue Ineffective public-private Discourages investments in and partnerships as evident from SGS development of local support charges negotiated by the Ministry of services Finance Discourage local distributors from Cumbersome import clearance working with legitimate business procedures Encourage the expansion of contraband sales while at the same time penalizing legitimate business transactions Supply Chain Poor quality of freight services Contributes to increase in cost and product damage, and discourages investments in the country Infrastructure Poor road conditions Increase cost and product damage, Uncompetitive energy pricing policy which must be absorbed by either the High cost of electricity consumer or importer High cost of diesel Taint the country as an attractive investment location High cost of transport discourage new investments in the economy The World Bank, Private Sector Development, East Asia and Pacific Region 85 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia IV Sources of Administrative Distortions: Examples of Laws and Regulations Requiring Refor m There are a number of key Cambodian · Law Regarding Duties on laws and regulations that contribute to Exported and Imported Goods the administrative distortions outlined in (Customs and Excise this report. Some sections of laws are Department) not implemented at all while others · Sub-decree on the Standard and sections are selectively over Management of Agricultural implemented. This part of the report Material (Ministry of will highlight a number of examples of Agriculture, Forestry, Hunting laws and regulations, and cite specific and Fishery) sections that contribute to some of the · Regulation on the administrative distortions identified thus Implementation of Pre-Shipment far. Inspection Services (Ministry of Finance and Economy/SGS) The report identified a number of cross- · Organization and Functioning of cutting issues that contribute to the Ministry of Public Works and administrative distortions across several Transport (Port Authority) sectors. In this context, there are at least · Cambodia Department of Control five laws of principal concern when of Imported and Exported considering actions to reduce Merchandise and Suppression of administrative distortions. These laws Falsification (Camcontrol) include: The following matrix provides citations from each law that requires consideration for reform activities. The World Bank, Private Sector Development, East Asia and Pacific Region 86 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Law Regarding Duties on Exported and Imported Goods (Royal Code No. 0196/18, January 24, 1996) - Customs30 Citation Critical Issue Chapter 231, Article 8: The value shall be calculated with Article 8 is an overlapping function with regard to goods for export/import shall be the wholesale price Article 5.2 of Regulation on the excluding duties at the exporting/importing points Implementation of Pre-Shipment Inspection Services (SGS) Chapter 2, Article 9 (1): Reduction in duty shall be applied This Article is under-employed by to the damage or loss of goods in the course of transportation companies like Nestle and others that or loading with plausible reasons certified by the competent import goods for resale or as inputs for authorities finished goods production Chapter 2, Article 10: Duties on exported and imported Article 10 provides the necessary legal goods shall be collected only one time framework for the introduction of a single, non-cash invoice payment system Chapter 2, Article 11: Control and duty collection on Article 11, unless it was nullified or exported, imported goods shall be implemented in zones and amended, would prohibit unannounced in- checkpoints determined by the government factory/warehouse customs checks that many importers and distributors currently, including those affiliated with Nestle (per example provided in the report) Chapter 2, Article 11: In the two situation mentioned Article 11 is an example of where the law above, if there is no official paper attached specifying that all is selectively implemented, giving a blind duties have been paid for the imported or exported goods, the eye to smuggling operations, while over owner of the goods shall be required to pay and shall be enforcing the law with `legitimate' subject to punishment in accordance with this law. business operations Chapter 332, Article 13 (1): Duly implement in accordance Ibid ­ no set fees or charges are with the determination of Customs authority to do the goods established under this law, and yet declaration, keep records of accounting, follow procedures of numerous complaints about high customs transport and warehouse the goods charges suggest high undocumented administrative charges Chapter 433, Article 14: Customs officers shall implement Article 14 is poorly enforced and customs properly the recommendation of the state to collect customs lacks capacity to properly implement its duties for the State budget, conduct the examination of duties under Article 14 goods, confiscate the goods for evidence, control and use the printed documents for collecting duties Chapter 4, Article 15 (3): Examine the goods in warehouses Article 15 is an overlapping function with and in stores of export- import business, and business stores Article 14, Sub-decree 54 of CAM Control which are under the control of customs and excises authority Chapter 4, Article 16 (4): Customs authority shall be able to Tighter provisions on resale required as sell the confiscated goods which are perishable, with the current provisions encourages approval from superiors on domicile inspection confiscation. Furthermore, statement on proceeds from sales must be clearly stated Chapter 4, Article 18: Customs offices who have done a Little evidence to suggest that this good work shall be awarded with the allowance determined incentive structure is functional. by the Ministry of Finance The entire Article requires reconsideration Local authorities, military forces shall assist the Customs as the private sector views the military as authority as requested to examine the offense on exported apart of the problem associated with and imported goods. importation of contraband goods. 30 The list of duties can be found in the Annex of this law 31 Chapter 2: Procedures on Duties Collected on exported Imported Goods 32 Chapter 3: Duty Obligations of Exporters/Importers 33 Chapter 4: Rights and Obligations of Customs Officers The World Bank, Private Sector Development, East Asia and Pacific Region 87 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Local authorities, military forces, individuals who have done a good work to assist the customs authority in implementing the law shall be awarded with the allowance determined by the Ministry of Finance Chapter 5,34 Article 21: Anyone who tries to avoid or Article 21 is not enforced, particularly due commit fraud on the duties on exported and imported goods to the lack of political will, as well as the shall be punished and pay 2 times the amount that the absence of capacity within Customs to offender tries to avoid or misrepresent. In the event it is implement. repeated many times, the punishment may be up to 5 times of the amount that the offender tries to avoid or commit fraud. In addition to paying the penalty fee, the offender shall pay all other duties that the offender tries to avoid or misrepresent. In the event the avoidance or fraud is serious or if is organized, the offender shall be subject to imprisonment from 3 months to 3 years. The means of transport that was used to commit the offense shall be confiscated. Chapter 5, Article 23: Anyone who export or import, Ibid transport, stockpile or sell prohibited goods, with reference to the types of offense must be punished as follows: · Confiscation of goods · Confiscation of goods and the means of transport that was used in committing the offense. The offender shall be imprisoned from 2 months to 10 years and confiscation of goods and the means of transport that was used to commit the offense. In the event the offense is serious, the offender shall be imprisoned up to 20 years. Chapter 5, Article 26: Customs officers commit Ibid embezzlement or steal export or import duty money, or abuse their positions or power to ask for bribes or to act as bribery agents, shall be punished in accordance with laws in force Sub-decree on the Standard and Management of Agricultural Material (Royal Code No. 69 ANKr ­ BK) Citation Critical Issues Chapter 135, Article 1: The present sub-decree has Article 1 is ineffective in ensuring `high quality' the purpose to ensure a high quality of agricultural agricultural material, principally due to the lack of materials so as to strengthen and increase the monitoring capability and system agricultural production with high effectiveness and stability in the Kingdom of Cambodia Chapter 1, Article 3 (1) - Standards of Quality control, registration, packaging and agricultural materials: Maximum quality degree labeling standards are not in place nor is the acceptable for agricultural materials mentioned in Ministry exhibited capacity to enforce Article 3 this sub-decree and generally having: the specificity of materials and the measures of control of quality such as registration, packing up, labeling, etc. Chapter 1, Article 4 -Registration: provision of The distributional monopoly that currently exists approval letter by the Ministry of Agriculture, suggest that registration and licensing procedures Forestry, Hunting and Fishing for any agricultural (Article 5) lacks transparency 34 Chapter 5: Penalty Provisions 35 Chapter 1: General Provisions The World Bank, Private Sector Development, East Asia and Pacific Region 88 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia material, trade, distribution and domestic use or exportation Chapter 1, Article 5 - Business license: letter of Article 5 addresses wholesale distributors, but no authorization given by the Ministry of Agriculture, provisions exist to cover retail sales, where a large Forestry, Hunting and Fishing to individuals or share of the violations occur during repacking that companies producing, trimming or improving, result in poor quality fertilizers being sold to small supplying, selling wholesale, wrapping-up again, holder farmers. Labeling standards are not adhered stocking up, importing and for exporting for trade of to at the retail level (also refer to above). agricultural materials Chapter 1, Article 3 (10) - New packing up: Provision for proper repackaging exists but is not Transfer of agricultural materials from their original implemented principally due to lack of wrapping to another smaller one for sale. enforcement capacity Chapter 1, Article 3 (11) - Falsified fertilizer: Ibid Fertilizer mixed with non chemical substances lessening the feeding rate and inappropriate to the fixed standard. Chapter 236, Article 5: A natural person or a legal Refer to comments on Chapter 1 Article 14 person or any company that wants to produce or import or export fertilizers shall have authorization from the Ministry of Agriculture, Forestry, Hunting and Fishing Chapter 2, Article 7: Fertilizers displayed for sale Article 7 is not enforced and is a source of poor shall be wrapped up in a packing material which is quality fertilizer sold at the retail level, particularly weather - resistant, not torn or pierced, solid to stand to small holder farmers up to transport, stocking and use. The new wrapping up in small bags for sale can be performed only when there is a letter of authorization from the Ministry of Agriculture, Forestry, Hunting and Fishing. Chapter 2, Article 8: Every bag shall be labeled to Article 8 is not enforced, particularly at the retail give sufficient clear information in Khmer to users, level and is a contributing factor to the sales of according to the instructions of the Ministry of poor quality fertilizer Agriculture, Forestry, Hunting and Fishing. It is forbidden to sell any fertilizer without label or with label but illegible. Chapter 2, Article 9: It is forbidden to import, Article 9 is clearly not enforced, partly due to the stock and sell any falsified fertilizer lack of political will, as well as the lack of enforcement capacity Chapter 2, Article 10: The sale of non-specific Article 10 contradicts and legitimizes the sales of fertilizer or fertilizer with poor quality shall be substandard fertilizer, which in turn is contributing authorized by the Ministry of Agriculture, Forestry, to the low yield factor among farmers Hunting and Fishing and shall be performed according to the instructions of the Ministry of Agriculture, Forestry, Hunting and Fishing on the business of those fertilizers Chapter 437, Article 27: Natural or legal persons Ministry of Agriculture lacks the technical capacity who want to produce seeds with certificates or to assess new untested varieties, which may division of plant seeds to engage in trade shall make contribute to the responsiveness of farmers registration with Ministry of Agriculture, Forestry, effectively responding to shifting market demand Hunting and Fishing and observe the technology instructed for production and keeping of those seeds 36 Chapter 2: Fertilizers 37 Chapter 4: Seeds and Division of Plant Seeds The World Bank, Private Sector Development, East Asia and Pacific Region 89 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia Chapter 738, Article 35 (3) & (4): In writing Provisions under subsections 3 & 4 are not warning the natural or legal persons having done enforces, partly due to the lack of political will, as business of falsified agricultural materials with poor well as the lack of enforcement capability. qualities different from those registered and set forth Furthermore, the provision is principally targeted in article 6,9, 22, 29, 32 and 34, and then preparing at wholesale rather than retail sales, where many the file and sending it to Court. violations are taking place that impact small holder In case of re-offending, definitively taking back the farmers. letter of authorization to do business. In writing warning the natural or legal persons having done business of agricultural materials in showing disrespect to wrapping up standard as set forth in article8, 19, 20, 29 and 33 and forcing them to enter in contract of correction with in 15 days. Temporarily withdrawing the letter of authorization to do business in case of second offense. Chapter 839, Article 36: Natural or legal persons Refer to comments on Chapter 1, Article 4 who want to do business of newly imported agricultural materials shall apply for registration of those agricultural materials with the Ministry of Agriculture, Forestry, Hunting and Fishing from the day this sub-decree comes into force. Regulation on the Implementation of Pre-Shipment Inspection Services (Announcement No. 599 shv - Rbk dated August 31, 2000) Citation Critical Issues Chapter 140, Article 1.7: 0.80% ad-valorem of the Costs associated with Article 1.7 considered high, FOB value of the goods inspected as declared in the particularly in the context of bulk petroleum exporter's final or pro-forma invoice and indicated in products. Also, some issues regarding whether the Report of Findings, applicable for all goods with rates were effectively negotiated with SGS. The the exemption of bulk petroleum products. entire fee structure may require reviewing to USD 0.30 per metric tine applicable for bulk consider competitive nature of the charges petroleum products only inspected as declared in the exporter's final or pro-forma invoice and indicated in the Reports of Findings SGS shall be entitled to its fees regardless of whether, after an inspection of the goods, the exporter or importer does not provide the information of documents necessary for the issuance of a ROF or, for any reason, does not process with the shipment of the goods. Chapter 241, Article 2.2 - Inspection of Goods: While Article 2.2 provide provisions for requiring All goods imported into the Kingdom of Cambodia inspection, enforcement is weak due to the lack of from the date of 2nd October 2000 shall be subject to capacity in Customs Department Pre-shipment Inspection by the Inspection Company in the relevant country of supply prior to shipment to the Kingdom of Cambodia. Chapter 3, Article 542: Required Tasks Functions of Article 5 overlap with Chapter 2, 38 Chapter 7: Penalty 39 Chapter 8: Transitory Provisions 40 Interpretation 41 Article 2: Goods Subject to Pre-Shipment Inspections The World Bank, Private Sector Development, East Asia and Pacific Region 90 Global Development Solutions, LLC Towards A Private Sector -Led Growth Strategy for Cambodia The Inspection Company or its affiliate in the country Article 8 of the Customs Regulations (refer to of supply of the goods shall perform the following reference on customs regulations) tasks in relation to the goods using all information at its disposal: a) Pre-shipment Inspection, b) Price verification c) Verification of the total value of the goods, d) Determination of the dutiable value of the goods in accordance with the Tariff Nomenclature, e) Calculate duties and taxes payable on the goods in the Kingdom of Cambodia Organization and Functioning of the Ministry of Public Works and Transport (Royal Code No. 0196/03, January 24, 1996 ­ Decision No. 053, January 17, 1997 on Defining the Promulgation on the Regulation of Dues & Charges of the Port Authority of Sihanoukville) ­ Port Authority Citations Critical Issues Chapter 2, Article 16: Container lift-on and Charges prescribed in Article 16 understates actual costs lift-off charges: incurred by importers and exporters. i. 20 ton container "full": US$46 for yard-truck, and US$57 for yard-train; ii. 20 ton container "empty": US$23 for yard- truck, and US$28 for yard-train; iii. 40 ton container "full": US$62 for yard-truck, and US$78 for yard-train; and iv. 40 ton container "empty": US$44 for yard- truck, and US$55 for yard-train. Cambodia Department of Control of Imported and Exported Merchandise and Suppression of Falsification (Royal Code No. 0196/16, January 24, 1996. Based on the Law on Establishment of the Ministry of Commerce, Sub-decree No. 54, September 22, 1997 on Organization and Functioning of the Ministry of Commerce - Sub-decree No. 54 Article 4(D)(3) of Sub-decree to form Camcontrol) Citation Critical Issues Article 14 - Camcontrol inspection: Authorizes Article 14 is overlapping with Chapter 4, Camcontrol to check import and export of merchandise. Article 14 (3) of the Laws Regarding Duties on Import/Export Goods (Customs Department) Article 15: The Law Regarding Duties on Exported and Custom Law does not grant any general powers Imported Goods (Customs Law), July 20, 1989: Provides to the Ministry of Economy and Finance to set for custom inspection by custom officers over imported- fees for inspection of imported-exported goods. exported goods. 42 Article 5: Pre-shipment inspection of goods The World Bank, Private Sector Development, East Asia and Pacific Region 91 Global Development Solutions, LLC