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Cambodia

Better Business
Better Jobs
Higher Growth
Julian Latimer Clarke, Senior Economist
SNEC Investment Workshop
4th August 2014
What are the opportunities?

Why is investment growing?

1. Cambodia has free entry to the EU market


under EBA

2. Cambodia has the second lowest wage in the


region

3. Very open economy (100% foreign ownership


allowed in most sectors)

4. Abundant natural resources

5. Low tax rate & tax holidays


What are the opportunities?

Why is investment growing?


1. China is shedding 8 million jobs Alternatives to Cambodia for regional investors
(production networks) 7
6
6

Number of respondents
2. ASEAN is an opportunity to 5

relocate part of these jobs 4


3 3
3
2
3. But Cambodia is competing for 2
1 1
investment with Vietnam, 1

Myanmar and Indonesia. 0


Vietnam Myanmar Indonesia China Malaysia Europe

Source: Foreign Investor Perception Survey, Question 11 (108 Responses) and Question 28 (95 Reponses)
Why do foreign investors invest here?

Cambodia's answer so far


1. Low cost of labor

2. Tax incentives (tax holidays!)

3. Location between two


powerhouse economies
Are tax holidays crowding out
better investment?
Cambodias reputation, its basic economic
1. Tax holidays attract footloose
and institutional environment, and the
investors
implementation of structural reforms aimed
at reducing capital controls, bureaucracy,
2. Tax holidays crowd out domestic and corruption are likely to be at least as
investment important as the tax system in attracting
FDIs.
3. Not beneficial for LDCs
We asked investors what theyre looking for

Investment incentives were a factor in only one of those countries!


What are the challenges?

Interdependence in Factory Asia


Main investment
challenges:
Informality
The Missing Middle
Improved Access to
electricity

Diversifying the manufacturing


base

Integration in regional value


chains

Increased connectivity
Constraints to Doing Business

Percentage of firms ranking constraints as Major or Very Severe


50%

Percent of firms saying issue is a "major" or "severe" constraint


45%
40%
Main 35%

Constraints: 30%
25%
20%
Electricity 15%
Corruption 10%

Transportation 5%

Skills 0%

Constraint
SEZs are not special enough

What are SEZ firms concerned


about?

Firms in SEZs complain more about everything,


even though the business environment inside
the zones is slightly better than outside.

The SEZ firms are concerned about:


Corruption
Skills
Electricity
Transportation

High complaint rate may be due to foreign


investors high expectations about the SEZ. .
Electricity is expensive!

Price per Kilowat Hour, by city


30
Electricity is expensive and
connection is patchy: 25

20
Firms report using generators 15
for up to 30% of their
production needs 10

5
Rate of electrification is only
0
35%, compared to 99% in Phnom Bangkok Hanoi Ho Chi Yangoon Vientiane Diesel
Penh Minh City
Thailand and Vietnam
Corruption is less of an obstacle

Share of firms reporting informal


payments
Corruption is still a major
100 Bangladesh
part of doing business: 80 Indonesia
60 India
Gift-giving is prevalent, but it is not 40
Cambodia 2007
seen as a constraint to doing 20
Cambodia 2012
0
business in Cambodia Lao PDR
Philippines
Lower percentage of sales spent on Sri Lanka
informal payments compared to
many regional comparators, but Reported Informal Payment as main
almost everybody has to pay! obstacle to growth

30%
25%
20%
15% Reported Informal
10% Payments as main
5% obstacle to growth in
0% 2012
Firm Faced a Firm Faced a
Situation Situation
conducive to conducive to
payments in 2007 payments in 2012
Worker skills are still lagging

Composition of firms workforce

Workers not well educated but


they are increasingly productive
and better paid!
Worker skills & wages are higher in SEZs
Exporting firms demand higher skills and
training
Most firms conduct their own training
Average monthly wage (US$)of unskilled workers
Total factor Productivity

non-SEZ SEZ
Labor productivity (value added / 4,117 4,948
worker)
Unit labor costs 0.40 0.42
TFP

5.5 5.0
Capacity utilization (%) 74.5 71.0
A Missing Middle of exporting firms

Who is exporting from


Cambodia?

Fewer firms (about 600) than we would


expect for a country of this size

Mostly large firms, with few mid-size


firms and some small firms.

The pattern is different compared to


other economy with a similar per-capita
income level (Pakistan and Kenya).
Bimodal distribution of export value
There appears to be factors discouraging among exporting firms.
export activity for mid-size enterprises.
Summary of findings (exp. dynamics analysis)

Are SMEs not


Low Exporters High rate
exporting
number of are large of survival because of
exporters companies (few new)
large costs to
export?
Estimated Fixed Costs to Export

High export costs seem to explain why few Cambodian


firms are exporting.

What are the


average export
costs?
In Cambodia they are
40% higher than the
regional average. This can
explain why very few firms
are exporting.

Source: authors computation using the World Bank Enterprise Survey Database..
Simulated Impact of Streamlining

Scenario 1: Cambodia rationalizes the use of export registration,


reducing the export cost to the regional average.
Scenario 2: Trade costs are lowered to the level of Vietnam, by
tackling also trade logistics issues.

Estimated likelihood that Cambodian Firms Export Expected number of Exporters

Current Scenario 1 Scenario 2

small(<20) 2.0 2.7 3.5


medium(20-99) 7.4 7.9 11.5
large(100 and over) 29.6 30.9 38.5

All firms 5.8 6.5 9.6

Under the first scenario, the total number of


exporters would double (mostly due to increase in
the middle-size firms entry rate).

Under the second scenario, the total number of


exporters would triple with new entrants
distributed across all firm sizes.
Formality leads to higher productivity
Policies should be adopted to encourage the informal sector to both grow and start
operating formally
About 70 percent of small firms and 45 percent of medium-sized firms are informal,
27-30 percent of aggregate employment, capital and value added, and 44 percent of
investment comes from informal firms
1. Formal sector workers have higher salaries -
workers in the formal sector enjoy better benefits,
and unskilled wages including benefits are US$10
higher per month
2. Formal sector firms are more
productive
3. Formal sector firms employ more
skilled workers, and invest more in
the training and skills development
of their workers.
Customs and Border Processes

Some industries have


obtained streamlined Time to clear goods through Customs
clearances:
Private shipping companies are
responsible for a large part of
shipping costs
Worldwide evidence shows that
Customs are only responsible for
about one-third of the delay
But Customs and trade regulations
are identified as one of the top
three business obstacles by 28% of
SEZ-based firms/ 11% of non-SEZ
firms.
Conclusions

Targeted interventions to improve the business environment:

Address the high cost of electricity


Hydro power, electricity trading across borders

Automate Government processes


Trade portal, COO, new company registration, CNSW

Integrate in to regional production networks by streamlining


border processes

Address informal competition through a draft Competition Law

Formality leads to higher productivity, so design and implement


incentives for business registration and burdensome practices

Focus on the implementation of reforms!


Additional Slides
NOT FOR PRESENTATION
Investment Climate Assessment

Survey of private sector


875 firms
Formal / informal
SEZ / non-SEZ

Geographic Coverage Sectors surveyed


Phnom Penh Manufacturing
Battambang Trade
Siem Reap Tourism
Kampong Cham Agroprocessing
Sihanoukville Other
Bavet
Koh Kong
Informal Payments and Gifts
Corruption is identified by about three-quarters of SEZ
firms as one their top three constraints. In all zones
with the exception of Phnom Penh, all firms
interviewed declared that gifts or informal payments
are required frequently, most of the time, or always
when dealing with authorities.
A lower percentage of non-SEZ firms (38 percent)
identified corruption among the top three obstacles in
the business environment, which seems to be
supported as well by a much lower share of non-SEZ
based firms (42.7 percent) reporting that gifts or
informal payments are required frequently, most of the
time, or always when dealing with authorities.
1. Exporters Dynamics in Cambodia
Exporters size

Cambodia is an outlier, indicating that the size of Cambodian exporters is very big compared
to the size of exporters in other countries with a similar level of development.
Concentration and Survival rate

Cambodia is an outlier, having the lowest level of concentration and one of the highest
survival rate (because of very few new entrants). This indicates low dynamism which, in the
long run, increases vulnerability.
Firms Participation in Exports and Trade Costs

Export productivity premium


Export participation is mostly determined by variable export costs such
as transport costs and tariffs and fixed export costs such as market
entry costs.

The firms that are able to overcome the trade costs to export are usually
the biggest and most productive.

The more expensive the trade costs are the larger and more productive
firms need to be in order to successfully engage in exports.

How does Cambodias export productivity premium compare to that of


neighboring countries? And what is the role of export costs in explaining
the probability that a firm decides to export?
Share of Exporters by Size

Cambodia is characterized by a binomial distribution of export by firm size.

Who exports?
The percentage of
exporting small and large
firms is similar to
comparator countries;
N.B.: Cambodias data are from 2011; while for the other countries they are
while medium firms
from 2009. participation in export is
much lower.
Estimated Probabilities to Export, by firm size

Cambodia have the lowest estimated probabilities to export within our


sample of countries.

Who is likely to
export?
Large firms have a 30%
chance to export,
compared to about 50%
chance of large firms in
Vietnam. What explains
this difference?
Cost/time to Trade Across Borders

Logistics costs and the number of documents needed to export appear as


the most binding factors hindering firms ability to export in Cambodia.

What does it take to


export a 20 ft
container from KH?
822documents
795days
usd
but port infrastructure is
good

Note: Burden of Customs Procedure measures business executives' perceptions of their


country's efficiency of customs procedures. The liner shipping connectivity index measures
the Cost to ship 1kg priority express air package through DHL to the United States.
Licenses/Permits required to Export

Export licenses are detrimental to export competitiveness in Cambodia.


In addition to the GDCEs export permit, MoC requires a CO for all shipment,
which is de facto another export license.

What is the
coverage and
ratio of export
licenses?
Out of 49 countries in
the NTM database,13
report to use export
requirements. Only in
Cambodia and Sri
Lanka exporters need to
be registered. Source: Authors computation using the global non-tariff measures database.
Simulated Impact of Streamlining

Scenario 1: Cambodia rationalizes the use of export registration,


reducing the export cost to the regional average.
Scenario 2: Trade costs are lowered to the level of Vietnam, by
tackling also trade logistics issues.

Estimated likelihood that Cambodian Firms Export Expected number of Exporters

Current Scenario 1 Scenario 2

small(<20) 2.0 2.7 3.5


medium(20-99) 7.4 7.9 11.5
large(100 and over) 29.6 30.9 38.5

All firms 5.8 6.5 9.6

Under the first scenario, the total number of


exporters would double (mostly due to increase in
the middle-size firms entry rate).

Under the second scenario, the total number of


exporters would triple with new entrants
distributed across all firm sizes.
What are the main challenges to prepare for the
ASW?
Cambodia ranks 114th out of 189 economies in the Trading Across Borders (TAB) index. It
takes on average 22 days to export and 24 days to import, at a cost of $795 and $930
respectively; 8 documents are required for export clearance and 9 for import.

Im/Export cost
reduced by
$100 each

Get ranking similar


to Vietnam in TAB
and improve 10
position in the
Ease of DB ranking
Documents to
Im/Export
reduced by 2
units each (6 d)
Trade Across Borders Indicator

The Doing Business Trading Across Borders index measures the time, cost, and the number of
documents required to export and import a standardized shipment of goods by sea. The entire
process is tracked for import or export, from the initial contractual agreement, to obtaining the
letter of credit, to the actual departure (or arrival) of the goods at the port.
Time & Cost for Export/Import Procedures

Real gains could be obtained by reducing the time and cost for documents preparation:
documentary requirements should be simplified to meet best international practices.

Nature of Export Procedures Duration (days) US$ Cost

Documents preparation 14 220


Customs clearance and technical control 3 275
Ports and terminal handling 3 100
Inland transportation and handling 2 200
Totals 22 795
Nature of Import Procedures Duration (days) US$ Cost
Documents preparation 15 225
Customs clearance and technical control 3 280
Ports and terminal handling 4 225
Inland transportation and handling 2 200
Totals 24 930

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