Cambodia Trade Integration Strategy 2019-2023

Article 3). such Vietnamese inputs are a key to the viability of such industry; and ASEAN LDCs including Cambodia are performing much better that the remaining ASEAN countries 2) Once the FTAs with the EU are concluded these even if the latter have a much greater industrial ASEAN countries will be progressively able to base. Such higher utilization rate is mainly due to cumulate among themselves while Cambodia the combination of and other ASEAN LDCs will not be able to cumulate with them. This is almost the reverse 1. higher preferential margin under EBA than under of the present situation where Cambodia has EU GSP scheme; been benefitting substantially from cumulation 2. more lenient PSRO applicable to LDCs under the with ASEAN countries, albeit reduced with the EU reform of rules of origin and EBA; graduation of Malaysia. Ultimately ASEAN 3. ASEAN cumulation and the changes to cumula- cumulation under EBA will be progressively tion introduced in 2011. reduced to ASEAN LDCs cumulation with little or As discussed all three factors mentioned above no value in terms of availability of intermediate are going to be eroded as follows: inputs to manufacture finished products for exports to the EU, a. The higher preferential margin will be pro- gressively eroded once ASEAN countries have The cumulation provisions inserted in the EU- finalized their FTAs with the EU since the FTAs with ASEAN countries are a telling example agreed tariff schedule phased out will start to of what are the prospects for cumulation within apply; ASEAN as far as exports to the EU are concerned. 43 The EU – Malaysia negotiations are currently on hold; EU – Thailand are continuing; Vietnam and Singapore in the process of ratification. Negotiations with the Philippines are underway. 26 Chapter 1 b. Concerning the PSRO, it appears that PSRO production in such ASEAN members away from at least in the clothing sector may not signif- ASEAN LDCs. icantly eroded at the time of entry into force As stated in the CTISU 2014, the impact that of the EU-Vietnam FTA since double trans- this will have on Cambodia depends largely formation (weaving and CMT: Cut Make and on a combination of market and rules of origin Trim) will remain the applicable requirement, as well as on other factors laying outside such however cumulation with South Korea fab- mere market access issues as contained in other rics provided under the EU-Vietnam FTA may chapters of this CTIS. Both the EU-Singapore, EU- provide a source of concern and competition Vietnam, but also the EU-South Korea FTA do not for Cambodian producers since thanks to that show significant better PSRO for chapter 61 and possibility Vietnam could source originating 62 and 87.12 (Bicycles). Garments still require a fabrics from South Korea; double transformation as under the current GSP c. the cumulation advantage of ASEAN LDCs rules. with respect to other ASEAN partners having In the case of the EU-Singapore FTA the EU rules entered an FTA with the EU will progressively of origin for their free trade agreement partners turn into a disadvantage since ASEAN coun- allow a free trade partner to cumulate inputs tries having signed an FTA with EU will be able produced in other free trade partners. To take a to cumulate among themselves while the concrete example, once the network of EU-ASEAN ASEAN LDC will be left with the only option of free trade agreements are in place, a Vietnamese cumulating among themselves leading to fur- producer of bicycles would be able to count ther marginalization. parts imported from Malaysia44 as Vietnamese for purposes of determining whether a Vietnamese Analysis shows the trade effects of Thailand, bicycle meets EU rules of origin. This is in sharp Vietnam and Malaysia under the FTA with the EU, contrast to the situation facing Cambodia where, Philippines being granted GSP+ and China having as described above, cumulation with Malaysia will been graduated from EU GSP in 2015.ASEAN not be possible when the derogation will expire. countries show the biggest export increase in The competitive position of Cambodia and the EU market at the expense of China that is bicycle producers is a telling example on how suffering from heavy trade diversion. Cambodia Cambodia manufacturing sector may be affected shows moderate trade diversion effects in the by these differences in cumulation possibilities. large majority of sectors and does not show any The EBA rule of origin for bicycles requires that significant increase of exports to the EU. The no more than 70 percent of the ex-factory price remaining ASEAN countries benefiting from their should consist of inputs that are non-originating, FTAs with the EU are set to get the lion share at the i.e. non-Cambodian. It is unlikely that the PSRO for expense of China. Vietnam will be comparable. However, by virtue In a way this table speaks for itself for a rapidly of cumulation a bicycle producer in Vietnam will changing trade scenario where Cambodia and clearly have more flexibility in sourcing inputs ASEAN LDCs should quickly devise a timely trade from ASEAN countries and Vietnam may become policy response to seize the challenges deriving the preferred investment destination for bicycle from the increased market access opportunities manufacturers seeking duty free access to the EU deriving from increased trade pressures of the US market. Trump administration on China and the fact that The CTISU of 2014 argued that trade policy, in the ASEAN partners having signed an FTA with EU near term, must address the loss of cumulation may gain market access in the EU. Such combined with Malaysia and Singapore. The Government factors may provide incentives to MNEs to move has responded to this challenge by encouraging 44 On the condition that Malaysia has also entered an FTA with the EU 27 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT bicycle producers to engage in a higher level trade preferences under DFQF and ASEAN FTA of manufacture and encouraging bicycle parts with dialogue partners. More specifically, among manufacturers to get established in Cambodia. CP-TPP member countries, only Mexico and However, even with the extension of the Peru do not have any preferential arrangement derogation period, it is unlikely that in the new with Cambodia at present. Exports to Australia, trading scenario parts of bicycles manufacturers Japan, New Zealand, Canada, and Chile benefit get established in Cambodia. from DFQF market access while the remaining members are part of ASEAN network of FTA Cambodia’s trade strategy for the next period, with dialogue partners. In the case of RCEP, all 2019 – 2023 needs to take into account the loss members have already an existing agreement/ of the progressive ASEAN cumulation, expiry trade arrangement with Cambodia under ASEAN of derogation and increased competition from or DFQF. This overlapping scenario is making the Vietnam. assessment of the value provided by RCEP and CP- The CTISU 2014 argued that negotiation of free TPP difficult and complicated. In fact, the benefits trade agreements between the EU and Malaysia, of joining RCEP/CP-TPP will have to be assessed Thailand, and Vietnam was not likely to affect the against the preferential margin, utilization rates, competitive position of Cambodian garment or and applicable rules of origin under existing footwear producers. Apart that this statement preferential arrangements. would need to be revisited this argument took into In strict terms the benefits of concluding RCEP and/ account only the EU market while countries like or joining CP-TPP may be quantified in terms of Vietnam are currently engaged in FTA on multiple preferential margins and rules of origin stringency fronts, the EU-Vietnam FTA the CP-TPP, RCEP and a that may be currently gained or lost depending on series of bilaterals. It is obvious that the combined the respective outcome of this arrangements. In effect of progressive duty free market access to reality and with a broader perspective this chapter these markets thanks to a network of FTAs will be is aimed at identifying precisely what are the main a magnet for producers and investor to relocate products exported by Cambodia to RCEP/CP-TPP in Vietnam in spite of the more stringent rules of partners comparing them with the market access origin that Vietnam may face under CP-TPP. opportunities in terms of tariff concessions and rules of origin under the respective arrangements as well with other non-tariff measures such as SPS 4. RCEP and CP-TPP – Challenges and that are playing an important element of market Opportunities access. As shown in Figure 5 above, CP-TPP and RCEP negotiations are partially overlapping existing Figure 5: RCEP, ASEAN, CP-TPP and DFQF preferences: Overlapping memberships Note: in green are countries providing DFQF market access to LDCs. 28 Chapter 1 Table 5: Overlapping trade preferences available to Cambodia with RCEP and CP-TPP partners Comparative table on Market Access (MA) and Rules of Origin (RoO) Cambodia MA scheme Product Coverage RoO partners ASEAN ATIGA All products DFQF RVC 40% and PSROs Last Manufacturing Process performed in LDC; DFQF All Products Minimum 50% of total factory cost; Minimum 75% when cumulation is used 40% Regional Value Content (RVC); Product Australia Specific Rules of Origin: Requirements vary FTA 99% of all products between criteria wholly obtained, RVC, CTSH with or without exceptions, specific working or processing requirements or alternative rules. All products except Canada DFQF 80% of non-originating when cumulation is used some dairies Include MFN Averages MFN Not Applicable (6%) Chile All products except DFQF wheat, wheat flour, Minimum Regional Value Content of 50% and sugar Products DFQF 97% of all products Minimum 40% of originating materials Minimum RVC of 40% using direct method and China ASEAN maximum value of non-originating material of 90% of all products China FTA 60% using indirect method; Product Specific Rules of Origin containing 22 pages. Minimum 30% of originating materials; Product DFQF 95.5% of all products Specific Rules India ASEAN Minimum RVC of 35%; Product Specific Rules of 90% of all products India FTA Origin Maximum value of non-originating materials of DFQF All products 40%; Product Specific Rules Japan All products except Minimum RVC of 40% and product specific rules FTA for machine parts and of origin containing 161 pages. petroleum oil products Include MFN averages Mexico MFN Not applicable (6.9%) from WTO Include MFN averages Peru MFN Not applicable (2.4%) In 2016, RCEP and CP-TPP markets represented 33% of Cambodia total exports, with 13% directed to countries that are part of both agreements (Figure 6). 29 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Figure 6: Cambodia Export shares to RCEP/TPP markets and to the rest of the world, 2016 4.1.Assessing the value of RCEP and markets represented about 26% of total exports options to improve market access trade in 2016. Out of this amount, 8% were exported to with China Japan, 6% to China and India, 3% to Australia, New As detailed in Figure 7 below, exports to RCEP Zealand and Korea, and 9% to ASEAN. Figure 7: Cambodia Export shares to RCEP markets and to the rest of the world, 2016 Despite that Australia already provides DFQF limited information was made available through market access to Cambodia, the average utilization other sources. On the basis of the preliminary of the scheme by Cambodia exporters amounted information and an examination of tariff offers to about 72% in 2016, with important variations RCEP does not seems to provide substantial between products. Pockets of low utilization rates improvements with respect to the market access combined with preference margin (PM) above 2 that Cambodia is already being granted as part of percentage point have been identified. Finally, the LDC, or ASEAN and ASEAN FTA network with according to data notified at the WTO, in 2016, dialogue partners. Cambodia has not been able to use the DFQF The crippling factor of RCEP is the architecture of scheme offered by India, with Utilization rate of the tariff offer since the RCEP partners have made a zero. Therefore, a functioning trade agreement single offer for all the ASEAN countries or towards could generate important opportunities for all RCEP partners. This means that Cambodia is Cambodia. treated in terms of market access as Singapore or The RCEP negotiating text has not been made Malaysia while there is a clear divide in terms of available in the course of this study. Only export capacity and level of development among 30 Chapter 1 these countries and Cambodia. This element perspective of the trading opportunities and alone casts serious doubts over the value added challenges that the CP- TPP agreements may have of RCEP in terms of market access granted to for Cambodia. First of all, as in the case of the RCEP, Cambodia with respect to previous agreement the trade preferences granted under a FTA are not and LDC arrangements that Cambodia is already of unilateral natural and are more permanent and benefitting. stable in nature. Added to this the RCEP draft main text on rules The CP-TPP is based on a series of a rule-based, of origin is 111 pages long and the excel texts of market-oriented system that offer predictability product specific rules of origin is over 6000 lines. for investors but also challenges for countries like These figures alone provides a glimpse of the Cambodia. The situation is further exacerbated complexities of the negotiations. Once again there by the fact that some of the main competitors is no provision for LDCs special and preferential of Cambodia, like Vietnam, is on a triple track46 treatment in the area of rules of origin for LDCs. scenario since it participates to RCEP, is member of the CP-TPP and has entered a FTA with the EU. Unless substantial progress is made in the last round of negotiations the current reading of the reports the main exports from Cambodia to CP- RCEP provides little scope for increased market TPP partners in descending order of export value. access for Cambodia. The only advantage of RCEP As can be easily noted from the table the main would be to “lock-in” in a contractual agreement partners are Canada, Japan and ASEAN countries some unilateral trade preferences.45 Even this where Cambodia is benefiting from existing assumption would have be further assessed. preferences granted under the GSP of Canada and Japan as well as the AJCEP and ATIGA with ASEAN The fact that Cambodia may graduate from LDC countries. The only partner where Cambodia may status in a foreseeable future should not mean to gain, at a cursory glance, preferential market forfeit in advance its negotiating position as LDC access is Mexico for limited export values of shoes. during the current round of negotiations in RCEP Added to the CP-TPP rules of origin for garments 4.2. Joining the CP-TPP requires triple transformation. The CP-TPP agreement is a modern FTA With respect to investment (Chapter 9), the CPP– encompassing a series of WTO-Plus disciplines TPP parties agreed to suspend the application both in terms of coverage and in depth. The of the provisions related to an “investment preliminary analysis of the CP-TPP with respect authorization”, including the submission of ISDS to market access and rules of origin is similar to claims (i.e. limiting the submission of claims to the RCEP in the sense that the CP-TPP may not bring breach of the treaty obligation) and the selection to Cambodia additional market access to what of arbitrators (in part). has been already been granted under different Regarding other aspects of CP-TPP Chapter 9 arrangements thanks to the current LDC status it is noteworthy that the investment chapter or as member of the ASEAN FTAs with dialogue includes several reform-oriented elements. For partners. The complex rules of origin of the CP-TPP example, it refines definitions of investor and especially in the garment sector does not reflect investment; clarifies the meaning of key standards the present capacity of the Cambodian garment to preserve regulatory space (e.g. clarifying that industry. a government’s failure to respect an investor’s However, reading a complex agreement such legitimate expectations does not automatically as the CP-TPP trough the lenses of market of amount to a breach of the minimum standard tariff and rules of origin offers a very limited of the treatment (Article 9.6), clarifying what 45 Like the DFQF and rules of origin granted by Japan and India and Japan but it would have to be assessed if the tariff offers and rules of origin in RCEP are equivalent or better that those granted under the current DFQF granted by these preference giving countries. 46 See footnote 14. 31 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT does and what does not constitute an indirect Some CP-TPP parties opted to terminate and expropriation (Article 9.8 and Annex 9-B)); contains replace some pre-existing IIAs. For example, a clause recognizing that parties should not relax Australia’s BITs with Mexico, Peru and Viet Nam health, safety and environmental standards and will be terminated and replaced by the CP-TPP reaffirms Corporate Social Responsibility (CSR)- investment chapter, under the terms set out in related obligations. the relevant side letters. In that respect the CP-TPP offers an opportunity to replace old-generation Of particular relevance are issues related to ISDS. treaties with a treaty containing more modern Certain CP-TPP Contracting Parties used side clauses. letters to bilaterally opt out of ISDS or otherwise modify the ISDS arrangements applicable When considering accession to the CP-TPP between them.2 For example, bilateral side letters investment chapter, Cambodia should make a provide that there is no ISDS are available between careful assessment about the pros and cons in Australia and New Zealand and New Zealand and light of the acceding country’s investment for Peru. In the bilateral relationships between New sustainable development plan. First and foremost, Zealand and three other parties (Brunei, Malaysia this includes defining the role of IIAs in a country’s and Viet Nam) ISDS will remain. However, consent development strategy, this would also include an to arbitration by the respondent State needs to assessment of the individual investment-related be given on a case-by-case basis. Moreover, the obligations contained in the CP-TPP. CP-TPP ISDS provisions allow disputing parties Among others, consideration would have to be to submit written comments to the tribunal given to the extent to which more modern CP- concerning any aspect of the proposed decision or TPP clauses could help modernize (i.e. replace) award (CP-TPP Art.9.23) and establish joint bodies old-generation clauses in pre-existing IIAs (e.g. with a mandate to issue binding interpretations of Cambodia-Japan, 2007). Importantly, careful treaty provisions (CP-TPP Art. 9.25(3)). decision making would also require a realistic At the same time, many CP-TPP parties remain assessment of the extent to which acceding LDCs bound by ISDS provisions found in earlier treaties will be able to avail themselves of side letters, to signed between them in different constellations. shape their individual commitments in line with Examples include the ASEAN Investment their special development needs Comprehensive Investment Agreement (2009) (of Overall the main challenge of Cambodia is to which Cambodia is a party), the Energy Charter put more resources on assessing the values of Treaty (1994), other TIPs and BITs signed between the various options and conducting a series of the CP-TPP parties. consultations to assess the terms and condition for acceding to the CP-TPP Figure 8: Cambodia Export shares to CP-TPP markets and to the rest of the world, 2016 32 Table 6: Japanese Imports from Cambodia and Utilization Rates under ASEAN and GSP, 2017 (sorted in descending order of MFN Dutiable Imports > 1 million of USD*) Product Imports from Partner ($ 000) ASEAN GSP Utilization NOT Receiving Utilization Rate HS2 MFN Covered Covered Receiving Rate (%) HS Chapter Description Total Value Receiving ASEAN (%) Code Dutiable GSP ASEAN GSP Pref. pref. Pref. 1 2 3 4 5 6 7 8 9 10 11 TOTALS FOR ALL PRODUCTS 1,313,963 1,196,802 1,156,942 1,173,250 109,605 980,032 107,166 84.71 9.13 62 Art of apparel & clothing access, not knitted/crocheted 490,329 473,308 473,308 473,308 15,427 449,987 7,894 95.07 1.67 61 Art of apparel & clothing access, knitted or crocheted 366,704 366,704 366,704 366,360 35,502 315,364 15,838 86.00 4.32 64 Footwear, gaiters and the like; parts of such articles 203,106 203,106 168,840 188,582 26,997 136,844 39,265 81.05 20.82 42 Articles of leather; saddlery/harness; travel goods etc 59,248 59,248 58,392 58,679 6,788 51,242 1,218 87.76 2.08 63 Other made up textile articles; sets; worn clothing etc 32,006 31,702 31,702 31,702 4,679 4,088 22,935 12.90 72.35 66 Umbrellas, walking-sticks, seat-sticks, whips, etc 17,497 17,497 17,497 17,497 271 9,860 7,366 56.35 42.10 39 Plastics and articles thereof 12,966 11,722 11,722 11,722 1,614 5,664 4,444 48.32 37.91 95 Toys, games & sports equipment; parts & accessories thereof 8,287 3,854 2,400 2,018 1,684 495 1,675 20.63 87.79 96 Miscellaneous manufactured articles 6,521 6,521 6,521 6,521 660 71 5,790 1.09 83.00 94 Furniture; bedding, cushions etc; lamps & lighting fittings nes; 6,154 956 956 956 10 946 0 98.95 0.00 illuminated signes; prefabr. buildings 67 Prepared feathers & down & articles thereof; artificial flowers; 4,185 289 289 289 289 0 0 0.00 . articles of human hair 65 Headgear and parts thereof 3,832 3,832 3,832 3,832 948 2,884 0 75.26 0.00 00 Items beyond HS Classification (HS2 = ‘00’) 3,007 3,007 0 0 3,007 0 0 . . 90 Optical, photogr., cinematogr., measuring, checking, precision, 2,932 1,961 1,961 1,961 0 1,961 0 100.00 0.00 medical/surgical instruments & apparatus; part 19 Preparations of cereal, flour, starch/milk; pastrycooks’ products 1,731 1,731 1,731 0 1,684 47 0 2.72 . 44 Wood and articles of wood; wood charcoal 1,633 1,342 1,342 1,342 1,303 0 39 0.00 2.91 71 Natural/cultured pearls, precious/semiprecious stones, prec. 1,465 689 689 689 685 4 0 0.58 0.00 Metals; imitation jewelry; coins etc 56 Wadding, felt & nonwoven; special yarns; twine, cordage, ropes 1,216 1,216 1,216 1,216 790 7 419 0.58 34.46 and cables etc 33 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.3. Cambodia trade relations with Japan: 5. Addressing SPS issues with China and from GSP to ASEAN FTA and beyond. other partners Trade relations with Japan are governed by the Market access in terms of tariff reductions is an GSP for LDCs and the ASEAN Dialogue FTA with element of market access that is not sufficient to Japan. Trade figures suggest that the Japan GSP ensure market entry into a partner. As examined for LDCs is mostly used by Cambodia. in the sections above the trade policy options to replace the US and the EU as main market for In the context of the GSP preferences Cambodia the garments and bicycles are limited in the near with other ASEAN LDCs should prepare a future. Conversely the analysis has shown that document clearly outlining the improvements there are trading opportunities for rice and other that Japan may make on the product specific agricultural products that may be affected not only rules of origin and on cumulation. This document by tariffs but also by Sanitary and Phytosanitary should be submitted on 29 April as agreed last measures (SPS). November 2018 to the WTO Committee on Rules of Origin (CRO) and discussed during the CRO Indeed, other elements may hamper Cambodian meeting of 15-16 May. Such action should be exporters to benefit from market access followed by an official visit of the ASEAN LDCs to opportunities. Non-tariff measures (NTM) are the Ministry of industry and Trade and Ministry of widely imposed by Cambodia’s trading partners,. Finance in Tokyo during the fall to secure follow Some measures are imposed on a multilateral up and commitment in adopting a reform of rules basis while some other are imposed to specific of origin under the Japanese GSP countries (reported under Bilateral NTM). China is the county imposing the maximum number of In a parallel fashion Cambodia and ASEAN LDCs measures, with 5’700 NTM, including 21 bilateral should begin to study the possibility to have ones. a series of bilateral FTAs with Japan that are providing better market access than the present At the product level, Rice exports to China are Japanese GSP , the ASEAN FTAs and RCEP. A study particularly exposed to NTM. Exports of semi- should be conducted in this regard to compare milled or wholly milled rice represent 12% of the different concessions that Japan has made Cambodia total exports to China and are facing a towards other partners to secure and argue for total of 106 NTM, including 2 bilateral measures. better preferential margins when negotiating as While most of the existing measures are Technical ASEAN LDCs. Barriers to Trade (TBT), according to consultations with local stakeholders, we can reasonably expect On the basis of the abovementioned findings and Sanitary and Phytosanitary measures (SPS) to be analysis the following recommendations are made: the most problematic for Cambodian exporters of As a matter of priority, Cambodia and other agricultural/food products. ASEAN LDC with the assistance development partners take advantage of the set agenda of the LDC core group on rules of origin in order to table a document to (i) highlight the changes to be made in the product specific rules of origin of the GSP of Japan, (ii) request to expand the scope of Japan cumulation provision for ASEAN to include Cambodia, (iii) take the opportunity of the CRO to open a dialogue on better rules of origin for ASEAN LDC under the different trade arrangements currently being negotiated like RCEP or Japan-ASEAN FTA. 34 FULL REPORT Table 7: Total SPS measures imposed by Cambodia’s partners by products, 2016 (sorted in descending values of Cambodia’s exports, KHM export share > 5%, Total SPS > 2) Multilateral KHM Exports Share in total Country HS 6 Description Bilateral SPS Total SPS SPS ($000), 2016 trade CHN 100630 Semi-milled or wholly milled rice 1 47 48 71’253 12% CHN 350510 Dextrins and other modified starches 0 19 19 51’219 8% THA 350510 Dextrins and other modified starches 0 7 7 46’758 11% MYS 100630 Semi-milled or wholly milled rice 0 6 6 25’196 25% VNM 170199 Cane or beet sugar, in solid form, nes 0 20 20 24’988 11% BRN 100630 Semi-milled or wholly milled rice 0 6 6 9’600 100% MYS 151110 Vegetable/palm oils and fractions, crude, not chemically modified 0 7 7 8’449 8% LKA 220300 Beer; made from malt 0 8 8 4’965 92% MEX 640320 Sandles, with leather soles and straps (over instep, around big toe) 0 3 3 4’617 8% ARE 640320 Sandles, with leather soles and straps (over instep, around big toe) 0 6 6 4’037 6% CHE 151110 Vegetable/palm oils and fractions, crude, not chemically modified 2 16 18 3’526 16% LAO 010391 Swine; live, other than pure-bred breeding animals, < 50kg 0 3 3 2’315 41% NZL 100630 Semi-milled or wholly milled rice 0 8 8 571 7% LAO 010310 Swine; live, pure-bred breeding 0 4 4 447 8% SAU 100630 Semi-milled or wholly milled rice 0 31 31 148 18% BFA 300490 Medicaments; consisting of mixed or unmixed products 0 5 5 100 99% GHA 100630 Semi-milled or wholly milled rice 0 7 7 61 6% DZA 100630 Semi-milled or wholly milled rice 0 15 15 53 39% SEN 100630 Semi-milled or wholly milled rice 0 3 3 34 29% MRT 100630 Semi-milled or wholly milled rice 0 3 3 19 14% 35 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 7 above reports only the sectors affected and analysis, it is recommended that Cambodia by at least two SPS measures and with export continue to discuss bilaterally with China through shares above 5%. These are important export established channel to address SPS measures sectors for which a reduction of SPS measures applied by China on rice imports and other related could potentially have a significant impact in agricultural products; terms of profitability of exporters. Rice exports is affected by SPS measures not only in China but 6. Conclusions and way forward in Brunei, New Zealand, Saudi Arabia, Ghana, On the basis of the abovementioned findings Algeria, Senegal and Mauritania. However, in the and analysis the following recommendations are latter countries, the measures are imposed at a made: multilateral level, making more difficult to solve the issue with trade policy instruments such as Trade relations with ASEAN trade agreement. Overall Cambodia should openly discuss and SPS measures may also have an impact in sector revisit with ASEAN partners its negotiating where we do not observe high trade values. It position to be able to negotiate as an ASEAN LDC is likely to be the case if the SPS has a deterrent in external trade relations and coordinate such effect on Cambodian exporters that are not able stance with other ASEAN LDCs. It should be made to penetrate the foreign market. For instance, clear with ASEAN partners that a new course of semi-milled or wholly milled rice are not exported action in ASEAN external trade relation should be to Indonesia and Japan while the total exports undertaken. from Cambodia amount to 297 million USD. The Trade relations with the EU absence of exports could be due to the fact that these countries impose 2 bilateral SPS measures Cambodia should take the initiative to enter into a on Cambodia combined with respectively 12 trade policy dialogue with the EU to define a new and 6 multilateral SPS within the same HS sub- trade relation that is going beyond EBA. However, heading. a more effective way is to make concerted effort by all ASEAN LDCs to engage the EU as a group. The analysis of the trade flows carried out in Table 1 clearly shows clearly shows that China cannot Cambodia is expected to graduate from LDC status replace the EU and US as market of destination for in the near future47 and the current market access garments and bicycles. China could be a potential under EBA that has been a crucial factor in its market for Rice exports and exports of agricultural export performance is going to be progressively products and processed foodstuff. However, the eroded by the ASEAN FTAs. main obstacle to enter the Chinese market are not only tariffs but also Sanitary and phytosanitary In addition, Cambodia will have to undertake requirements. In the context of the WTO the SPS actions at technical level to prepare the ground for committee has been established to provide a extended cumulation with Vietnam and explore forum for discussion and exchange of information. possible ways to cumulate with Japan. According to the SPS IMS database, WTO members Such actions should be undertaken as soon as have raised 31 specific trade concerns on the SPS possible to relay a message to garments and measures applied by China. bicycle manufacturers that the Government is Cambodia should make sure that the RCEP actively pursuing a viable trade strategy. provisions on SPS contains WTO-Plus elements Trade relations with Japan that permits an enhanced dialogue with China and where possible equivalence and mutual Trade relations with Japan are governed by the GSP recognition agreements. for LDCs and the ASEAN-Japan Comprehensive Economic Partnership48 (AJCEP) Agreement or On the basis of the abovementioned findings ASEAN-Japan FTA (ASEAN-Japan FTA). Trade 47 See footnote 56 on page 11. 48 The AJCEP Agreement was signed in 2008. It has been finalized the First Protocol to amend the AJCEP Agreement to incorporate three additional chapters on Trade in Services, Movement of National Persons, and Investment and signed on 2nd March 2019. 36 Chapter 1 figures suggest that the Japan GSP for LDCs is Negotiating RCEP mostly used by Cambodia. The RCEP negotiating text has not been made In the context of the GSP preferences, Cambodia available in the course of this study. Only limited with other ASEAN LDCs, at the WTO, should information could be retrieved from other sources. prepare a document clearly outlining the On the basis of the preliminary information and an improvements that Japan may make on the examination of tariff offers RCEP does not seems product specific rules of origin and on cumulation. to provide substantial improvements with respect This document should be submitted to the WTO to the market access that Cambodia is already Committee on Rules of Origin (CRO) and discussed being granted as part of the LDC, or ASEAN and during the CRO meeting and follow up in relevant ASEAN FTA network with dialogue partners. fora. Such action should be followed by an official visit to the Ministry of Industry and Trade and The crippling factor of RCEP is the architecture of Ministry of Finance in Tokyo to secure follow up the tariff offer since the RCEP partners have made a and commitment in adopting a reform of rules of single offer for all the ASEAN countries or towards origin under the Japanese GSP. all RCEP partners. This means that Cambodia is treated in terms of market access as Singapore In a parallel fashion Cambodia should begin or Malaysia while there is a clear divide in terms to study the possibility to have a bilateral FTA of export capacity and level of development with Japan that would be providing better between these countries and Cambodia. This market access than the present Japanese GSP, element alone casts serious doubts over the value the ASEAN+1 FTA and RCEP. A study should be added of RCEP in terms of market access granted conducted in this regard to compare the different to Cambodia with respect to previous agreement concessions that Japan has made towards other and LDC arrangements that Cambodia is already partners to secure and argue for better preferential benefitting. margins when negotiating as ASEAN LDCs. Added to this, the RCEP draft main text on rules Trade relations with China of origin is 111 pages long and the excel texts of product specific rules of origin is over 6000 lines. The analysis of the trade flows carried out clearly These figures alone provide a glimpse of the shows that China cannot replace the EU and US as complexities of the negotiations. Once again there market of destination for garments and bicycles. is no provision for LDCs special and preferential China could be a potential market for Rice exports treatment in the area of rules of origin for LDCs. and exports of agricultural products and processed foodstuff. However, the main obstacles to enter Unless substantial progress is made in the last the Chinese market are not only tariffs but also rounds of negotiations the current reading of the Sanitary and phytosanitary requirements. In the RCEP provides little scope for increased market context of the WTO the SPS committee has been access for Cambodia. The only advantage of RCEP established to provide a forum for discussion and would be to “lock-in” in a contractual agreement exchange of information. According to the SPS unilateral trade preferences50. Even this Information Management System (IMS) database, assumption would have to be further assessed. WTO members have raised 31 specific trade concerns on the SPS measures applied by China. The fact that Cambodia may graduate from LDC status in a foreseeable future should not mean to Cambodia should make sure that the RCEP forfeit in advance its negotiating position as LDC provisions on SPS contains WTO-Plus elements during the current round of negotiations in RCEP. that permits an enhanced dialogue with China and, where possible, equivalence and mutual Negotiating CP-TPP accession recognition agreements49. The CP-TPP agreement is a modern FTA encompassing a series of WTO–Plus and WTO Extra disciplines both in terms of coverage and 49 For instance the EU-Vietnam SPS provisions contain a number of passible suggestions on how develop some WTO plus disciplines 50 These unilateral trade preferences are those granted under DFQF and related rules of origin by Australia, Japan, China, India, South Korea and New Zealand. However, it would have to be assessed if the tariff offers and rules of origin in RCEP are equivalent or better that those granted under the current DFQF granted by these preference giving countries. 37 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT in depth. The preliminary analysis of the CP-TPP consultations for better rules of origin in the WTO with respect to market access and rules of origin CRO committee on rules of origin. A document is similar to RCEP in the sense that the CP-TPP may detailing where improvements on the current not bring to Cambodia additional market access rules of origin provided by the Eurasian customs to what has been already been granted under union should be prepared and presented at the different arrangements thanks to the current above-mentioned WTO committee, preferably by LDC status or as member of the ASEAN FTAs with ASEAN LDC. Subsequently Cambodia and other dialogue partners. The complex rules of origin of ASEAN LDC should launch initiatives to follow up the CP–TPP especially in the garment sector does on this matter to obtain better market access and not reflect the present capacity of the Cambodian rules of origin. garment industry. Also, highly important, as Cambodia is negotiating However, reading a complex agreement such as to accede to the EAEU, is the need for a detailed the CP –TPP uniquely trough the lenses of tariff study on market access, rules of origin and and rules of origin offers a very limited perspective economic impact of the accession to the EAEU of the trading opportunities and challenges that that can be used as a guide toward leveraging the the CP-TPP agreements may bring to Cambodia. advantages of the EAEU. First of all, as in the case of the RCEP, the trade preferences granted under a FTA are not unilateral Preparing for the 12th WTO Ministerial Conference and are more permanent and stable in nature. (Kazakhstan, July 2020) The CP-TPP is based on a series of a rule-based, It is highly recommended that Cambodia and market-oriented system that offer predictability ASEAN LDCs make full use of the opportunities for investors but also challenges for countries like offered by the multilateral trading system to flag Cambodia. The situation is further exacerbated their issues and undertake parallel initiatives by the fact that some of the main competitors to those undertaken at regional level. Every of Cambodia, like Vietnam, is on a triple track51 opportunity to show that Cambodia and ASEAN scenario since the country a) participates in RCEP, LDCs are engaged in the multilateral track should b) is member of the CP-TPP and c) has entered be exploited to show to partners that Cambodia is an FTA with the EU. It follows that such multiple an active player in the international trade. track route shared by other ASEAN countries Research and capacity building attracts investors to such location since it provides multiple access to markets with respect other It is of paramount importance that Cambodia locations, such as ASEAN LDCs that are only invests resources in further developing and engaged in RCEP. studying the challenges and trading opportunities that are highlighted in this section and build the Overall the main challenge of Cambodia is to necessary capacity in the different ministries and put more resources on assessing the values of private sector. It is highly regretted that in spite the various options and conducting a series of of numerous Aid for Trade initiatives present consultations to assess the terms and condition in the country there are very few resources for acceding to the CP-TPP dedicated to establishing a trained pool of highly Negotiating better preferences in Eurasian capable trade negotiators and researchers. Such Customs union. recommendations are largely echoing those already made almost three years ago during a The analysis of the trade flows carried out in Table workshop organized by Ministry of Commerce and 1 clearly shows that the Eurasian customs cannot UNCTAD52. Such research and capacity building replace the EU and US as market of destination for should assist the Government in taking informed garments and bicycles. decisions on trade policy at large and in carrying out related trade negotiations. Nevertheless, efforts could be made to improve the market access conditions by initiating 51 Vietnam is member of 1) CP-TPP, 2) RECEP, 3) is part of the network EU-ASEAN FTAs. In addition, Vietnam has entered a series of bilateral FTAs like the Vietnam-Japan FTA. 52 https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1233 38 help Cambodia respond to such challenges in the context of highly dynamic and fast changing global and regional trading systems. The chapter is organized in three main subsections: 1. The UN-LDC graduation process; 2. Key challenges to trade competitiveness; and, 3. The impact of trade development on Quality of Growth and Trade-related SDGs. CHAPTER 2 4. Gender mainstreaming in Cambodia Trade Strategy LDC GRADUATION, TRADE The chapter presents some unique data as well as borrows from analyses developed in various other COMPETITIVENESS, chapters of CTIS 2019-2023 in order to formulate an overall argument about reform challenges QUALITY OF Cambodia must confront over the next ten to twelve years. GROWTH AND SDGS UN-LDC graduation (hereafter LDC graduation) will result in the loss of market access preferences. This will affect Cambodia’s trade competitiveness. 1. Introduction As shown in Chapter 1, Cambodia makes extensive use of LDC market access preferences. However, The Royal Government of Cambodia has set out also as shown in this chapter and Chapter 1, those ambitious milestones for the country’s future preferences have begun to erode – irrespective social and economic development. These include of graduation – because of deep changes becoming an upper middle income developing resulting from a growing number of bilateral and country by 2030 and a high income country by regional free trade agreements (FTAs) impacting 2050. In July 2016, the World Bank reclassified Cambodia. In addition, trade competitiveness Cambodia as a lower middle income country must be viewed in a holistic fashion. Market access to reflect significant improvements in is Gross preferences are not the only determinant of trade National Income per capita (superior to $1,025/ competitiveness. Cambodia must also continue to capita).53 This has no immediate impact on (1) take robust steps to improve the effectiveness Cambodia’s UN-LDC status which determines of its trade facilitation arrangements, (2) seize on Special and Differential Treatments (SDTs) it opportunities arising from the deepening of global receives under various trade agreements. So, on and regional value chain integration and the its way to achieving its longer term ambitious growing importance of e-B2B commerce in value targets, the country must graduate from its LDC chain integration, and (3) improve the business status. environment for enterprises’ productivity and cost In line with CTIS’ focus, this chapter looks at the competitiveness so as to pursue opportunities for country’s objectives from the perspective of trade moving up value chains through a focus on new development. Specifically, the chapter looks at key products, new destinations, and product quality. challenges to Cambodia’s trade competitiveness As it does, Cambodia must also understand how that the country needs to address in the next ten improvements in overall trade competitiveness – to twelve years, as it graduates from UN-LDC. The or lack thereof – may affect positively or negatively chapter’s intent is to point to reforms that can the Quality of Growth and trade-related SDGs. 53 http://blogs.worldbank.org/eastasiapacific/cambodia-is-now-a-lower-middle-income-economy-what-does-this-mean 39 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 2. LDC Graduation Process and Trade Minimum thresholds for the first two indexes Development (country must be above those thresholds) and a maximum threshold for the third one (country 2.1. The Process of LDC Graduation must be below that threshold) are adjusted over The UN established the category of Least time as relevant. Whenever a country meets Developing Countries (LDCs) in 1971. LDCs a two-threshold requirement for the first time, are low-income countries confronted by it triggers a set of in-depth studies conducted structural impediments to sustainable human by UNDESA in advance of the next following development. They tend to be vulnerable to Triennial Review to better understand possible economic and environmental shocks and have risks and uncertainties that the country might be limited human assets. LDCs benefit from special facing once it repeats the two-index requirement international support measures including market at the next Review.55 Based on findings, CDP access preferences (typically preferential tariffs recommends that ECOSOC endorses a three-year and more favourable Rules of Origin) and other transition period from LDC to GSP preferences in special and differential treatment under various order to reach full graduation. trade agreements (including slower scheduling of Until early 2018, only six countries had graduated reforms), financial and technical support to meet from the LDC status – Botswana (1994), Zimbabwe the objectives of the Paris Agreement on Climate (2006), Cape Verde (2007), Maldives (2011), Samoa Change, and others.54 (2014), and Equatorial Guinea (2017.)56 But the • To assess LDC status and potential for overall process of LDC graduation is accelerating. graduation, the UN Committee for Development As of May 2018, four new countries had reached Policy (CDP) uses three Indexes. To graduate, the two-index threshold successfully during two LDCs must reach a threshold for two out of consecutive Triennial Reviews (May 2018 and May three indexes during two consecutive Triennial 2015) – Bhutan, Kiribati, Sao Tome and Principe, Reviews: and the Solomon Islands. CDP did recommend • The Gross National Income per capita Index that ECOSOC endorses a three-year transition (GNI/capita), measured as a three-year average period to full graduation for those. In addition, of GNI per capita; Angola and Vanuatu that had met the criteria for • The Human Assets Index (HAI), measured graduation several times in the past but had been through four equal components – percentage held back for full graduation became eligible of population that is malnourished; mortality to graduate in 2021 and 2020 respectively. Two rate among children aged 5 or under; growing additional countries – Nepal and Timor-Leste – enrolment in secondary school; and, adult met the two-index-two-consecutive-Triennial- literacy rate; Review requirement in May 2018 but CDP did not • The Economic Vulnerability Index (EVI) which recommend them yet for the transition phase due tracks instability of agricultural production; to remaining economic and political uncertainties. instability of exports of goods and services; share 2.2. Cambodia’s Path to LDC Graduation of forestry and agriculture, manufacturing, and services in GDP; the concentration of In May 2018, Bangladesh, Myanmar, and Lao PDR merchandise exports; economic smallness; and met the two-index threshold criteria for the first the percentage of the population displaced by time. If they repeat that performance in 2021 natural disasters. they could become eligible for LDC graduation by 2024. Exports from those three countries are competing directly with Cambodian exports. 54 Change in country income classification will also alter access to preferential lending from World Bank and other multilateral lending institutions. For now, Cambodia continues to have access to IDA loans. https://policies.worldbank.org/sites/ppf3/PPFAnnex/b875a7a4-0f49-4632-92e9-d008584caab3Annex2.pdf 55 There is an alternative to the two Indexes twice-in-a-row requirement for LDC graduation. Countries can graduate if the GNI per capita is twice larger than the required threshold twice in a row. This was the case for Angola. 56 In the past Zimbabwe was classified as an LDC by the CDP but the country never accepted its inclusion in that list. Still following triennial reviews conducted by CDP, Zimbabwe was found to meet criteria for graduation as far back as 2006. 40 Chapter 2 As of May 2018, Cambodia met only one of very conceivable that Cambodia will meet the the three possible thresholds – namely the two-index requirement by 2021 (see table 8). If measure of its the Human Assets Index above the Cambodia repeats the same by 2024, Cambodia minimum threshold – which it had done already could achieve full graduation as of 2027 or 2028 at in 2015. However, with great improvements in the end of a three-year transition period. the two other Indexes over the recent past, it is Table 8: Cambodia’s Improvements in Graduation Indexes, 2006-2018 Index Graduation Thresholds* Cambodia Cambodia/Threshold 2006 GNI/Capita $900 $303.3 33.7% HAI 64 46 71.9% EVI 38 52.3 137.6% 2009 GNI/Capita $1086 $490 45.1% HAI 66 57.8 87.6% EVI 38 55.6 146.3% 2012 GNI/Capita $1,190 $707 59.0% HAI 66 57.9 87.7% EVI 32 50.5 157.8% 2015 GNI/Capita $1,242 $852 68.6% HAI 66 67.2 target met EVI 32 38.3 120% 2018 GNI/Capita $1,230 $1,075 87.4% HAI 66 68.9 target met EVI 32 34.8 109% *Note: GNI/Capita and HAI: Country must reach a level higher than the threshold. EVI: Country must reach a level below the threshold Source: UNDESA 2.3. Cambodia’s LDC Graduation in the be sure, the pace at which Cambodia reaches its Context of a Rapidly Changing targets will be determined, in no small part, by the International Environment speed at which reforms can be implemented. CTISU 2019-2023 seeks to support RSIV by exploring The Rectangular Strategy IV (RSIV) adopted more fully reform areas that shape directly trade by the Government in September 2018 goes development and, indirectly, the broader socio- to the core of the reforms needed to reach economic and environmental development of the Cambodia’s milestones and its Vision 2050 – not country, including the country’s SDGs. only graduating from LDC, but also reaching its upper middle income and upper income targets. RSIV includes reforms directly pertinent to trade development and the risks associated including “instability of exports of goods and services.” To 41 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 3. Four Key Determinants of On a country-by-country basis, the US is the leading Cambodia’s Trade Competitiveness importer of goods from Cambodia, importing 18.5% of Cambodia’s total goods exports. However, The simplest way to understand how Cambodia’s on a “market bloc” basis, the EU absorbs nearly Trade Competitiveness is being challenged is to 41% of all Cambodian goods exports, followed by look at changes that are also affecting the country’s NAFTA countries (US, Canada, Mexico) 25%, East direct export competitors and understand Asian and Pacific countries (China, Japan, Korea, how both Cambodia and its competitors are Hong Kong, Taiwan, Australia) 17.5%, and ASEAN responding to changes. Cambodia’s direct export countries 8%. See table 9. The importance of the competitors are countries with very similar export EU for Cambodian exports reflects the country’s baskets and/or moving towards the kind of higher extensive use of preferences granted under EBA. value exports that Cambodia might be targeting. It also raises serious questions following the Many are within the broad Asian region. They launch of an 18-month EU investigation focusing include other LDCs such as Myanmar, Bangladesh, on the possible withdrawal of EBA preferences and Lao PDR as well as middle income developing from Cambodia on political grounds. If such were countries such as Vietnam, Thailand, or other to happen and Cambodia was forced to enter EU selected ASEAN countries. Examples presented markets either on a GSP or MFN basis, it would here focus mostly on those. precipitate some of Cambodia’s competitiveness challenges discussed in this chapter. Table 9: Top 10 Importing Countries of Goods Exported from Cambodia, 2017 (Mirror Data) thousand US dollar Rank Importers 2017 Value % Share of Total By Country Total $17,213,088 100.00% 1 USA $3,176,922 18.46% 2 Germany $1,775,847 10.32% 3 United Kingdom $1,301,957 7.56% 4 Japan $1,262,898 7.34% 5 France $1,040,124 6.04% 6 China $1,007,582 5.85% 7 Canada $996,899 5.79% 8 Thailand $904,868 5.26% 9 Spain $817,900 4.75% 10 Belgium $507,590 2.95% By Market Blocs 1 EU $7,003,233 40.69% 2 NAFTA $4,303,735 25.00% 3 East Asia + Pacific $3,022,704 17.56% 4 ASEAN $1,359,203 7.90% East Asia + Pacific: Japan, China, HK, Korea, Australia, Taipei, NZ NAFTA: US, Canada, Mexico Source: ITC TradeMap Cambodia’s goods export have grown very rapidly Top 3 export sectors at HS-2 level (Clothing and over the past few years, nearly doubling in value Footwear) captures three-fourth of all exports between 2013 and 2017 – from approximately $9 and the Top 10 exports, 90%, newer exports are billion to $17.250 billion (see table 10). While the emerging and growing rapidly as well. 42 Chapter 2 Table 10: Goods Exported by Cambodia (HS-2 digit) thousand US dollar57 2017 HS 2013 2017 Share 2017 Leading Rank 2-digit Product label Export Export of Total HS 4-digit Code Value Value Exports Total All products 100.00% HS-6110 Apparel and Articles of apparel and clothing 1 ‘61 $4,540,976 $7,725,175 44.88% Clothing, knitted and accessories, knitted or crocheted crocheted Articles of apparel and clothing 2 ‘62 accessories, not knitted or $2,293,116 $3,486,924 20.26% crocheted Footwear, gaiters and the like; parts HS-6403 Footwear 3 ‘64 $692,684 $1,930,673 11.22% of such articles with leather uppers Articles of leather; saddlery and 4 ‘42 harness; travel goods, handbags $16,749 $448,266 2.60% and similar containers; articles ... Electrical machinery and HS-8544 Insulated equipment and parts thereof; 5 ‘85 $225,017 $435,887 2.53% wire and electrical sound recorders and reproducers, cables television ... Vehicles other than railway or 6 ‘87 tramway rolling stock, and parts $363,050 $423,346 2.46% HS-8712 Bicycles and accessories thereof 7 ‘10 Cereals $252,730 $352,407 2.05% HS-1006 Rice Natural or cultured pearls, precious 8 ‘71 or semi-precious stones, precious $7,595 $343,061 1.99% metals, metals clad ... Fur skins and artificial fur; 9 ‘43 $0 $292,893 1.70% manufactures thereof57 HS-071410 Cassava, Edible vegetables and certain roots 10 ‘07 $13,077 $289,484 1.68% fresh tubers and and tubers dried chips Top 3 76.35% Top 10 91.37% 11 ‘40 Rubber and articles thereof $173,985 na na 12 ‘39 Plastics and articles thereof $21,592 $156,222 0.91% Other made textile articles; sets; 13 63 worn clothing and worn textile $52,401 $147,966 0.86% articles; rags wood and articles of wood; 14 44 $62,926 $132,635 0.77% charcoal Optical, photographic, cinematographic, measuring, 15 90 $9,088 $111,630 0.65% checking, precision, medical or surgical . . Source: ITC TradeMap 57 Mostly tanning with nearly all exports to China and Hong Kong 43 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 3.1.Special and Differential Treatment Detailed analyses of current and post-graduation market access preferences for each of the six Market access preferences and other types of sectors are presented in Annex 1. The analyses special and differential treatment (S&D) will be for the six sub-sectors use (1) ITC Trademap affected by LDC Graduation. Quite possibly, based on Comtrade to identify main importers, elimination of market access preferences will main exporters and Cambodia’s direct country most directly impact trade competitiveness at competitors in its top export markets, (2) WTO graduation. tariff data base, and (3) individual importing But other preferences will be affected as well – countries’ websites for Rules of Origin. One if not fully, at least partially – with a significant limitation of the ITC Trademap is that the database impact on other dimensions of economic does not aggregate data for EU as a single development. UNDESA 2018 Summary Report of market. Hence, wherever EU is a large importer Impact Assessments for seven LDCs graduation of a particular Cambodia export, we use the EU’s prospects observes it is unclear how deeply other largest importing country to evaluate market SDTs – including those relating to the scheduling access conditions. of reform under such agreements such as TRIMS, HS-6110 Apparel and Clothing, knitted and TRIPS, TFA etc. – might be affected by graduation. crocheted Those will be negotiated with relevant bodies during the transition period. However, even if Apparel and clothing, knitted and crocheted (HS- Cambodia were to negotiate extensions for some 6110) is the largest HS-4 digit export sector under of those, in all likelihood others will be eliminated.58 HS-61. The EU and the US are the two largest Those changes will have an impact on elements of importers as shown in Table 2.4. Cambodia’s industrial development policy. Hence In the EU (example of Germany shown in table 2.4), Cambodia needs to develop analytical capacity in Cambodia benefits from EBA – DFQF and RoOs order to strategize and prepare for negotiations including “making up” and regional cumulation – during the transition phase as well as be ready as do Myanmar and Bangladesh. At graduation, to make possible adjustments to its industrial tariffs would rise to the 9.6% under the same development policy thereafter. GSP preference that applies at the present time 3.2. Market Access Preferences to Vietnam, India, Pakistan – some of Cambodia’s middle income country competitors. RoOs To illustrate expected changes resulting from would change from simply “making up” to double market access preferences, this section focuses transformation “knitting and making-up” which on changes in market access preferences for five Cambodia would be challenged to meet, at least HS-4 digit sectors and one HS-6 digit sector from at the present time. GSP tariff is slightly lower among the Top 10 exports. These are listed below: than the MFN tariffs that apply to China. However, 1. HS-6110 Apparel and Clothing, knitted and by the time Cambodia graduates, Vietnam will crocheted benefit from the elimination of tariffs into the EU 2. HS-6403 Footwear with leather uppers under EVFTA. Depending on the 6- or 8-digit HS 3. HS-8544 Insulated wires and cables code, a large number of tariffs will be eliminated 4. HS-8712 Bicycles and other Cycles not Motorized at entry into force of the agreement (category A), 5. HS-1006 Rice and other within four years through four equal yearly 6. HS-071410 Cassava, fresh tubers and dried reductions (category B3) or within 6 years through chips, HS-110814 Native Starch, and HS-350150 six equal yearly reductions (category B5.) Modified Starch The US do not provide LDBDC or GSP preferences for HS-61 chapter. Most countries, including China, Cambodia, other ASEAN countries, India, Pakistan, 58 UNDESA/CDP, Summary of Impact Assessments for Bhutan, Kiribati, Nepal, São Tomé and Príncipe, Solomon Islands and Timor-Leste, February 2018 44 Chapter 2 or Bangladesh enter under an MFN tariff range to zero in gradual equal installment over a ten-year of 32% / 0.9%. RoOs are based on tariff line shift. period (except for tariffs applying to a few HS-8 Jordan (under JOFTA) and Honduras, Guatemala, digit to be reduced over a 15 year period.)59 RoOs and Salvador (under CAFTA-DR) benefit from zero are based on change in tariff line and a de minimis tariff and some preferential RoOs. At graduation, rule. Viet Nam’s tariffs range between 30.0% and there will be no change in market access for 2.0% under ASEAN-Japan FTA with RoOs requiring Cambodia. a change in HS-4 digits tariff line or 40% domestic content with regional cumulation possible with HS-6403 Footwear with Leather Uppers other ASEAN countries. Cambodia benefits from Footwear with leather uppers (HS-6403) is DFQF for now with RoOs similar to Viet Nam Cambodia’ largest exports under HS-64 (Footwear, based on the ASEAN-Japan FTA. Post-graduation, gaiters and the likes; parts of such articles.) The Cambodia would find itself in nearly similar EU, Japan, and the US are the three largest market access condition as Viet Nam – but both importers of footwear with leather uppers with a loss of tariff advantage over Italy within a exported by Cambodia with a share of over 30% 10-year period – roughly by 2029. Viet Nam would for EU, 16.5% for Japan, and 15.5% for the US benefit from wider regional cumulation as EVFTA (Table 2.5.) Table 2.5 also shows Cambodia’s main would allow it to include EU and other content in export competitors in the three markets. its domestic content. Viet Nam and China are very large exporters to Cambodia is only the 11th largest exporter to the the EU (example of Germany shown in table 2.5.) US. China, Viet Nam, and Italy are the top 3. The Viet Nam benefits from GSP with a tariff range US does not provide GSP or LDBDC advantages in between 4.5% and 1.5%, with 50% domestic footwear so nearly all countries enter under MFN. content requirement, and the benefit of regional MFN tariff ranges from 10.0% to 0%. RoOs calls for cumulation for inputs from ASEAN countries change in tariff heading and a 7% de minimis rule. (less Singapore and Malaysia.) However, within Only Mexico (6th largest exporter) under NAFTA four to eight years of the entry into force of the and the Dominican Republic (DR) (8th largest EVFTA, tariffs for Viet Nam will be eliminated. exporter) under CAFTA-DR benefit from zero tariff. China exports enter under MFN (duties between RoOs for Mexico calls for 60% regional cumulation/ 8.5% and 4.5%.) Tunisia and Morocco both domestic content and 55% in the case of DR, or benefit from 0% tariffs under so-called Deep change in tariff line and 10% de minimis rule. Cooperation FTAs (DCFTAs) signed under the HS-8544 Insulated Wires and Cables European-Mediterranean Agreement. RoOs: At present Cambodia benefits from DFQF under EBA, Insulated wires and cables (HS-8544) are 30% domestic content, and regional cumulation. Cambodia’s largest exports under HS-85 (electrical Post-graduation, Cambodia (under GSP) will be in machinery etc.) Thailand and Japan are the two a less favorable position than Viet Nam, Tunisia, largest importers of insulated wires and cables or Morocco, due to the FTA in place between the exported by Cambodia, with nearly 56% and EU and those countries. Domestic content under 24% of total Cambodian exports respectively RoOs would increase from 30% to 50%. Also, (Table 2.6.) Table 2.6 also shows Cambodia’s main Vietnam will be excluded regional cumulation export competitors in the two markets and their once EVFTA enters into force. respective market access conditions. Italy and Viet Nam are the two largest exporters China (tariff range between 0% and 10%) and to Japan, followed by China and Cambodia. Italy Japan (0% duty) are the two largest exporters to exports under MFN tariffs ranging from 30.0% Thailand – with China by far the largest. Cambodia down to 21.6% as does China. However, Italy, is the 4th largest exporter to Thailand and a under the EU-Japan FTA, will see its tariffs reduced reasonably sizeable one. Cambodian exports 59 The EU-Japan FTA entered into force February 1, 2019 45 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT to Thailand have no tariff preference over those 48.5% antidumping duty starting in 1993 and offered to other ASEAN exporters. They all benefit renewed several time until March 2019. EU is from zero duty under ATIGA. But Japan, under currently reviewing extending the duty for another Japan-Thailand FTA, also benefits from zero duty five years. Under EBA, Cambodia benefits from and the same RoOs as ATIGA countries – namely, DFQF and a 30% domestic content RoO. A 2015 shift in tariff line or 40% domestic content. LDC EU investigation determined that most bicycles graduation will provide no new benefit or loss exported from Cambodia did originate from the thereof for Cambodia. If EU and Thailand were country and were not transhipped from China to complete their ongoing FTA negotiations (with some small exceptions.) Cambodia also successfully, EU producers would likely benefit benefits from regional cumulation from ASEAN from the same preferences as already granted to (except Singapore and Malaysia) for purpose of Japan. The difference between ATIGA and FTAs the required 30% domestic content (some quotas is that countries like Japan, which already has an were provided by EU for Cambodia to continue FTA with Thailand, and EU member states, which to import parts from Malaysia during a transition might get one, are able to include inputs from any period.)60 Regional cumulation from Vietnam countries with which they have an FTA as part of would be lost once EVFTA enters into force. their domestic content, potentially giving them a Bangladesh benefits from similar preferential greater RoOs advantage over ATIGA countries. treatment, with regional cumulation from SAARC. Assuming a normal graduation from EBA to GSP, China, Viet Nam, the Philippines, Indonesia, and Cambodia could then find itself with a 10.5% Thailand are the five largest exporters of insulated duty and 50% domestic content requirement, wires and cable to Japan. Cambodia’s exports to potentially a far less competitive position than Japan are still quite small. Under AJCEP (ASEAN- Viet Nam which, under EVFTA, would benefit Japan FTA), Cambodia benefits from 0% duty with from a duty scaling gradually down to zero within a RoO based on shift in tariff line or 40% domestic eight years as of entry into force of the agreement content (including regional cumulation of inputs and with regional cumulation rules in its favor from ASEAN countries.) Graduation from LDC to since inputs from countries benefiting from FTA GSP would not change market access preferences with the EU could also be included in domestic for Cambodia. China is subject to a small tariff content. The same could happen for Thailand if ranging from 0% to 4.8%. As Japan, China, and FTA negotiations with the EU succeed. Philippines Korea are in the process of negotiating a three- could also become a more serious competitor way FTA, that tariff could be reduced to no duty. since it benefits from zero duty under GSP+. HS-8712 Bicycles and other Cycles not Motorized The US market is overwhelmingly dominated by Bicycles and other Cycles not Motorized (HS- Chinese and Taiwanese exporters. Cambodia 8712) are Cambodia’s largest exports under HS- is the third largest exporter but a small one for 87 (Vehicles other than railway and tramway etc.) now. As an LDC, Cambodia currently benefits EU member states are by far the largest importers from zero tariff and 35% domestic content, with of Cambodian bicycles, followed far behind by some regional cumulation with other ASEAN the US. Cambodia happens to be the largest countries. Following graduation from LDC to GSP, non-EU exporter to key EU country markets its tariff would rise to a range of 0% to 11.0% with (example of Germany.) The US market remains unchanged RoOs. China and Taiwan are subject overwhelmingly dominated by products from to a tariff range from 3.7% to 11.0%. The open China and Taiwan – at least until the US engaged question is whether Chinese exports to the US into a tariff war with China. will be affected significantly by the outcome of the current US-China tariff war (possible rise of In the EU, the earlier importance of China was its tariff to 25%) and whether this may create an diminished majorly following imposition of a opening for Cambodian exports. 60 Parts from Malaysia can be used in a maximum quota of 100,000 units to expire December 31, 2019 46 Chapter 2 HS-1006 Rice and Milled Rice measures but, possibly, even more importantly the understanding that Cambodia is not price The EU, China, and Malaysia are the top importing competitive against very large producers of white countries for semi-processed, semi-milled, or rice – Viet Nam, Thailand, Myanmar, Pakistan, or milled rice from Cambodia as recorded under HS- even Myanmar – combined with the fact that 1006. From January through September 2018, fragrant and premium rice will sell at a range of EU imported 193,499 MT out of a total of 389,264 $800 to $1000/MT compared to white rice at $350 MT exported by Cambodia.61 Informally, there is a to $400/MT. significant quantity of un-recorded export of rice paddy (and possibly even milled rice) to Vietnam In the Chinese market where Cambodia is the and Thailand. third largest exporter, the country benefits from no preference over its competitors (1% In-Quota- In the EU, Cambodia’s competitors such as India, Tariff or IQT.) In 2018, the In-Quota was 200,000MT Pakistan, and Thailand are subject to In-Quota- for Cambodia. In late January 2019, China raised it Tariffs (IQTR) of 15% for husked and 0% for semi to 300,000MT for 2019 following the introduction milled, milled, and Basmati rice with semi-milled of Safeguards by the EU. In Malaysia, Cambodia and milled Indica rice getting a 100,000MT benefits from the same ATIGA preferential 20% overall quota and a 10,000 MT Basmati quota tariff as do Viet Nam and Thailand. (India and Pakistan.) There is an ad-valorem tariff for Out-of-Quota-Tariff (OQTR.) Until January HS-0714 Cassava, HS-110814 Native Starch, HS- 2019, Cambodia and Myanmar were benefiting 350150 Modified Starch from EBA DFQF. The EU launched a safeguard Cambodia is the world’s second largest exporter investigation in 2018 at the request of Italy and of fresh and dried chip cassava after Thailand. Viet Spain. The safeguard measures against both Nam ranks close to Cambodia. Cambodia benefits countries entered into force January 18, 2019. from no duty and no quota under ATIGA for its The EU is introducing three-year ad-valorem exports to Thailand and Viet Nam. There would be tariffs (175euro/MT during year 1; 150euro/MT no change at graduation. during years 2 ; and, 125euro/MT during year 3) that will put the two countries at a very significant There is growing interest from investors to process disadvantage against competitor exporters. Post- fresh cassava into native and modified starch in graduation, assuming the current safeguards have Cambodia.63 Cambodia current exports of native been lifted, in principle Cambodia and Myanmar starch to China and the US would not be affected would receive the same treatment as Thailand. by graduation as both countries apply no quota One issue with the newly imposed safeguards is and no duty – in China, under China-ASEAN FTA; in that most exports of milled rice from Cambodia the US, under MFN. However, Cambodian exports falls under HS-10063098 which includes milled will be affected in its other two export markets – long grain white rice (Indica) as well as fragrant India and the EU. In India, graduation will result in a and premium rice – with the latter not competing loss of tariff preference from the current LDC tariff with rice produced by Italy and Spain. Specifically, of 0% or 15% (tariff depends on the Indian buyer as of 2017, 51% of milled rice exported to EU was – direct user vs. trader) to a 50% MFN tariff. In the fragrant and premium, with a major decrease EU, Cambodia would lose DFQF and would face in quantities of Indica white rice exported to the same ad valorem tariff imposed on Thailand EU from 155,000MT in 2016 down to 78,000MT and Viet Nam – with the significant disadvantage in 2017.62 The shift from white rice exports to that Thailand benefit from a free-quota tariff of fragrant and premium exports reflects, in part, 10,000MT and Vietnam of 30,000MT whereas some anticipation by rice millers of possible EU Cambodia would need to compete for a share of 61 MAFF, One Window Service for Rice Export 62 Same source 63 See Chapter 8 47 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT an additional tariff-free quota of 10,500MT that cassava starch, though it is likely to become applies to any other exporter of cassava starch to one in a relatively near future. When Cambodia the EU. The EU is highly protective of its potato reaches that stage it is likely not to lose or gain any starch industry. advantage at graduation since most importing countries charge 0% tariff (or very small tariffs) Cambodia is not yet an exporter of modified under MFN or GSP. In Summary Table 11: Summarized Impact Analysis of LDC Graduation on Cambodia’s Market Access Preferences in 6 HS-4 Digit Export Sectors HS-4 digit Importing Cambodia currently vs. Cambodia post-Graduation vs. sector Markets Competitors Competitors EBA DFQF: 0%. Tariff advantage over Same as GSP competitors such as India GSP (9.6%) or MFN (12.0% - 10.5%) or Pakistan with 9.6% tariff. Change in competitors. RoO: “making up” and RoOs: “Double Transformation” (knitting regional cumulation. + making up) and regional cumulation. EU Viet Nam will see its entry tariffs into the EU eliminated at entry into force of the Apparel & EVFTA or within 4 or 6 years. Viet Nam Clothing, access advantage to EU markets will be knitted superior to that of Cambodia. and MFN tariff range 32.0% / 0/9%. crocheted No LDBDC, no GSP preferences. RoO: change in tariff heading. US Jordan (under JOFTA), Honduras, No change Guatemala, El Salvador (under CAFTA-DR) have no tariff and regional cumulation LDC DFQF: 0%. Tariff advantage Same as Viet Nam under AJCEP including over Italy and Viet Nam. RoO: 40% 30.0% down to 2.0% tariff range. RoOs: domestic content or change in tariff no change. But both countries lose tariff Japan heading under ASEAN-Japan FTA advantage over Italy under EJFTA with (AJCEP) tariffs down to zero after 10 years (or 15 years in a few 8-digit lines) MFN tariff range 10% / 0.0% - No change for Cambodia. Mexico and DR Footwear No GSP, no LDBDC for HS-6403. still zero duty advantage under NAFTA with RoO: change in tariff heading and CAFTA-DR and regional domestic Leather and de minimis rule. Mexico and content rule Uppers Dominican Republic have market US access advantage including zero duty, under NAFTA and CAFTA- DR respectively and regional domestic content rule (60% and 55% respectively) or change in tariff heading. 48 Chapter 2 O% under EBA DFQF. Tariff Under GSP, 4.5% / 1.5% tariff range. advantage. RoO: 30% domestic RoOs: 50% domestic content and content and regional cumulation regional cumulation (except Singapore, (except Singapore and Malaysia.) Malaysia, Vietnam.) Viet Nam’s tariffs into EU Regional cumulation from Vietnam EU (currently GSP) eliminated after 4 to is to be excluded once EVFTA enters 8 years under EVFTA and better regional into force. But Tunisia and Morocco cumulation rules. Also, no duty for Tunisia also benefit from zero duty and and Morocco. Insulated regional cumulation under DCFTAs Wires and No market access advantage over Cables other ASEAN countries under ATIGA. Zero duty, change in HS Thailand No change 4-digit tariff line, and Regional Cumulation. Japan also zero duty under Japan-Thailand FTA (JTCEP) No duty under ASEAN-Japan FTA (AJCEP.) RoOs: change in tariff line Japan No change or 40% domestic content, regional cumulation 0% duty under EBA DFQF. Tariff Under GSP Cambodia faces 10.5% advantage over Taiwan (MFN, duty and loses advantage over Viet 14%), China (anti-dumping, 48.5%), Nam (under EVFTA) with zero tariff and Thailand and Viet (GSP tariffs, within 8 years. Cambodia could also 10.5%) respectively. RoOs: 30% local lose advantage over Thailand if ETFTA EU content and regional cumulation negotiations succeed, and loses from ASEAN (except Singapore and advantage over Philippines (GSP + hence Malaysia.) Regional cumulation zero tariff ). RoO: domestic content and Bicycles from Vietnam is to be excluded regional cumulation increases from 30% and other once EVFTA enters into force. to 40% (except Singapore, Malaysia, Cycles not Vietnam.) Motorized Under GSP (11% / 0% GSP tariff range), Cambodia has no/very small advantage over other competitors benefiting from No duty under LDBDC DFQF. RoOs: GSP or entering under MFN (11% / 3.7% US 35% domestic content and limited MFN tariff range). No change in RoOs. regional ASEAN cumulation. Current dominant position of China might be challenged if US-China trade war not resolved. Until January 2019, no tariff no Strong competitive disadvantage under quota advantage under EBA Safeguard (next 3 years minimum.) DFQF. Following introduction Under GSP, Cambodia would be of Safeguards by EU, Cambodia’s competing directly with large exporters earlier advantage has turned into India, Pakistan, Thailand with the benefit Milled Rice EU disadvantage since not eligible of special zero duty quotas: 100,000MT to export under reduced in- for semi-milled and milled. In addition, quota-tariff (IQTR) that apply to Pakistan and India have a zero duty on competitors. In addition, India and 10,000MT for fragrant rice. Thailand Pakistan have special quota for would likely negotiate fragrant rice quota fragrant rice (Basmati.) under FTA negotiations with EU. 49 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT No advantage. Nearly all imported milled rice irrespective of origin benefits from the same 1.% IQTR China and overall Quota rarely reached. No change Quota for Cambodia rises from 200,000MT in 2018 to 300,000MT in 2019 20% preferential tariff for rice Malaysia imported from within ASEAN under No change ATIGA. All other, 40% MFN tariff Cassava, Cambodia main exports are to Fresh Thailand, Viet Nam, and China. No change tubers and DFQF under AFTA and China-ASEAN dried chips FTA Cassava, DFQF for Cambodian exports to At graduation, no change in China; no Cassava China under China-ASEAN FTA; change in USA; Cambodia lose its tariff Native LDC tariff advantage for exports advantage against Thailand and Viet Cassava Starch, to India (0% or 15%); 50% tariff for Nam in India; Cambodia lose advantage Native Cassava GSP countries; DFQF under MFN to against Thailand and Viet Nam in EU as Starch Modified USA; DFQF under EBA otherwise both countries benefit from tariff-free Starch ad valorem tariff to EU for GSP quota and Cambodia would need to countries negotiate a tariff -free quota Cassava 0% in China under China-ASEAN In general no change at graduation Modified FTA; 0% LDC in Japan; 0% under except small tariff in Japan Starch EBA and GSP in EU; 0% MFN in USA In short, at graduation from LDC to GSP, in export Inferior market access conditions may already sectors where Cambodia must compete against exist when a particular importing country exporters that have entered into bilateral or does not provide LDC or GSP preferences for regional FTAs in the same target markets, exporters a particular sector and Cambodia is forced to will typically lose tariff advantage and possibly compete on an MFN basis against competitors suffer from weakening of RoOs advantage. That that receive market access preferences under includes even losing market access preferences FTAs. For instance, Cambodian exports of leather against high income countries, as in the case of footwear must compete in the US market under Italy for footwear exports to Japan that will gain MFN against Dominican Republic exports granted advantages under the EUJFTA or Canada for preferences under CAFTA&DR. Also, in situation bicycles export to the US that will benefit from an where a particular export is already included in advantage under NAFTA. the scope of a regional FTA to which Cambodia is a party (e.g. ASEAN-Japan FTA for electrical This weakening or loss of market access preference cable, China-ASEAN FTA and AFTA/Malaysia for may already happen before LDC graduation, rice) Cambodian exports may already have lost depending on how fast FTAs benefiting preferences and are forced to compete on the Cambodian competitors may enter into force. In same basis as other competitors. the EU, the benefit accrued by Viet Nam under EVFTA will pose challenges for Cambodia in This short review has focused on easily identifiable several sectors, as could an EU-Thailand FTA if threats to Cambodia’s market access preferences such materializes. in the present or at graduation through limited examples. This analysis does not exclude other 50 Chapter 2 possible threats not discussed here such as For more than 20 years, the IFC/World Bank has emerging competing exporters – e.g. emerging published annual country surveys – Doing Business AGOA competitors in US markets targeted by – measuring critical determinants of business Cambodian exporters – or from the EU withdrawal attractiveness, including the ease/difficulty of of EBA benefit to name only two examples.64 “trading across borders.” In addition to cross- But it does point clearly to challenges posed to country comparisons, the studies allow analyses Cambodia by FTAs before or after LDC graduation, of historical trends within individual countries. including not only challenges to competitiveness, However, to improve the quality of cross-country but also to the country’s need to build analytical comparisons, IFC revised its methodology starting capacity for strategizing about and negotiating with 2016 data. So opportunities for historical FTAs. This opens another set of new challenges: comparisons are more limited at the present time. LDC and GSP preferences are asymmetric; To measure direct time and costs associated with FTAs require further market opening to foreign trade facilitation, Doing Business now uses “auto competition. parts” shipment for imports in all countries and the dominant export in each country – “garments” 3.3. Trade Facilitation in the case of Cambodia Trade Facilitation – the process of moving Table 12 compares the ease/difficulty of trade imported or exported goods through customs – is facilitation in Cambodia with other countries in a significant trade competitiveness factor. From a the region and OECD High Income countries. cost perspective, there are official and “informal” Cambodia does reasonably well in term of the fees associated with meeting documentary and dollar cost associated with documentary and border compliance for both exports and imports. border compliance for both imports and exports But there are also indirect costs borne by exporters when compared to both the ASEAN range and and importers associated with the amount of even the average for the larger East Asia and time their shipments sit idle. Idle inventory costs Pacific region. It tends to be on the high-end producers the value of the inventory multiplied by of the ASEAN range for time (hours) associated the daily bank lending rate while long processing with documentary compliance for both imports at customs may create an “opportunity cost” by and exports and low-end of ASEAN range for preventing producers from entering value chains time associated with border compliance (“green that require short and dependable deliveries – channel” all the way to “visual inspections”). hence restricting up-value opportunities. Chapter 4 reviews data for Cambodia over the period 2016-2018. The review may suggest some slight decline in Cambodia’s performance. 64 The probability of EBA withdrawal from Cambodia by the EU is difficult to assess at this early stage in the review process – though RGC must clearly concerned itself with this possibility. 51 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 12: Trading Across Border - Cambodia, ASEAN, East Asia, High Income Countries, 2018 data ASEAN East Asia & OECD High Cambodia Thailand Vietnam Range* Pacific** Income Time to Export - Border 48 142-10 54.7 44 55 12.5 Compliance (Hours) Cost to Export - Border $456- $375 $382 $223 $290 $139 Compliance ($) $140 Time to Export - Documentary 132 155-2 57.6 11 50 2.4 Compliance (Hours) Cost to Export - Documentary $100 $235-$35 $109 $97 $139 $35 Compliance ($) Time to Import - Border 8 230-8 69.2 50 56 8.5 Compliance (Hours) Cost to Import - Border $580- $240 $416 $233 $373 $100 Compliance ($) $213 Time to Import - Documentary Compliance 132 132-3 57.2 4 76 3.4 (Hours) Cost to Import - Documentary $120 $210-$40 $110 $43 $183 $25 Compliance ($) * Best and worst hours or costs among ASEAN members ** Includes ASEAN, China, Taipei, HK and most Pacific Islands. Does not include Japan or Korea. Export: HS-61 Apparel and Clothing, Knitted or Crocheted; via Sihanoukville to US Import: HS-8708 Auto Parts via Poipet from Thailand Source: IFC, World Bank Group, Doing Business 2019 Importantly, the two goods used to measure Cloud (VCC) has been hired to work with DGCE border compliance in Doing Business – garments to develop a CNSW (Cambodia National Single for exports and auto parts for imports – benefit Window) that will integrate seven major Agencies: from special measures at border posts to MEF-GDCE, MoC, CDC, MAF, MoH, MoI&H, and accelerate shipments. Based on discussions with Ports and Airports of Cambodia. CNSW will industry sources, it would appear that the trade connect electronically traders to all major permit facilitation performance for the two sectors does issuing regulatory authorities. According to GDCE, not extend fully to other imports and exports. some of the immediate challenges will be to help In 2005 the World Bank and the Government Agencies others than GDCE computerize their own launched a Trade Facilitation and Competitiveness processes to issue their respective permits and technical assistance project to improve Customs certificates and incorporate those into the CNSW. operations. The project helped Cambodia Experience from other countries, including high introduce ASYCUDA and the Single Administrative income countries, shows that it often takes strong Declaration and the implementation of the system leadership from the very top of Government to in 81 customs offices and border crossings. This get multiple agencies to operate out of a platform led to significant reduction in time and cost for shared by all. In the US, for instance, it took a border and documentary compliance. DGCE’s 2014 Executive Order from President Obama to major current reform effort focuses on the Phase break through the reluctance of the 50 or more US 2 of the introduction of its Cambodia National border agencies to incorporate their procedures Single Window (CNSW) to be compliant with the into the NSW.65 ASEAN NSW requirements. Singapore’s cargo 65 Executive Order -- Streamlining the Export/Import Process for America’s Businesses, February 19, 2014. Note also that US CBP took a “soft” approach to creating a NSW. CBP opted first to bring under the same electronic window the online processes of individual agencies “as is”, and to focus on “re-engineering” of processes once everyone was under the same umbrella. 52 Chapter 2 Eventually the CNSW will need to serve as a basis In Summary for developing a risk management (RM) system Cambodia is making steady progress towards that fully covers risks of all agencies – not simply developing and implementing a CNSW that will those risks that are most pertinent to GDCE. GDCE integrate all regulatory into the export/import will need to ensure that this more developed RM documentary processes. Cambodia may need system is applied not only in Phnom Penh but strong leadership from the Prime Minister to at all border points and customs offices. This, in ensure the integration process gets a strong buy- order to cut down further in delays associated in from all Agencies involved. Looking forward, with border and document compliance. the CNSW should also be the basis for a risk Developing a more sophisticated RM system management system that encompasses risks will present a number of challenges. First, it relevant to all agencies and becomes a platform assumes that other border agencies already have to create a true Authorized Economic Operator their own RM systems to track and assess risks system. For the latter to succeed, it will take a deep pertinent to their responsibilities. To support level of dialogue and trust between Government dialogue between DGCE and the Private Sector, and the Private Sector. In parallel, Cambodia must MEF created the CPPM (Customs-Private Sector take steps to provide appropriate trade facilitation Partnership Mechanism in 2009 with modification arrangements and customs facilities for the introduced in 2015.66 In addition, Private Sector booming international express courier business. could also raise any issues in Working Group on Export Processing and Trade Facilitation, chaired 3.4. Deepening Global and Regional Value by Minister of Commerce which would then be Chains, e-Business, and Cambodian SMEs referred to Prime Minister for deliberation in the annual G-PSF. Global and regional value chains are increasingly stretched over multiple country locations with Further down the line, Cambodia will need international investors balancing supply chain to expand its existing Customs Compliance risks against costs and ease of doing business. Program (currently 13 operators are included Cambodia benefits from the fact that it is located in the program) and turn it into a full-fledged in one of the world’s fastest growing region as well Authorized Economic Operator (AEO) program as current pressures on international investors that supports a larger number of exporters and to move various investments away from China importers through accelerated trade facilitation.67 towards other countries in the region due to In addition to these developments, Cambodia will rising labor costs and other factors. In addition, in need to accelerate the development of special a number of sectors, Cambodia still benefits from trade facilitation arrangements and facilities for market access preferences, at least until many express couriers which are playing a critical role of those disappear following LDC graduation as not only in the delivery of e-B2C shipments but discussed earlier or under the impact of FTAs as equally, if not more importantly in term of volume discussed previously. and value, in the delivery of e-B2B shipments (see discussion below.) In the US, the value of A significant issue in value chain integration is e-B2B shipments handled by express couriers is the growing importance of e-B2B business. Good estimated at $1 trillion which is twice the value of statistics are hard to come by and whatever is e-B2C shipments handled by express couriers.68 available should likely be viewed with a good deal Both an expanded AEO program and improved of caution. In addition, data seems to differ based arrangements for express couriers will require a in part on how widely or narrowly e-B2B and e-B2C level of partnership among key actors that does are defined. Still, according to Statista (Germany), not exist as of yet. Global B2B business grew from $5.83 trillion sales 66 MEF Prakas No. 906, 9 October 2009; MEF Prakas No. 320, 26 March 2015 67 See WCO, Compendium of Authorized Economic Operator Programs, 2018, page 122. 68 Source: United Parcel Service (aka UPS) 53 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT to $7.66 trillion sales between 2013 and 2017.69 graduate from “reactive” to “proactive”, export skills The US is dominant in B2B e-commerce, growing need to be strengthened in the Cambodian SME from $5.34 trillion to approximately $6 trillion community beginning with the basics of market during 2013-2017. Global B2C e-commerce research, business plans and export marketing grew from $1.23 trillion to $2.55 trillion during strategy, managing rigorous quality and standards 2013-2017. In 2016, China was the largest B2C required by large value chain buyers, product and e-commerce market, with $975 billion, followed export promotion, use of relevant e-B2B platforms, by US with $647 billion and UK with $192 billion. effective business and brand promotion through e-tools including social media, etc. In the case Berkshire Hathaway’s Business Wire suggests that, of direct domestic sales to large export-oriented by 2016, nearly 63% of all industrial supplies were investors, Cambodia might benefit from analyzing purchased on-line in the US. Broadly speaking, and possibly duplicating the approach used by e-B2B has several significant impacts on supply Vietnam to turn a growing number of Vietnamese chain management including, but not limited SMEs into part suppliers to some of the large FDI to, better control of inventory by continuously producers based in the country.71 For instance, the adjusting supply to demand, better ability to Vietnamese Government worked with Samsung identify “weak links” in a supply chain and take (its largest FDI exporter) to increase the number corrective measures, and allowing global or of Vietnamese firms that could supply Samsung regional value chain producers to cut costs operations which until recently had relied almost through bypassing “middlemen” (wholesalers) exclusively on its own network of suppliers. The and sourcing directly from producers. The move program has proven quite successful but revealed, towards Industry 4.0 will improve further the at first, that there was great need for Vietnamese efficiency of supply chain management and producers to improve their capacity to meet the deepen linkages with suppliers via eB2B.70 But, rigorous standards and technical specifications as mentioned earlier, the growth of eB2B will also required by Samsung. contribute to the expansion of express courier transport, as e-B2B shipments represent a far In Summary larger volume than transport of e-B2C shipments. Cambodia benefits from the fact it is located in The deepening expansion of global and regional one of the most dynamic and fast growing region value chains, throughout the East and South East of the world which remains at the center of the Asia region and in Cambodia as well through development of global and regional value chains. large export-oriented domestic investors (mostly To deepen the integration of Cambodian SMEs FDI), offer both opportunities and challenges for in global and regional value chains by increasing Cambodian SMEs to increase their engagement their role as local or export suppliers to large with such value chains. Such engagement may export-oriented businesses, Cambodia will need come through Cambodian SMEs expanding their to put in place a deliberate approach to strengthen role as “indirect exporters” by supplying large their capacity to proactively meet the demand of domestic exporters (mostly FDI) or by becoming large global and regional value chain businesses. suppliers to large global and regional value chains For Cambodian SMEs, this will include, but not through their own exports. In both cases, this be limited to, learning how to operate their own requires shifting from a “reactive” to a “proactive” businesses in a world increasingly driven by e-B2B business development approach. As is the case in and to meet production standards that may be far most countries at a similar stage of development, more demanding than those they have been used most Cambodian SMEs are “takers” and depend to meet thus far. on buyers coming to them and placing orders. To 69 https://www.statista.com/aboutus/ Statista is a business data firm with offices in key markets around the world that develops business data primarily through business surveys. 70 See Chapter 12 for a discussion of Industry 4.0 71 For instance, “The Participation of Developing Countries in Global Value Chains: Implications for Trade and Trade Policy,” OECD Trade Policy Note, April 2015; Claire H. Hollweg, Tanya Smith, and Daria Taglioni, Editors, Vietnam at a Crossroads: Engaging in the Next Generation of Global Value Chains, World Bank, September 2017. 54 Chapter 2 3.5. Productivity, Cost Competitiveness of Cambodia, compared to $0.055/KWH average in Businesses, and Moving up Value Chains Vietnam (with on-going discussions in Vietnam to raise it to $0.08/KWH in order to attract new To remain competitive as well as move up investment in power plants.) In the summer value chains, Cambodia will need to ensure of 2017, Cambodia’s Prime Minister pointed to that factors affecting the productivity and cost the fact that “informal trade facilitation fees” competitiveness of individual businesses are represented 48% of total trade facilitation costs. In addressed in a positive way. This includes, but other words, these added a roughly $410 “informal is not limited to, addressing labor productivity, cost” to the $475 to $500 official fees paid by an bridging the skill gaps, tackling and reducing exporter to clear through Sihanoukville port a the high costs of energy, trade facilitation, and fully loaded 40-foot container.73 While the Prime transport logistics, as well as the loss of market Minister instructed relevant actors to do away access preferences triggered by LDC graduation with those extra fees, it seems organized efforts to and the rapid expansion of bilateral and regional address the issue have yet to be launched. FTAs benefiting its country competitors. Transport costs are high as well. Costs of trucking The World Bank’s Cambodia Economic Report 2017 and freight forwarding services for the same estimates that labor productivity grew by 2.7% in 40-foot container moving from factory gate in Construction, 1.6% in Farming, 0.7% in Wholesale/ Phnom Penh to Sihanoukville Port were estimated Retail, and 0.2% in Garments and Footwear during at approximately $330 in 2017. To compensate, a the period 2007-2014 suggesting that producers significant number of major value chain investors in export-oriented industries have been struggling have tended to locate their investments in SEZs to keep up with the rise in wages. The very large nearby the Vietnamese and Thai borders so they number of public holidays in Cambodia rigorously can make use of those countries roads and port enforced in industry might not help when facilities and, in cases, cheaper electricity from compared to farming where those may be more Vietnam. loosely followed. The skill gap is likely another factor, although the RGC is keenly aware of the Such “costs” have an impact not only on the issue and has strong policies in place to address immediate competitiveness of individual this challenge.72 investors, but their ability to move-up value chains as suggested by one global value chain investor in By way of comparison, minimum wage in garment the electronics sector. That investor indicated that and footwear (reset annually after negotiations he would like to produce higher value products in with employers and unions) was $170/month in Cambodia but was meeting at least two obstacles. 2018, compared to a range of $118 to $170/month Moving up value would involve bringing more in Vietnam. Vietnam uses four geographical zones sophisticated machineries, requiring more to set minimum wages and the bulk of it garment electricity – unfortunately expensive – and more and footwear sectors are located in low minimum technical staff – unfortunately lacking. wage areas. Cambodia has 22 Public Holidays week days scheduled for 2019 excluding week-end days Still, some export-oriented investors in Cambodia and 26 Public Holidays including Saturdays. Major are finding ways to move up value chains. In the industrial businesses in Cambodia operate on 46 garment sector, several positive trends seem at hour-6 day-a-week schedule. For comparison, Viet work. First, the share of FOB exports compared Nam has eleven week-day Public Holidays. to CMT has been increasing – with a current level of FOB estimated at about 30%. This is positive Other external factors have a direct impact on the in view of the fact that labor costs play a less cost competitiveness of individual businesses. significant role in total cost competitiveness Cost of electricity for business was $0.16/KWH in of firms in FOB than in CMT. Second, they are 72 See chapter 3 73 The Prime Minister numbers are confirmed by industry sources. 55 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT helped by the emergence of a domestic supply products in foreign markets (compared, say, to sector to support the growth of FOB. Third, some Thai Jasmine Rice or Indian and Pakistani Basmati local CMT subcontractors (mainly Cambodian- rice) due to the slow roll-out of the quality mark owned firms) to the main exporters (primarily for Cambodian premium/fragrant variety by the FDI) are graduating to becoming direct exporters Cambodian Rice Federation and its branding in themselves. Fourth, in discussion with the industry, destination foreign markets. These efforts need the Government has asked SNEC to prepare a to redouble and accelerate. strategy for the sector. Ultimately, together with In Cassava, the challenge is to get beyond the these positive developments, there likely is a need current dominance of fresh tubers and dried chips for Cambodia to identify niche markets – products as the main export ($35/MT for fresh tubers; $150/ and destinations – for its Garment and Textile to MT for dried chips) towards exports of native specialize. starch ($350/MT), modified starch ($700 to $1,200/ A look at the transformation of the Textile and MT) or ethanol (price more or less pegged to oil; Apparel sector in Thailand might be useful to $700 to $900/MT.) Here again, examples from understand how a neighbouring country has other key country producers from the region can re-focused its sector. Between 1998 and 2016 be informative about ways to develop the sector the share of Textile in Thailand’s exports of (for instance, Thailand in “Modified” starch.) In “Garments and Textile” grew from 40% to 60% of this sector as well, diversification of destinations the total export value of the sector. Thailand has for some main derivatives away from the Chinese focused on growing specialty “technical textiles” market maybe key to success. In all likelihood, in – such as water-repellent, anti-bacterial, or fire- addition to new investment, structuring the sector resistant fabrics, on targeting niche garments of cassava derivative producers will be necessary such as medical uniforms or sportswear, and on to move away from a buyer-driven market to a diversifying its export markets away from EU, US, seller-driven market. and Japan towards ASEAN (23% of its exports) and In Summary “Other” countries (30% of its exports.)74 Cambodia is showing capacity to move up value Two other interesting developments are chains with the right kind of entrepreneurship, new transformations under way in the rice and investment, sector leadership by some firms, and cassava sectors. In rice, over the past few years of a supportive targeted policy environment. As it growing milled rice exports, the large millers have did earlier with the Rice Strategy, the forthcoming determined that Cambodia lacks the scale to be Textile and Garment sector strategy should be competitive in milled white rice and should focus an opportunity for the Government to support on Premium and Fragrant Rice or even organic rice. future expansion of the sector towards higher While white rice is sold at somewhere between value production. Quite likely, other key export $350-$400/MT, Cambodian Premium and Fragrant sectors may need similar attention. Overall, the Rice can yield between $800-$1,000/MT. In 2016, Government needs to continue its efforts to bring 306,000MT of Premium and Fragrant milled rice down a number of critical external costs in order were exported out of a total of 540,000MT or 57%% to increase the competitiveness of its business of total; and, in 2017, 393,000MT of Premium and environment. Fragrant rice out of a total of 635,000MT or 62%. In addition to a product shift, Cambodian millers 4. Quality of Growth and SDGs have been looking at new markets including China. But getting into new markets (products or Because trade is such a critical driver of Cambodia’s destinations) can be tricky. In term of Premium economic growth, it has a major impact on its and Fragrant rice, millers remain hindered by the SDGs. While it is difficult to provide a detailed lack of Cambodian image recognition for their analysis of how future trade development may 74 See, Thailand Textile Industry, 2018 56 Chapter 2 impact Cambodia’s SDGs in a few paragraphs, have been slow. The skill gap and rising wages a look at some of the sectors discussed in this with limited productivity gains in industry are a chapter help point to some key results and challenge to Cambodia’s competitiveness in those issues. To do so, the chapter updates the matrix sectors. Skill limitations in the current labor force of socio-economic and environmental impacts means that large investors continue to depend in key export sectors presented in Chapter 1 of heavily on expat technical and professional labor CTIS 2013-2017 to identify positive and negative in middle and high level positions. changes between the period 2012-2018 against SDG #5 Gender Equality selected SDGs. Results are shown in Table 2.12 shown in Annex. The table focuses on impacts on The RGC, through the NSSF, has introduced a six of the 15 SDGs. 3-month maternity leave scheme for women. This important benefit applies to any woman in SDG #8 Decent Work and Economic Growth a firm employing more than eight workers. BFC The Cambodian economy has grown vigorously continues to see as a challenge the reduction for the past decade following a short slow-down in women discrimination in term of access to in the aftermath of the 2009 Financial Crisis. better jobs in the core industries of Garments Market access preferences under Cambodia’s and Footwear, but improvements in working LDC status are under threat from a proliferation conditions along other variables. of FTAs signed by its competitor countries, and, SDG #11 Sustainable Cities and Human even more so when it becomes eligible for LDC Settlements graduation. This could have a negative impact on growth. However, rapid relocation of lower-wage Industrialization is driving out-migration from sectors away from China to ASEAN might be a rural areas and contributes to rapid urbanization. powerful counteracting factor. Second-tier cities in Cambodia are growing rapidly (though hard data are hard to come-by to assess Wage rates in Garments and Footwear are set the magnitude of change.) Young rural women by Government based on negotiations with the are moving to industrial and urban areas to take Private Sector and Unions. Those rates have up factory jobs while farming is increasingly grown vigorously in recent years. Those rates becoming a seasonal occupation and rural men have largely spread to other sectors and the rest move to neighboring countries for other work of the economy even though other sectors are seasonally, if not for extended periods. not mandated to follow. This has been largely the result of growing competition for workers in labor Industrialization contribute to uplifting standards markets. The result has been significant growth in of living but also creates negative externalities per capita income and a rise in standards of living. that need attention. While manageable for now, In addition, the RGC has been expanding a range residential waste water treatment may become of benefits under the National Social Security a significant issue in the future. Recycling of Fund (NSSF.) NSSF obligations applies to anyone solid waste – residential and industrial – needs working in a company employing more than eight deepened attention. Effluents from dirty individuals. industries – e.g. cassava starch, tanning and dyeing – must be anticipated and mitigated. In The RGC is placing very high priority on skill rural areas, the Government has a 10-year strategy upgrading of youth (before start of work life) to make latrines universal and cut down on heavy through in-depth reforms of Primary and pollution of drinking water from shallow wells. Secondary Education, University, and TVET systems. Progress in upskilling the existing labor In rural areas, the shift from full-time to part- force are slow coming and, except for construction time farming is taking focus away from long term and farming, labor productivity gains appears to proper maintenance of soil towards short-term 57 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT output goals with limited concern for possible wind electricity production is an issue that retards misuse of chemical fertilizers, herbicides, or the development of larger production capacity pesticides. Some observers have described a and could help bring down the cost of electricity – new “pioneer” approach to farming especially high when compared to neighboring competing in cassava where farmers, using a mono-culture exporting countries. approach, move from one deforested area to the MoE is strengthening its capacity to conduct next as land productivity starts declining. Environmental Impact Assessments but much SDG #10 Reduce Inequalities remains to be done to enforce findings and regulations. As mentioned previously, discrepancies in income and wage levels between those in Garments and There is growing interest on the part of producers Footwear and those in other parts of the economy for recycling solid waste from their business (e.g. have narrowed based in part on the effect of garments, cassava starch, rice husk, others) into income remittances from urban workers or second-order profitable derivative businesses. Cambodian overseas migrant labor to rural areas In agriculture, there are efforts to counteract as well as pressure on domestic labor markets in a negative impacts of current approach to farming fast growing economy. with more positive and sustainable approaches including introduction of GAP, GHP, Organic, or Geographically, increased urbanization in second- SRP (Sustainable Rice Platform) in production, and tier cities brings positive externalities to the GMP and HACCP in food processing. newer urban resident through better access to markets and services. But urbanization does bring In summary, successful economic growth comes negative externalities as well. with rapid transformation as well as costs and benefits. The transformation of Cambodia over SDG #7 Affordable and Clean Energy; the past 20 years or so has been remarkable. But SDG #12 Sustainable Consumption and it is important for Cambodia to learn early on how Production best to mitigate the possible costs resulting from Cambodia is behind in the introduction of low- its success. impact, sustainable and renewable energy resources – especially solar and wind. The lack of a “feed-in policy” for large and small scale solar and 58 Chapter 2 Table 13: SDG Impact in Six Export Sectors Manufactured Bicycles and Electrical/ Garments Footwear Goods Electronics Employment Creation SDG #8 Decent Work and • sector 2012: 370,000 2012: 64,200 2012: Possibly as many Economic Growth employment 2018: 575,000 2018: 120,000 as 10,000 2018: possibly 30,000 • On the one hand, growth in exports Also 2018: and employment approximately 20,000 in may slow down as a travel bags and leather result of loss of market accessories access preferences • future sector 2013-2017: 12% 2013-2017: 35% Electrical equipment at graduation, growth (sector annual; annual; High grew at 20% annual or insufficient productivity export value) Annual growth annual growth more over 2013-2017. growth, skill gap, and may increase in rates likely to High growth difficulties in moving short term due continue in the likely to continue up-value unless RGC to loss of market future even after Graduation. respond with policies share Bicycles grew at 8% to counteract those by China. Growth annual over 2013- possible challenges likely to slow as 2017. Growth likely to a result of loss accelerate in short term • On the other of EBA (in 18 due to sector relocation hand, relocation of months if EBA out of China into investment in sectors withdrawn or at ASEAN. Growth might such as garment, graduation) slow at Graduation due footwear, leather to loss of preferences accessories, travel • main indirect Remittances to Remittances to Remittances to goods moving out impact provinces provinces provinces of China or more Wages and Working Hours advanced ASEAN 2012: Monthly 2012: same 2012 and 2018: Average countries is providing Minimum $80; Minimum; wages slightly higher new sources of growth average monthly average monthly than garments due take-home $170 take-home $155 to skill composition? • World Bank’s Cambodia 2018: Monthly 2018: same Typical week: 46 hours + Economic Report 2017 Minimum $170; Minimum; OT/week. estimates that labor average monthly average monthly Assembly line workers productivity grew by take-home $235 take-home $202 are paid Government 2.7% in Construction, Typical week: 46Typical week: stipulated minimum 1.6% in Farming, 0.7% hours + OT/week.46 hours + OT/ wage in order to in Wholesale/Retail, and week. compete with Garment 0.2% in Garments and and Footwear where Footwear during 2007- minimum wage is 2014. This seeming mandatory productivity challenge Working Conditions in Industry might be • labor Mostly unionized Mostly Some unions representation unionized 59 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT • sector Monitored under BFC: 2017 Survey None addressed in part monitoring conducted by BFC covering nearly through a combination 40% of the of upskilling of labor factories found that between force and moving up- 2014 and 2017 compliance rate value especially in grew from 33% to 44%. Key garments (for example, issues are child labor, forced from CMT to FoB.) labor, freedom of association, and • Large number of annual women discrimination. Women public holidays has a discrimination remains the most negative impact on significant issue based on survey. Other social August 2017: August 2017: August 2017: (1) liability Productivity: 22 Public benefits under (1) liability (1) liability insurance of 0.6% of Holidays week days in NSSF: insurance of 0.6% insurance of wages to a maximum 2019 excluding week- of wages to a 0.6% of wages of $2/worker; (2) Health end days; 26 including Social benefits maximum of $2/ to a maximum insurance and two-year Saturdays (major apply to worker; (2) Health of $2/worker; (2) access to free public businesses in Cambodia everyone insurance and Health insurance transport. Cost of operate on 46 hour-6 employed in a two-year access and two-year health insurance day a week schedule). company with to free public access to free previously levied at For comparison, the 8 employees or transport. Cost of public transport. 1.3% of salary under US has 11 week days; more. health insurance Cost of health the 50-50 contribution Viet Nam 11 week days; previously insurance scheme by Thailand 21 week days; levied at 1.3% previously levied National Social Security Germany 15 week of salary under at 1.3% of salary Fund to become 100% days; UK 15 week days the 50-50 under the 50-50 employers’ cost; (3) CGTI in Garment, ACAC contribution contribution As of end of 2019: in Hotel/Restaurant scheme by scheme by national retirement sector, NPIC, NPIA, RUC, National National Social fund for all workers at a RUA, others) Social Security Security Fund to rate of 4% of wages to Fund to become become 100% be paid 2% by employer • Quality of life-long- 100% employers’ employers’ cost; and 2% by workers. learning provided cost; (3) (3) outside work places is As of end of As of end of highly variable. 2019: national 2019: national retirement fund retirement fund • Strong OTJ training for all workers at for all workers at for new workers in a rate of 4% of a rate of 4% of businesses in sector wages to be paid wages to be paid where there is little to 2% by employer 2% by employer no supply of trained and 2% by and 2% by young people workers. workers. Skills Development • training ops 2012: OTJ. No 2012: Significant 2012: OTJ. Also off-site TVET. OTJ. No TVET training incl. abroad. 2018: GMAC has 2018: GMAC has Very limited TVET opened opened its CGTI. 2018: Major 60 Chapter 2 its Cambodia CGTI not yet Government effort to Garment Training focusing on strengthen TVET for Institute (CGTI). training needs high school graduates GMAC and the of Footwear new CGTI making sector. Major a major effort to government increase life-long- effort to learning training strengthen TVET opportunities for high school for employed graduates workers. CGTI launching TVET for high school graduates • career ops 2012: limited for 2012: limited for 2012-2018: some line workers. line workers. opportunities for 2018: some 2018: may be assembly line workers. improvements for improving Major Government Khmer assembly as result of effort to strengthen line workers to improvements TVET for high school move up. in TVET and life- graduates long-learning opportunities provided by employers Gender Equality SDG #5 Gender Equality; 2012: 80%-90% 2012: 90% + 2018: mostly women on women; under- women; under- assembly lines • Under NSSF, a woman aged labor is an aged labor is an can benefit from a issue. issue. Growing Effective January three-month paid 2018: sector share of men 2018 as part of NSSF maternity leave if remains 2018: sector coverage: female employed in firm dominated by remains employees are entitled employing more than 8 women dominated by to a three-month workers women. maternity leave with Effective January Effective 120% salary, co-shared • Based on BFC, women 2018 as part of January 2018 by discrimination remains NSSF coverage: as part of NSSF 70% from the National an issue in Garments female employees coverage: female Social Security Fund and and Footwear but are entitled to a employees are 50% from employers improving three-month entitled to a maternity leave three-month with 120% salary, maternity leave co-shared by 70% with 120% from the National salary, co-shared Social Security by 70% from the Fund and 50% National Social from employers. Security Fund and 50% from employers. 61 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Living Conditions • access to 2012: Quality can 2012: Quality 2012: Some SEZs and SDG #11 Sustainable shelter be poor in urban can be poor SEZ employers provide Cities and Human environment. in urban good shelter for factory Settlements Some SEZs and environment. workers. Else, access to SEZ employers Some SEZs and good shelter varies. • Industrialization provide good SEZ employers 2018: unchanged contributes to shelter for factoryprovide good urbanization which workers. shelter for can impact water use, 2018: unchanged factory workers. residential sewage, 2018: household solid waste, unchanged recycling, air pollution, • sanitation 2012: Quality can 2012: Quality 2012: Usually good etc. (water/latrines; be poor in urban can be poor 2018: pressure on water, residential environment in urban pressure one sewage • For now, residential solid waste 2018: future environment treatment; latrines waste water (mostly management) pressure on 2018: future usually available organic matter) is residential waste pressure on treated “naturally” by water; latrines residential waste pumping waste water usually available water ; latrines in wetlands outside usually available cities. In the future, there will be a need for significant investment in residential waste water treatment but very expensive. Waste water from garments and other industries not yet a significant issues except some exceptions (cassava starch – see below, leather tanning,..) Some SEZ have water treatment plants. Disposal of urban residential waste and solid waste recycling needs growing attention. Air pollution due to vehicular traffic increasing. Also aggravated by older trucking fleet. • Pressure on quantity and quality of urban low- income housing 62 Chapter 2 Regional Impact SDG #10 Reduce Inequalities • Industrial development is moving outward from original focus areas (Phnom Penh, Sihanoukville, Bavet, Poipet….) and expanding geographically including alongside borders with Vietnam and Thailand and in the hinterland • Labor migration from rural to industrial areas (mostly women) and to overseas (mostly men) as well as mechanization of farming are attracting income and people in urban areas leading to significant growth of secondary urban centers • Lack of data makes it difficult to fully measure full impact of rapid urbanization on Cambodia Environmental Impact of Industrial Development SDG #7 Affordable and Clean Energy; • energy 2012-2018: High 2012-2018: High 2012-2018: High use of SDG #12 Sustainable use of electricity use of electricity electricity Consumption and • water, 2012-2018: High 2012-2018: 2012-2018: Relatively Production industrial use for washing Tanning and good water treatment water and ironing; some dyes; dyeing in SEZs. MoE trying to • Cost of electricity is use of chemicals. chemicals can strengthen capacity for high: approximately be an issue Environmental Impact $0.16/KWH (higher Assessment (EIA) in PP area); EDC gets • soil 2012-2018: 2012-2018: 2012-2018: None known electricity from coal, Possible negative Possible diesel fuel, hydro. EDC impact from poor negative impact has contracted for the management of from poor construction of two industrial waste management of water industrial waste water 63 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT • solid waste 2012-2018: 2012-2018: 2012-2018: Varies with utility-scale PV farms. EDC Fabrics and Fabrics, manufacturing still lacks a feed-in policy chemicals. leather, rubber, to encourage PV electricity Ongoing work on chemicals. development among recycling fabrics Ongoing work business and residential to improve customers. Potentials for recycling of wind and solar electricity waste materials vastly under-tapped. • Industrial water effluents in selected emerging sectors – cassava starch, see below, leather and leather tanning, others Expansion of “dirty” industries (for example, leather tanning) needs to be managed to avoid significant negative environmental impacts. • Growing need for management and recycling of solid waste from selected industrial operations • MoE strengthening capacity for Environmental Impact Assessment (EIA) but most EIA issued after plants have already been built 64 Chapter 2 Cassava Processing Agricultural Goods Milled Rice SDGs + Starch Employment Creation SDG #8 Decent Work 2012: A few thousands in 2018: A few and Economic Growth rice mills; thousands employed 2018: Same as 2012 in cassava starch. • On the one • sector employment Employment to hand, increasing grow in starch if new migration towards investment succeeds cities is pushing 2012: Fast growth. 2012: Global demand towards decreasing 2018: challenges in the and prices unstable. farming population EU market (Safeguards) Hard to predict and increasing will affect short-term 2018: New large scale mechanization as • future sector growth growth; Exports to China investment in starch well as possibly likely to increase but not production may push higher land enough to make up loss up sector growth productivity. of markets in EU as well as cassava farming • On the other 2012:Millions of farmers 2012: Hundreds of hand, farming is grow some rice; thousands of farmers increasingly a part- 2018: Challenge is to grow cassava year occupation accelerate growth of 2018: if investment and farmers are premium and fragrant in starch takes off, increasingly • main indirect impact varieties in paddy fields could result in more relying on seasonal in order to increase large farmers growing agricultural workers. mills output for such starch unless farming Farmers focus on varieties mechanization short-term output increases productivity goals and not on Wages and Working Hours long-term good 2012: Around minimum 2012: Around maintenance of wage. Vary with season. minimum wage. soil and water. Work hours vary with Vary with season. A “pioneer” season Work hours vary with farming culture 2018: no change. Farm season is developing worker wages around $7/ 2018: no change. that is promoting day (close to minimum Farm worker wages expansion of crops wage rate.) around $7/day (close such as cassava in to minimum wage recently deforested rate.) areas with Working Conditions significant misuse of • labor representation none none chemical fertilizers, • sector monitoring 2012: None 2012: None herbicides, pesticides that tend to drive land productivity down and has serious impact on water and soil 65 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT • cleanliness and safety 2012: Modern export- 2018: Pressure on • Agricultural oriented mills relatively processors to meet wages and wages clean– but modern rice int’l SPS standards of workers in mills must meet int’l SPS and technical processing facilities standards standards for have grown and are 2018: Many large mills starch supported pegged more or less have become HACCP and by international to urban industrial ISO certified standards and buyer wages ($7 +/- per specs. day i.e. $160-$180 Skills Development per month) training ops 2012: Limited OTJ in large 2012: Limited OTJ in • Lack of proper establishments. Mostly large establishments. training of and informal. No TVET. Some Mostly informal. No information RUA training TVET. dissemination 2018: RUA making major 2018: Starch plants among farmers and effort to strengthen require technical and agricultural workers its post-high school engineering staff. contribute to weak programs. TVET slowly RUA making major understanding of changing but a challenge effort to strengthen long term, positive its post-high school management of soil programs. TVET and water. Limited slowly changing but a capacity of MAFF challenge Extension Services • career ops 2012: Very limited except 2012: Very limited holds back the in a few large mills except in a few large ability to introduce 2018: Limited until skill establishments more environment- gap reduced 2018: Limited until friendly agriculture skill gap reduced practices. • NSSF benefits apply to all workers employed in firms with more than 8 workers Gender Equality SDG #5 Gender Equality 2012:Majority men in 2012: Majority men • In theory, women- mills in cassava starch specific NSSF 2018: unchanged processing plants benefits apply 2018: unchanged to all women in enterprises employing more than 8 workers 66 Chapter 2 Living Conditions SDG #11 Sustainable • access to shelter 2012: Mills provide 2012: Rural living: Cities and Human shelter. Quality limited Good access to Settlements 2018: good access to shelter • Government has shelter 2018: Good access to a goal to make shelter • sanitation (water/latrines) 2012: Quality of latrines 2012: Quality of latrines in rural areas and water: variable latrines and water: universal within a 2018: Government target variable ten year period to make latrines universal 2018: Government • Public buildings (e.g. in rural areas within 10 target to make schools, rural clinics) years latrines universal in usually lack latrines. rural areas within 10 However, MoEYS has years a major construction program underway to add latrines to all rural public schools with a positive impact on retention of girls in primary and secondary education Regional Impact SDG #10 Reduce • See above discussion of urban/regional impact Inequalities • Workers in processing facilities are paid wages that follow minimum wage set in Garments and Footwear. Contributes to increased standards of living in rural areas • Farmers income and wages of farm workers has improved and increased standards of living of rural populations • Population migration out of rural areas is having impact on increasing urbanization 67 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Environmental Impact of Agricultural Development and Processing SDG #7 Affordable • energy 2012: Electricity 2012: Semi and Clean Energy; dependent. Could use processing needs SDG #12 Sustainable sustainable energy little electricity Consumption and solutions 2018: Production of Production 2018: Still no feed-in “native” and “modified • See above policy from EDC but some starch is dependent discussion about large mills have installed on electricity. Still no land productivity husk-fed generators feed-in policy from and impact of EDC. Newer plants increasing use of using part of cassava chemicals on soil residues to produce and water heat for starch drying • Environmentally • water 2012: None known 2018: Significant adequate treatment 2018: no change need for water of waste water in treatment from starch cassava starch is a production significant issue • soil 2012: None known 2018: Cassava • Absence of latrines 2018: no change cultivation has lead to pollution of negative impact on drinking shallow- soil unless mitigated. well water used Significant impact on by villagers. deforestation Likewise, allowing • solid waste 2018: Some plants are 2018: Starch waste animals in housing using husk for bio-fuel. can be used for bio- compounds. See energy above fuel or fertilizer. Bio- Need to educate fuel can be used by villagers to keep plants o dry starch animals in separate areas. Deep wells could improve this situation and help reduce arsenic in water Sources: Interviews with UNDP; BCF/ILO; FAO; HR Inc. Cambodia; Private Sector; selected SEZs; various experts; and desk research. 5. Gender and Cambodia Trade equality in the countries of Asia Pacific could add Integration Strategy75 $4.5 trillion to their collective annual GDP in 2025, a 12 percent increase over the business-as-usual The general understanding and knowledge that trajectory. trade can be a tool of the economic empowerment of women, and ultimately, that gender equality This report also remarks, that “Asia Pacific is today and women’s economic empowerment can be arguably the most dynamic region in the world, a gateway not only to inclusion, equality and a global engine of growth driven by productivity, poverty reduction, but a boost to a nation’s investment, technology, and innovation. Women economy, is increasing globally. A 2018 McKinsey can help—and are helping—to power this report76, concludes that advancing women’s engine, making vital contributions to sustaining 75 This section is a contribution by the Ministry of Women Affairs (MoWA), Royal Government of Cambodia to increase the visibility of gender mainstreaming in trade policies and strategies. 76 McKinsey & Company. (2018). The Power of Parity: Advancing Women’s Equality in Asia Pacific, p.1 68 Chapter 2 and enhancing Asia’s growth and lifting more is critical to growth, and, in turn, to the creation people out of poverty. Yet gaps remain large in of new and better jobs as well as income which many countries in the region on gender equality are requirements for poverty-reduction. Yet, both in work and in society. From an economic connecting trade expansion to poverty-reduction, perspective, trying to grow without enabling the gender equality, and greater inclusiveness remains full potential of women is like fighting with one a challenge”78. hand tied behind one’s back. There has been On a similar note, a 2015 study of the ASEAN progress towards gender parity in Asia Pacific Secretariat et al. on Projected Gender Impacts of overall. But there is still much more to do. Now is ASEAN Economic Community, which analyzed the time to redouble efforts”. the mechanisms through which ASEAN However, in terms of macro-economic structures economic integration may create opportunities and outcomes, that is, of macro-economy in for accelerating gender equality and women’s general, there still exists a widespread conception economic empowerment in the region as well as that it is gender neutral. But this understanding can it identified challenges that may prevent women have far reaching implication and consequences. from taking advantage of these newly created In fact, mounting research and literature suggests opportunities, concluded: “The impact of the that trade and other macroeconomic policies and formation of AEC on women in the ASEAN is going instruments have an impact on gender outcomes to be significant in terms of the volume of jobs such as employment, income, empowerment and that are created. However, in terms of changing intra-household relations etc. In other words, the the gender pattern of employment and wages, effects of trade policies on economic and social the impact will be small. The main reason why activities tend to differ by gender. This is due to women are not likely to be materially impacted a combination of cultural, social and economic by a boost in trade, investment and skilled labor factors. Women and men may have different skills, integration is because for a vast majority of the face diverse challenges and have different access women, these are not the sectors that affect their to productive resources. Trade liberalization does lives. There are vast inequalities in women’s labor not have a clear-cut positive effect on women’s force participation in the ASEAN Member States economic empowerment and wellbeing. Its that inhibits their ability to take advantage of impact can be double-edged. Ultimately, as clearly the opportunities created by the AEC or other noted by UNCTAD their note on Trade as a Tool for demand side shocks in the job market. The supply the Economic Empowerment of Women (2016): of women is the workforce is relatively stable and “Gender-blind trade and other macroeconomic consistently lower than men due to a combination policies tend to exacerbate existing gender of social, cultural and institutional factors. inequalities”77. Therefore, while the number of women employed may go up, the increase will not necessarily Trade policies do not have equal impacts on all change other employment outcomes: wages, segments of the population, including men and types of jobs and the sectors where women are women. Trade liberalization can be a tremendous currently employed.” 79 force for providing new opportunities for women or may inadvertently further entrench or exacerbate Ultimately, this study addresses all ASEAN existing gender biases and discrimination.. Member states, when it recommends that “targeted interventions are needed, immediately, However, the previous Cambodia Trade to ensure that the benefits from the AEC or any Integration Strategy (2014-18) in its introduction other economic integration are shared by women. acknowledged that: “Trade sector competitiveness Supply and demand side policy interventions 77 UNCTAD. (2016). Expert Meeting on Trade as a Tool for the Economic Empowerment of Women: Trade as a Tool for the Economic Empowerment of Women - Note by the UNCTAD Secretariat, p.2 78 Cambodia CTIS 2014-2018 Full Report, p. 13 79 ASEAN Secretariat, Friedrich Ebert Stiftung, UN Women, and Australian Aid. (2015). Projected Gender Impacts of ASEAN Economic Community, p. 14-18 69 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT are proposed to increase women’s share in paid requires a nuanced understanding of economic employment and in their wage levels. These and social dynamics, as well as of specific local include investments in women’s technical contexts. Thus, although the following snapshot training, fiscal incentives for firms to hire women is not exhaustive and can neither replace a and greater monitoring of gender commitments profound and well-researched gender-analysis, at the regional and national levels. At the end of which ideally complements the assessments of the day, nations and governments have to realize the challenges, risks and benefits etc. of trade that investing in increasing women’s share in the and trade integration, nor gender mainstreaming regional and national trade and national income efforts along the new trade integration strategy is a win‐win strategy for the society, economy, and its implementation, this snapshot does private businesses and individuals”.80 provide some selected brief insight into gender- related challenges along a chapter of each of the Against this background, and particularly in CTISU’s main three pillars, namely: light of the RGC is at the beginning of the sixth legislature, entering Phase IV of the Rectangular a) Pillar I., Chapter 3: Skills, Education and Training Strategy or Growth, Employment, Equity and for Growth Efficiency: Building the Foundation Towards b) Pillar II., Chapter 9: Light Industries for Export Realizing the Cambodia Vision 2050, as well Diversification and Enhancement as the RGC’s process toward embracing a new c) Pillar III., Chapter 11&12: eCommerce & Digital development framework, namely the 2030 Economy and Industry 4.0 Agenda for Sustainable Development, which is geared towards establishing close links Chapter 3: Skills, Education and Training for between economic development, environmental Growth sustainability and social justice, the update of the Cambodia Trade Integration Strategy offers great As noted in this chapter of the CTISU 2019-23, “the momentum to further address the challenges of RGC has identified the ‘skill gab’ in the Cambodian connecting trade expansion to poverty-reduction, labor force as major obstacle and constraint gender equality, and greater inclusiveness. to further development and diversification of Cambodian export” (p.74). In fact, the Cambodia Trade Integration Strategy Update (CTISU 2019-2023) – as it is meant to be However, girls and women still tend to be more mainstreamed through the Rectangular Strategy disadvantaged than boys and men in access to IV and Vision 2030, to serve as a basis for the design and benefits of skills, education and training for of the New National Strategic Development Plan growth. This is exemplified in the following by (2019-23), and to guide the work of the RGC – some gender-related challenges and realities offers a favorable window of opportunity for the relevant to understand the nexus between trade, RGC and all stakeholders and partners involved gender and Skills, Education and Training for to further promote Gender Equality and Women’s Growth. For example, in the MoWA Cambodian Empowerment, and especially Women’s Economic Gender Assessment (2014) finds that: Empowerment through investing in increasing women’s share in the regional and national trade • Gender parity in education is improving, but and national income and thus to embrace this gaps remain between region and age groups. win‐win strategy for the society, economy, private Females in rural areas, particularly girls businesses and individuals. from ethnic minorities, are generally more disadvantaged than others […]. In all 3 Pillars of the CTISU 2019-23, gender issues are relevant, albeit not always clearly visible. The • Beyond lower secondary girls’ access to nexus between trade and gender is complex and education is limited and completion is challenging. 80 ASEAN Secretariat, Friedrich Ebert Stiftung, UN Women, and Australian Aid. (2015). Projected Gender Impacts of ASEAN Economic Community, p. 14-18 70 Chapter 2 • Significant progress in TVET has been made into the empowerment of women. but girls and women still experience lower While a job in the garment sector can potentially be employment opportunities and wage an opportunity for the economic empowerment discrimination. of women, it is the reality in Cambodia that despite • While the participation of girls in public TVET their high rate of participation in the garment has increased, progress remains limited. industry, women are still not on equal terms to Training offered to women is often gender- their male colleagues. stereotyped, in skills such as weaving, textiles In fact, women face a range of gender-related and garments, beautician and hairdressing, challenges and realities relevant to understand and handicrafts. the nexus between trade, gender and Light • Female participation is weak in formal, long- Industries for Export Diversification and Enhance. term, high-skilled and high-demand training CARE International and Australian Aid in their programs in sectors such as construction and 2017 Bulletin81 on Women In Cambodia’s Garment mechanics, where jobs are higher paid and Industry: Their Work, Their Safety, for example, more valued. note that: And ADB and ILO, in in their Addressing the Skill • Women workers earn less on average than Gap Employment Diagnostic Study on Cambodia their male colleagues. (2015) have found, for example, that Female workers have disproportionally lower education • Although women occupy 85% of the garment levels than male workers. The shares of female sector’s total workforce, women are over- workers with vocational education or a university represented in lower status and lower skill degree are also substantially lower than their male roles. counterparts. • Nearly 1 in 3 women experience sexual Chapter 9: Light Industries for Export harassment in their workplaces. Diversification and Enhancement • Cambodian Gender Assessment on Gender in As noted in this chapter of CTISU, manufacturing Education and Vocational Training (2014) by remains a priority activity for Cambodia in Terms the Ministry of Women’s Affairs, notes: of its contribution to the economy, employment and merchandise export. Though to date the • Women tend to be employed in lower sector remains highly concentrated on the positions and low-skilled jobs, and seldom in garment sector, the RGC is aiming to transform management positions. the industrial structure from a labor-intensive • Women are mainly concentrated in a few industry to a skill-driven one through connecting sectors, usually with less social and economic to regional and global value chains. value. Cambodia has not only a fast growing labor force, • Female participation is weak in formal, long- but also one of the highest women labor force term, high-skilled and high-demand training participation rates in the region. It is especially programs in sectors such as construction and the footwear and garment sector that employs mechanics, which would offer them access to overwhelmingly a female workforce. For example, jobs that are higher paid and more valued. the garment sector in Cambodia employs approximately 600,000 people and up to 85% of workers are women. However, a high labor force participation rate does not necessarily translate 81 The Bulletin’s information is taken from CARE’s study, “I know I cannot quit.” The Prevalence and Productivity Cost of Sexual Harassment to the Cambodian Garment Industry. 71 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Furthermore, ADB and ILO, in in their Addressing regulatory and legal bottlenecks that constrain the Skill Gap Employment Diagnostic Study on sector development, as well as it needs to deal Cambodia (2015), which assesses and analyses (as remarked in chapter 12 of CTISU) with “some various national data, have found, for example, challenges in terms of human capital, access to that: new technologies training, and most importantly, a mindset change”. (p.246) • Unemployment is more likely to occur among women than men. But to do that, also requires an understanding of gendered socio-economic dynamics and realities There are some significant differences between in Cambodia, in order to develop policies that the industries of employment of men and women. promote trade integration as well as catalyze Among industries where informal workers were sustainable economic development and poverty concentrated, the key differences are in apparel reduction while also promoting women’s manufacturing and in construction. empowerment and gender equality: Because Women account for a large majority of informal although on some aspects, national data is limited, employment in apparel manufacturing, while very it can be summarized and generalized, that few women work in the construction industry. women in Cambodia are still more disadvantaged then men in access to, for example, ICTs and ICT MSMEs have a higher proportion of female infrastructure, to e-commerce and other skill workers than non-MSMEs. development, to new technologies training, to More than half (54%) of the people engaged in financial services and financing for SMEs, or to MSMEs are female. Additionally, women are less innovation and technology in supply chains and likely than men to be in regular employment in cross-border trade etc. MSMEs. They are overrepresented in vulnerable, In conclusion, national data, as well as numerous non-regular employment in micro-establishment. studies and assessments identify and – directly Women manage the majority of MSMEs, at 65% and indirectly – show for above mentioned, of total establishments, with nearly all being and other obstacles and challenges regarding micro-establishments —the majority of which are women’s economic empowerment in Cambodia. unregistered/informal. And because the remaining obstacles to women’s economic leadership and empowerment in Women head very few small or medium-sized Cambodia are multi-facet, multi-layered and establishments. complex, sustainable changes in effect, require parallel progress and visible responses, not only Chapter 11: eCommerce and Chapter 12: Digital also to women’s social, political and personal Economy and Industry 4.0 empowerment, but particularly to essential As noted in this chapter 11 of CTISU, the national development approaches, such as eCommerce ecosystem has boomed over the past Cambodia’s trade integration. few years, thanks to investment in infrastructure, In conclusion The RGC has long been committed booming FinTech industry fuelling an ICT-savvy to Gender Equality and Women’s Advancement, young population. However, for Cambodia to not and particularly to Women’s Economic only capitalize on the vast opportunities presented Empowerment. Under their leadership, numerous by eCommerce, but in effect, to prepare enabling issues, challenges and obstacles have not only environments to fuel innovative technologies been addressed, but also been improved. Today, and ultimately to adapt and respond to the huge the RGC can show for a wide range of responses transformations stemming from digital economy and gender responsive mechanisms/instruments and Industry 4.0., the country needs to address in several trade-related sectors. However, (as remarked in chapter 11 of CTISU) the physical, gender mainstreaming and gender sensitive 72 Chapter 2 implementation remains challenging, not the The RGC is also at the beginning a new sixths least also because some prevalent social and legislature, entering Phase IV of the Rectangular cultural norms, perceptions and attitudes that Strategy or Growth, Employment, Equity and inform gender roles, relations and expectations Efficiency: Building the Foundation Towards still perpetuate some gender inequalities. To Realizing the Cambodia Vision 2050. In this transform these also requires a behavioural and regards, as the CTISU 2019-23 is meant to be mindset change. mainstreamed through the Rectangular Strategy IV and Vision 2030, it offers perfect momentum However, the snapshot provided above of gender and venture point to address the challenge of dynamics and issues that are directly and indirectly identifying entry points for connecting trade related to trade were meant not only to exemplify expansion to poverty-reduction, gender equality, the diverse and complex nexus between gender and greater inclusiveness. and trade, but most importantly, are meant to promote for the visibility and thus integration Adopting a gender perspective contributes and consideration of gender issues within trade to a deeper and richer understanding of trade related instruments and beyond in Cambodia. performance. This in turn is essential to inform the design and implementation of gender-sensitive Certainly, globally, although the nexus between, measures and ensure that existing inequalities are gender equality and development is increasingly not reproduced or exacerbated with shifts in and recognized and acknowledged and a new updates of Cambodia’s strategy and directions generation of free trade agreements include for trade. This includes two steps: First, a gender- trade and gender chapters, these chapters related assessment and analysis along the mostly remain a light component. However, such guiding principles and of the CTISU’s pillars/ trade developments should not be overlooked, as roadmap should be conducted soon; the second they encompass a number of positive outcomes, is to include gender-related considerations in the and it is a right step towards realizing the global CTISU 2019-23 action matrix along the identified community’s commitment to a new global entry points for strategic interventions and gender development framework that aims at “leaving mainstreaming. no one behind” and shifting to an inclusive and sustainable development and growth. This is a collective effort, but it does require strong leadership by the main implementing entity, the And Cambodia, together with the international Ministry of Commerce of Cambodia. Ideally, all community, too, committed to the 2030 stakeholders and partners jointly commit to the Sustainable Development Agenda, which in fact related efforts and a clearly voiced commitment. requires to go beyond Business-As-Usual. This is a great window of opportunity: By establishing 6. Conclusions and Recommendations: a close link between economic growth, A Seven-Point Strategy to Prepare for LDC environmental sustainability and social justice, Graduation and SDGs attainment the 2030 Agenda provides the opportunity to address gender issues in a multidisciplinary, 1. LDC Market Access Preferences and FTAs: multifaceted manner, linking economic, social Graduation from LDC to GSP (or MFN) will and environmental aspects. And contrary to the result in the loss of market access preferences Millennium Development Goals that sometimes that have played a key role in the rapid growth were internationally criticized for providing of Cambodian exports. Cambodia has ten “short-term fixes” to development problems, the or eleven years to prepare for that – or even SDGs aim at addressing the power structures and less – considering that preferences are already social relations that are the source of poverty and being eroded in key export sectors under the inequality. impact of FTAs signed by competitor exporting countries. The RGC needs to build analytical 73 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT capacity and develop a strategy for FTAs skills that includes a focus on market research, focusing on identifying opportunities for business and export plans, products and services market diversification and moving up-markets development that meet demanding standards through new products, new services, and/or and specs expected from multinational buyers, new destination markets (at country level and at sales promotion and branding including business level.) But FTAs create new challenges. through electronic platform, etc.; Preferences granted under LDC or GSP status are 5. Productivity, Business Costs, and Moving asymmetric (unilateral.) Under FTAs, benefits up Value Chains: Productivity is a key factor granted are bilateral. FTAs require a focus not in trade competitiveness. Factors holding back only on export opportunities but also on risks productivity are known to the RGC. They include and opportunities of domestic market opening limited labor productivity gains in industrial to partners; sectors when compared to wage growth, 2. LDC Special and Differential Treatments: limitations imposed by skills gaps on the ability LDC graduation will also result in the loss of of firms to move up value chains, as well as or, at best, weakening of other SDTs available the high costs of electricity, transport logistics, under key trade agreements. This will likely force and trade facilitation. The RGC has introduced Cambodia to make changes to its industrial reform programs to address many of those development policy. The same might result constraints. Those reforms need to be sustained from the negotiation of FTAs as negotiating especially during the ten-year or so transition parties may demand accelerated changes to period to middle income developing country some of those SDTs as part of a bilateral or so that competitiveness can be improved in response to other external changes; regional agreements. Cambodia must deepen 6. Mitigate Social and Environmental Costs: its understanding of those relationships and Cambodia’s robust economic growth over strategize about how best to respond to such the past 20 or 25 years has improved the challenge; standards of living of Cambodians significantly. 3. Trade Facilitation and Risk Management: Cambodia must take resolute steps to Trade Facilitation is a core factor in the cost mitigate the social and environmental costs of competitiveness of Cambodian exporting development associated with increased exports, enterprises. Risk Management is at the core of industrialization, and urbanization – including successful trade facilitation and a requirement need for water treatment, waste management for cutting down time and costs for document and recycling, urban congestion and pollution, and border clearance. Together with a multi- deforestation so that they do not overwhelm the agency Cambodia National Single Window, gains accrued by Cambodia’s society from the RM and related reforms must be at the top of remarkable growth of the past 20 or 25 years. Cambodia’s trade facilitation reform agenda 7. Promoting enhanced participation of in order to arrive at an effective AEO program women in trade and further mainstreaming and other key reforms. An advanced RM system gender aspects in trade policies and can only succeed if based on a deepened strategies, in line with RGC’ commitments to Government-Private Sector Partnership based gender equality and women’s advancement, on trust; and particularly to Women’s Economic 4. Supply Chain Management, e-B2B, and Empowerment. This could take the form of Cambodian SMEs: Many Cambodian SMEs adopting a gender perspective that contributes lack the skills they need to compete for the to a deeper and richer understanding of trade business of global and regional value chains, performance. This in turn is essential to inform either to become suppliers to large investors the design and implementation of gender- operating in Cambodia or by exporting their sensitive measures and ensure that existing goods and services to global and regional value inequalities are not reproduced or exacerbated chain actors. To succeed, SMEs are in need of a with shifts in and updates of Cambodia’s strategy robust capacity building program on export- and directions for trade. 74 Chapter 2 Chapter 2 Annex Tables Top 10 Importing Markets for HS-6110 Exported by Cambodia (Apparel and Clothing, knitted or crocheted) Thousand US Dollar Rank Importers 2017 Export Value 2017 % Share of Total Exports World $2,121,824 100.00% 1 USA $423,426 19.96% 2 Germany $312,921 14.75% 3 United Kingdom $195,541 9.22% 4 Canada $174,817 8.24% 5 France $149,630 7.05% 6 Spain $143,204 6.75% 7 Japan $115,252 5.43% 8 Poland $84,704 3.99% 9 China $61,265 2.89% 10 Belgium $52,207 2.46% Top 10 80.73% Top 10 Importing Markets for HS-6403 Exported by Cambodia(Footwear with Leather Uppers) Thousand US Dollar Rank Importers 2017 Export Value 2017 % Share of Total Exports World $748,454 100.00% 1 Japan $123,717 16.53% 2 USA $115,658 15.45% 3 United Kingdom $69,589 9.30% 4 Germany $68,549 9.16% 5 Canada $67,099 8.97% 6 Netherlands $38,858 5.19% 7 France $33,851 4.52% 8 Italy $30,697 4.10% 9 China $19,537 2.61% 10 Korea $18,007 2.41% Top 10 Importers 78.24% of which EU countries in Top10 32.27% 75 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Top 10 Importing Markets for HS-8544 (Insulated Wires & Cables) Exported by Cambodia Thousand US Dollar Rank Importers 2016 Export Value 2016 Percent Share of Total Exports World $145,483 100.00% 1 Thailand $81,079 55.73% 2 Japan $34,728 23.87% 3 Korea $12,455 8.56% 4 Hong Kong $9,166 6.30% 5 Singapore $3,148 2.16% 6 China $1,641 1.13% 7 Slovakia $1,449 1.00% 8 Viet Nam $816 0.56% 9 Netherlands $438 0.30% 10 USA $225 0.15% Top 5 Importers 96.63% Top 8 Importers of Cambodian Bicycles and Other Cycles not Motorized incl. Delivery Tricycles (HS-8712) Thousand US Dollar Rank Importers 2016 Export Value 2016 Percent Share of Total Exports World $345,362 100.00% 1 Germany $114,804 33.24% 2 United Kingdom $81,801 23.69% 3 Belgium $51,425 14.89% 4 USA $22,370 6.48% 5 Canada $14,763 4.27% 6 Netherlands $12,953 3.75% 7 Sweden $12,035 3.48% 8 Austria $8,105 2.35% Top 8 Importers 92.15% Top 6 EU countries 81.40% 76 Chapter 2 Top 10 Importing Markets for HS-1006 (Rice) Exported by Cambodia Thousand US Dollar Rank Importers 2017 Export Value 2017 % Share of Total Exports World $339,673 100.00% 1 China $101,125 29.77% 2 France $57,695 16.99% 3 Germany $31,263 9.20% 4 Malaysia $25,637 7.55% 5 Netherlands $17,810 5.24% 6 United Kingdom $12,178 3.59% 7 Poland $12,162 3.58% 8 Czech Republic $10,098 2.97% 9 Italy $9,629 2.83% 10 Hong Kong $8,923 2.63% Top 10 Importers 84.35% of which China 29.77% of which Malaysia 7.55% of which EU countries in Top10 44.41% Top 3 Importing Markets for HS-071410 Exported by Cambodia Fresh Cassava and Dried Chips Thousand US$ 2017 Export Main Competitors in Market Access applied to Rank Importers Value Importing Country Cambodia and Competitors World $598,036 1 Viet Nam $311,415 Lao PDR no duty, no quota for ASEAN 2 Thailand $285,010 Lao PDR no duty, no quota for ASEAN 3 China $1,610 Thailand, Viet Nam no duty, no quota for ASEAN Top 3 % of world exports 100.00% 77 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Top 5 Importing Markets for HS-110814 (Cassava Native Starch) Exported by Cambodia Thousand US$ 2017 Export Main Competitors in Market Access applied to Cambodia and Rank Importers Value Importing Country Competitors Total $27,381 Thailand, Viet Nam, 1 China $15,948 no duty, no quota for ASEAN Lao PDR Cambodia benefits from 0% or 15% import 2 India $7,698 Viet Nam, Thailand duty in India (based on the Indian buyer); Viet Nam and Thailand have a 50% tariff Thailand, Viet Nam, 3 USA $2,164 no duty, no quota Brazil Under EBA, DFQF for Cambodia and Laos; 166euro/MT tariff for Thailand and Brazil. Lao PDR, Thailand, 10,000MT tariff free-quota for Thailand; 4 Italy $580 Brazil 30,000MT tariff free quota for VN under EVFTA; 10,500MT tariff free quota for all other countries combined. 5 France $336 Top 10 Importing Markets for HS-350510 (Modified Starch)* Thousand US$ 2017 Export Main Exporters to Market Access applied to Main Rank Importers Value Importing Country Exporters Total $3,371,399 Thailand, USA, EU, Viet 0% duty under FTA with ASEAN; 12% 1 China $335,238 Nam MFN 2 Japan $335,030 Thailand, USA, Viet Nam 6.8% MFN; 1.36% GSP; 0% LDC USA, Thailand (non-EU 3 Germany $323,150 0% GSP and EBA; 7.7% MFN countries) 4 USA $164,562 Thailand, EU, China 0% MFN United USA, Thailand (non-EU 5 $129,735 0% GSP and EBA; 7.7% MFN Kingdom countries) USA, Thailand (non-EU 6 France $127,961 0% GSP and EBA; 7.7% MFN countries) 0% AFTA; 0% China-ASEAN FTA; 5% 7 Indonesia $107,546 Thailand, USA, China MFN Russian 8 $98,113 EU, Thailand, USA 0% MFN Federation 9 Korea $93,654 Thailand, EU, USA, China MFN tariff range 8% to 385.7% 0% LDC; 0% to 3%, GSP; 0% under 10 Canada $90,918 USA, Thailand, EU, China NAFTA; 0% to 8% under MFN * include modified starch from all source material, not simply cassava 78 10 through 12); and, 60.3% had completed post- secondary education.82 In short, as of 2017, roughly 575,000. These include young Cambodians with two-year Associate degrees, four-year Bachelor and Engineering degrees, as well as six-year and beyond Master and PhD degrees. Even with those improving numbers, the quantity and quality of Chapter 3 individuals with formal “hard” skill training and education remain limited, with the skills provided by individual skill training institutions often out of THE CHALLENGES step with the demands of the labor market. Confronted with a shortage of STEM-type skills OF EDUCATION among the Cambodian labor force, especially at medium and high skill level, large investors – AND SKILLS foreign and domestic – continue to rely extensively on expatriate employees at the technical, professional, middle- and senior-management TRAINING FOR levels. Expatriate staff comes primarily from the broad ASEAN and Asian regions to fill technical, TOMORROW’S professional, and medium level management positions (e.g. Thailand, Vietnam, the Philippines, LABOR MARKET India, other countries) and from advanced economies for senior management jobs (e.g. Japan, China, Australia, EU, US, other countries.) Dependency on expatriate staff comes at a cost to investors, affecting their competitiveness and ability to move up value chains to the broader 1. Introduction benefit of Cambodians. Employers are also No country other than Cambodia has faced such concerned with the very low number of assembly a steep challenge, in modern times, rebuilding line workers in manufacturing or in like positions in an entire educational and skills training system other sectors that have a modicum of formal hard from the ground up. In that respect, Cambodia’s skills training at the certificate level (referred to achievements over the past 40 years have been in this chapter as “lower-medium” skills) acquired remarkable. either during upper high school or through short courses and programs once employed. This has However, the Cambodian workforce’s education an impact on current overall productivity and and skills training remains limited. In 2017, represents an additional challenge if key sectors approximately 8.8 million Cambodians among are seeking to move up value chains through the the 10.4 million individuals of working-age were introduction of new, more demanding technology. in the work force. Of the population between the ages of 15 and 64, 12.0% of the workforce had Cambodia is bound to remain an export-driven received no formal education; 31.7% had some economy for the foreseeable future. To achieve the primary education, but not completed; 26.0% had Government’s objectives and move Cambodia’s completed primary education (grades 1 through economy up value chains in key export-oriented 6); 15.5% had completed lower secondary sectors will require accelerating the development education (grades 7 through 9); 8.2% had of a medium and high skilled labor force with completed upper secondary education (grades STEM-type training and education, including 82 Ministry of Planning, Cambodia Socio-economic Survey 2017. 79 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT a low-medium skilled labor force. Key sectors This chapter looks at: under the RSIV includes garment and footwear, 1. Labor market demand and gaps in the supply light industry, agricultural commodity processing, of individuals with technical and professional but also ICT-based services and tourism, as well skills, especially STEM-type skills; as support sectors such as logistics and transport, 2. A mapping of Government, Private, and NGO construction, and education and training. institutions seeking to respond to shortages and To bring about a substantial increase in the gaps in medium- and high-skilled positions; quantity and quality of young Cambodians 3. Challenges to meet the dual objective of educated and trained in STEM-type occupations preparing the labor force for tomorrow’s skills at the certificate, associate diploma, bachelor while addressing today’s skill shortages. and engineering degree, master and PhD degree levels will require, at a minimum, (1) significant 2. Shortages of Low, Medium, and improvements in the quality of STEM education High Skilled Workers and training at those levels including compliance 2.1.NEA’s 2018 Occupational Outlook with stronger quality standards in training materials, teaching, and training practices; (2) In the summer of 2018, the National Employment implementation and widespread dissemination Agency (NEA) published a very interesting of best practices among education and training Cambodia Job Outlook 2018 produced with providers; (3) a significant cultural change among technical support from SIDA’s experts.83 NEA young people about the value of technical STEM- surveyed 1,000 establishments for availability type occupations: (4) promoting a culture of life- or shortages in low, medium, and high skilled long learning supported by quality providers of labor in 131 occupations organized in eleven short course programs; and, (5) significant new occupational areas. The survey’s key findings are investment in TVET and University institutions summarized in table 14. and greater funding to support students. 83 http://www.nea.gov.kh/images/survay/Cambodia%20Job%20Outlook%202018-Final-05282018.pdf 80 Chapter 3 Table 14: Labor Shortages and Availability in 11 Occupational Areas Shortages Availability (High shortage: > 3.2 index on scale; shortage:> 2.8 and <3.2 on (< 2.5 on scale)* scale)* Hospitality and Restaurant High Chefs Hotel receptionists shortage Valets Shortage House-keeping Bartenders Hotel managers Cleaners and helpers Cooks Waiters Short-order cooks Restaurant managers Administration, Economics, Finance, and Law High Lawyers General office clerks shortage Advertising and public relations managers Executive secretaries Information clerks Receptionists Office supervisors HR assistants Accountant associates Book keepers Building and Construction High Glaziers shortage Plumbers and pipe fitters Construction site supervisors Cabinet-makers, mill workers Shortage Carpenters Painters Laborers Concrete workers Electricians Civil engineering equipment operators Civil engineers Brick layers Building architects 81 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Computer, IT, and Multimedia High ICT user-support technicians shortage Software and system developers System analysts and system designers Graphic and multimedia designers ICT operations technicians Shortage Computer network technicians Database and network professionals Web and multimedia developers Web technicians Educational and Training High Information technology trainers shortage Shortage Primary and early childhood teachers Vocational education teachers Foreign language teachers Secondary education teachers University and higher education teachers Health Care High Radiography technicians Nurses aids shortage Dental technicians Shortage Medical doctors Midwives aids Pharmacists Midwives Dentists Installation, Operation, and Maintenance High Equipment electricians shortage Process control technicians Equipment mechanics Shortage Electrical line installers and repairers Air-con and refrigeration mechanics Electrical technicians Factory and Production Work High Steam engine and boiler operators Production clerks shortage Machinery installers 82 Chapter 3 Welders Bakers, pastry-cooks, confectionary makers Shortage Packing, bottling and labeling machine operators Agricultural technicians Manufacturing supervisors Textile, fur, leather products, laundry machine operators Earthmoving equipment operators Electrical and electronic equipment installers Rubber, plastic and paper product machine operators Sales, Purchasing, and Marketing High Freight forwarding agents Credit and loan officers shortage advertising and marketing officers Shortage Property managers and real estate agents Retail salespersons Street food salespersons Sales demonstrators Buyer and procurement officers ICT salespersons Bank tellers and clerks Technical and Scientific Work High Telecom engineers shortage Industrial and production engineers Chemical engineers Mechanical engineers Product designers, Garment designers Electronics engineering technicians Shortage Electrical engineers Chemical engineering technicians Mechanical engineering technicians Electronics engineers Transportation and Logistics Shortage Heavy truck drivers Logistics clerks Taxi, van, and private car drivers Transport laborers Messengers, package deliverers, luggage porters Source: NEA, Cambodia Job Outlook 2018. *Note: The NEA survey uses a scale of 1 to 5 to identify great availability of supply (1) all the way to intense supply shortage (5). Once averaged, any occupation scoring above 3.2 rating is considered a “high shortage” occupation, between 3.2 and 2.8 a “shortage” occupation, and under 2.5 an occupation with “significant labor supply” 83 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT The eleven occupational areas identified in the skill levels. Specifically and by decreasing order of NEA survey are all fast growing areas of the importance:85 Cambodian economy. Areas showing occupations 1. Foreign language in the far right column are those that experience 2. Customer handling less pressure on labor supply than others as they 3. Oral communications are able to fill in relatively easily a significant 4. Problem solving number of job positions from the labor market. 5. Team work It is the case of (1) Administration, Economics, 6. Planning and organization Finance and Law; (2) Health Care; and, (3) Sales, 7. Written communications Purchasing, and Marketing. The other eight 8. Numeracy areas are not only growing fast but confronting 9. Literacy significant shortages especially among medium- and high-skilled individuals, as well as some lower- 2.2. 2023 Occupational Forecast medium skilled positions. Clearly, labor shortages are not simply the result of lack of individuals with There does not appear to be any occupational relevant “hard” skills, but also a function of rapid forecast available in the public domain for growth in labor demand in individual sectors Cambodia looking at skill demand between today or regions. However, the eleven occupational and 2023. However, it is possible to make some areas in the survey are all areas characterized by educated guesses based on objectives identified in rapid growth in a fast growing economy, yet an the Rectangular Strategy 4 (RS4.) Under Rectangle economy that is not operating at full-employment 2 “Developing key and new sources of economic levels. Hence, to a large extent, the survey points growth” and “Readiness for digital economy and primarily to a mismatch between demand and industrial revolution 4.0”, RS4 identifies: supply reflecting weaknesses in supply of workers with STEM-type skills at many different levels. • Garment and footwear • Agro-processing (also mentioned under In term of“hard”skills, not surprisingly, the greatest Rectangle 4) shortages are among individuals with a STEM- • Light manufacturing and assembly type technical/vocational and higher professional • Tourism training background – various engineering • Entertainment services fields, machinery installation and operations, ICT • ICT services installation and network management, and Web- • Oil and gas based communications and marketing skills.84 Shortages do also involve some “lower-medium” In addition, RS4 identifies a number of key support skilled occupations – typically at the equivalent sector for growth including: of a Certificate level – especially in Hospitality, Construction, Manufacturing/Assembly as well as • Teachers for technical education at upper in Transportation and Logistics reflecting in part secondary and tertiary education levels the fact that fast growth may lead to shortages at (Rectangle 1) nearly all occupational levels. (See CGTI’s views on • Logistics and transport this issue in a later part of the chapter describing.) • Construction In addition to the “hard” skills identified in the NEA’s Job Outlook, the survey also lists “soft” skills deficiencies identified by employers typically at all 84 An earlier study prepared by NEA and financed by ILO, Skills Shortages and Skills Gaps in the Cambodian Labor Market: Evidence from Employer Skills Needs Survey, November 2013, surveyed 500 establishments. There is little evidence of significant changes in skills shortages over time between the more recent study used here and the earlier one – except, possibly, for declining demand pressure in Finance or Sales and Marketing. 85 NEA, Ibid, From Figure 14 at bottom of page 17. The NEA Figure shows both hard and soft skills. We separated out the soft skills from the hard skills without changing the decreasing order of importance of soft skills. 84 Chapter 3 Key across most of those sectors – from factories 3. A Mapping of Government, Private, to hotels – are MEP technicians (certificate and and NGO Education and Training associate degrees) and engineers (bachelor and up Institutions Seeking to Respond to degrees) both for installation and maintenance.86 the Skill Gap With increasing automation in production, the demand for control technicians and engineers 3.1. Primary and Secondary Education should also increase very significantly. Agro- Any effort to address the demand of employers processing will require additionally more in Cambodia’s fast growing economy starts with laboratory technicians and engineers and food foundation and soft skills. Primary and secondary safety professionals. A significant demand in educations have a key role to play in building the tourism is likely to be for kitchen personnel base for individuals to acquire “hard” skills later in including Chefs, but diversification of the tourism life, be it through education and training through product will also create new demand for skilled TVET and higher education institutions, on the job and medium-skilled personnel for installation training, or life-long-learning opportunities. and maintenance of leisure activity-related equipment. In 2017-2018, total enrolment in public schools was 3.143 million students including 205,492 in In addition to MEP personnel, Oil and Gas as well pre-school, 2,028,694 in primary school (grade as Construction will continue to put pressure on 1 through 6), 605,173 in lower secondary school demand for structural and civil engineers, site (grade 7 through 9), and 303,893 in upper and project managers, welders and concrete secondary school (grade 10 through 12.) There specialists. were 92,817 teachers (52% women) – 5,146 in The rapid growth of internet-based services will pre-school, 46,157 in primary school, and the lead to increasing demand for ICT personnel, not balance in secondary school. There were slightly simply in traditional areas of network management over 13,000 primary and secondary public schools but also in design of web applications to support in Cambodia in 2017-2018.87 Of the young the new services. Likewise, in more traditional Cambodians enrolled in primary and secondary manufacturing and assembly sectors, the growing education around 95% of those are public schools, importance of internet-based supply chain with the remaining 5% in private schools. management tools as well as internet-based sales The primary and secondary school system in promotion and development will call for new mid- Cambodia remains plagued by high drop-outs level management and supervisory skills to ensure rates. Hence, based on 2016-2017 drop-out rates of Cambodian businesses maximize the benefits of 4.1% in primary school, 15.4% in lower secondary, internet-based networking systems. and 18.3% in upper secondary, if we were to follow Increasing investment in more advanced the same first grade class throughout the twelve machineries in manufacturing and processing will years of primary and secondary education we also put significant pressure on larger numbers of would expect that from an enrolment of 340,000 better trained line workers at the lower-medium students in first grade (roughly the number in skill level. 2016-2017) only 22.1% would complete twelfth grade. For comparison, 84% of the working age As discussed in the next major section, all of those population of OECD countries (18-64 years old) developments will continue to put pressure on has completed upper high school (grade 12 or staffing educational and training institutions with equivalent.) And from the 65,000 or so students teachers and trainers specialized on STEM hard completing grade 12 roughly 40,000 to 45,000 skills. 86 Mechanical, Electrical, Plumbing. Mechanical covers HVAC – heat, ventilation, AC. 87 MoEYS, Department of Education Management Information System, 2014-2018 Education Statistics and Indicators. 85 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT would move on further and obtain an Associate or introduced an additional “motivation fee” higher degree.88 of $25/month to attract teachers in isolated rural areas. Also, today’s teachers are mostly The Government is fully aware of the urgent need upper high school graduates with two years to strengthen the educational sector as well as of additional training. The Ministry is working lower drop-out rates and increase completion to increase qualification of teachers at the rates. The public education sector has seen its bachelor level and to strengthen teachers budget grow strongly for the past decade. MoEYS’ training. MoEYS is also strengthening its $848 million budget in 2017 represented a 25% inspection capacity of teaching staff and increase from 2016. It is scheduled to receive has created five inspection zones to better $915 million for 2019, an 8% increase from 2017. structure its efforts in this area. Education is the largest recipient of public budget • As part of its effort to strengthen the quality resources. and relevance of curriculum, the Ministry To improve the educational system, the Ministry is seeking to recruit 2,000 new teachers in of Education, Youth and Sports (MoEYS) has been mathematics, physics, chemistry, and biology implementing a series of five-year Education Strategic to strengthen STEM (Science, Technology, Plans. The most recent plan, ESP 2014-2018, focused Engineering, and Mathematics) education in on consolidating the gains from previous plans with grades 7 through 12. At the moment, MoEYS three policy goals and five pillars: operates two Teachers Institutes that produce about 200 new teachers per year with a • Policy 1: Ensuring equitable access for all to focus on 10 main topics. Japan is providing education services technical assistance. • Policy 2: Enhancing the quality and relevance • To strengthen governance, MoEYS is of education and training launching a pilot project with the World Bank • Policy 3: Ensuring effective leadership and targeting 100 lower secondary high schools management of education staff at all levels in 25 provinces focusing on “Autonomy, And: Accessibility, and Assessment.” To do so • Pillar 1: Improving the competencies and the project will focus on four principles – quality of teachers leadership; teaching and learning; human • Pillar 2: Improving the quality of curriculum resources management; and, financial • Pillar 3: Strengthening inspection capacity of management. One of the objectives of teachers the project will be to increase community • Pillar 4: Strengthening assessment and involvement, especially parents, in schools evaluation, including strengthening grade and students development. Following the school exams and the baccalaureate (grade 12) pilot phase, the goal is to expand the same • Pillar 5: Strengthening higher education at program to 500 schools within five years. university level, by improving the quality of To repeat, the ultimate objective of the measures curriculum and promoting research rolled out by MoEYS is to improve quality of To implement those pillars, MoEYS has launched a education, while lowering drop-out rates and number of initiatives. To identify just a few: increasing completion rates. This is combined with a strong focus on strengthening STEM • To strengthen the quality of teachers, MoEYS education with the goal of increasing the share is stressing the need to make teaching a of young people that are ready for Technical/ more attractive profession. The Government Vocational and Professional education and has raised teachers salary significantly since training in STEM-related occupations and ready to 2013 from about $100/month at that time to meet the demands of employers as they enter the $250/month in 2018. In addition, MoEYS has labor market. 88 Meeting with MoEYS, Department of Policy and Planning. 86 Chapter 3 3.2. Technical/Vocational and Professional Cambodia’s National TVET Policy 2017-2015, use Education and Training the TVET acronym to refer to a broad range of skill training structures and levels from which 3.2.1. The National Technical Vocational individuals can benefit at different stages of their Education and Training Policy work life, including before or after they enter 2017-2025 the labor market. For the sake of clarity in the On June 16, 2017, the Council of Ministers approved discussion that follows, this chapter uses a more a National Technical Vocational Education and conventional classification that distinguishes Training Policy 2017-2025. An important overall among: objective of the policy is “to set up a common 1. Technical/Vocational Education and Training or framework for all partners to contribute to the TVET at Associate Degree (post-secondary high development of the workforce based on structure school) or Technical Baccalaureate and Certificate and in an orderly manner towards long-term levels (during upper secondary or through short initiatives and employment.”89 courses and programs during work life) The Policy identifies eight bottlenecks:90 2. University/Professional Education and Training at Bachelor or Engineering degree levels, Masters and 1. Limited quality of the national technical PhDs vocational education and training infrastructure 3. On-the-Job Training also known as OJT and significant mismatch with labor market 4. Short Courses and Programs, which encompass demand; • Remedial technical/vocational education 2. Limited value attached by young people to and training technical vocational education; • Life-Long-Learning (LLL) for knowledge 3. Insufficient funding to produce high quality upgrading, upskilling, and/or upward TVET education; mobility 4. Weak linkages across different educational and training structures; The lack of comprehensive statistics makes it very 5. Limited foundation and soft skills; difficult to arrive at detailed understanding of the 6. Limited involvement of all stakeholders to ensure enrolment in those different types of “hard” skills effectiveness of the system; training mechanisms. Tables 3.2 and 3.3 provide 7. Lack of financial support for young people some very partial illustration. Table 15 is based wanting to enroll in TVET education on data dating back to 2011-2012 and shows 8. Weak governance total number of graduates at post-secondary level of 46,703 graduates for that academic year. To respond to those bottlenecks, the policy sets Partial information would tend to suggest that out four major goals: those numbers have not changed dramatically 1. Improving TVET quality to meet national and since 2011-2012 if only because of a flattening international market demand in the annual cohort of youth population. Table 2. Increasing equitable access to TVET 16 shows enrolment in “hard” skills education 3. Promoting Public-Private Partnerships (PPP) to and training programs from upper-secondary increase resources and foster the sustainable certificate through to PhD levels in 39 MoLVT development of the TVET system public institutes and other training institutions 4. Improving the governance of the TVET system in 2017-2018 academic year. If anything it does show a significant reliance on “short courses” to address skill gaps at entry level especially among low-medium skilled workers (certificate level - see further discussion below.) 89 National Technical Vocational Education and Training Policy 2017-2025, Foreword by the Prime Minister, page iii (unofficial English translation) 90 Ibid, pages 3-4 87 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 15: Number of graduates in higher education level 2011-2012 Number of Graduates at Higher Education Level Level Graduates % Female Associate 10,395 37.4% Bachelor 34,978 41.3% Master 1,296 28.3% PhD 34 2.9% Total 46,703 40.0% Source: Directorate General of Higher Education, 2014 from Leang Un and Say Sok, Higher Education Governance in Cambodia, January 2014 Table 16: Enrolment in MoLVT public institutes, polytechnics abd other T-VET institutions 2017-2018 Enrolment in MoLVT Public Institutes, Polytechnics, and other Technical/Vocational Institutions # of Short Upper Secondary Associates Bachelors Masters PhD Institutes Courses Certificates 39 27,135 3,215 5,638 8791 27 0 Note: Not included are enrolment statistics in MoLVT registered NGOs and Private Sector Institutions Source: MoLVT, TVETMIS Office, Technical and Vocational Education and Training Statistics, 2017-2018, 3.2.2. Technical/Vocational Education and classified more appropriately as providers of short Training or TVET courses and programs rather than TVET as defined here.91 At most, the TVET system was estimated to In its more conventional use, TVET typically refers graduate 2,500 individuals per year. to a formal two-year (possibly three-year) course of technical/vocational education and training A presentation dated August 2017 by one of the before entry into the labor market. It can be DDGs of NEA quoted slightly different estimates.92 incorporated into the last two or three years of DG TVET at that time identifies 704 TVET providers upper high school and give rise to a Certificate (public, NGOs, and private) including 214 of Completion or a Technical Baccalaureate. registered with MoLVT. The 39 public institutions Alternatively, it may involves a two-year (possibly registered with MoLVT included nine Polytechnics/ slightly longer) course of studies delivered by a Institutes, five Regional Training Centers, and 25 specialized TVET institution to individuals that Provincial Training Centers. have completed upper high school, leading to an Another presentation dated May 2017 by a Associate Degree. TVET institutions are registered different DDG of NEA used somewhat different with 14 different line ministries, though MoLVT estimates and quoted a total of 55 public TVET has the largest number of registrants. institutes, 52 private institutions and 58 NGOs or a In its Brief #73 dated November 2016, ADB total of 165 TVET institutions registered with a line suggested there were approximately 325 TVET ministry. Of those, there are 39 public, 43 private, institutions registered across twelve ministries at and 24 NGO registered with MoLVT.93 that time. Of these, 56 were public institutions The difference in those numbers may seem confusing and the rest NGOs or small private institutions – but quite likely simply reflects differences in definition with many among the latter that should likely be of TVET as well as difficulties in separating out 91 ADB Brief #73, Policy Priorities for a More Responsive Technical and Vocational Education and Training System in Cambodia, November 2016, page 3 92 MoLVT, NEA, presentation by DDG, ACAC as TVET and Long Term Support of MoLVT: Policies and Strategies, August 9, 2017 93 MoLVT, NEA, presentation by DDG, TVET and the STED Experience in Cambodia, May 30-31, 2017 88 Chapter 3 clearly conventional TVET institutions from other university-level education. As part of the $90 providers of skill training – especially providers of million World Bank loan mentioned earlier, MoEYS short courses and short programs – on the basis is planning to strengthen research capacity in of registration alone. four public universities as a pilot project – RUPP, RUA, University of Battambang, and Svay Rieng As mentioned earlier, conventional TVET is not University. simply provided at the post-upper secondary education and training level but can also be 3.2.4. On-the-Job Training (OJT) built into a two- or three-year upper secondary In all likelihood, the vast majority of Cambodians high school program leading to a Certificate learn their “hard” skills on the job. This is true not or Technical Baccalaureate. This type of TVET only among lower skilled workers but also medium remains very underdeveloped in Cambodia’s and high skilled workers. Given the limited secondary education system today and is in number of young people completing lower and great demand today as well. More advanced upper secondary education, the limited number equipment on production lines will, if anything, of graduates from TVET or higher education increased demand for this level of training. pathways, limited quality and significant MoEYS indicates that only five high schools offer mismatch between skills acquired through formal such programs today covering skills in agriculture, education and training and labor market’s needs, electricity, electronics, and mechanics. MoEYS employers must step in and train even those with sees the needs to expand those programs, despite some higher education and training. constraints from the availability of resources. One typical example of mismatch is what is 3.2.3. University/Professional Education happening in the emerging world of e-services. and Training Slowly, some enterprises are emerging in Cambodia has 121 public and private universities Cambodia in such areas as electronic marketing – 48 public and 73 private. Universities are and communications, back office processing registered with a total of 16 line ministries (see and applications development, electronic audio discussion of Accreditation later in the chapter.) visual including movie animation and VFX, and There are 73 universities registered with MoEYS other. For the most part, those companies require (13 public, 60 private) and 25 with MoLVT (12 post-high school education. There are a few public, 13 private.) TVET programs such as Passerelles Numeriques Cambodia that offer Associate degrees in ICT A significant issue with university education at fields and Public and Private Polytechnics and the moment is the strong preference of students Institutes that offer Bachelor degrees in those for business management, accounting, and like areas.94 And yet, while those companies recruit studies and the low attractiveness of professional at TVET or Bachelor degree level, most, if not all, training in STEM-related fields. Another issue is need to further train new recruits if only because the quality of education. Cambodian education the existing Education and Training programs are tends to stress traditional “rot” learning based on very limited in what they offer in a fast growing memorization over interactive, problem-solving and very diverse field. education. Limited training of teachers, force- of-habits on the part of the teaching staff, lack OJT is typically intense and expensive (3 to 4 of appropriate equipment, very limited research months full time), impacting cost competitiveness focus in universities are among the many factors of businesses, especially if Cambodian businesses that explains a relative weak focus on problem- compete in export markets with firms from other solving soft skills and the uneven quality of countries that have access to labor trained by 94 Passerelles Numeriques Cambodia is part of a larger TVET NGO with similar training facilities in Vietnam and the Philippines. The program focuses on training in System and Network Administration and Web Programming. Students receive a Certificate or Associate Degree (based on passing a final exam) accredited by MoEYS. Holder of Associate degrees can continue on to receive a Bachelor degree in universities offering computer science diploma. Since its launch in 2005, more than 1,400 individuals have graduated from the school. https://www.passerellesnumeriques.org/en/our-actions/cambodia/ 89 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT traditional training and educational institutions As noted by GMAC, the limitation of basic hard before entry into the labor market (at no direct skill development through short courses offered cost to the firms.) To be sure, extensive OJT, even at entry into the labor market or through OJT is following some formal education and training that it tends to be highly task-specific and rarely in the skill appropriate for the job, is not unique provides individuals with skills that will help to e-services field. Even in large and growing them grow and develop further on a career path. sectors where there are greater education and GMAC expectation is that CGTI’s offering can help training resources pre-employment – hospitality, develop a lower-medium skilled labor force for construction, mechanics, garment and footwear, the garment and footwear industry with broader others – significant skill building must happen on skills that can be further nurtured and developed the job for a large number of new recruits. throughout a career. GMAC estimates that, at this point, only 5% of the sector labor force has 3.2.5. Short Courses and Programs benefited from training at certificate level (roughly In a recent assignment financed by the British 30,000 workers out of a 650,000 labor force.) CGTI’s Embassy, MangoTango Asia, a Cambodia-based goal is to double that number within a few years. firm specialized in electronic marketing and 4. Meeting Today’s Skill Shortages communications, developed a website and mobile and Tomorrow’s Labor Market application for MoLVT – www.TVETCambodia.org Demands: Challenges for Providers – trying to provide comprehensive information of Skill Education and Training on TVET and Short Courses/Programs providers in Cambodia. The company identified well over To better understand some of the challenges for 1,200 providers of various programs running improving the outcome of the various systems from a few-day short courses all the way through and institutions that provide skill training in formal TVET. Cambodia, this chapter takes a more detailed look at four case stories of strong Cambodian TVET and In addition to OJT, the recourse to short courses higher education institutions plus one significant serves two main purposes: (1) train workers that PPP initiative. have joined the labor force with very limited or no hard skills and (2) provide new training to They are respectively: workers already established in the labor force • The National Polytechnic Institute of seeking to upgrade their skills and/or move up Cambodia (NPIC) (Text Box 3.1) their job ladder (Life Long Leaning - LLL.) Given • The Royal University of Agriculture (RUA) the lack of statistics, it is hard to assess the extent (Text Box 3.2) to which short course training is used by either • The Academy of Culinary Arts – Cambodia group. The use of the short courses to address (ACAC) (Text Box 3.3) basic skill gaps in “lower-medium” skills at entry • The Cambodia Garment Training Institute into the labor market seems quite extensive for (GTCI) (Text Box 3.3), and instance in the training of “lower-medium” skills in • The Sector Skills Councils (SSCs) – a joint many occupations such as automobile mechanics initiative of MoLVT and CAMFEBA or MEP technicians. But there is also evidence of high demand for short courses and programs that meet LLL needs. For instance, the recently open The four TVET and higher education institutions Cambodia Garment Training Institute (CGTI) offers are described briefly in four text boxes (listed a wide range of short courses aimed at helping above and shown in Annex.) The SSCs imitative employees with work experience develop new launched jointly by CAMFEBA and MoLVT is skills to move up the job-ladder in the garment discussed in detail under the Public-Private- sector (see Text Box 3.4). Partnership subsection hereafter. 90 Chapter 3 4.1. Supply Shortages: Quantity and Quality National Polytechnics and Institutes, Regional and The challenges of meeting very significant skill Provincial Training Centers, and TVET institutions shortages and reconstructing a system destroyed are registered with 14 different line ministries by years of conflicts may have contributed to the and fall under the purview of the National development and expansion of an educational Training Board (NTB.) The Board is chaired by the and training system emphasizing, initially, Council of Ministers but, operationally speaking, quantity over quality. It might be tempting to managed by MoLVT. The NTB uses six standards: view the two challenges as separate. They are Management and Governance, Resources, not. The struggle of the current educational and Staff and Teaching Staff, Trainee and Student, training system in attracting greater numbers of Curriculum and Teaching/Learning, as well as young people towards STEM-related vocational, Research and Development.96 technical, and professional occupations is linked, A major standard in the accreditation process is in part, to a shortage of institutions offering that which applies to standardized and uniform quality education and training in those fields Curriculums. ASEAN members have adopted and a failure to demonstrate that these STEM- National Qualifications Frameworks (NQF) – type tracks can lead to challenging jobs, in high e.g. Cambodia Qualifications Framework (CQF) demand from employers, with potentials for – that are expected to align with the ASEAN strong earnings at graduation, future earnings Qualifications Reference Framework (AQRF) which, growth prospects, and upward mobility. On a itself, is aligned with international standards. Thus positive note, education and training providers far, ASEAN has developed AQRF for Hospitality that do succeed in providing high quality STEM- and Construction. NQFs, including CQF, aim at related education and attracting students will find providing standard course curriculums and course employers knocking at their door for graduates. materials to be used by all educational institutions For instance, based on its own tracking survey as pertinent for all educational and training levels of graduates, NPIC has an 83% placement ratio starting from Certificate levels and up to PhDs. In of students at graduation and, longer term, addition to uplifting the quality of curriculums an unemployment ratio among graduates of and teaching materials, NQFs are also intended approximately 5%, which is very low for Cambodia. to lead to standardized Course Credits to facilitate ACAC’s first enrolled class is expected to graduate students’ transfer from one institution to another. in March 2019 and ACAC’s Administration has already received from employers in the hospitality The roll-out of CQF has been slow. The enforcement sector more demand for graduates than it will be of an effective accreditation process based on an able to meet. assessment of the resources and delivery capacity of individual education and training institutions Quality should be reflected in and enforced remains very weak. Only a few universities, TVET through the Accreditation process of educational institutions, and Polytechnics have their own and training institutions. Universities registered Internal Quality Assessment Units (IQAU.) In the with MoEYS fall under the purview of the context of a weak accreditation structure, the best Accreditation Committee of Cambodia (ACC.) The universities, polytechnics, and TVET institutions ACC uses nine standards: Mission, Governance tend to rely on accredited foreign universities and Management, Academic program, Academic and academies to benchmark their own teaching Staff, Student and Student Services, Learning curriculums. This is reflected in the experience of Services, Physical Plant, Financial Plan and the four institutions reviewed in the Text Boxes. Financial Management, as well as Dissemination For instance, CGTI’s curriculum and teachers of Information.95 certification is developed and managed by Textile 95 See Accreditation Committee of Cambodia, Minimum Standards of Accreditation of Higher Education Institutions, 2010 96 See Cambodia Profile in Promoting Skills Development and Job Creation in East Asia, Korea-World Bank Partnership Facility, 2015 91 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT and Fashion Industry Training Centre (TaF.tc), a education and training is based on internships; training institution accredited in Singapore; ACAC the last year of RUA’s bachelor degree is dedicated relies on SHL-Luzern, a 100-year old hospitality to internships, in some case for as long as 12 school accredited in Switzerland; NPIC has relied months; likewise, NPIC relies extensively on extensively on partnerships with universities in internships as part of the students’ curriculum. Korea and Thailand; and RUA also continues to Successful internship does require senior staff in rely on its network of foreign academic partners participating companies with some training skills to develop new courses and further train its own as well as an interest in “mentoring” young people. teaching staff. In short, partnerships with foreign Successful public-private partnership demands academic, educational, and training institutions a change in mind-set on all sides – government, is an important way for those institutions to training providers, employers, and other develop quality curriculum and teaching staff. stakeholders. It assumes a willingness to trust and But this practice may not be easy to expand to value each other’s contribution to addressing and smaller and less-connected TVET and higher solving jointly a specific need, namely prepare education institutions. For now, in the absence of young people to be ready to enter the world of solid accreditation processes and enforcement of work with the skills that make them attractive to compliance, accreditation, for most institutions, employers and contribute to each individual’s adds up to little more than registering with the own welfare. relevant line ministry. To support the development of PPPs to address 4.2. Public Private Partnerships skill gaps and mismatches, CAMFEBA and MoLVT A critical component of any delivery of quality are launching a joint initiative that targets major skills training is the partnership between training occupational areas through the creation of Sector providers and employers. Employers are directly Skills Councils (SSCs) 97. The initial SSCs focus on confronted with technological changes and four major occupational sectors: automotive, market demand shifts in their industry and usually construction, electricity, and manufacturing. The better positioned to identify technical, vocational, purpose of the SSCs is to create a platform for and professional skills and changes in skills needs. multi-stakeholder partnership to identify and They can provide assistance in determining which analyze skill needs in the four sectors and develop equipment is most appropriate for training. In practical responses.98 Specifically: some cases, they may even provide equipment • Identify priority occupations within the Sector to training institutions at reduced or no cost and develop competency-based training or at least access to equipment that a training (CBT) packages to be used by training and institution could not afford. In addition, they can education providers organized around provide internship positions to be incorporated competency standards, curriculum, learning in students’ training curriculum and employment materials, and assessment tools for each opportunities at graduation. Internship is a following CQF; critical component of any education and training • Encourage industry experts from among especially for medium and high skilled STEM-type SSCs member enterprises to participate in occupations. Each of the four training institutions working groups responsible for developing featured in the four text boxes rely extensively CBT packages; on partnerships with the private sector for any • Ensure that the competency standards or all of the benefits suggested above. Half of developed by the working groups focusing the education and training of ACAC student is on individual occupations are endorsed by spent in internships with employers; two-third the larger SSCs before submission to the NTB of the time to complete CGTI Associate Degrees’ 97 The creation of SSCs is based on the MoU between MoLVT and CAMFEBA date June 11, 2018 and the Prakas issued by MoLVT on July 10, 2018. The SSCs Secretariat is receiving some support from ADB under the Bank’s ongoing support to TVET reform in Cambodia. 98 See, CAMFEBA and MoLVT, Sector Skills Councils Operating Guidelines, undated Fall 2018 92 Chapter 3 for approval and adoption as a national knowledge of young people. For instance, few standard; young people are aware that quality diplomas in • Identify industry experts from the business those areas can command, at graduation, salaries sector that can be trained and certified as that compare with those in fields such as business competency assessors to be engaged by or accounting – $200 to $250 for Associates, $300 MoLVT’s DG-TVET to conduct independent to $350 for Bachelors, between $400 and $500 for assessment and certification of TVET Masters and above $500 for PhDs for starters. graduates and workers; To promote enrolment in those fields, TVET- and • Support the development of the TVET Centers University-level providers use various tools. Many of Excellence (COEs) in the priority sectors, organize field visits to high-schools jointly with including identify and implement soft skills NEA. Some organize open door visits of their required in individual sectors, strengthen facilities for interested high schools students. training of TVET teaching staff, and strengthen For instance, NPIC invite high school students to internship programs for public TVET provider come and visit its campus and to discuss with NPIC institutions; students. ACAC selects small groups of students • Review and evaluate proposals for new periodically and invite them to spend one week at TVET training for funding under the Skills the school as observers to discover first-hand what Development Fund (SDF);99 and, their enrolment might mean. They are expected • Consult with SSCs members and enterprises to sit in classroom sessions and to witness kitchen through workshops and develop annual work practices. They are even given a Chef uniform plans. while visiting, like enrolled students and teaching staff, as part of their exposure to the unique The membership of SSCs will include enterprises, culture and community of kitchen personnel. industry associations, training providers, social Newspaper and conventional TV and radio media development partners, organized labor, and are another way to reach out to potential students. government authorities responsible for TVET However in the internet world, mobile apps and and employment. The expectation is that the social media are increasingly more effective in SSCs mechanism will encourage a much more getting young people’s attention – even in rural widespread engagement of the private sector areas. in strengthening the broader TVET system in Cambodia, above and beyond ongoing support Dissemination of success stories can also be a very to individual enterprises to individual TVET effective way to change inaccurate perceptions. providers. They can focus on the experience of current students themselves – from a team of engineering 4.3. Branding and Marketing of Technical, students building a drone or an electrical car, to Vocational, and Professional electrical students developing lighting for a show, Occupations or culinary students preparing a new menu for TVET-level and Polytechnics/Institute University- a restaurant or an airline carrier – or they can level education and training focusing on STEM highlight successful contemporary Cambodian skills suffer from a poor image owing in part to its technicians and professionals that have reached quality combined with the lack of understanding high levels in their profession including famous of the opportunities that STEM-type technical and Cambodian Chefs, distinguished architects or professional skills can offer individuals. There is a designers, etc. Videos distributed via social media, need for government as well as the educational and YouTube channels, and TV are the most effective business communities to challenge deliberately ways of disseminating this message. and directly the misunderstandings and lack of 99 The SDF is a $5 million grant fund created by the RGC and managed by MEF 93 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.4. Life-Long-Learning and Soft Skills be from internet-based courses. While these may open a much wider set of learning opportunities, Cambodians, like anyone else in the world, are they also challenge individuals in knowing which living in a world of very rapid technological, may be most appropriate to meet their needs. informational, and cultural changes. The ability not simply to cope with change, but also to In licensed professions in the Anglo-Saxon become an actor of change and benefit from it, part of the world, licensed individuals such as is anchored deeply in the capacity and interest of doctors, nurses, teachers, architects, engineers, each individual for life-long-learning developed etc. are required to accumulate a number of short starting at an early stage of education. Life-long- course credits each year in order to remain up-to- learning requires curiosity about change as well date on new procedures, new techniques, new as acquiring a set of specific soft skills through technologies, new products, new materials, etc. education and training including the capacity to and maintain their license. identify and define a problem and the capacity 4.5. The Cost of Quality Technical, to search and find tools that can help solve the Vocational, and Professional Education problem. In addition, problem identification and and Training problem solving in the world of work is often the result of team work rather than individual work. Quality technical, vocational, and professional education is expensive. The costs of facilities These qualifications are challenging for – including labs and R&D facilities – are high, Cambodian youths partly because of weaknesses the need to upgrade equipment to keep up in the “soft” skills developed in those areas during with technology is costly, and operating costs primary, secondary, and tertiary education. (materials and supplies, electricity, others) add Cambodia inherited an educational systems that up. Stronger partnerships between educational used to stress memorization (“rot” learning”) over institutions and employers can help defray some creativity and problem-solving. Teaching problem- of those costs especially if employers are willing solving requires a very different pedagogical to subsidize some equipment upgrading or approach and the transition requires also that offer opportunities for internships that provide teachers retrain themselves and change teaching work experience in a real-world setting to methods. As observed in the NEA Employment students during their formative years. Otherwise Outlook study discussed at the beginning of this government or students or both are left to pay for chapter, weaknesses in problem-solving, team the cost of education. work, and related other soft skills is a repeated complaint heard from employers. Another issue is the impact of limited quality technical, vocational, and professional education Increasingly, life-long-learning comes in two resources currently available on SMEs. In the ways: formal face-to-face short courses or absence of such resources resulting in a limited internet-based courses, demonstration videos, number of young people joining labor markets manuals, etc. There are a large number of with appropriate hard skills, large companies have institutions offering short courses in Cambodia, greater resources to deploy alternative OJT than unfortunately all too many with limited quality. SMEs do, putting the latter at a further competitive CGTI is a strong example of a provider offering a disadvantage. large menu of high quality short courses through a robust professional organization including 5. Six Recommendations strong experts, teachers, and curriculums to those employed in the industry who can access such MoEYS through its five-year Education Strategic learning either to learn about new technologies Plans and MoLVT through the National Technical or to improve their skills in order to move upward and Vocational Education and Training Policy 2017- in their profession. Increasingly some of those can 2025 have well defined objectives and strategies 94 Chapter 3 to respond to the needs of the education and skill At a minimum, such effort could include training sector. The focus of the recommendations annual or bi-annual workshops focusing presented here is not to repeat what MoEYS on one or two dimensions of Best Practices Plans and the Policy have already identified or – including presentations of individual Best are already implementing with financial support Practices developed by individual institutions in from the Government and/or Technical Assistance Cambodia or the region and discussions among support from selected Development Partners, participants about challenges encountered but simply contribute possible practical ideas to by institutions wanting to replicate those. This implement pragmatic solutions to some of the dissemination effort could be accompanied by needs identified in those policies and strategies. the design of a support program intended to With the exception of Recommendation #1 assist weaker TVET and higher institutions in which will take some time to implement, all implementing best practices in order to lift their other recommendations in this section should be standards and quality. Resources of the SDF implemented within three- to five-year timelines. could be used to fund such a support program. 3. Target key skill levels and occupational areas 1. Improving the Accreditation processes to for current and future leading sectors: foster quality among training providers: Earlier discussions in the chapter have identified The Government need to accelerate the two main occupational areas where hard skill development of CQF at pertinent levels of development is most needed: education and training and for occupations that • “Medium and high” skills (Associate degree are critical to current and future leading sectors and higher) in STEM-related occupational of the economy. Improving quality also mean areas where shortages of such skilled labor implementing an accreditation process among is a significant constraint to the ability of educational and training institutions that value the Cambodian economy to attract new and stresses compliance with quality standards. investment and move up value chains. In Introduction and use of CQFs is an important particular, this chapter identified occupational part of such a process, as is the dissemination areas at technicians and engineers/scientists of quality best practices among education and levels such as MEP, food science and food training providers. safety, control technicians and engineers, 2. Disseminate quality best practices developed skilled personnel in development of new in Cambodia and the region and support internet-based services, e-based supply chain adoption among training providers: management, e-marketing, cooking Chefs, MoLVT, MoEYS, employers’ associations such and a few others; as CAMFEBA and other need to focus on • “Lower-medium” skills (certificate level) in disseminating Best Practices developed by key production areas including garments, stronger Cambodian and ASEAN TVET and footwear, light manufacturing assembly higher education and training institutions and with a view to strengthen not only new labor support implementation of those Best Practices force but also current low-skilled labor force among the broader community of a TVET and already employed in some of the economy’s higher education institutions. This role might be leading sectors. More advanced technology taken up as an activity of the MoLVT-CAMFEBA’s in the work place will put increasing pressure SSCs initiative or by the planned Centers of on filling this skill gap. Development of the Excellence (CoE) However, this effort should second group of “lower-medium” skilled not be limited to the more limited sector focus workers will require a significant expansion of planned at this moment for SSCs and CoEs. technical curriculums in upper secondary high schools under the management of MoEYS. 95 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4. Launch nationwide marketing campaign face or online by a relevant, specialized training for technical, vocational and professional providers. As with other NSSF benefits, the cost “STEM” occupations: for such could be borne 50/50 by employers and In parallel to the efforts of individual TVET and employees. higher education institutions focusing on STEM- 6. Addressing the high costs of STEM-type TVET related occupations, the RGC should launch and Higher Education training: a national marketing campaign focusing on In recent years, RGC has made a major budgetary attracting young people to those occupations. commitment to MoEYS to strengthen the quality Such campaign should be developed by and outcome results of primary and secondary communications professionals and make education – including improving the quality extensive use of social media. It should focus of teaching staff, reducing drop-out rates, on presenting “success stories” of young people encouraging greater retention, etc. engaged in exciting projects during their Strengthening the quality of STEM-type studies and of successful Cambodian technical education and training intended to prepare and professional individuals that have been young people to current and future demands of engaged in known successful projects and may the labor market as well as narrow the mismatch have gained national and global recognition as between current labor force and current labor a result. markets – be they provided by public institutions Barring other resources from the Government, under the aegis of MoEYS, MoLVT, or other line including from the budgets of MoEYS or MoLVT, ministries as well as private and NGO providers some limited resources from the SDF could be – will require significant resources, quite likely used to finance such a campaign. above and beyond the current resources of the 5. Promote a culture of Life-Long-Learning and SDF. RGC should accelerate the use of current improve employees productivity: SDF resources to pilot various initiatives that Short of implementing a demanding full- could provide directions for future larger-scale fledge professional requirement for a minimum interventions aimed at strengthening the entire amount of annual upgrade training in order to education and training network of providers maintain one’s technical or professional license supported by a larger financial effort. (which could be quite burdensome and costly Parallel to public resources to strengthen the in the current Cambodian environment), RGC network of providers, RGC needs to look at might want to look into some form of social ways to strengthen access to financial support benefit via NSSF whereby, every few years, for students at the upper secondary and post semi-skilled and skilled individuals working in high school levels to facilitate increase rates of a firm with eight or more employees would be students seeking training at those levels. eligible for a technology upscaling/updating short course or short program delivered face-to- 96 Chapter 3 Chapter 3 Text Boxes 7. The Faculty of Computer Science 8. The Faculty of Tourism and Hospitality Box 3.1: National Polytechnic In addition, NPIC has an R&D Center and a Institute of Cambodia (NPIC)100 Department of Optical Science. The latter provides one- or two-year degrees to train A Large Campus with Advanced Equipment and optometrists. The R&D Center has a $20,000 a Diverse Faculty annual fund to finance small student projects. NPIC opened its doors to student in 2005 with a Teachers are encouraged to pursue research 10ha campus financed by a $23 million loan from through overseas scholarships financed by NPIC Korea. NPIC reports primarily to the Ministry foreign partners. of Labor and Vocational Training (MoLVT) and At present, the eight Faculties are staffed Ministry of Economy and Finance (MEF.) Its with 212 teachers: 26 PhDs, 101 Masters, 90 Board of Directors includes representatives from Engineer-Bachelors and 43 Bachelors (e.g. 13 ministries. To keep its equipment up-to-date Khmer language, chemistry, physics, etc.) As a in the face of rapid technological development, Cambodian University focusing on STEM, NPIC is NPIC has developed an extensive network of registered with MoLVT and accredited under the partners in the private sector that provides it with National Training Board (NTB.) new equipment when needed. Partnerships with a German and Chinese Technology When NPIC opened, it had difficulties finding Institutes in late 2018 helped NPIC acquire qualified teachers. It relied on experts from nearly $2 million worth of new equipment in Thailand and Korea to train teachers in Cambodia telecommunications, mechatronic (including a and sent teachers overseas for skill upgrading. CNC milling machine), and electricity. From one partnership with a Korean University in 2005, NPIC has expanded its network to 168 NPIC has eight faculties and 20 departments partnerships with educational institutions and including: private companies in 19 countries. Today it has strong partnerships with universities in Korea, 1. The Faculty of Social Science and Foundation Year Indonesia, and Japan. NPIC sends 10 to 12 2. The Faculty of Civil Engineering and Architecture students to Indonesia each year (see below) and a. Civil Engineering receives approximately 30 Indonesian students. b. Architecture 3. The Faculty of Electricity Several Levels of Training and Education for a. Distribution and Transmission Technical and Engineering Professions b. Electrical Control Systems c. Energy Technology NPIC’s first enrolled Class in 2005-2006 included 4. The Faculty of Electronics 248 students. The 2018-2019 Class enrolment a. Electronic Engineering was approximately 1,100 students. As of 2018, b. Telecommunications NPIC had a total of 3,400 students – 11% women 5. The Faculty of Mechanics – enrolled in: a. Mechanics • A two-year Master Program (post completion of b. Air Conditioning a bachelor degree) available in Civil Engineering 6. The Faculty of Automotive Mechanics and Electricity a. Electricity and Electronics • A four-year Engineer/Bachelor Program available b. Automotive Engine from all 8 Faculties c. Chassis & Body • A two-year Associate Degree available at 100 http://www.npic.edu.kh/ 97 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT completion of Upper High School (whether In addition to technical skills, NPIC focuses on or not they completed successfully their developing students’ soft skills: communication, baccalaureate.) Holders of an Associate problem solving, time management, team Degree from NPIC or another Technology work, work behavior, planning and budget Institute can pursue a full engineering management, importance of life-long learning bachelor with NPIC by enrolling in a five- among others. semester additional course of studies As of 2018, NPIC achieved 83% placement of students at graduation. NPIC uses its extensive In addition: network of partnerships to place students. • The Faculty of Computer Science offers a joint There is very high demand from the Cambodia- degree with Polytechnic Institute, Indonesia based private sector to recruit well-educated including one of the four year of studies spent in and trained from TVET and University programs Indonesia to fill their internal skill gap. • Students that completed upper high school NPIC surveys its students at three months and one can enroll in a Certificate Degree to be trained year after graduation to assess their satisfaction as a Technician. The program is based on and pay grade. In addition, NPIC surveys partnerships with private sector companies employers to understand skill needs. Starting and includes 700 hours of training – 300 hours earnings level in 2018 was approximately $200/ classroom training and 400 hours on-the-job month at the Associate level and $350/month at training the Engineer level. At Master level and PhD level • Through the Hyundai-Koica Dream Center, NPIC (overseas PhD) graduates can get $400 to $500/ offers a one-year or two-year Certificate degrees month as starting salary. in auto mechanics for individuals that dropped out of high-school at grade 9. Students from Approximately 35% of the students originate the Center are able to get internships with local from Phnom Penh and its suburbs; 65% from companies and receive placement support at other provinces. To attract new students, NPIC completion form NPIC sends small groups of teachers and students to high schools to promote engineering education. It also advertises yearly via TV, NPIC is largely self-funded through student radio and the press. Since 2017, NPIC has tuitions and fees and partnerships. Tuitions reduced its marketing effort because, as NPIC for the Associate Degree are $400/year; for has established its reputation, “word-of-mouth” Engineer/Bachelor Degree, $600; and, for Master among young people is sufficient to generate Degree, $1,200. Classroom size ranges between enrolment. Key demand from student is for 15 and 30 students. Laboratories are designed the field of Civil Engineering, Electricity, and with 31 stations – a maximum of 30 students Automotive Mechanics. There is more limited plus one teacher. demand for Mechanical Engineering and Computer Science. 98 Chapter 3 Box 3.2: Royal University of 3. Animal Science 4. Veterinary Medicine Agriculture (RUA)101 5. Forestry The Leading Agricultural University in 6. Agricultural Engineering Cambodia 7. Fisheries 8. Agro-Industry RUA was founded in 1964 as the Royal University 9. Agricultural Economics and Rural of Agronomy Sciences (RUAS – Université Royale Development des Sciences Agronomiques.) Approximately 10. Land Management and Land Administration 200 students graduated between 1965 and 1975. The University reopened in 1984 with Russian ….As well as twelve Centers: sponsorship as the Institute of Agricultural Education (IAE.) The focus then was on short 1. Documentation term courses. Russian sponsorship ended in 2. Language 1994 and the University was rename The Royal 3. Information Technology University of Agriculture. In 2000, it was the first 4. Agricultural and Environmental Studies university in Cambodia to introduce the course 5. Livestock Development Studies credit system for its bachelor degree. Its Master 6. Food Research and Development programs started in 2002. 7. Ecosystem Services and Land Use Research Today, RUA’s student body includes approxi- 8. Nutrition and Welfare mately 3,500 students in four different program 9. Agri-Water level: two-year Associate degree; four-year Bach- 10. Potato Research elor degree; two-year Master degree; and PhD. 11. Excellence on Sustainable Agricultural In 2016-2017, there were 153 students enrolled Intensification and Nutrition in the Associate degree; 3,347 in the Bachelor 12. Biogas Technology and Information degree; 111 in the master degree; and 24 in the PhD degree. Of the total, 1,187 or nearly one- The great majority of students are enrolled in third of the student body was female – a very the Bachelor program (3,347 out of 3,645 in significant increase from earlier years: between 2016-2017 – 92% of the student population.) 1989 and 2016, 9,527 students graduated from The largest groups are in Agronomy, Veterinary RUA (previously IAE) but only 1,856 or 19.5% Medicine, Agro-Industry, and Agricultural were women. Economics and Rural Development. The The University reports primarily to the Ministry remaining 8% are divided nearly equally of Agriculture, Forestry and Fisheries (MAFF) between the Associate Degree (153 students) and Ministry of Education, Youth and Sports and the Master Degree (111 students), with a (MoEYS.) RUA is accredited by MoEYS under the small number of students in the PhD program Accreditation Committee of Cambodia. (24 students.) The Bachelor program includes a common core during Year 1 followed by a Ten Faculties and Twelve Centers to Support specialized program during the next three years Education and Research based on student preferences. The main focus of the Associate Degree is on Food-Processing, The University’s educational and research Agronomy, and Extension Services. The mission is organized around ten Faculties ….: Associate Degree seeks to enroll students that 1. Agronomy have completed Upper High School – including 2. Rubber Science students that have failed the baccalaureate. 101 http://www.rua.edu.kh/ 99 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT RUA’s 2017-2026 Strategic Plan RUA is also engaging into new support from development partners to strengthen its RUA’s Ten-Year Strategic Plan is organized mission. For instance: around three main goals: • Starting in 2016, with a $2.5 million grant • Improving the quality and quantity of academic, from USAID, RUA is working with Kansas research, and technology transfer programs to State University on strengthening research, contribute to economic development (including extension service, and staff capacity. The the objectives of the Government’s IDP) CESIAN program is developing five agricultural • Developing human resources and infrastructure technology park – a “mother park” in Phnom for high standards of education and research Penh, and four dissemination parks in • Promoting good governance and improving Battambang, Siem Reap, Kampong Thom, fund generation and management and Kampong Cham to disseminate new technology among farmers using extension To achieve these results, RUA works closely with service officers; its approximate 120 Cambodian and foreign • RUA is expecting some support funding from educational and research partners as well as its a new program being launched by the World own Teaching and Support staff including nearly Bank to MoEYS; 500 individuals. It relies on partners – including • RUA received support from the Asian foreign partners – for its internship program Development Bank as part of its Cambodia during the last year of its Bachelor degree. For program on SPS to develop new curriculum for instance, at present 210 students are enrolled in SPS in agronomy, animal science, veterinary an eleven-month internship program in Israel to medicine, and agro-industry. The program learn about advanced agricultural production concluded in 2018 but included funding for a technology and RUA has signed an MoU with new micro-biology laboratory. Japan for similar internship support. Because farming in Japan is a half year activity, the Marketing and Student Enrolment internship program will focus on three-month student exchanges. The University also has a While agriculture is an area in great need of skilled goal to encourage student to start new Agro- Cambodian, innovation and new technology, and-food processing businesses to support the the University finds it difficult to attract student Government’ objective for Cambodia to move into the field. Particularly difficult is to attract up the value chain in agriculture. At present, 7% young people into Extension Services which are of the students go into business at graduation; critical to disseminate new farming practices RUA’s objective is raise the number to 12%. and technologies. This is the case even though a 2014 survey of 481 graduates from 2009- 2013 suggested earnings roughly in-line with those of other graduates of STEM professions – $316/month for Bachelors and $496/month for Masters. The same study also suggested very low unemployment among graduates – about 5%. 100 Chapter 3 Box 3.3: The Academy of A Rigorous Course of TVET Education and Training Provided by a Highly Qualified Staff Culinary Arts – Cambodia (ACAC)102 Studies are organized around a first semester on-campus teaching and training followed A Two-Year Associate Degree in a New, Top-of- by a second semester on-the-job industry the-line Facility internship during Year One with a repeat of a similar sequence during Year Two. New student ACAC opened its doors to its first Class of students Classes enter every six months. The fifth Class in March 2017. ACAC offers a two-year associate of students is set to enter in April 2019 at which degree post-upper-high school in culinary arts. time the first Class will graduate. At present, ACAC’s curriculum follows ASEAN teaching and 164 students are enrolled – with 23 drop-outs training standards for the Hospitality industry. from the initial 187 students enrolment in the Most students have a baccalaureate degree, first four Classes. The size of each new Class and a few a bachelor degree. ACAC is the first has been growing steadily and will reach its full institution in its field in Cambodia to offer an capacity (between 60 and 65 students) with the internationally recognized diploma to train new incoming Class. For that matter, it is quite Chefs. Graduates receive a degree from ACAC possible that the Academy will be unable to recognized by the Swiss Hotel Management admit all that apply in the incoming Class due School (SHL) of Luzerne which serves as the to limitations in the size of its facilities. From the Academy’s technical training partner. SHL has original 187 admissions, 96 students are women 100 years of teaching experience in hospitality. and 91 men. ACAC degree meets ASEAN standards for the field. ACAC is registered with the Ministry of For industry internships, the school relies on Tourism and falls under the aegis of MoLVT’s its extensive partnership with local hotels and National Training Board (NTB) for Accreditation. restaurants including Himawari, Hyatt Siem Reap, Naga World, Raffles, Sokha Hotel, Sofitel, ACAC was established as a public private Gate Gourmet and many others. In addition, partnership by the Prime Minister. Its Board ACAC has established a partnership with includes representatives from the Ministry of Emirates. The company already recruits interns Tourism, the Ministry of Commerce, the Ministry for some of its overseas facilities. Thus far four of the Economy and Finance, the Ministry of interns are in Dubai, two in Japan, one in Hong Education, Youth and Sports, the Cambodia Kong and one in Bangkok. Demand from local Hotel Association, the Cambodia Restaurant hotels and restaurants to recruit students as Association, the Cambodia Chefs Association, they graduate already far surpasses supply. the philanthropic owner of the building, and Shift 360 – the NGO that developed the project, Current Academy staffing includes the Dean, manages day-to-day operations of the school, nine faculties, four administrative staff, and three and leads fund-raising activities. The facility is marketing staff. In addition, ACAC operates brand new and established in a building provided a laundry and has a small housekeeping, by a philanthropic owner. Initial financing came engineering, and service team. from WTO-EIF and Swedish Sida. The classrooms and kitchen equipment are top-of-the-line, with Most students pay tuitions – slightly under much of the cooking equipment originating $1,000/semester on average for Cambodians; from Europe. The roof has a renewable energy $1,600/semester on average for international roof providing hot water through passive solar students. ACAC offers scholarships to deserving panels and electricity through a photo-voltaic Cambodian students – thus far, 19 scholarships plant. have been granted. There are nine foreign students among the 164 students currently 102 http://acac.edu.kh/about-acac/ 101 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT registered. There will be two more among the Marketing and Student Enrolment fifth Class to start in April 2019. To attract students, ACAC has a very active Consulting Activities presence on Facebook and other social media and has an MoU with the National ACAC provides consulting services based on Employment Agency (NEA.) ACAC is very demand from individual clients and partners. focused on promoting “success stories” of For instance, ACAC has been requested to famous Chefs, including Cambodian Chefs, and develop menus for all of Emirates East Asia current students to re-brand Culinary Arts as a flights. In addition, ACAC has a management profession with opportunities for individual job contract with a restaurant in Phnom Penh which progression as well as professional and financial it uses for internships for some of its students. success. Text Box 3.4: Cambodia Garment India, Canada, Japan, Korea, and China.) CGTI is accredited by the NTB. Training Institute (CGTI)103 Diploma Certificates for Young People A New Training Institute to Address Skill Needs Wanting to Enter the Industry and Short of Cambodia’s Garment Sector Courses for Upskilling and Life-Long Learning CGTI opened its doors August 23, 2017. It of Established Industry Workers follows into the foot path established previously CGTI offers two types of training: by GMAC to provide training supports to the Cambodian sector’s development and upscaling. • Short courses focusing on upskilling of But GTCI’s new staffing and the new facility, Garment factory employees in a wide range of located in Phnom Penh Special Economic Zone, technical areas as well soft skills (team work, provide a far more adequate setting to expand, leadership, lean thinking, etc.). The course deepen, and diversify such support. The new are designed in such a way that they can building was constructed with a loan from AFD contribute to skill building among individuals and provides multiple classrooms with modern that may have a limited degree of literacy. equipment ranging from video displays to Short courses may range from one to five days garment manufacturing equipment as well as a depending on the topic and depth of training. library of fabrics, a canteen, and meeting rooms. • Diploma certificates targeting young people already employed in the industry or wanting TaF.tc International, a Singapore training to enter the sector. Individuals must have center established in 1983, serves as CGTI’s graduated from high school, an associate training partner. TaF.tc is accredited by the degree program, or university. At a minimum Committee for Private Education of the EduTrust individuals must have completed high school. Accreditation Board of Singapore’s Ministry of Typically, Diploma certificates are designed Education and appointed CET by SkillsFuture of to include a four-month intensive on-campus Singapore of the Ministry of Manpower. TaF.tc training followed by a one-year paid internship provides support for curriculum development, with one of GMAC’s partner. teaching, and quality control. The curriculum follows Singapore and international standards. For 2019, CGTI is offering a schedule of nearly TaF.fc certifies local trainers and contribute 200 short courses. Trainers are either locals or trainers from its own pool (from Singapore, expats. Typically, classroom size is limited to 15 103 https://www.cgti-cambodia.org/ 102 Chapter 3 to 20 trainees. During 2017, CGTI estimates it the students paid and the other half was trained approximately 700 individuals through financed through scholarships (there is a total short courses and in 2018 approximately 1,000. of 60 scholarships available at the present time.) Tuition for short courses range from $100 for a During the four-month on campus training, one-day course to $330 for a five-day course. the student receives a $150 monthly living Many attendees are sent by their employers. allowance. During the following twelve-month Employers that are partners of GMAC and paid internship, the student receives a $250 contribute to its financing are charged only monthly allowance. 50% of the tuitions. In addition to its Diploma Certificates, CGTI has a partnership agreement with a Chinese At the present time, the current Diploma University for a four-year training on design. One Certificates focuses on three areas: limitation of the partnership is that candidates must speak Chinese. • Apparel Design and Product Development; • Apparel Merchandising; and, CGTI also provides in-factory training requested • Industrial Engineering, Quality and Production. by clients and some consulting services. Marketing and Student Recruitment There were 15 students in Diploma Certificates in 2017 and 16 in 2018. Thus far, 10 students To attract new student in the Diploma have already graduated. Tuitions for the four- Certificates, CGTI has an MoU with NEA and month on-campus intensive training in 2018 conduct joint visits to high schools. In addition, ranged around $800. Approximately half of CGTI organizes open house visit to its facility. 103 The Cambodian Trade Integration Strategy (CTIS) 2014-2018 stressed the importance of trade and market diversification, trade facilitation, transport logistics, sanitary and phyto-sanitary measures, technical standards, investment environment for export-related activities, and intellectual property rights. In the CTIS, other strategies have been proposed to promote trade through productivity, competitiveness and human resources enhancement. CHAPTER 4 2. Current trade facilitation TRADE environment Trade facilitation refers to the expedition of FACILITATION movement, clearance, and release of goods, including goods in transit. In order to facilitate trade, effective cooperation between customs, other line agencies, appropriate authorities on trade facilitation and customs compliance 1. Introduction issues needs to be promoted. In terms of trade Cambodia has had an open and liberal market facilitation measures, Cambodia has introduced economy since the middle of the 1990s. many measures to facilitate areas such as customs Development partners and international automation, national single window, one stop organizations has played an important role in border posts, customs risk measures, E-permit and the development of liberalised trade policies. customs, phytosanitary certificates, certificates of The Cambodia Industrial Development Policy Cambodian origin, and trade registration. (CIDP) launched in 2015 have the aim to move However, these improvements do not seem to be from labour intensive industries to skill driven reflected in the annual doing business reports. In industries by 2025. The CIDP is composed of four fact the ranking of Cambodia in the trading across main strategies: border has gone down over these past few year as 1. Mobilise and attract foreign and private illustrated in Table 17 hereunder. One may disputes domestic investments by focusing on large these findings and even the methodology behind industries, expanding markets and enhancing the findings but it is a fact that these ranking and more technology transfer. numbers are published every year and are used as 2. Develop and modernise SMEs. reference on a global basis. 3. Revisit the regulatory environment in order to strengthen the country’s competitiveness. 4. Coordinate supporting policies. The World Trade Organization (WTO) and the Association of South East Asian Nations (ASEAN) are the two main multilateral institutions helping Cambodia expands its export market. Cambodia’s trade policy focuses very much on enforcing commitments made under the WTO and ASEAN. 105 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 17: Cambodia’ trading across borders performance (2014-2018) 2014 2015 2016 2017 2018 Trading across borders (rank) 114 124 98 102 108 DTF score for trading across borders (0–100) N/A 65.92 67.63 67.28 67.28 Time to export Documentary compliance (hours) N/A N/A 132 132 132 Border compliance (hours) N/A N/A 45 48 48 Domestic transport (hours) N/A N/A 6 N/A N/A Cost to export Documentary compliance (US$) N/A N/A 100 100 100 Border compliance (US$) N/A N/A 375 375 375 Domestic transport (US$) N/A N/A 200 N/A N/A Time to import Documentary compliance (hours) N/A N/A 132 132 132 Border compliance (hours) N/A N/A 4 8 8 Domestic transport (hours) N/A N/A 11 N/A N/A Cost to import Documentary compliance (US$) N/A N/A 120 120 120 Border compliance (US$) N/A N/A 240 240 240 Domestic transport (US$) N/A N/A 1,125 N/A N/A Source: adapted from www.doingbusiness.org As seen in Table 17, there has been a change in the presentation of the trading across border data. Table 18 hereunder shows the details for the year 2014 and 2015. There was less details before 2016. Table 18: Performance for 2014 and 2015 2014 2015 Documents to export (number) 8 8 Time to export (days) 22 22 Cost to export (US$ per container) 795 795 Documents to import (number) 9 9 Time to import (days) 24 24 Cost to import (US$ per container) 930 930 Source: adapted from www.doingbusiness.org 106 Chapter 4 The data shown in Table 17 are more detailed sea cargo will theoretically enable faster and more and provide a clearer picture of the performance efficient customs clearance and movement of of Cambodia. These indicators are often freight105. However, the NACCS system is still not used as proxy for trade facilitation efforts but a full national single system (NSW) as requested many Governments still dispute its findings. by GDCE and therefore the actual benefits of Nonetheless, they are still used as reference. In migrating from ASYCUDA to NACCS remain to be the case of Cambodia, it can be seen that after seen. an impressive improvement in the ranking in The National Single Window (NSW) development, 2016, the tendency is for the ranking to drop. is under the purview of GDCE. The objective is to The trading across borders index of Cambodia is allow parties involved in trade, transport and not at all that worrying when it comes to costs to logistics to lodge standardised information and export and import. However, in terms of time to documents with a single entry point to fulfil all export and import, there seems to be a significant import, export, and transit-related regulatory difficulty with the time necessary to go through requirements. The purpose of the NSW is to documentary compliance. This somehow reflects strengthen government-to-government (G2G); a lack of inter-agency cooperation and the absence government-to-business; and business-to-business of a meaningful, efficient and well-functioning inter-relationships. Significant steps have been National ingle Window. taken to implement NSW including the Cambodia 2.1. Current issues NSW (CNSW) Blueprint developed with financial support of the World Bank. The CNSW incorporates Trade facilitation is not just about Customs issues technical and functional specifications for the but Customs do play a critical role in facilitating system, a governance and operational model, trade. This is why it is important to look first procurement strategy and a project implemen- at Customs reforms: the General Department tation plan. The completion of a Legal Gap Analysis of Customs and Excise (GDCE) introduced the was carried out under the ASEAN Single Window Single Administration Document (SAD), with the – ASEAN Connectivity through Trade and support of the World Bank. It also introduced the Investment (ASW-ACTI) project106. The feasibility automated customs processing system called study to be conducted by Japan is probably the Automated System on Customs Data (ASYCUDA) first step but more is needed in terms of system in 2009 in order to facilitate export, import, and coverage in order to actually have a real NSW. goods in transit. The ASYCUDA WORLD system has now been implemented at 81 major customs In addition, the Customs-Private Sector branches and offices and covers all Single Partnership Mechanism (CPPM), established Administrative Declarations (SAD) and trade in 2009 and launched in 2010 to encourage volume data. However, ASYCUDA is not a single participation from the private sector in promoting window (NSW) system and this is clearly missing compliance with law and regulations as well as to in Cambodia. enhance the effectiveness of trade facilitation. The CPPM is responsible for coordinating, cooperating In 2018, Japan proposed a replacement to and mutual understanding between Customs ASYCUDA, with the Japan-made NACCS (the Administration and the Private Sector. The CPPM Nippon Automated Cargo Clearance System). has a duty of resolving all customs related matters The Cambodian government requested Japan at the greatest possible extend before moving to conduct a feasibility and suitability study of to other dispute settlement bodies, or to the introducing NACCS in Cambodia104. The NACCS, a Government-Private Sector Forum107. Currently, system dedicated to electronic processing of air/ it seems to be the only functioning dialogue 104 May Kunmakara, Japan puts new customs system on the table, Khmer Times, 19 June 2018, https://www.khmertimeskh.com/50502235/japan-puts-new-customs-system- on-the-table/ 105 Nippon Automated Cargo and Port Consolidated System, http://www.naccs.jp/e/ 106 General Department of Customs and Excise (GDCE), http://www.customs.gov.kh/trade-facilitation/national-single-window/ 107 General Department of Customs and Excise (GDCE), http://www.customs.gov.kh/trade-facilitation/customs-automation/ 107 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT forum between Customs and the private sector at the Ministry of Economy and Finance (MEF) is with almost monthly meetings or when there is a still limited even though it has been established specific issue that needs to be resolved. for quite some time. The Government Private Sector Forum (GPSF) The Ministry of Commerce has played a leading role was established in 1999 by the Cambodian with regards to trade facilitation. Today, ASEAN government with the support of the International Form D can be provided in 5 border provinces to Finance Corporation (IFC) in order to address help Cambodian traders obtain privileges from trade and investment climate issues and the ASEAN Economic Community (AEC). Self- to institutionalize inputs, complaints, and certification also exist as the programme started in recommendations from the private sector into August 2015 but strangely enough there are only 2 policy making, legal and regulatory reforms, and firms that has joined this specific programme. The operational aspects of implementation. The GPSF Ministry of Commerce would like more exporters is facilitated by a Secretariat under the Council for to join this program and more efforts are needed the Development of Cambodia (CDC). Under the to publicise the benefits of self-certification. framework, different working groups were created 2.2. Additional Trade Facilitation Reforms including the Working Group for Export Processing and Trade Facilitation with a function to highlight A regulatory framework for Customs brokers is in and prioritize problems and propose solutions place in Cambodia. The General Department of to government counterparts on issues related to Customs and Excise (GDCE) is tasked to administer trade and transit facilitation108. After many years the registration and licensing of brokers. Customs of Forum not being held, GPSF was reactivated in brokers play an important role in the efficiency of 2019 where the Prime Minister chaired the GPSF international logistics in Cambodia. on March 29, 2019. Regardless, the current the establishment of the National Trade Facilitation On February 15, 2008 the Ministry of Economy Council (NTFC) remained critical to support trade and Finance issued Regulation No. 115 MEF.BK on facilitation policies in the country. the Establishment and Functioning of Customs Brokers. This Regulation states that qualified According to the Cambodia Chamber of Commerce, persons to fulfil customs formalities are: the GPSF was a very good initiative but many issues remain unresolved until the GPSF meetings were 1. The importer, exporter, owners of goods or their restored in March 2019. It is difficult to simplify authorized representatives, which are allowed to complex processes as the more complicated the declare goods only for themselves; and; process, the more risk of rent seeking activities by 2. Persons authorized to act as qualified customs agencies involved. Transparency and reliability of brokers by the Ministry of Economy and Finance, trade related processes is a key issue that needs which may declare goods to customs on behalf to be addressed if trade facilitation efforts are of others. Any person wishing to carry out to be successful. Collected fees need to also be the business of customs broker must obtain transparent and supported by the elimination of a customs broker license from the Ministry of unnecessary documents. This will further accelerate Economy and Finance. trade facilitation in the country and is supported by the private sector. An individual will be considered as a qualified customs broker if the person is a citizen or resident It is also observed that there exists a gap between of Cambodia; is at least eighteen years of age; what the Cambodian Government is doing and possesses a minimum of a high school certificate the information received by the private sector. level; provides a “certificate of non-conviction As an example, the knowledge related to the issues by the competent judicial authority; has existence of the national trade repository, located sufficient financial resources to conduct the 108 USAID (2016) Facilitating Cambodia’s Trade Integration: A roadmap to implementing the WTO Trade Facilitation Agreement, p. 35. 108 Chapter 4 business; has a good record of fiscal compliance; However, even after the introduction of Regulation and has successfully passed the Customs Broker No. 115, customs brokers’ service quality remains Qualification Examination administered by the relatively poor. There are numerous complaints Customs and Excise Department. that their service quality is not professional enough due to many mistakes in the documentation A legal person will be considered as qualified needed for the clearance of goods. Traders and customs broker if the company is incorporated manufacturers are then subject to time losses in Cambodia and has a Commercial Registration resulting in unnecessary financial costs. According Certificate issued by the Ministry of Commerce; to the many reports consulted, additional training has sufficient financial resources to conduct its of customs brokers should be provided to business; has a good record of fiscal compliance; professionalize and improve their service skills in and has a Value-Added Tax Registration Certificate supporting international trade logistics. issued by the Tax Department. All members of the board of directors of the company need to have The Law on Customs and the Regulation No. both a certificate of non-conviction issued by the 115 provide Customs all the tools to establish competent judicial authority as well as a good and enforce minimum standards of training record of fiscal compliance. The majority of the for the customs broker by organizing training board of directors must be citizens or residents of programmes and examinations for customs Cambodia. Finally, at least one employee of the brokers. The challenge, however, is that laws, company must be a qualified customs broker. regulations and practices are changing rapidly and the use of ICT systems and on-line applications

Article 7 of Regulation No. 115 stipulates that is increasing every day and licensed customs “the Customs and Excise Department shall define brokers have to accompany these processes and the minimum specialized subjects relevant to apply new methods and techniques in their field customs broker profession and may organize of work. Therefore, it is recommended to organize training courses for persons who intend to take obligatory short refresher courses, for instance the Customs Broker Qualification Examination”. once every four years or more often if necessary. The Customs and Excise Department have the legal obligation to organize at least once every The General Department of Customs and Excise year a Customs Broker Qualification Examination. (GDCE) of Cambodia has been during the last ten years very proactive in facilitating trade In Article 8 it is stated that customs broker licenses and assisting the importers, exporters, logistics shall be issued on an individual basis to persons operators and customs brokers by publications who are determined to be qualified customs about rules and regulations including applications broker. A legal person shall only be licensed as on import, export, customs clearing, etc. GDCE a customs broker if at least one employee of the published the Handbook on Customs Clearance in company is a qualified person. The customs broker October 2015, which is very useful for the business license also specifies the customs offices where the community in Cambodia. The basic information customs broker is licensed to operate. The license on customs clearance is easily accessible for shall be granted for a fixed period of two years. everyone. GDCE could play an even more active All licensed customs brokers must pay an annual role in organizing mandatory refresher courses license fee of 2,000,000 Riels to the Customs and and examining the Customs brokers with more Excise Department. A licensed customs broker rigour. The establishment of a Customs Brokers’ must deposit security with the Customs and Association would also be helpful in developing a Excise Department sufficient to cover duty, taxes reputable interface. and fees to be paid at any for its customs clearance operations before commencing operations. The GDCE has fully implemented Advance Rulings but form and amount of security shall be established there is partial implementation of Post Clearance by the Director of Customs. Audit, Risk Management and Automated Systems 109 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT in their 1st phase of Customs reforms. The scope tation mode: of Customs regime is still limited but at least Within the shipping sector, Customs clearance Customs valuation has now been decentralised to procedures require documentation to be land border posts and airports. The focus is mostly provided for the cargo of each container. Shipping on 3 high value products on the Customs watch lines are required to consolidate documents list as duty needs to be pre-evaluated such as for obtained from each of their clients and to provide the import of telecoms equipment or vehicles. both hard copies (in person) and soft copies Customs reform is now in its 2nd phase with (manually uploaded) to Customs. The vessel implementation of the NSW as a key theme. The number included on the documents is already Customs update for 2019-2023 will focus on: known when the cargo is inspected by Customs at the warehouse and, if the necessary systems 1. Revenue Mobilisation were in place, Customs should be able to access 2. Enforcement Compliance these documents through ASYCUDA. This would 3. Automation remove the need for shipping lines to upload the 4. Cooperation and; documents manually, a duplicative procedure 5. Capacity building. which represents an administrative burden. However, the issue of Authorised Economic Within air cargo, Customs require carriers to Operators (AEO) still need to be properly dealt provide the necessary clearance authorization with and more work is needed by GDCE. Customs papers in hard copy and there is no system only have developed a “best trader” programme of electronic Air Waybills, which is becoming and hope to be able to have AEOs by 2021. increasingly common across Customs authorities Licences would be issued by the MEF with an worldwide and is supported by a number of AEO code of conduct by 2019. In the NSW phase airlines currently active in Cambodia. Annex D of 1, linkages were made related to the issuance of the revised Recommended Practice 1670 (IATA certificate of Origins (Form D) and in the NSW 2nd RP1670) describes how electronic Air Waybills can phase Customs hope to establish connectivity help to simplify the interface between shippers with other related agencies such as MoH, MoA, and carriers even among signatories to the Ministry of Industry and Handicrafts (MoIH), Port Warsaw Convention (including Cambodia), which Authorities and Cambodia Development Council. requires paper documentation. It is hoped that this 2nd phase will be completed by More generally, where additional documentation the end of 2019. such as revisions to Master Lists needs to be According to the EUROCHAM 2017 White Paper109, submitted to Customs, such documents would the GDCE has recognized in its Strategy and Work be quicker to provide electronically rather than in Program on Reform and Modernization 2014-2018, person. there is opportunity to realize further time and cost Furthermore, where customs service fees are savings through expanding the use of electronic due, there is currently no system through which transactions. The existing capabilities for GDCE to payments can be made electronically. A secure receive and accept documents electronically are online payment system would again reduce the limited and in many cases there is still a need for need for representatives to make themselves a representative of the owner of the cargo to be physically present. physically present at an ASYCUDA centre in order to answer queries from customs officials or provide Camcontrol is also an important agency related to additional documentation in hard copy. trade facilitation that focuses on high risk products and is the CODEX110 focal point. As part of trade This is the case across multiple types of transpor- 109 https://drive.google.com/file/d/1oOT-MjnmpN2hhxtyrVb68UUO1LP2n9AU/view 110 http://www.fao.org/fao-who-codexalimentarius/en/ 110 Chapter 4 facilitation reform, the Prime Minister had since 3.1. Compliance with the ASEAN Economic January 29, 2019, signed a Sub-decree 27 officially Community (AEC) ends the role of the Camcontrol at the country’s The requirements under ASEAN are more stringent border crossings. Capacity of Camcontrol has than those of the World Trade Organization expanded with 3 main laboratory for food testing Trade Facilitation Agreement (WTO TFA). This and petroleum related products which will be used is understandable as the objective of the AEC for ensuring in-country food safety, consumer is to establish a single market and production protection and fair competition practices, as part base for the region. Sanitary and Phyto-Sanitary of a new institution restructuring. There are also 3 (SPS) issues are under the Ministry of Agriculture mini-laboratory at Sihanoukville, Poi Pet and Svay (MoA) and the Ministry of Health (MoH) and are Rieng but testing equipment is still insufficient. In outside the control of the MoC. This is why the the case of fresh produce which would normally facilitator role of the MoC is critical for the success require a permit from the Ministry of Agriculture of improving trade facilitation in the country. and Fisheries (MAFF), there is no need for a MAFF officer to be present at the border as there exist The ASEAN Seamless Trade Facilitation an MoU between Ministries related to Mutual Indicators (ASTFI) Baseline Study, will enhance recognition of documents. the monitoring of the implementation of trade facilitation measures in the region. The objectives Reform mentioned above will put more impetus of the ASTFI will enable ASEAN to determine the on GDCE Camcontrol to act on behalf of partner potential contribution of ASEAN trade facilitation government agencies Camcontrol and in initiatives in achieving the target of 10% reduction collaboration with those partner agencies so that in trade transactions cost by 2020 and striving to their specific knowledge of their domain can be double intra-ASEAN trade by 2025. Cambodia brought to bear, for maximum success rates in is committed but the challenge is still there for detection and enforcement. Cambodia to achieve these targets. In this way, relatively larger agencies, such as The key agreement within the AEC is the ASEAN GDCE and Camcontrol, which have stronger Trade in Goods Agreement or ATIGA. ATIGA has a enforcement competencies and experience of number of chapters that deals directly with trade cross-border regulatory offences, are able to facilitation. Chapter 5 of ASEAN Trade in Goods provide support to other agencies for undertaking Agreement (ATIGA) covers trade facilitation: seizures and carrying out enforcement on suspicious shipments detected. Consequently, all 1. Article 45 of ATIGA indicates that Member States agencies work together to achieve the synergies shall implement a comprehensive ASEAN Trade necessary to meet their respective regulatory Facilitation Work Program, as an integral part of mandates, and contribute to the prosperity and ATIGA. The Work Program is very comprehensive security of the country. and covers actions to be taken by Cambodia related to Customs; Trade Procedures; Standards 3. Compliance with international trade and Conformance; Sanitary and Phyto-sanitary facilitation commitments Measures; and ASEAN Single Window. The Ministry of Commerce (MoC) has an important As stated previously, the Cambodian Govern- role to play as a facilitator in advancing the trade ment has already established a number of facilitation agenda in Cambodia, especially for measures to further facilitate trade but the those commitments that have been agreed to perceived reality is somewhat different with no under regional and multilateral agreements. improvement in the doing business ranking for trading across borders. 2. Article 49 of ATIGA say that Member States should establish a National Single Window 111 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT “in accordance with the Provisions of the These obligations are complemented by those Agreement to Establish and Implement the described in the “Strategic Plan for Customs ASEAN Single Window and the Protocol to Development (SPCD) 2011-2015” and the ASEAN Establish and Implement the ASEAN Single Window”. Customs Agreement, signed in 2012. In order for the ASEAN Single Window (ASW) 3.2. Compliance with the WTO Trade to become operational, all ASEAN member Facilitation Agreement countries need to have their respective NSW. This is not the case yet for Cambodia. In 2014, the WTO adopted the Trade Facilitation 3. Article 47 of ATIGA lists the ASEAN guiding Agreement with the aim to expedite the movement, release and clearance of goods, principles on trade facilitation, namely: including goods in transit. At present, importers transparency; communications and and exporters around the world do incur consultation; simplification, practicability and significant costs due to inefficient control and efficiency; non-discrimination; consistency and clearance procedures at customs and other predictability; harmonization, standardization border authorities, unnecessary border formalities and recognition; modernization and use of new and documentation requirements and opaque technology; due process and co-operation. administrative fees and charges, all of which The MoC is aware of these guiding principles add significant dead-weight economic cost to but implementation is still a challenge as international trade111. currently there is no baseline in terms of actual Cambodia ratified the WTO TFA in February 2016 trade facilitation performance. Having guiding and later in the year completed an assessment principles is not sufficient as trade facilitation of its trade facilitation framework in the light of needs to be implemented and operationalized. TFA requirements and developed a road map A monitoring and evaluation framework is to implement the Agreement. According to the therefore needed in Cambodia in order to OECD, in their trade policy note112, if Cambodia is assess and follow the implementation of trade able to fully implement the WTO TFA then there is facilitation measures as per the country’s a potential reduction in trade cost by 18.2%. commitments. In August 2017, Cambodia submitted to WTO its category A, B and C notifications, as well as the Chapter 6 of ATIGA fixes a comprehensive list of indicative dates for the implementation of the obligations for Member States. Commitments in various provisions of the TFA. As of November this area and are related to: 2018, Cambodia had notified 60.9 percent under • Pre-Arrival Documentation (Article 55), Category A, 19.3 percent under Category B, and 19.7 percent under Category C. Cambodia has • Risk Management (Article 56); requested assistance and support for capacity • Customs Valuation (Article 57); building for nine measures including: • Application of Information Technology (Article 58); • Authorized Economic Operators (Art.59); 1. Information available through internet, • Repayment, Drawback and Security (art.60); 2. Notification, • Post Clearance Audit (Art.61); Advance Ruling 3. Pre-arrival processing, (Art. 62); Temporary Admission (Art.63); 4. Electronic payment, • Customs Co-operation (Art. 64); 5. Authorized operators, 6. Perishable goods, • Transparency (Art. 65); 7. Border agency cooperation, • Enquiry Points (Art.66); 8. Single window, and; • Consultation (Art.67); 9. Transit. • Confidentiality (Art.68); • Review and Appeal (Art.69). 111 World Trade Organization (WTO), Implementing the Trade Facilitation Agreement, https://www.wto.org/english/res_e/booksp_e/aid4trade15_chap4_e.pdf 112 https://www.oecd.org/tad/policynotes/oecd-trade-facilitation-indicators-asean.pdf 112 Chapter 4 Figure 9: Categories submitted to WTO Share of Categories A, B, C Based on % of all notifiable items A - 60.9% B - 19.3% C - 19.7% Not yet notified - 0.0% TFAD ( Trade Facilitation Agreement Database) www.tfadatabase.or Category A contains provisions that a developing after a transitional period of time following the country Member or a least-developed country entry into force of this Agreement and requiring Member designates for implementation upon the acquisition of implementation capacity entry into force of this Agreement, or in the case through the provision of assistance and support of a least-developed country Member within one for capacity building. year after entry into force. • Cambodia ratified the WTO TFA on February 12, 2016 Category B contains provisions that a developing • Category B implementation commitments from country Member or a least-developed country December 2018 to December 2020 Member designates for implementation on a date • Category C implementation commitments from after a transitional period of time following the December 2018 to December 2022 upon receipt of entry into force of the Agreement. capacity building support • Category B and C notification of definitive dates for Category C contains provisions that a developing implementation have not yet specified country Member or a least-developed country • Type of technical assistance required has not yet Member designates for implementation on a date specified Concerning Article 1.1 related to “Publication”, trade agreements, tariff quotas, import, export, the Ministry of Economy and Finance created and transit documents, SPS requirements and the National Trade Repository113 in 2015 to documents, prohibition and restrictions, practical share regulatory information relating to trade guides covering import, export, transit and appeal and business registration. In compliance with procedures, relevant trade laws, enquiry contact TFA, the trade portal has information related to information. However, the Cambodia’s trade procedures for export, import, and transit, forms portal still lacks some updated information and and documents, rates of duty and taxes, rules of does not have appeal procedures. classifications, rules for valuations, rules of origin With regards to Article 5.3 related to “Test laws, regulations, and administrative rulings, Procedures”, Camcontrol (Cambodia Import- transit restrictions, penalties, appeal procedures, 113 https://www.cambodiantr.gov.kh/ (accessed January 6, 2019) 113 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Export Inspection and Fraud Repression Degree on the Facilitation of Trade Through Risk Directorate-General) is the main agency Management was issued. The Sub-Decree advises overseeing inspections, testing, and market creating inter-agency coordination group which surveillance for exports and imports. Camcontrol includes representatives from the Customs and has four Departments (Department of Consumer Excise Department, Camcontrol, Ministry of Protection and Fraud Repression, Department of Commerce, Ministry of Agriculture, Forestry and Technical Affairs and Public Relation, Department Fisheries, Ministry of Industry, Mines and Energy, of General Policy and Dispute Resolution and Special Economic Zone Committee, and any other Department of Laboratory) and it also has 27 relevant agencies specified by Sub-Decree. In branches nationwide. However, there is still some 2010, a Risk Management Unit was established overlapping role with the Ministry of Agriculture, within the Camcontrol to guide and facilitate Forestry, and Fisheries (MAFF) which inspects the introduction of a risk-based approach116. Due agricultural shipments and the Ministry of Health to limited capacity and effective inter-agency that inspects medical shipments. Therefore, coordination, there is a need to develop risk Camcontrol and other related ministries need to management procedures and training, and build collaborate related to these test procedures. capacity for the officials from all related agencies. It has been suggested that a multi-agency In Article 8.1 related to“Border Agency Cooperation” group be created to consider primacy for (Domestic), inter-governmental coordination, testing operations, holistic testing or sampling particularly between GDCE and Camcontrol, is requirements, locations of facilities, processes still an issue due to a lack of digital infrastructure and procedures for testing based on multi- connectivity and a lack of understanding of agency cooperation, alignment with regional and each other’s terms of reference and operating international standards, and appeals or re-testing procedures. There is a lack of clarity and duplication or re-exporting procedures aligned with TFA114. in responsibilities between Customs and Camcontrol, and other trade-related agencies117. In In Article 7.4 related to Risk Management, relation to Article 8.2 “Border Agency Cooperation” Cambodia does not have a formal multi-agency (External), Cambodia has formally submitted to the cooperation on risk management. Only GDCE WTO. However, this issue is being solved started and other agencies connected to the ASYCUDA with the reform on Camcontrol.118 recognize risk management115. In 2006, the Sub- Table 19: Categories submitted to the WTO

Article 1: Publication & Availability of Information Category 1.1 Publication B 1.2 Information Available through Internet C 1.3 Enquiry Points A 1.4 Notification C

Article 2: Opportunity to Comment, Information Before Entry into Force and Consultation 2.1 Opportunity to Comment and Information Before Entry into Force B 2.2 Consultations A 114 USAID (2016) Facilitating Cambodia’s Trade Integration: A roadmap to implementing the WTO Trade Facilitation Agreement, pp. 23-24. 115 USAID (2016) Facilitating Cambodia’s Trade Integration: A roadmap to implementing the WTO Trade Facilitation Agreement, pp. 26. 116 Camcontrol, https://www.camcontrol.gov.kh/index.php 117 USAID (2016) Facilitating Cambodia’s Trade Integration: A roadmap to implementing the WTO Trade Facilitation Agreement, p.31. 118 Since January 29, 2019, Camcontrol is longer stationed as one of the border agencies. 114 Chapter 4

Article 3: Advance Rulings A

Article 4: Procedures for Appeal of Review

Article 5: Other Measures to Enhance Impartiality, Non-discrimination and Transparency 5.1 Notification for Enhanced Controls or Inspections A 5.2 Detentions A 5.3 Test Procedures B

Article 6: Disciplines on Fees and Charges Imposed on or in Connection with Importation and Exportation and Penalties 6.1 General Disciplines on Fees and Charges Imposed on or in Connection with Importation A and Exportation 6.2 Specific Disciplines on Fees and Charges for Customs Processing Imposed on or in A Connection with Importation and Exportation 6.3 Penalty discipline A

Article 7: Release and Clearance of Goods 7.1 Pre-arrival Processing C 7.2 Electronic Payment C 7.3 Separation of Release from Final Determination of Customs Duties, Taxes, Fee and A Charges 7.4 Risk Management B 7.5 Post Clearance Audit A 7.6 Establishment & Publication of Average Release Time A 7.7 Trade Facilitation measures for Authorised Operators C 7.8 Expedited Shipment B 7.9 Perishable Goods C

Article 8: Border Agency Cooperation A/C

Article 9: Movement of Goods intended for Import under Customs Control A

Article 10: Formalities Connected with Importation, Exportation and Transit 10.1 Formalities and Documentation Requirements B 10.2 Acceptance of Copies A 10.3 Use of International Standards A 10.4 Single Window C 10.5 Pre-shipment Inspection A 10.6 Use of Customs Brokers A 10.7 Common Border procedures and Uniform Documentation Requirement A 10.8 Rejected Goods A 10.9 Temporary Admission of Goods and Inward and Outward Processing A

Article 11: Freedom of Transit A

Article 12: Customs Cooperation A 115 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT In a move to further facilitate trade and reduce the Deputy Prime Minister for economic affairs costs for businesses, the Government issued a and the National Single Window Committee at sub-decree that puts an end to the presence of Ministry of Economy and Finance. The MoC would Camcontrol at border checkpoints. Sub-decree need to stock-take the jurisdiction of the various 27, signed by Prime Minister Hun Sen on January related institutional bodies when the NTFC is 29, 2019 officially ends the role of the Cambodia established. Import-Export Inspection and Fraud Repression Directorate General or Camcontrol at the country’s 4. Proposed policies to further border crossings. The General Department of enhance trade facilitation Customs and Excise (GDCE) now becomes the only Economic reforms and trade facilitation strategy institution authorised to carry out inspections in Cambodia have been faced with intertwined of goods at border gates, seaports, and special political and institutional issues. Khieng (2009) economic zones, according to the sub-decree. stated that “there is a need for better coordination, consultation and involvement of key stakeholders, The government also decided to reduce by half increased mobilization of resources and the scanning fee for exported and imported investment in local capacity building programmes, containers, a decision that will come into effect promotion of public awareness, improve roles of April 1, 2019. The decision to half the fee was related development partners and donor agencies announced in a Jan 29 letter to GDCE signed by in the management and implementation of trade Aun Pornmoniroth, the Deputy Prime Minister facilitation initiatives”121. According to the study and the Minister of Economy and Finance119. The report on facilitating Cambodia’s trade integration removal of the Kampuchea Shipping Agency prepared by the United States Agency for and Brokers (Kamsab), a state agency established International Development (USAID), it shows that in 1979 to facilitate trading by ship officers the main issues in trade facilitation in Cambodia from ports, was made on January 30, 2019. The are high unofficial fees, complex, non-transparent, Prime Minister stated the actions were taken to and burdensome procedures, risk management, reduce the difficulties and complexities in doing valuation methods, direct trader input and use of business and to facilitate the import and export ICT, port congestion, supply chain security, and of Cambodian goods to international markets120. private-sector trade capacity122. The list is certainly The establishment of the National Trade Facilitation long and not exhaustive. Committee (NTFC) is currently underway with There are four main structural constraints related support from development partners such as the to trade facilitation in Cambodia: World Bank. However, more time is needed to institutionalise the NTFC, define its scope and 1. Lack of effective platform to effectively responsibility, consensus on its membership and deliver results-based reforms especially at the which agency will function as the Secretariat. ministerial level. This is an urgent priority as existing public and 2. Lack of policy coordination and cross-sectoral private dialogue mechanism related to trade collaborations in trade-related activities. facilitation has been in limbo for quite some 3. The competitiveness of the private sector time. It must be noted that there is a risk that a remains low. Furthermore, outdated number of trade facilitation issues may overlap infrastructure, uncompetitive practices, with existing institutional jurisdictions such as and regulatory uncertainty undermine the National Transport Facilitation Committee at competitiveness of the private sector. MPWT, National Logistics Committee chaired by 4. Human resources and digital infrastructure are 119 https://www.khmertimeskh.com/50574979/camcontrol-removed-from-borders/ (accessed March 17, 2019) 120 https://www.phnompenhpost.com/business/kamsab-removed-ports-kingdom-braces-loss-preferential-trade-access 121 Sothy Khieng (2009), Country Paper-Cambodia, The Regional Trade Policy Forum on Trade Facilitation and SMEs in Times of Crisis, 20-22 May 2009, Beijing, China, p.4, https://artnet.unescap.org/tid/artnet/mtg/tf_sme_cam.pdf 122 USAID (2016) Facilitating Cambodia’s Trade Integration: A roadmap to implementing the WTO Trade Facilitation Agreement. 116 Chapter 4 limited. Lack of clarity and multitude of state Category B, and 19.7 percent under Category C. agencies are other key constraints in trade Cambodia has requested assistance and support facilitation. for capacity building for nine measures including International development partners need (1) information available through internet, to continue to provide technical support to (2) notification, (3) pre-arrival processing, (4) strengthen the institutional capacity and electronic payment, (5) authorized operators, (6) leadership of trade-related agencies, particularly perishable goods, (7) border agency cooperation, in Customs reforms. Diagnostic trade integration (8) single window, and (9) transit. These nine study and knowledge sharing of best practices measures are the areas that Cambodia need from different parts of the world should be international assistance for capacity building and expanded. Public-private dialogue on trade institutional reforms. facilitation needs to be encouraged in order to Cambodia is already the beneficiary of technical better develop policy reforms and design inclusive assistance and support from different donors. and holistic solutions. One of the latest flagship project is the ARISE+ Cambodia has worked closely with development project, which will focus on trade facilitation partners such as the World Bank, ADB, UNCTAD, issues under the WTO TFA and Cambodia’s ASEAN WTO, GIZ and JICA to improve the capacity commitments with the aim to strengthen intra- of trade-related government agencies. Trade ASEAN trade and investment. The project has liberalization and facilitation have been the key started in January 2019 and will run until June areas of focus. In terms of implementing WTO TFA, 2023. The ARISE+ project has identified work as of November 2018, Cambodia has notified 60.9 streams under three components as shown in percent under Category A, 19.3 percent under Table 20: Table 20: ARISE+ Work Streams 2: Strengthening Institutional 3: Enhancing Private Sector 1: Improving Customs, Trade Capacities and Improving Engagement, Notably of SMEs, Facilitation and Standards Regulatory Practices and Better Preparedness for AEC 1.1. Cambodia National Single 2.1. Capacity Building / 3.1 SME Export Development Window (CNSW) Institutional Strengthening 1.2. Authorised Economic 2.2. Trade and Investment 3.2 Trade Information Operators Statistics 2.3 Coordination of Trade 1.3. Pre-arrival processing 3.3 Trade Advocacy Facilitation Implementation 1.4. Product Risk Management in 2.4. Transparency and Clarity of Camcontrol Legislation and Policies Source: GIZ Cambodia needs to overcome these 4 structural and transparency of trade-related government constraints in order to implement trade agencies, strengthen capacity of both public facilitation more effectively. Some specific sector and private sector on trade-related issue, policy recommendations include to accelerate develop feedback system especially to receive the establishment of the National Committee complains and record obstacles, and monitor and on Trade Facilitation in order to coordinate improve the trading environment. trade-related policy, facilitate intra- and inter- agency collaborations, enhance accountability 117 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT In order to monitor the implementation of the The foundation for this M&E framework is based WTO TFA and all trade facilitation efforts, it is upon the Wold Customs Organisation Revised proposed that the soon to be established NTFC Kyoto Convention (WCO RKC) Convention which and/or the relevant agency at the Ministry of is also known as The International Convention on Commerce develop a Monitoring and Evaluation the Simplification and Harmonization of Customs (M&E) framework for the implementation of the procedures. Figure 10 hereunder provides the WTO TFA. This is something that can be done very linkages between the WTO TFA and the WCO RKC. quickly and used to assess progress made in terms of trade facilitation. Figure 10: WTO TFA linkages with WCO RKC WTO TFA WCO RCK Section I General Annex

Art. 1 Publication and availability of Chapter 1 General Principles information Chapter 3 Clearance and Other Customs

Art. 2 Consultation Formalities

Art. 3 Advance ruling Chapter 4 Duties and Taxes

Art. 4 Procedures for appeal or review Chapter 5 Security

Art. 5 Other measures for transparency Chapter 6 Customs Control

Art. 6 Disciplines on fees and charges Chapter 7 Application of Information penalties Technology

Art. 7 Release and Clearance of Goods Chapter 8 Relationship between the Customs

Art. 8 Border agency cooperation and Third Parties

Art. 9 Movement of goods intended for Chapter 9 Information, Decision and Rulings import Supplies by the Customs

Art. 10 Formalities Chapter 10 Appeals in Customs matters

Art. 11 Freedom of transit Special Annexes

Art. 12 Customs Cooperation A Chapter 1 (Formalities prior to the lodgement of the goods declaration) C Chapter 1 (Outright exportation) E Chapter 1, 2 (Customs transit/ Transhipment) F Chapter 1, 2, 3 (Inward and Outward processing/Drawback) G Chapter 1 (Temporary admission) H Chapter 1 (Customs offences) Source: The Author 118 Chapter 4 The WCO RKC has introduced a number of measure the successful implementation of the qualitative and quantitative key performance WTO TFA in Cambodia and results should be indicators (KPIs) that are used in monitoring the collected on a yearly basis for public dissemination. implementation of this international convention. This should be seen as a short term high ranking KPIs currently do not exist for the monitoring of the priority that could immediately be implemented WTO TFA and using the one proposed in the WCO with minimal resources. The benefit of using this RKC will enable harmonisation, standardisation M&E framework will support related agencies and simplification of the M&E framework for in the implementation of their respective trade trade facilitation. Table 21 hereunder provides facilitation action plans. a comprehensive list of indicators needed to Table 21: Proposed indicators for WTO TFA implementation monitoring WTO TFA Performance Indicator

Article 1: Yes/No Question Publication (to promptly • Do you publish Customs Laws regulations, procedures (including all publish information associated regulatory documents), fee and charges imposed prior to regarding Customs implementation? procedures and fees Quantitative indicators and charges, in a non- • % of information stipulated in Article 1.1 of TFA publicly available discriminatory and easily • No. of visits to the Webpage accessible manner) Information Available Yes/No Question Through Internet • Do you make available on the internet information on importation, exportation, transit and appeal procedures (including all associated regulatory documents), fees and charges? Quantitative indicators • % of information stipulated in Article 1.1 of the TFA publicly available on the internet • No. of visits to the Webpage Enquiry Points (establish Yes/No Question or maintain one or more • Do you have one or more enquiry points to answer enquiries of interested enquiry points to provide parties? answers, forms and Quantitative indicators document in a reasonable • Average times between receipt of enquires and issuance of answers time period) • No. of answers issued per year Notification (of the official place(s) where information has been published. The URLs of websites publishing information) 119 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT

Article 2 Yes/No Question 2.1 Opportunity to • Do you provide opportunities and reasonable time periods to traders to Comment and comment on the introduction or amendment of laws and regulations? Information before Entry Quantitative indicators into Force • Time periods for traders to make comments on laws and regulations • No. of cases involving the introduction or amendment of laws and regulations which were subject to prior consultation with traders • No. of comments received per year

Article 2 Yes/No Question 2.2 Consultations • Do you have a formal consultative committee/meeting with business? Quantitative indicators • No. of formal consultative meetings with business per year

Article 3 : Advance 1. Classifications Rulings Yes/No Question • Do you have an advance ruling system on tariff classification? Quantitative indicators • No. of written advance rulings issued per year 2. Non-preferential Rules of Origin Yes/No Question • Do you have an advance ruling system on non-preferential rules of origin? Quantitative indicators • No. of written advance rulings issued per year 3. Valuation Yes/No Question • Do you have an advance ruling system on Customs valuation? Quantitative indicators • No. of written advance rulings issued per year

Article 4: Procedures for Yes/No Question appeal or review • Do you have administrative appeal or review procedures, before judicial procedures are used? Quantitative indicators • No. of administrative appeals or reviews filed per year

Article 5: Yes/No Question 5.1 notification for • Do you have a system of issuing notifications or guidance for enhancing enhanced control or the level of controls at the border? inspections Quantitative indicators • No. of notifications or guidance issued per year 120 Chapter 4 1.2 Detention Yes/No Question • Do you inform the carrier or importer of the detention of goods declared for importation? Quantitative indicators • Average times between detentions and notifications 5.3 Test Procedures Yes/No Question • Do you grant an opportunity for a second test? Quantitative indicators • No. of second tests conducted per year

Article 6: Yes/No Question 6.1 General Disciplines • Do you review fees and charges periodically? on Fees and Charges Quantitative indicators imposed on or in • Average cycle of the review connection with importation and Exportation 6.2 Specific Disciplines Yes/No Question on Fees and Charges • Do you limit fees and charges to the approximate cost of services rendered? imposed on or in Quantitative indicators connection with • No. of kinds of fees and charges limited to the cost of services rendered, importation and which are collected by the Customs administration Exportation 6.3 Penalty Disciplines Yes/No Question • Does your Customs administration have the legal authority to impose penalties for a breach of Customs laws and regulations? • Do you have legislation that encourages voluntary disclosure? Quantitative indicators • No. of cases involving penalties imposed by the Customs administration per year • No. of cases involving voluntary disclosure per year

Article 7: Yes/No Question 7.1 Pre-arrival Processing • Do you allow the submission of Customs import declarations prior to the arrival of goods? Quantitative indicators • % of pre-arrival declarations relative to all Customs import declarations 7.2 Electronic Payment Yes/No Question • Do you have a system and procedures to allow the electronic payment of duties? Quantitative indicators • % of electronic payment relative to the total amount of duties collected 121 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 7.3 Separation of Release Yes/No Question from Final Determination • Do you adopt or maintain procedures allowing the release of goods prior to of Customs Duties, Taxes, the payment of duties? Fees and Charges Quantitative indicators • % of Customs import declarations permitted for release of goods prior to the payment of duties, relative to all Customs import declarations 7.4 Risk Management Yes/No Question • Do you adopt or maintain a risk management system for Customs control? Quantitative indicators • % of Customs import declarations directed for documentary examination • % of Customs import declarations directed for physical inspections 7.5 Post-clearance Audit Yes/No Question • Do you have a post-clearance audit system? • Quantitative indicators • No. of post-clearance audits conducted per year 7.6 Establishment and Yes/No Question Publication of Average • Do you conduct Time Release Studies (TRS)? Release Times Quantitative indicators • ort/export/transit 7.7 Trade Facilitation Yes/No Question Measures for Authorized • Do you adopt or maintain an AEO programme/compliance programmes? Operators Quantitative indicators • No. of companies joining your AEO programme/compliance programme 7.8 Expedited Shipments Yes/No Question • Do you adopt or maintain procedures allowing for expedited release of goods under Article 8.2 of the ATF123? Quantitative indicators • No. of Customs import declarations subject to respective procedures under

Article 8.2 of the ATF per year 7.9 Perishable Goods Yes/No Question • Do you give priority to perishable goods when scheduling examinations? Quantitative indicators • No. of Customs import declarations of perishable goods prioritized in examinations

Article 8: Yes/No Question Border agency • Do you have regular meetings with CBRAs (Cross-Border Regulatory cooperation Agencies) to coordinate their activities to facilitate trade? Quantitative indicators • % of CBRAs involved in the joint meetings 123 Agreement on Trade Facilitation i.e. WTO TFA 122 Chapter 4

Article 9: Yes/No Question Movement of goods • Do you allow goods intended for import to be moved under Customs intended for import control from a Customs office of entry to another Customs office? under customs control Quantitative indicators • No. of cases involving the movement of goods under Customs control intended for import, per year

Article 10: Yes/No Question 10.1 Formalities • Do you review formalities and documentation requirements regularly? and Documentation Quantitative indicators Requirements • Average cycle of the review • No. of formalities and documentation requirements 10.2 Acceptance of Yes/No Question Copies • Do you accept electronic copies of supporting documents? Quantitative indicators • % of kinds of supporting documents that can be submitted by electronic means in terms of total kinds of supporting documents 10.3 Use of International Yes/No Question Standards • Do you use the WCO Data Model for identifying and describing information required in Customs import/export/transit declarations? Quantitative indicators • % of data elements in Customs import/export/transit declarations conforming to the WCO Data Model 10.4 Single Window Yes/No Question • Do you have a Single Window system? Quantitative indicators • No. of business processes or services involved in your Single Window system 10.5 Pre-shipment Yes/No Question Inspection • Do you require the use of pre-shipment inspection in relation to tariff classification and customs valuation? Quantitative indicators • No. of Customs import declarations subject to pre-shipment inspection per year 10.6 Use of Customs Yes/No Question Brokers • Does your Customs legislation allow any persons having the right to dispose of the goods to lodge Customs declarations? Quantitative indicators • % of Customs import declarations lodged by persons other than Customs brokers 10.7 Common Border Yes/No Question Procedures and Uniform • Do you apply common Customs procedures and uniform documentation Documentation requirements throughout your Customs territory? Requirements 123 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 10.8 Rejected Goods Yes/No Question • Do you allow the importer to return the rejected goods to the exporter or another person designated by the exporter? Quantitative indicators • No. of cases involving returns to the exporter or another person designated by the exporter per year 10.9.1 Temporary Yes/No Question Admission of Goods • Do you allow goods which are intended for re-exportation within a specific period to be brought into your Customs territory without requiring the payment of duties? Quantitative indicators • No. of temporary admission procedures per year 10.9.2 Inward and Yes/No Question Outward Processing • Do you allow inward and outward processing? Quantitative indicators • No. of cases involving inward and outward processing per year

Article 11: Yes/No Question Freedom of transit • Do you have transit procedures which allow the movement of goods within your Customs territory without requiring the payment of duties? Quantitative indicators • No. of transit entry declarations per year

Article 12: Yes/No Question Customs Cooperation • Do you have legislation to allow your Customs administration to provide information on import or export declarations to foreign Customs administrations? • Do you have legislation to protect information provided by foreign Customs administrations? Quantitative indicators • No. of cases involving provision of information on request from foreign Customs administrations per year • No. of cases involving the use of information provided by foreign Customs administrations at judicial or criminal proceedings per year Source: Adapted by Author There is a need to establish an initial baseline baseline will also enable the confirmation of the based on Table 21. The result from the baseline can various category A submitted to WTO that they are be used to identify gaps in the implementation of already in place and fully functioning. An annual the WTO TFA as it will highlight articles where no survey based on this Table 21 would initially be actions have been taken. It can also help further sufficient to help support the monitoring of trade crystalize the Category C which requires technical facilitation efforts in Cambodia. assistance from development partners. This 124 There is a need to first define trade logistics as logistics does not fall under the jurisdiction of any specific agency as it is a cross-agency issue. According to the Global Facilitation Partnership for Transportation and Trade (GFPTT), trade logistics124 are those actions that can be taken by countries to change the import/ export process and optimize supply chains without a significant commitment of additional government CHAPTER 5 human and financial resources. In order to optimise the logistics of supply chains, governments will need to address the transparency of rules and regulations, TRADE LOGISTICS efficiency of the document and clearance process, and predictability in the application of those rules DEVELOPMENT and regulations by the appropriate authorities and intermediaries in line with trade facilitation principles. Many of these points can be implemented by using government officials to institute policy changes 1. Introduction without financial outlays. Some recommendations do require funding but can be covered by user fees, Enhanced transport connectivity, inside savings from those policy changes, or re-allocation Cambodia and within ASEAN, is required for the country to sustain economic growth and integrate of existing resources. production networks that will enhance intra- Logistics is difficult to define because it is a constantly regional trade. It is therefore necessary to upgrade evolving concept. Logistics no longer concerns the country’s transport and logistics infrastructure. only the handling of materials or transportation of Improved transport and logistics infrastructure materials; it has grown in scope to encompass a set will strengthened the overland linkages with of activities that facilitate economic transactions neighbouring countries and enhance the mobility associated with production and trade. These of people, goods and services within the country. include customer service and support; demand Logistics development is a key policy issue that forecasting and planning; facilities site selection, contributes to the country’s growth through warehousing, and storage; inventory management; productivity improvement and the competitiveness logistics communication and order processing; of its logistics sector. The establishment of the material handling and packaging; reverse logistics, ASEAN Economic Community (AEC) has enhanced sourcing; and transportation. regional connectivity through increased trade, investment, and tourism with the establishment of Logistics play a key role in national and regional a single market and production base in the region. economies in two ways. First, it is one of the major expenditures for businesses, thereby affecting Cambodia has gradually improved its transport and being affected by other economic activities. and logistics infrastructure to establish efficient Second, it supports the movement of a multitude and effective connectivity to facilitate industrial of economic transactions; it is an important aspect relocations from neighbouring countries and of facilitating the sale of all goods and services. China. Cambodia is geographically well-suited to be an important logistics hub for Southeast Asia Logistics is not just confined within national as the country is part of existing global supply borders or markets because within each country chains networks that involves various countries or region there are export and import firms in the region through a vast regional transport that face specific logistics attributes that may be network already in place. different from those experienced in the domestic 124 https://gfptt.org/node/79 (accessed January 6, 2019) 125 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT market. In an international logistics system, many This chapter describes the current logistics state agencies and in particular customs agencies development in the country, with a view to provide play a very important role in the efficiency of insights into its future development and provide the international logistics system. There is also a policy recommendations from a trade logistics heavy reliance on specialized service providers, perspective. The current logistics development such as freight forwarders or customs brokers that section will provide an overview of the existing can facilitate the flows of goods across borders. logistics related infrastructure. The main difference between domestic and international logistics is the environment in which 2. Current logistics related the logistics system operates. Trade logistics from a infrastructure125 policy perspective is much more than just transport Road network development in Cambodia has infrastructure development. A holistic approach contributed to the growth of the national transport that addresses the requirements of traders’ needs, sector and has provided the country with linkages service providers’ expertise, infrastructure capacity, to neighbouring countries as well as improved and institutional framework is needed in order to national distribution. Efforts to rehabilitate and develop trade logistics policies. upgrade the road network started in the 1990s with various international donors contributing A national or a regional logistics system is composed to its development. Presently, both national of (1) shippers, traders, and consignees; (2) public, highways and secondary roads has undergone private sector logistics service providers; (3) major repairs and substantial improvements. provincial and national institutions, policies, and rules; and (4) transport and communications Maritime and inland waterway networks have infrastructure. Figure 11 shows how these four been developed over time at significant cost and components combine to determine the performance currently offer relatively good connectivity to of each part of the macro-logistics system in terms of regional markets. Sihanoukville Port and Phnom cost efficiency, responsiveness, reliability, and Penh Port function well and expansion projects security. These 3 performance indicators reflect both are planned as warranted by expected increases in on the level of integration of the logistics system and demand. The railway network, consisting of only logistics services capability within a country. The two lines, is partially operational for the Southern sum of these factors determines the competitiveness lane, with a gradual increase in capacity. of Cambodia’s logistics system 2.1. Road Network Development Figure 11: Logistics System Components Cambodia’s road network covers almost 40,000 km of paved and unpaved roads, consisting of just over 5,000 km of national and international roads Infrastructure (both 1-Digit and 2-Digits). There is under 6,200 km of provincial roads and approximately 28,000 km of rural or tertiary roads126. The Ministry of Public Service Logistics Institutional Providers System Framework Works and Transport (MPWT) has developed a country-driven action road maintenance and operation programme to protect its road assets. Shippers/ Priority maintenance works are comprised of Consignees routine, periodic and emergency maintenance. Source: The Author Cambodia’s road network development is based on connecting major growth centres 125 This section is adapted from the Cambodian Transport and Logistics Master Plan prepared under the supervision of the General Department of Logistics, Ministry of Public Works and Transport (MPWT). 126 According to the government agency responsible for the construction and maintenance, administrative road classification is categorized into National Road (1-Digit Road & 2-Digit Road), Provincial Road (3 and 4-Digit Road) and Rural/Tertiary. 126 Chapter 5 nationwide with a radial road network system. through arterial road axes (NR 1 to NR 7). Isolated Cambodia has selected 6 regions (Phnom Penh, provinces are connected to arterial axes with sub- Sihanoukville, Battambang, Siem Reap, Stung axes to facilitate balanced development. Figure Treng, and Kampong Cham) as the major hubs 12 provides an overview of the road network in for economic growth. Phnom Penh, as the capital, Cambodia. is the centre of this network and is connected Figure 12: Road Infrastructure Source: After Effective and Sustainable Road and Bridge Maintenance, Road Related Infrastructure Sub-Technical Working Group, 27 July 2017. The major arterial road network includes the was inaugurated and operationalised since April Greater Mekong Sub-region’s (GMS) Southern 2015. Corridor, the GMS Interlink Sub-corridor (including The newly built ring-road around Phnom Penh is the Phnom Penh-Sihanoukville corridor), and in relatively good conditions, well maintained and the GMS Southern Coastal Sub-corridor. Notable is expected to support logistic in the country as progress has been made on the ASEAN Highway freight trucks are permitted to use the road during Network (AHN), which aims to establish efficient, daytime with other types of vehicles no longer integrated, and safe regional land transport needing to pass through Phnom Penh to move corridors linking all ASEAN Member States and to other regions. This will relieve the overall traffic neighbouring countries. The Neak Loeung Bridge congestion in Phnom Penh. 127 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT The overall conditions of the 1-Digit roads are The Southern line connects Phnom Penh and considered fair127. NR1, which connects Phnom Cambodia’s International port, Sihanoukville. Penh to Vietnam, is currently under expansion to Basic rehabilitation of the Southern Line has been respond to higher levels of passenger traffic and completed and it is currently in operation, but it freight logistics demand. The conditions of NR2 is not operating at an efficient level as supporting and NR3, which serve as primary roads linking infrastructure is still missing such as automatic Kandal and Takeo provinces to Phnom Penh, are signals, electric level crossings, and additional also good. These routes are primarily populated sidings/stations, etc. Containers and the railroad by passenger bus transportation. NR5, connects terminal of Sihanoukville have been rebuilt and Phnom Penh to Thailand’s frontier region of the bulk processing facilities at Sihanoukville has Battambang and Banteay Meanchey provinces, been renovated as well. Although there are several which handles most of the freight logistics daily trains, the volumes by rail are still low, around between Thailand and Cambodia through heavy 3,000-4,000 containers per month are transported usage of trucks and containers. to and from the seaport, and the market share is less than 20% along that corridor. The majority of 2.2. Railroad freight transport still goes by truck, this is the case Cambodia’s railway system consists of two main single- for containers, but also for other cargo like fuel. track lines which is about 640 km long. The Northern The railway is operated by the Royal Railways of line is 386km and the Southern line is 264km, but Cambodia (“RRC”). In June 2009, the Government currently only the Southern line is now in operation. made a major step to restructure this organisation The Northern line connects Cambodia’s capital with a view to making it more responsive to the city of Phnom Penh and Thailand’s Aranyaprathet, demand of a competitive transport market. A consisting of a recently repaired railroad portion of 48 Cambodia Railroad Development Plan was km between Sisophon and Poipet. The Northern line’s prepared in 2013 to promote integrated national suffers from approximately 200 km in damages and development and balanced development among currently most of the existing facilities have stopped regions, comprising of 8 local routes, a high- operating due to either physical damages o lack of speed route, an industrial railroad, and a lead-in maintenance. The government is currently allocating railroad128. This is illustrated in Figure 13 and 14. budget and seeking new funding in order to restart the railroad operations on the Northern lane. 127 5 types of roads based on the width and pavement type of the road: 1) Primary: Separated from motorcycle roads / Asphalt or concrete pavement; 2) Class I: Highway of over 4 lanes/Asphalt or concrete pavement; 3) Class II: Roads consisting of more than 2 lanes/Asphalt or concrete pavement; and 4) Class III: Narrow road of 2 lanes/DBST pavement. 128 The Cambodia Railroad Development Plan was prepared with the assistance of KOICA. 128 Chapter 5 Figure 13: Map of the Northern and Southern Railways Lines Sources: (i) Railway Department, Ministry of Public Works and Transport, The Current Situation and Future Development Plan of Railway Network in Cambodia, March 2017 Figure 14: Longer-term Railway Plan Source: Railways Department, Ministry of Public Works and Transport, presentation to Land Transport Sub-TWG Meeting, 28 July 2017 129 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 2.3. Inland Waterways and Ports Vietnam. The throughput of PPAP is currently about 1 million tons, of which about 60% is Domestic river transport in Cambodia is still accounted for by fuel imports and about 40% by relatively limited, with passengers having the containerised general cargo. Due to the increase in most important share. River transport along the freight volume, the Government has established Mekong River in Cambodia involves both inland a New Container Terminal with an initial capacity barge traffic and seagoing shipping. The main of 120,000 TEU and an expected total capacity of traffic is dedicated to inland shipping for the 300,000 TEUs per year located 25km downstream domestic market and cross-border trade with from Phnom Penh. The first stage of the port was Vietnam. Domestic river transport is expected to completed in December of 2012. There is a total increase in the future with rice exports steadily of 3 construction stages and the port is currently rising. Because of the bilateral navigation continuing its development. agreement between Vietnam and Cambodia, the introduction of foreign barges into each other’s 2.3.2. Sea Port: Sihanoukville Port territories is set to increase. At present, among the ports in Cambodia, Inland waterways in Cambodia is estimated to be only Sihanoukville Autonomous Port (“PAS”) 1,750 km long but vessels can only operate on 580 and Phnom Penh Port handle about 85% of km of existing inland waterways. The Mekong River international container traffic. Other smaller makes up 30% and is the main inland waterway. coastal or river ports are crucial to the growth of The Tonle Sap River and the Bassac River makes regional trade, such as Koh Kong port, Sre Ambel up 15% and 5% respectively, and all other rivers Port, Steung Hav Port and Kampot Port but their handle the remaining 50% of the traffic. In the volume is still limited. 102km stretch of the inland waterway between Because of draft restrictions and the relatively Phnom Penh and the border of Cambodia and low cargo volume, PAS caters to feeder ships from Vietnam, vessels that are longer than 110 metres Singapore. Import and export cargo is shipped are not permitted to pass. Certain sections of through PAS using smaller feeder vessels that haul inland waterways in Cambodia have limited draft cargo to Singapore, Malaysia, and Hong Kong for depths which restrict vessels’ size. The Mekong transhipment to final destination. It also handles River can only be used during the daytime due to oil tankers and other general cargo vessels from the absence of navigational lights. Vessels larger Thailand, Malaysia, and around the region. The than 20 DWT cannot operate on the Kratie and biggest traffic types by tonnage are containers Stung Treng sections which are very shallow. The (45%), cement (32%), and oil products (18%). rest of the inland waterway network are limited to The throughput capacity of PAS, in its present ships that weigh equal to or less than 100 DWT. condition, is estimated at about 3 million tons per There are 7 inland ports in Cambodia, Kampon year, excluding oil and gas which has separate Chnang, Kampon Cham, Stung Treng, Kratie, facilities. PAS can accommodate up to 20,000 DWT Battambang, Siem Reap, and Phnom Penh. vessels. Sihanoukville Port has also established 2.3.1. River Port: Phnom Penh Port a Special Economic Zone to support hinterland economic activities. The Phnom Penh Autonomous Port (“PPAP”) is the country’s main river port, accessible to vessels 3. Institutional framework for from the South China Sea through Vietnam. The logistics129 port is located on the Tonle Sap River about three This section assesses the legal and regulatory to four km from its junction with the Mekong, framework for the logistics in Cambodia and makes some 348 km from the mouth of the Mekong some recommendations for improvement. The of which 102 km is in Cambodia and the rest in 129 This section has been adapted from the draft Assessment of Legal and Regulatory Framework for the Logistics Sector in Cambodia : Background Paper on Review, Diagnosis and Priorities for Reform by the World Bank (2018) 130 Chapter 5 initial assessment is that Cambodia’s regulatory the legal status of Cambodian multimodal regime for logistics needs to be modernized transport operators. In addition, even though and to close large and inconsistent gaps in laws Cambodia ratified the GMS Cross Border Transport and regulations by adopting international good Agreement (CBTA), it has not implemented all the practices and standards. annexes and protocols to the Agreement. This has constrained the full implementation of the Logistics and transport services in Cambodia Agreement. currently operate under numerous decrees, sub- decrees and regulations, orders and guidelines Cambodia does not have land transport law but but not all activities in the sector are covered. has it in preparation like many other laws related Cambodia does not have a law on land transport to transport and logistics. Some general transport but it has partial coverage of some aspects of issues are being regulated in the existing road law road transport mainly under a road law and land and land traffic law. These include registration for traffic law. Other transport modes, railway, port obtaining an operator’s license and overloading and maritime transport and inland waterway are of trucks as they directly affect road infrastructure presently not covered by any primary legislation. and traffic safety. Access to the road transport However, the Government has drafted laws market and access to the profession of road for these sectors though they are still to be transport operator as well as truck or bus driver enacted. In fact, the process of enacting new is not really regulated in Cambodia. Often legislation seems to face long delays in part due registration and fulfilling the administrative to limited capacity of the lead agencies as well as a requirements are sufficient to obtain an operator’s seemingly convoluted bureaucratic process. That license for carrying out road transport services. said, the Government is keen to make progress Professional drivers only need a driver’s license and is actively driving the process of enacting the and are often able to obtain such license without new legislations. driving lessons and examination. In addition to incomplete coverage, Cambodia’s Railway transport in Cambodia operates under regulatory framework for logistics does not a regulatory regime from some secondary fully conform to regional commitments and is legislations which often lack important provisions, inconsistent with international good practices. especially those relating to safety. The only railway Regional, international conventions and operator, the Royal Railway Company, has to deal agreements on transport and logistics are partially with several government agencies among them translated into national laws and regulations. the Port Authority, Customs and Camcontrol130 Some of the international conventions that can and to follow and comply with their guidelines and help fill the regulatory gaps relate to safety and regulations on different aspects of its operations. handling of hazardous materials. In the field of international railway transport, the transport of dangerous goods is mostly regulated Cambodia is a signatory to the 2005 ASEAN under Regulation for the International Carriage Framework Agreement on Multimodal Transport of Dangerous Goods by Rail (RID), under the but has not yet transposed this Agreement into its guidance of OTIF (International Organization for national legal framework, which means that the International Carriage by Rail). Although rail traffic country is still not compliant with the Agreement. in Cambodia is purely domestic, and OTIF and RID Currently, Cambodia does not have a system to relate to international carriage, in many countries authorize and recognize operators registered RID also applies to national traffic. This is also in other ASEAN member states, its multimodal recommended for Cambodia. transport operators are also not recognized by other member countries. Implementation of Cambodia has drafted but not yet finalized this Agreement is important as it will strengthen important basic laws that govern port, maritime 130 Prior to January 29, 2019 131 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT transport and inland waterway transport. The Draft Law on Maritime Transport provides Currently, these transport modes and facilities are the legal and institutional framework for being guided by secondary legislations such as administration and management of maritime royal decrees, sub-decree, ministerial regulations, transport and defines general principles on standards and procedures. By recognizing the governance structure for development, the requirement of basic primary legislations administration and management of maritime that should conform and be compliant with affairs. Each chapter in the law addresses key international conventions and that serve international conventions such as SOLAS131 and as a framework for transport and logistics MARPOL132. The general provisions describe development, three draft laws were prepared and the objectives, among other the safety of ships, are pending to be proposed for finalization and the environment, maritime operations and adoption. These include (i) Draft Port Law, (ii) Draft commerce, development of the sector, labour Law on Maritime Transport; and (iii) Draft Law on force, followed by marine area and exclusive Inland Waterway Transport. These draft laws were economic zone of the Kingdom of Cambodia. reviewed and their contents appear to include Respective chapters deal with ship registration, basic conformity and principles of international business licenses for shipping companies (to be conventions, good practices and standards. issued by MPWT), crew requirements, safety of ships, safety and environment, navigation and The Draft Port Law contains provisions that entry permits, inspection and control of vessels, conform to international good practice and investigations in case of incidents, shipyards and standard. It defines four classes of port categories repairs, and finally enforcement and penalties. (international, bilateral, domestic, and special The provisions are of a general nature, and not all ports such as for a specific commodity and details are included. Some of the details will need for a specific user), and the port zone. The to be further elaborated in secondary legislation. responsibilities of the port management body are described, these include amongst others port The Draft Law on Inland Waterway Transport facilities and channels, harbour master function, mainly focuses on cabotage in inland waterway port development and implementation plan, transport operations. The main purpose of the and the supervision and/or the conduct of port Draft Law is to maintain order, security and operations. The last one leaves room for third safety of inland waterway transport, to protect party and private sector involvement. It specifies human and wildlife and environment of the the principles of port dues and charges and the inland waterways. It also draws some contents requirement for publication of those, and the to prevent adverse effects to human health and possibilities of the MPWT to set these limits. damage of public and private property, and The Draft Port Law has a chapter on safety and encourage development of the inland waterway environment such as for ship generated waste, sector. This Draft Law is applicable to ships, crew, spill contingency plan, and port facility security ship owners and shipping companies, with the requirements, all in line with IMO regulations, and construction of waterways and other activities chapters on pilotage, and navigation channels. related to navigation. The Draft Law only relates Details are supposed to be included in follow up to Cambodian waters, it does not include border sub-decrees. The Port Authorities are in discussion crossing in international transport. The Draft with the MPWT on the Draft, but argue that the Law covers mainly those activities that are not main points for them in the Draft Law relate to regulated under the Draft Law on Maritime trade facilitation and safety issues. Transport. The intersection between maritime transport regulations and inland waterway transport can at times be confusing unless the 131 International Convention for the Safety of Life at Sea (SOLAS); Adoption: 1 November 1974; Entry into force: 25 May 1980 132 International Convention for the Prevention of Pollution from Ships (MARPOL); Adoption: 1973 (Convention), 1978 (1978 Protocol), 1997 (Protocol - Annex VI); Entry into force: 2 October 1983 (Annexes I and II). 132 Chapter 5 scope of respective regulations are clearly defined. Cambodia does not currently regulate freight In particular, Cambodia seeks to regulate carriage forwarding while it regulates its customs of cargo between two points in the national brokers. This is quite common across the world waterways including coastal sea water within the as most countries do not have a specific legal country by vessels registered in Cambodia and in and regulatory framework for freight forwarding another country. Like most countries, Cambodia other than having freight forwarding businesses still highly restricts the permission of foreign registered as enterprises. Some countries impose vessels to engage in cabotage. business operating license issued by public work and transport agencies but such imposition often Cambodia does not have a national legal brings about administrative frustrations rather framework for multimodal transport though it than facilitating the establishment of the freight has signed the ASEAN Framework Agreement on forwarding industry. It may not be necessary Multimodal Transport. A national legal framework for Cambodia to have a national legislation to for multimodal transport should normally cover regulate the freight forwarding business. Rather, carriage of goods by national and international if Cambodia drafts a law on multimodal transport multimodal transport contracts, which also include then that should cover freight forwarding activities provisions concerning the liability of multimodal without the need for a specific law. Customs transport operators. Cambodia and other ASEAN brokers are regulated under the Law on Customs Member States signed the ASEAN Framework and related customs regulations. However, the Agreement on Multimodal Transport on 17 capacity of customs brokers needs substantial November 2005. In the Agreement “international upgrade if they are to have a significant impact on multimodal transport” is defined as the carriage of the logistics performance of Cambodia. goods by at least two different modes of transport on the basis of a multimodal transport contract Cambodia faces capacity challenges not only in from a place in one country at which the goods coordinating across ministries to process and are taken in charge by the multimodal transport adopt new laws but also in implementing and operator to a place designated for delivery enforcing existing laws and regulations of the situated in a different country. An important transport and logistics services. In November element in this Agreement is the registration of 2017, Cambodia established a national logistics multimodal transport operators. For inclusion in steering committee and a national logistics council the register of multimodal transport operators, that aim at improving coordination between the juristic person concerned shall submit an line ministries and to act as a consultative and application to the respective competent national decision-making forum to deal with transport body and establish that he fulfils all requirements and logistics issues. While there has been some as prescribed by national law. Lack of a national progress, key challenges remain important in legal framework for multimodal transport in terms of the capacity of the MPWT to develop Cambodia has constrained its compliance with and enforce laws and regulations. Cambodia has this Agreement. This puts serious bottlenecks a lengthy process to develop primary legislation for the international and national operation of with a few reaching final stage of approval. There Cambodian multimodal transport operators. have also been limited stakeholder consultations While Cambodia does not have a system to in drafting legislations and regulations to which authorize and recognize operators registered in important feedbacks and opinions of the private other member states, its operators are also not sector were reported to be excluded from the recognized by any of other Member Countries. final legal text of laws and regulations. The MPWT Having a national legal framework for multimodal still needs to improve its capacity to monitor the transport operators would help address this implementation of laws and regulations and their constraint. impact. 133 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT The challenge is that logistics is not under accessibility of regulations (2.8/7). Efficiency and the jurisdiction of one ministry and more effectiveness of policy and rules implementation consultations and coordination are needed to also lag regional averages. Irregular payments clarify the institutional environment for logistics and informal fees remain a serious issue in in the country. The risk of overlaps, especially obtaining permits, certification and inspections with trade facilitation issues, are always present as for industry traders and service providers. Despite there can be no trade without logistics. The MoC huge investments in customs modernization and has an interest in logistics matters but currently automation, the burden of customs procedures the establishment of the General Department of remains high for traders and services providers. Logistics (GDL) has given MPWT a leading role There is limited data available to monitor the in logistics development in Cambodia with the performance of logistics service providers, formulation of a logistics master plan for the shippers and consignees. In general, the logistics country. system of Cambodia is perceived as archaic, 4. Current logistics performance of inefficient, ineffective and costly to users. The Cambodia133 available macro-level data are not detailed enough allow the assessment of the actual logistics Cambodia faces serious challenges in logistics services of a country. There is therefore need to performance with indications that costs are higher establish a baseline on the logistics performance and the quality of its logistics services lower than of manufacturing firms and service operators in other regional peers. Establishing an accurate Cambodian. picture of the logistics performance is hampered by a lack of a readily data to monitor logistics in the Measuring the performance of a logistics system country. Cambodia has leveraged integration into from the user perspective offers valuable insights. the global marketplace with continuous growth in The users of logistics in a country are the exporters, trade volumes, there is a much stronger need for the importers, the manufacturers and the traders. establishing a proper monitoring and evaluation A monitoring framework with key performance system to support transport and logistics strategic indicators (KPIs) is designed to keep track of planning, evidence-based policy making, and the the actual logistics performance in the country. implementation of policies related to logistics. These KPIs focus on the actual logistics capability Monitoring and evaluation are integral parts of of both users of logistics services and logistics policy development within logistics. Monitoring service providers covering three performance focuses on the activities and outputs, evaluation dimensions: logistics cost, time and reliability. focuses on the outcome and goals through a set However, obtaining data on these parameters of appropriate indicators. of performance often requires surveys, (i) of manufacturers and other generators of demand Based on the available data, Cambodia has and (ii) of freight forwarder and logistics service made some progress in improving logistics providers. performance. For instance, data from the 2017- 2018 World Economic Forum Report point to The results of a survey conducted for the improvements in the quality of road transport background study on the Monitoring and infrastructure (scored at 3.2 in a scale from 1 to 7), Evaluation (M&E) framework in 2017 confirmed port infrastructure and air transport infrastructure that Cambodia suffers from significantly higher (3.7/7) but also little improvement in the quality logistics cost over sales when compared to of railroad transport (1.6/7). The performance Vietnam and Thailand. Cambodia’s logistics cost of institutional and policy dimension remains over sales is estimated at 20.52 percent, higher relatively poor, especially in terms of a legal than Thailand (11.1 percent) and Vietnam (16.3 framework for resolving disputes (2.9/7) and percent). In ASEAN, Thailand has the lowest 133 The World Bank prepared three background studies as inputs for the Cambodia Logistics Master Plan development led by the Royal Government of Cambodia (RGC) in 2017-2018. This section is derived from the Monitoring and Evaluation Framework background study. 134 Chapter 5 logistics cost over sales while the Philippines has operators to which services operators would the highest logistics cost at more than 27 percent. absorb all informal payments in their final prices It is possible that the archipelagic nature of the presented in the service contracts. Philippines negatively impact logistics cost as Reliability is the most important concern for logistics activities tend to be more expensive export-oriented manufacturers in Cambodia. in islands countries. Logistics cost over sales is Among time, cost and reliability, 38% of defined to have four components: (i) transport manufacturers identified reliability as their cost over sales, (ii) warehousing cost over sales, primary concern. Limited reliability in a national (iii) inventory carrying cost over sales, (iv) logistics logistics system negatively impacts the overall administration cost over sales. In 2017, the value performance of logistics of the country. Poor of logistics cost in Cambodia was be estimated at reliability forces manufacturers, producers and US$1.96 billions of its total exports. traders in the country to carry more inventory. Transport costs are the highest component of The higher the inventory level, the higher the logistics costs followed by inventory carrying cost. tied-up capital cost thus affecting the overall Transport and warehousing cost in Cambodia is logistics cost in the country. As such, reliability has even higher than in Indonesia. This means that to be given priority when policies are designed to reducing logistics cost in the Cambodia is not just improve logistics performance. If reliability is not an issue of reducing transport cost. The high cost improved, then cost issues cannot yet be given of inventory is a by-product of limited reliability priority in the country. At the end of the day, high in the logistics system in Cambodia. Another key costs tend to be further transferred back to either issue is that logistics cost is driven by the sector customers or suppliers. In improving logistics, cost in which the responding firm operates. Firms that is still an important dimension but the level of cost operate in high-value sectors will often have lower will be highly affected by the obtained reliability. logistics cost/sales when compared with firms in Cambodia is performing relatively well in cash lower value sectors. conversion cycle (C2C) and delivery in full on The survey also confirmed that informal charges time (DIFOT). A comparison of these KPIs against levied by government agencies remain significant. selected ASEAN countries shows that Cambodia’s Informal charges were estimated at about 48 cash conversion cycle (C2C) is shorter when percent of the logistics administration cost or compared to other countries. It is possible that represent about 4.38 percent of total annual because the country is still a cash economy logistics costs in 2017. A decomposition of these where payment is often made upon delivery of informal charges has been attempted to improve goods and services thus shortening cash flows. understanding of informal payments as a burden The country’s DIFOT capability is slightly better to the trading community. These informal charges than Indonesia. However, it is still one of the key were confirmed by industry stakeholders and weakness of the Cambodian logistics system. logistic services providers and operators. Based The DIFOT level for automotive is the highest in on this estimate, the informal charges in Cambodia Cambodia. This is probably due to the nature was therefore estimated at US$ 85,720,800 per year. of the automotive industry where just-in-time practices are the norm. It is also interesting to Among others, trucking costs are competitive notice that the textile and garment sector has a when compared to neighbouring countries. relatively low DIFOT level when compared with Local freight-forwarders, however, have allegedly Indonesia and Thailand but higher than Vietnam. consolidated opaque practices whereby they This is interesting as this sector is still relatively produce formal invoices to cover the informal competitive when compared to Vietnam even costs incurred when clearing goods at the border. though there is not much difference in terms The informal costs are often hidden in lump-sum logistics costs/sales. service contracts between industry and services 135 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 5. Cambodia logistics master plan (iv) To enhance competition in logistics through high quality, diversified and Consistent with the vision of the Royal Government efficient logistics services to respond of Cambodia to become an upper-middle-income various demands; and country in 2030 and a high- income country by (v) To contribute to poverty reduction and 2050, Cambodia is envisioned as connected and contribution to the achievements of integrated in the ASEAN Economic Community. the Sustainable Development Goals by Development of the country’s industrial facilitating movement of people, goods development can generate sustainable and and services, by fostering domestic inclusive high economic growth by way of economic markets, and promoting tourism and diversification, strengthening competitiveness and rural development. promoting productivity. This will need a common (vi) To enhance the well-being and livelihood vision with a long-term and sustainable approach of Cambodian peoples through improved to transform and modernize Cambodia’s transport connectivity to economic centres within and logistics from a high cost, slow and inefficient the country and mobility for all modes of sector to an affordable, speedy and efficient transportation. industry by 2025, taking into consideration the need to link with global value chains and supporting 5.2. Objectives industrial development, promote local economic and social development, mitigating environmental To achieve the goals, the Master Plan need to set impacts, and complement national connectivity out the following objectives: with regional connectivity. The developed Transport Connectivity national logistics vision will need to address the policy options, the funding mechanisms, and (i) To identify the priority transport projects implementation arrangements. which shall be implemented within the short, medium to long term, and to identify 5.1. Goals necessary activities to properly maintain The goals of the National Transport and Logistics and manage the transport network in Master Plan are consistent with Royal Government’s Cambodia. overall economic policies and strategies, which (ii) To give high priority to the upgrading include the eradication of poverty, liberalisation of of provincial and rural roads network the economy, and decentralisation of public sector connecting to all parts of the country and responsibilities. More specifically they are aimed: with neighbouring countries and to accord high priority to their maintenance; (i) To transform the inadequate transport (iii) To develop, maintain and manage system in Cambodia into a comprehensive, well-functioning intermodal transport fully-developed and sustainable national networks, followed by a regular system of transport system to accommodate monitoring and evaluation; population and employment growth for all (iv) To place emphasis on traffic safety and by 2030; strict measures against transport offences (ii) To enhance regional integration in the including over loaded carriers; global supply chain through seamless (v) To put in place policies, strategies, transport and high connectivity in the legal and regulatory framework for an Greater Mekong Sub-region; efficient management of the transport (iii) To enhance industrial competitiveness infrastructure. through stronger production networks, optimum transport under efficient network and hubs, and modal-mix; 136 Chapter 5 Logistics 5.3. Key principles (vi) To create a comprehensive, cost effective The Master Plan is premised on the following key logistics system capable of responding to principles: the current and future economic demands; (i) Serve to accelerate the completion (vii) To drive the structural-change in the of existing transport and logistics current logistics system in three important infrastructure projects; phases: 1) debottlenecking current logistics (ii) Ensure coherence of various sectoral obstacles in the short-term; 2) reaching transport and logistics strategies, plans, global standards in the medium term, and and studies developed by MPWT and 3) activating logistics business regional development partners; hubs in the long term. (iii) Strive for balance between national transport and logistics needs and Operationalization of the Master Plan Greater Mekong sub-regional and ASEAN (viii) To establish a permanent high-quality Economic Community interests; long-term transport and logistics planning (iv) Feasible in practice with clear financial capability within MPWT, equipped to mobilisation models, including the monitor performance of the Master Plan, involvement of private sector; and prepare subsequent periodically (v) Ensure public intervention for logistics Master Plan updates. improvement needs based on: (i) (ix) To establish the principles of funding, Expansion and more variety of transport recommend appropriate funding modes; (ii) Reduction of time and cost of mechanisms and provide an estimate of logistics; and (iii) Functioning competition the required funding to implement the in logistics service providers to fully utilize projects identified in the Master Plan; the truck transport, water-based transport (x) To stimulate innovative win-win and rail transport. partnerships among the public sector, the private sector and the development 5.4. Caveat related to the master plan partners community; The proposed master plan need to stress the need (xi) To enhance the role of private sector in for inter-agency coordination as logistics issues are the implementation of the Master Plan not solely under the jurisdiction of the MPWT. The initiatives, in particular by increasing MoC is also involved in the status and role of logistics private sector participation through services firms. Since trade logistics focuses more on bidding processes in routine and periodic international logistics issues, trade facilitation and road maintenance. trade logistics will need to be combined as logistics (xii) To draw up specific timetables for realising is a derived demand of trade. the goals of the Master Plan, taking into account the different financing The foundation for this Master Plan is from requirements; and the Industrial Development Plan (IDP), which (xiii) To prepare capacity building programmes. emphasizes the transformation of the industrial structure from labour-intensive industries to technology-driven industries. To realize such transformation, the IPD emphasized four key policy measures: 1) strengthening connectivity with the global supply chain; 2) integration with the industrial network in the Mekong region; 3) formation of industrial clusters that would 137 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT enhance competitiveness and productivity; and have to be developed to sustain the growth of the 4) development of policies focusing on initiatives manufacturing sector. towards technology-driven, and knowledge-driven Logistics soft and hard infrastructure will have to be industries. adequate to support this substantial growth. Easing Currently Cambodia is still dependent on light logistics bottlenecks are important for Cambodia industries, like garments and footwear, which to sustain its competitiveness in the international rely totally on low production costs and trade market. Lowering logistics costs, increasing service preferences with developed countries. Although reliability and reducing delays is key to keep the shift of industrial structure towards more value- Cambodia’s growth story in the next 15 years. For added and skilled oriented has begun, it may take Cambodia to remain cost-competitive and diversify several more years before the transition is fully into more sophisticated manufacturing segments, completed. As such, the light industry will continue it is critical to implement reforms aiming to reduce to take a leading role in the employment generation trade logistics costs and improving trade logistics and exports during this transition period. transparency and reliability. As economic growth pulls up labour costs, Cambodia falls behind the region in most logistics the official minimum wage level has risen up indicators. High logistics cost, based on market commensurately over the years, eroding to some conditions in Cambodia only is not justifiable. extent the country’s competitiveness vis-à-vis Trucking costs in fact are very competitive when other lower wages countries like Bangladesh, they are compared to neighbouring countries. Myanmar, and even in some regions in Vietnam. Informal costs are often hidden in lump sum service To counter that effect, reducing logistics costs and contracts between industry and services operators increasing logistics reliability is indispensable for to which services operators would absorb all the survival of the light industry in Cambodia. informal payments in their final prices presented in the service contracts. As such, logistics development and industrial development are an inseparable pair for ensuring The design and implementation of a strong border inclusion in the global value chain. The logistics trade policy is an essential element to reduce sector should provide with the following values to logistics costs and support export expansion. the new manufacturing industry: In the short term, Cambodia needs to reduce 1. Lower cost and reliable time for cross-border trade logistics costs to remain competitive. transport to maintain investment value of Since informal costs appear to be included in the Cambodia; current value of logistics costs, it is urgent for the 2. Competition between transport modes; and; government to design and adopt a comprehensive 3. More choices in value-added logistics services. integrity strategy considering international good practices for border management operations 6. Conclusions & policy and to implement modern automation systems recommendations for border management and port operations by digitalizing/automating processes entailing cross- Economic growth is projected to navigate between border trade to the extent technologically feasible 6-7% depending on expansion of future exports will reduce face-to-face interaction and remove and FDI. Initial diversification from garments into informal payments. new sectors such as electronics and bicycles is helping Cambodia to climb up the value chain. The automation of border procedures beyond This trend can only be supported if effective Customs can also help to improve logistics indicators, policy measures are devised and implemented to reducing time and increasing predictability, hence address the two main bottlenecks: high electricity reducing cost to import-export goods. Investment and logistics costs. Moreover, labour skills will also in improving logistics soft and hard infrastructure 138 Chapter 5 would have to be commensurate with Cambodia’s efficiently and rely on a more consistent logistics growth ambitions. system. Logistics costs in Cambodia are higher as compared The focus of logistics outsourcing is still on traditional to other ASEAN countries such as Vietnam, and logistics activities whereas the outsourcing of value- Thailand. However, it needs to be understood that added activities is not widespread in the country. logistics costs depend very highly on the sector This is probably because most respondents are under study. Medium to high-value sectors tend to not familiar with the types of value-added services have lower logistics cost as it is not surprising to find that are offered by LSPs in the country. Logistics within the same sector a range of different logistics outsourcing can be expanded but this needs to be cost/sales due to the value-added included in the supported with LSP quality assurance scheme. production of the goods. It is true that the logistics The logistics performance of the country, based on cost in Cambodia is overall higher than those of the same methodology as the World Bank’s LPI, is other countries but the context of each country is perceived to be higher than the WB’s LPI score and also different. ranking. This result is valid for both international This high logistics cost are not only a by-product of and domestic logistics. The rationale behind the the country’s geography but are also due to logistics higher score is because respondents who are reliability issues. Low levels of logistics reliability directly dealing with logistics issues in the country indirectly affect the level of logistics cost as it forces are much more familiar of the logistics context manufacturers to have higher levels of inventory. in Cambodia than those who are answering the Uncertainties in the national logistics system WB’s LPI from outside the country. There is a negatively impacts the overall performance of need to harmonize the domestic’s logistics with logistics in the country. This forces manufacturers, international logistic standards in order to enable producers and traders in the country to carry more seamless connectivity between domestic and inventory. The higher the inventory level, the international logistics. higher the inventory carrying costs thus affecting There is a need to further explore and understand the overall logistics cost in the country. supply chain issues in both the best and worst There are variations in sectors in terms of logistics performing sectors. Lessons can be learned and performance and cost. This is not surprising as best practices transferred to other less performing different sectors have different requirements sectors. This is part of the peer” group methodology related to logistics performance. There is also a approach that enables logistics knowledge transfer. need to better understand the commodity flows The studies of domestic logistics corridors would to and from origins and destinations in the country also be necessary in order to identify waste in the in order to improve not only logistics but also to system. reduce the cost of access. A reliable domestic The focus in terms of trade logistics improvement logistics network is a first step in the right direction. therefore needs to be on assuring the reliability and From the perspective of users of the country’s the removal of uncertainties in the logistics system logistics system, reliability is the dominant logistics in Cambodia. If reliability of logistics improves in performance issues. Low level of reliability directly the country, then local manufacturers and LSPs can affects logistics capability. This forces the users to design and plan more optimized logistics systems rely more on inventory and warehouses. Relying and consequently become more competitive. This on inventory and larger warehouses to keep the will also mean that logistics costs of key sectors in goods directly increase logistics cost for the users. the country can be reduced. Focus can then move Manufacturers in Cambodia require that logistics to time-based competition in order to sustain the should be reliable in order to be able to plan country’s competitiveness. 139 partners134, investment law reforms and easing of doing business licensing and regulatory requirements. The main objective of those reforms has been to improve the country’s competitiveness and integrate into global production networks.135 While Porter defined a country’s competitive advantage as “its capacity to attract businesses, both local and foreign, to use the country as a platform CHAPTER 6 from which to conduct business”,136 the concept of “competitiveness” is relative and comparative in COMPETITIVENESS, nature, referring to structural characteristics, such as productivity, innovation, skills, and/or dynamic BUSINESS CLIMATE, aspects, such as prices, macro-economy and exchange rates.137 TRADE FINANCE Porter highlights four main areas that determine the competitive strengths and weaknesses of AND INTELLECTUAL countries and their major sectors: PROPERTY RIGHTS • Factor conditions: The efficiency, quality and specialization of inputs available to firms - e.g. natural, human and capital resources and research and development, or R&D, infrastructure. 1. Taking Stock of Cambodia’s • Related and supporting industries - e.g. access Competitiveness to reliable suppliers. • Demand conditions- e.g. size and sophistication. • Context for firm strategy and rivalry - e.g. local Since its accession to the World Trade Organization context and rules, competition. (WTO), Cambodia has undertaken a series of major reforms aimed at improving the country’s business and trade enabling environment, as However, this is certainly not the only way demonstrated by its adoption of major economic to measure competitiveness. The IMD World reforms in order to secure economic growth as an Competitiveness Yearbook, for example, engine for pro-poor development. Some of these provides pragmatic approach to measuring reforms include the reduction of Cambodia’s tariff competitiveness by dividing the national ceilings at the WTO, lower applied average tariffs, environment into four main Competitiveness adherence to key multilateral trade agreements, Factors: Economic Performance, Government such as the Technical Barriers to Trade (TBT) and Efficiency, Business Efficiency and Infrastructure. Sanitary and Phytosanitary (SPS) Agreements, Each of these four factors has been broken down increased integration with its partners in the into five sub-factors, each highlighting different Association of South East Asian Nations (ASEAN) facets of competitiveness, as reflected in Table 1. which has moved towards an ASEAN Economic Community, trade agreements with ASEAN+ 134 These include Australia and New Zealand, China, India, Japan and Republic of Korea. 135 This chapter also uses, extensively, information and data from reports published by international organizations for the purpose of comparation only but it does not, in any ways or forms, imply the Government’s agreement with the reports inter alia analysis, findings, recommendations etc. from those reports. 136 Porter, M. E. (1990). The Competitive Advantage of Nations. Free Press Edition, New York. 137 UNDP (2009). Cambodia Country Competitiveness: Driving Economic Growth and Poverty Reduction. Discussion Paper No. 7, Insights for Action, United Nations Development Programme. 141 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 22 : IMD’s World Competitiveness Yearbook - Factors Competitiveness Factors Sub-Factors Macro-economic evaluation of the domestic economy: Domestic Economy, Economic Performance International Trade, International Investment, Employment and Prices. Extent to which government policies are conducive to competitiveness: Government Efficiency Public Finance, Fiscal Policy, Institutional Framework, Business Legislation and Societal Framework. Extent to which the national environment encourages enterprises to perform in Business Efficiency an innovative, profitable and responsible manner: Productivity and Efficiency, Labor Market, Finance, Management Practices and Attitudes and Values. Extent to which basic, technological, scientific and human resources meet the Infrastructure needs of business: Basic Infrastructure, Technological Infrastructure, Scientific Infrastructure, Health and Environment and Education. Source: IMD The World Bank also provides a helpful framework nomic nature, supporting services and infrastruc- for analyzing country competitiveness through ture, and policy support by reduction of market the prism of three pillars, namely of a macroeco- failures.138 Figure 15 - World Bank suggested competitiveness Diagnostic Framework Aligning macro incentives §§ Removing economic biases arising from tariff and non-tariff barriers, real exchange rate misalignment, and distortive tax regimes ensuring overall fiscal health of the economy, efficient labor market operation, product and factor market conditions, property rights protection, effective regulation, and ease of firm entry and exit. Improving backbone services §§ improving backbone services and inputs such as energy, and reducing transactions telecommunications, finance, and other services inputs; improving costs capacity and coordination of government agencies at the border, international transit arrangements, regional and multilateral agreements, and policy reforms that ensure more competitive markets for international transport, logistics, and other services that facilitate trade transactions. Proactive policies for §§ Promoting technology creation and adaptation, streamlining overcoming government and product standards and certifications, providing trade finance, market failures supporting industry clusters, facilitatiog special economic zones and other spatial developments, and ensuring coordination of economic actors and linkages and spillovers to the local economy. Source: World Bank (2012) In this chapter, we adopt the IMD’s approach and Access to Trade Finance. Section 6.1.3 examines a analyze some of the key areas considered crucial for specific area inside Government Efficiency, key in competitiveness. Section 6.1.1 considers Cambodia’s promoting innovation: Intellectual Property Rights, Economic Performance, focusing primarily on innovation and technological adoption. While Domestic Economy, International Trade, and government efficiency is significant, it is covered in International Investment. Section 6.1.2 focusses on part by the governance related consideration of the a particular and critical aspect of Business Efficiency, CITSU, examined in this and other chapters. 138 Reis, J. G. & T. Farole (2012) Trade Competitiveness Diagnostic Toolkit. World Bank: Washington DC. 142 Chapter 6 1.1. Cambodia’s Overall Competitiveness high growth rate, ranging between 6.9 and 7.3 (Macroeconomic) Environment percent annually. This growth level is slightly higher to those experienced in the region by the country’s Cambodia is a highly integrated and open economy, peers, such as Viet Nam and Myanmar, which in with trade representing 125% of its Gross Domestic 2017 grew by 6.8 and 6.7 percent, respectively. Product in 2017, making it the third most open Such sustained growth is mainly driven by domestic economy within the Association of South East Asian consumption and exports, mainly in the services, Nations (ASEAN). In terms of GDP growth, in the last construction and garment industries. decade the country has experienced a stable average Box 1 - Identifying Cambodia’s sources of growth The boom in Cambodia’s garment sector, which produces 84 percent of all value added in manufactured exports, and the boom in tourism, were a major source of foreign exchange to the country. In addition, official development assistance has supported progress in many public services such as trade logistics, SEZs, road, sea and utilities infrastructure, health, and education. Overall, the growth was largely driven by attracting foreign financial resources in various ways. Foreign investors continuously confirm that low labour costs, high tax incentives and tariff preferences, and preferential access to export markets are the key reasons for their investments in Cambodia. Source: WB (2018) Figure 16 - Cambodian sector’s contribution to GDP growth Nevertheless, such impressive economic growth and poverty reduction efforts have been dependent on Agriculture selected economic sectors. A few sectors stand out Indus-construction in terms of their contribution to GDP growth, such as garments and footwear, construction and other Serv-hotels & rests service sectors, including transport, tourism and ICT Taxes less subsidies services. Many of these sectors have seen growth Indus-garment & footwear underpinned by foreign investor. As highlighted by Indus-others the OECD (2018), foreign investment in the country Serv-others has been buoyant since the country’s accession to GDP growth the WTO. Since 2015, annual inflows of over USD 1 billion have been witnessed. As a share of GDP, the 8 7.4 stock of FDI in the country, which stood at 93 percent 7.1 7.0 7.0 7.1 7 6.9 in 2017, is the one of the highest in the ASEAN 6 region, second only to Singapore.139 Accoring to the 5 World Bank, gross fixed capital formation reached 21.9 percent of GDP in 2017, while FDI represented 4 12.6 percent of GDP in that same year.140 3 2 1 0 2013 2014 2015 2016 2017 2018/p Source: WB (2018) 139 OECD (2018). Investment Policy Reviews: Cambodia 2018. Organisation for Economic Co-Operation and Development, Paris. 140 World Bank https://datacatalog.worldbank.org/dataset/world-development-indicators 143 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Figure 17 - Cambodia’s FDI inflows, USD million, 2010-2018,quarterly. 900 800 700 600 500 400 300 200 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 Source: Census and Economic Information Center The country, however, experiences a concentration it represents one of the smallest levels in the of FDI inflows on a limited number of sectors, with region, such that Cambodia remains with a manufacturing, in particular garments, attracting significant savings-investment gap that increases most of the inflows, followed by agriculture, exposure to fiscal indebtedness and repayment accommodation, finance and electricity. Similarly, mismatches. domestic investment has been growing, although Box 2 - Improving Cambodia’s Competitivneess: Addressing informality An important element hampering the country’s competitiveness is the dominance of the informal sector in its national economy. Such informality not only creates unfair competition to those operating in the formal sector, but also frustrates traceability in supply chain management. Particularly, almost one third of companies operating in Cambodia identify the practices of competitors in the informal sector as a major business environment constraint.141 Similarly, different international rankings have identified Cambodia as a challenging place to do business, particularly in regards to establishing a new business. Thus, the country ranks 185th in the WB’s DB 2019 Indicators, over 190 countries.142 In this sense, Cambodia requires nine procedures for an investor to open a company, taking about 99 days to complete all procedures, and representing a cost equivalent to approx 47 percent of the country’s GNI per capita, significantly more than the country’s regional peers. Table 23 : Doing Business Indicators: Starting a Business, 2019141142 Country Procedure (time) Cost (% pf GNI) Ranking (over 190) Cambodia 99 days 47.4 185 Average East & Asia Pacific 25.9 days 17.8 - Thailand 4.5 days 3.1 39 Myanmar 12 days 24.8 152 Philippines 31 days 20 166 Source: WB Doing Business (2019) In this context, Cambodia has started to address governmental procedures and a more efficient such challenges through reforms on the law enforcement. One of the key steps in reducing country’s Investment Law, the automation of informal payments and inefficiency has been 141 WB (2016). Enterprise Surveys: Cambodia. The World Bank Group. Available from: http://www.enterprisesurveys.org/data/exploreeconomies/2016/cambodia#informality 142 There has been some criticism of these results from the Doing Business Rankings, not just by Government officials but also from foreign direct investors that believes the situation is more positive than is portrayed in such rankings. 144 Chapter 6 seen in the launch of an online registration Cambodia’s REER has risen quite sharply since service for companies.143 Prior to 2016, company 2008 and is forecasted to continue rising up to registration was done manually, taking five 2021. An increase in REER implies that exports working days to process the documentation become more expensive and imports become and issue a Registration Certificate. In addition cheaper.146 The loss of external competitiveness is to reducing the number of steps required to explained by the fact that prices in Cambodia have obtain the Certificate, the user can now submit risen faster than in its partner markets, while the all the documentation and pay the processing nominal exchange rate has failed to depreciate to fee on-line. Once completed, the documentation account for such price differentials. Therefore, an is reviewed by a business registration official. unsupervised increase indicates a loss in trade The approval or refusal of the application occurs competitiveness, which might lead to a future within three to five working days after the upload decrease in exports, as domestically produced of the documents. If approved, the company will goods become less attractive to international be immediately registered and a certificate of costumers. registration will be issued. If a new company is In terms of trade, Cambodia has made significant registering as a private or public limited company, efforts to modernize and reform customs it is automatically incorporated.144 Additionally, operations and to improve trade facilitation. In the MoC has initiated an interface and connection 2014, a Best Traders programme was implemented system, integrating MoC’s business registration to incentivize larger traders that adhere to good with the tax system and the Cambodia National practices to avoid verifications related to rules of Single Window (CNSW). origin, customs valuation and security provisions. In 2015, the Ministry of Commerce introduced an Also, the Council for the Development of Cambodia online system for obtaining automated certificate (CDC) provides unofficial translations of the main of origins. In July 2007, the Senate ratified the investment regulations to foreign investors.145 Law on Customs, which was promulgated by the The country, however, experiences a concentration King on 20 July. In January 2019, the control of of FDI inflows on a limited number of sectors, with shipments at the border was streamlined.147,148 The manufacturing, in particular garments, attracting reduction in tariffs, and introduction of simplified most of the inflows, followed by agriculture, procedures for trade, has facilitated trade and accommodation, finance and electricity. Similarly, enabled Cambodia to tap into regional and global domestic investment has been growing, although production networks. it represents one of the smallest levels in the The country’s efforts in this area have had an region, such that Cambodia remains with a impact on the country’s total exports to the world, significant savings-investment gap that increases which between 2014 and 2017 moved from exposure to fiscal indebtedness and repayment USD6.9 billion to USD 18.4 billion. Particularly, the mismatches. country has become significant more competitive Additionally, the overall external competitiveness in the exports of Machinery (HS 84-85-87), as demonstrated by the surge in exports, which moved of Cambodia is reflected through its real from USD 84.7 million in 2014 to USD 973.8 million effective exchange rate (REER), which is its in 2017, representing a Compound Annual Growth nominalexchange rate against trading partners, Rate (CAGR) of 125.7 percent during that period. adjusted for differences in price inflation. 143 See MOC’s Online Business Registration: https://www.businessregistration.moc.gov.kh/guest/ 144 See WTO (2017). Trade Policy Review of Cambodia – Report by Cambodia. World Trade Organization, WT/TPR/G/364, October, para. 4.39. 145 See OECD (2018). OECD Investment Policy Reviews: Cambodia 2018. Organisation for Economic Co-Operation and Development, Paris. 146 IMF, see http://datahelp.imf.org/knowledgebase/articles/537472-what-is-real-effective-exchange-rate-reer 147 See Chan, S. (2019). Camcontrol removed from borders. Khmer Times, February 4. Available from: https://www.khmertimeskh.com/50574979/camcontrol-removed-from-borders/ 148 For additional trade facilitation and trade logistics measures, please see Chapters 4 and 5 of the CTISU 145 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Figure 18 - Cambodia’s Real Effective Exchange Rate REER (1995=100) 130 120 110 100 90 80 95 97 99 01 03 05 07 09 11 13 15 17 19 21 19 19 19 20 20 20 20 20 20 20 20 20 20 20 Source: EIU Box 3 - Supporting Cambodia’s Exports of Machinery The machinery sector is one of Cambodia’s newest sectors, which, if successfully supported, will enable Cambodia to further integrate into regional value chains with horizontal division of labour. Strengthened regional integration arising from the full implementation of the ASEAN Economic Community, might enable Cambodia to move up the value chain, adapting its production from nondurable consumer goods (clothing and footwear) to durable consumer goods (electrical machinery, machinery, and vehicle parts) and then to capital goods industries. Source: WB (2017). Cambodia Economic Update: Cambodia Climbing Up the Manufacturing Value Chains. The World Bank Group, October. Such a boost in exports is explained by Cambodia’s made by Cambodia150 , (ii) the initial specialisation competitive gains, understood as “the percentage of Cambodia in being positioned on dynamic change in competitiveness of a country’s exports in markets151 , (iii) initial sectoral specialization of the world market for the selected sector in the period domestic supply on products characterized by under review”, competitiveness that is understood in dynamic demand152 , and (iv) the ability of Cambodia the gains (or losses) of a country’s market share that to adjust export supply to growing or declining would occur if changes were only due to variations import markets.153 This analysis highlights that in country’s market share in import markets.149 Cambodia had derived much of its growth from An analysis of the decomposition of export growth competitiveness effects and adaptation of export shows that the majority of the trade created supply to dynamic markets in the electronic between 2013 and 2017 comes from old markets. components industry, while the apparel sector is It is possible to decomposing the source of export almost exclusively deriving its growth in exports growth according to (i) Competitive gains/losses from competitiveness effects. 149 See ITC methodology at https://tradecompetitivenessmap.intracen.org/Documents/TradeCompMap-Trade%20Performance%20Index-Technical%20Notes-EN.pdf 150 The competitiveness effect in fact shows the percentage change in competitiveness of a country’s exports in the world market for the selected sector in the period under review. Positive values indicating a gain in market due to increased competitiveness of a selected country sector on the world market. 151 The initial geographic specialisation index represents a quota of the “relative change of world market share”. This index shows the benefits associated with the initial specialisation of domestic exporters on dynamic markets. The overall effect (the weighted average of the variation in the share of partner countries in world imports) is positive if the country is well positioned on dynamic destination markets in the beginning of the time period. 152 The initial product specialisation index represents a quota of the “relative change of world market share”. This index shows the gains or losses associated with the initial sectoral specialisation of domestic supply on products characterised by dynamic demand. The effect is positive if both factors go in the same direction, i.e. if the share of an import market in world imports increases (declines) and the sector is over (under)-represented in the country’s exports to its partner and vice-versa. The overall effect is positive if the country is well positioned on dynamic products in the beginning of the time period. 153 See ITC methodology at https://tradecompetitivenessmap.intracen.org/Documents/TradeCompMap-Trade%20Performance%20Index-Technical%20Notes-EN.pdfan import market in world imports increases (declines) and the sector is over (under)-represented in the country’s exports to its partner and vice-versa. The overall effect is positive if the country is well positioned on dynamic products in the beginning of the time period. 146 Chapter 6 Figure 19 - Competitiveness drivers of top 5 export sectors in Cambodia, 2013-2017 0%-50% 50%-100% 250% 100%-150% 200% 150%-200% 200%-250% 150% Electronic components 100% Transport equipment 50% Fresh food 0% Leather products Competitiveness effect , p.a. (%) Initial geographic specialisation, p.a. (%) Initial product Clothing specialisation, p.a. (%) Adaptation effect, p.a. (%) Source: ITC Trade Competitiveness Map In terms of product survival, Cambodia’s exported attracting investment products show high rates of survival rates, with into export sectors, as investors seek to capitalise exports reaching approximately 10 countries in on the market access provided to Cambodia. In the first year of existence154 this context of FDI and export competitiveness, the services and manufacturing sectors are the The successful product survival rates is partly driving forces of the economy in terms of value explained by the availability of regional markets, addition, mainly due to the formidable growth and the possibility to access international of export processing zones (that have propelled markets, through preferences, such as the EU. apparel industries in particular), and expansion of This advantage is a lever to insulate from major tourism, real estate and construction activities. switching of buyers. It has also been a reason for Figure 20 - Cambodia’s export survival, births (LHS) and deaths (RHS) 2013-17155 Source: World Bank WITS Particularly, it is worth highlighting that the areas: garments and wood processed products, manufacturing sector has been driven by an although this last sector has lost importance in the increase in the country’s exports, although face of emerging sectors, such as the production these are mainly concentrated in two main of electrical machinery (HS 85). These different 154 Economic development is generally accompanied by the introduction of new products, and the ability of a country to sustain trade relationships is a sign of economic maturity. This indicator reports the birth, survival, and death of products, as well as their trade values and number of markets to which they are exported in user-selected start and end years. A high death rate among products dispersed across industries may indicate economic volatility; concentrated in a sector, it may indicate evolutions in domestic production. See http://wits.worldbank.org/WITS/docs/TradeOutcomes-UserManual.pdf 155 The chart provides two graphs, each with number of destination markets on the horizontal axis and value in thousands of USD on the vertical axis. The first graph illustrates product survival and births. Surviving products are in blue, and new products 147 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT exporting sectors have been mainly supported carried out by the European Commission based by tariff preferences, granted under the European on Human Rights concerns in Cambodia. The Union’s Everything-But-Arms (EBA) scheme (see suspension of EBA dos not necessarily imply a Chapter 1). Nevertheless, these preferences are withdrawal of preferences, something which is to currently under threat due to the temporary be decided in six months’ time. 156 suspension of EBA owing to the investigation Box 4 - Expanding Cambodia’s Competitiveness: ASEAN’s Economic Community During the 12th ASEAN Summit in January 2007, the ASEAN leaders affirmed their strong commitment to accelerate the establishment of an ASEAN Economic Community (AEC) by 2015. Under the AEC, ASEAN countries joined forces as a single market and production base, making the region more dynamic and competitive by introducing new mechanisms and measures to strengthen the implementation of existing economic initiatives, such as: • Accelerating regional integration in priority sectors; • Facilitating movement of business persons, skilled labour and talents; and • Strengthening the institutional mechanisms of ASEAN Member States. The ASEAN Community as a whole will remain outward looking, and the AEC foresees: (i) a single market and production base; (ii) a highly competitive economic region; (iii) a region of equitable economic development; and (iv) a region fully integrated into the global economy. Source: Aring, M. (2015) 1.2. Cambodia’s Intellectual Property Rights innovations are instrumental in opening new Landscape `markets and new industrial branches for a new product. In this context, national intellectual Since the publication of Cambodia’s Diagnostic property systems play a crucial role in supporting Trade Integration Strategy (CTISU) 2014-18, the a business to gain and retain its innovation-based country has strengthened its effor`ts to establish advantage. 157 a sound and robust Intellectual Property Right (IPR) legal and regulatory framework, anchored However, the concept of innovation is broad, and on international standards. The main changes includes the attempts made by firms to develop involve the adoption of the Law on Geographical new and/or improved products or processes, Indications in 2014, and the country’s accession or experiment with alternate ways to do things. to the Protocol Relating to the Madrid Agreement Innovation, in itself, is also a process, requiring Concerning the International Registration of “a broad set of tangible and intangible assets with Marks in 2015, the Patent Cooperation Treaty in embedded knowledge, ranging from basic human 2016, and The Hague Agreement concerning the and organizational capital to R&D, need to be International Registration of Industrial Designs in accumulated and combined to yield innovation February 2017. outcomes in the form of new or improved products and services, production and delivery processes, There are strong linkages between Intellectual business organization, and patented intellectual Property Rights (IPRs) protection and innovation. property”.158 In turn, the combination of those Investment in R&D and firms‘ incentives to elements can lead to greater productivity, better innovate is influenced by the degree of protection jobs, increased firm growth rate, and diversification of IPRs in a country. Meanwhile, technological (see Figure 21). 156 European Commission, ibid 157 See ITC methodology at https://tradecompetitivenessmap.intracen.org/Documents/TradeCompMap-Trade%20Performance%20Index-Technical%20Notes- 158 Cirera, X. & Maloney, W. F. (2017). The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. The World Bank Group, Washington D.C., 148 Chapter 6 Figure 21 - The Innovation Paradox Innovation inputs and Innovation Outputs Impact Knowledge Activities and Outcomes Technology Firm growth New or improved (new demand or Equipment products and services increased market share R&D New or improved due to enhanced quality Intellectual property use business processes or cost advantage) Human Capital New business models Productivity growth Training (improved business New or improved Engineering and design organizational and processes and Software and databases managerial practices technology) Managerial and Patents and other Economic organizational capital Intellectual property diversification and practices Source: Cirera & Maloney (2017). Box 5 – What are Intellectual Property Rights? The grant of a property right by the government, albeit generally for a limited period of time, over useful intangible intellectual output provides the owner of such legal property rights the right to exclude all others from commercially benefiting from it. In other words, the legal rights prohibit all others from using the underlying IP asset for commercial purposes without the prior consent of the IP right holder. The different types of IP rights include trade secrets, utility models, patents, trademarks, geographical indications, industrial designs, layout designs of integrated circuits, copyright and related rights, and new varieties of plants. Source: Kalanje, C. M. The need to adopt a robust National Innovation risk.159 System (NIS) is important in order to strengthen The NIS needs to have a broad scope to reflect the role of innovation across the country. the fact that innovation policy cannot consist However, innovation cannot be supply driven: of simply offsetting innovation-related market there must be demand from firms that have the failures. It must also ensure that a broader set of capabilities to innovate and the incentives to do complementary factors, necessary for firms to so. The NIS must address the existing barriers receive the potentially high rates of return from hampering accumulation, such as credit; entry technological adoption, are present. and exit barriers to industries; business and regulatory climate, rule of law, etc… This is crucial both because physical capital is a complement to innovation and because the accumulation of knowledge capital is subject to all the same accumulation barriers as physical capital—capital markets, business climate, or ability to diversify .Cirera & Maloney (2017), ibid. 159 149 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 24 : WEF Global Competitveness Report 2018 - Innovation Innovation Capability Ranking Value State of cluster development 45 4.1 International co-inventions 107 0.02 Multi-stakeholder collaboration 69 3.6 Scientific publications 101 87.7 Patent applications 113 0.02 R&D expenditure 105 0.1 Quality of research institutions 112 0 Buyer sophistication 47 3.7 Trademark applications 107 83.05 In the international sphere, Cambodia ranks high • The International Convention for the Protection in terms of property rights and its protection. In 2018, the country ranked 82 in terms of property of New Varieties of Plants (UPOV), rights available and 62 in terms of protection of • The Geneva Phonogram Convention, and IPRs. This represents a significant improvement • The Brussels Satellite Convention. in comparison to the previous year, when the The current national framework governing country ranked 102 with regards to property Intellectual Property Rights is dispersed, with a rights and 130 on the protection of IPRs.160 multitude of ministries addressing specific areas IPRs: Nevertheless, such improvement has not been • The Ministry of Commerce (MoC) is responsible reflected on the side of innovation, which has stagnated. Nevertheless, there are certain areas for trademarks, geographical indications, and where Cambodia stands out, such as the state of trade secrets; cluster development, buyer sophistication and • The Ministry of Industry and Handicrafts (MIH) multi-stakeholder collaboration. for patents, industrial designs, utility models, In this context, the country is currently receiving integrated circuits, as well as plant breeder rights; technical assistance from the World Intellectual • the Ministry of Culture and Fine Arts (MoCFA) for Property Organization (WIPO) to facilitate the copyright and related rights; country’s application for membership to a series • the Ministry of Information for broadcasting; and of international treaties and conventions, such as: • the Ministry of Posts and Telecommunications (MoPT) for internet domain names. • WIPO Copyright Treaty (WCT) • WIPO Performances and Phonograms Treaty There are currently three main IP Offices: (WPPT), • The Berne Convention for the Protection of • the Department of IPRs (within the MoC), Literary and Artistic Works related to Copyrights • the Department of Industrial Property (within and Related Rights, MIH), and • The Patent Cooperation Treaty • the Department of Copyright and Related Rights (within the MoCFA). In order to ensure coordination across the laws and regulations, and acting as a clearinghouse different agents, the Council of Ministers for technical assistance relating to the intellectual created the National Committee for Intellectual property sector. This National Committee has Property Management in 2008. The committee been instrumental in promulgating the numerous is responsible for developing national policy on new laws adopted in the field of IP over the last intellectual property, strengthening inter-agency decade. cooperation, preparing and disseminating new 160 Schwab, K. (2017) The Global Competitiveness Report 2017-2018, World Economic Forum; and Schwab, K. (2018) The Global Competitiveness Report 2018, World Economic Forum; 150 Chapter 6 One of the main changes experienced in this Pepper, Kampong Speu Palm Sugar, Kep flower of area since the drafting of the previous CTISU has salt, Kratie pomelo, Phnom Srok silk, Battambang been the adoption of the Law on Geographical fragrant rice, Battambang oranges, Siem Reap Indications in 2014. The Law foresees four main prahok, and Kampot durian.161 sectors that can be protected by a Geographical The Law allows the registration of both local and Indications (GI): agricultural goods, foodstuffs, foreign geographical indications. In the case of handicraft goods, or any other goods produced the foreign ones, these shall be registered as in the geographical area or transformed in long as the foreign geographical indication is Cambodia. So far, the country has registered registered in accordance with the local provision the following geographical indications: Kampot in its country of origin. Box 6 – In what cases does the Law prohibit the use GIs? The Law foresees four situations where geographical indication cannot be validly registered: - If it is contrary to laws and regulations, morality, religion, good custom or public order; - If it is likely to mislead or confuse the public with respect to the characteristics, the nature, the quality, the place of origin, the production process of the goods and/or its use; - If it is used as a name of a plant variety or animal breed; or - If it is a generic term As mentioned above, the country has also which is followed by a search carried out by an acceded to a number of international treaties and International Searching Authority (ISA) and a conventions: written opinion regarding the patentability of the invention. This novelty has a double benefit: In 2015, Cambodia accessed the Protocol Relating to the Madrid Agreement Concerning the • On one hand, foreign applicants applying for International Registration of Marks, commonly patent protection in Cambodia may use such known as the Madrid System. The Madrid System international reports instead of domestically- makes it possible for an applicant to apply for produced ones, therefore ensuring the a trademark in a large number of countries affordability of the process. by filing a single international application at a • On another hand, Cambodia’s patent office will national IP office. Thus, the System simplifies the also benefit greatly from this added capacity, as process of multinational trademark registration it will reduce the administrative burden on search by eliminating the requirement to file individual and examination processes, including formality applications at the IP office in each country in checks and patentability assessments.163 which protection is sought.162 The relevant national or regional authorities administer matters related to the examination of Cambodia also became a member of the Patent the application, if foreseen by national law, and Cooperation Treaty (PCT) in 2016. The PCT the issuance of a patent. It is worth highlighting provides a unified procedure for filing patent that a PCT application might not itself result in applications to protect inventions in each of the grant of a patent, as this is a prerogative of the PCT’s contracting States. A single filing of a each national authority.164 The PCT procedure PCT application is made with a Receiving Office, 161 See Abacus IP (2019). Guide to Geographical Indication Law in Cambodia. Abacus IP, January 25. Available from: http://www.abacus-ip.com/guide-to-geographical- indication-law-in-cambodia/ 162 WIPO (2015). Cambodia Joins the Madrid System. World Intellectual Property Organization, March 5. Available from: https://www.wipo.int/madrid/en/news/2015/ news_0002.html 163 Mirandah, G. & Yee, T. Y. (2016). Cambodia Accedes to PCT and Fosters IP Development. HG.org, November 6. Available from : https://www.hg.org/legal-articles/cambodia- accedes-to-pct-and-fosters-ip-development-06-11-2016-40807 164 As highlighted by the WTO TPR of Cambodia, this implies that a PCT application, which establishes a filing date in all contracting states, must be followed up with the step 151 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT essentially leads to a standard national or regional Having an appropriate set of IPRs allow investors to patent application, which may be granted or reduce the risk associated with the development rejected according to the applicable law in each of the product, ensuring that these are arable to jurisdiction in which a patent is desired.165 In the reap acceptable returns for their participation in specific case of Cambodia, the applicable law is the the process. Therefore, IPRs play an important 2003 Law on Patents, Utility Model Certificates and role in facilitating the process of taking innovative Industrial Designs, which provides a procedure technology to the market place, improving, at the for registering foreign applications in Cambodia. same time, the competitiveness of technology- Under this law, patent rights can be subject to based enterprises, whether such enterprises revocation and abridgement by the Government, are commercializing new or improved products as the Ministry has the right to exploit a patented or providing service on the basis of a new or invention itself, or allow a third party to do so to improved technology.167 promote the public interest. 1.3. Cambodia’s Trade Finance landscape In 2017, Cambodia also become member to The Improving access to trade finance is key for Hague Agreement concerning the International continuing to expand a competitive external trade Registration of Industrial Designs. The Hague sector. Cambodia’s financial landscape has evolved Agreement provides a mechanism for acquiring, significantly in recent years, allowing for the maintaining and managing design rights in expansion in the scope and spectrum of financial countries and intergovernmental organizations services available. Since the establishment of the that are members of The Hague Union through first privately-owned commercial bank more than a single international application filed with the 20 years ago, the country has developed a financial International Bureau of the World Intellectual system consisting, inter alia, of 38 commercial Property Organization (WIPO).166 Thus, this is a cost banks, 15 specialized banks, 7 micro-finance effective mechanism enabling the applicants to deposit-taking institutions, 65 microfinance easily acquire design protection in multiple countries, institutions, 178 registered microfinance operators, as a single international application replaces a 7 representative offices of foreign banks, and 12 whole series of individual national applications. financial lease companies. The sector is undergoing Similar to the PCT procedure, upon publication of a shift from cash to digital, and from corporate to the application, National Offices then carry out a retail and real estate lending. Notwithstanding the substantive examination, analyzing whether the substantial progress towards the supply of financial industrial design fulfils the substantive conditions of intermediaries, access to finance and trade finance protection provided for by its domestic legislation. instruments in particular remain a challenge, In the specific case of Cambodia, the applicable law particularly for SMEs. is the 2003 Law on Patents, Utility Model Certificates and Industrial Designs. In this context, the relatively large presence of foreign-owned banks enhanced lending capacity Finally, in 2018 the Government passed the Law on and raised services quality has contributed to Compulsory License for Public Health, which allows enhancing access to trade finance for many Cambodia to benefit from the 2017 Amendments enterprises, including SMEs. In recent years, the to the WTO’s TRIPS Agreement dealing with public main banks have been diversifying services, health. The main purpose of this amendment is notably for corporate customers, with payroll to allow pharmaceutical products made under management services, overdraft facilities, working compulsory licenses granted under the terms capital, financial leasing, international payments of the amendment to be exported to countries (including foreign exchange services) and trade lacking production capacity. finance. of entering into national or regional phases to proceed towards the grant of one or more patents. 165 WTO (2018). Trade Policy Review of Cambodia – Report by the Secretariat. World Trade Organization, WT/TPR/S/364/Rev.1, March, para. 3.127. 166 WIPO (2017). The Hague System for the International Registration of Industrial Designs: Main Features and Advantages. World Intellectual Property Organization. 167 Kalanje, ibid. 152 Chapter 6 Nevertheless, and despite the rising financial Similarly, and whilst trade finance products are penetration, access to finance for most firms and available, these are distributed very selectively. In households remains low. While in principle lending effect, whilst bank institutions may discount, buy facilities are open to SMEs, very high collateral and sell bills of exchange and bills of lading, issue requirements apply. Long tenors for lending all kinds of trade-related guarantees (shipping, are hardly offered in Cambodia. Banks focus on money retention, bid and advance payment), overdraft and short-term lending (including import and export loans, issue and endorse letters working capital), to the extent that client can of credit, discount invoices, the reality shows that display sufficient land or building collateral. The few of these products are actually used. Only a relatively large number of banks (38) masks the few large companies or conglomerates are in a fact that the market is dominated by a handful position to display the financial statements, “hard of institutions. The largest foreign-owned banks title” bills and documentation for collateral in order focus on the corporate sector and aim mainly at to benefit from mostly trade-related lending. Even supporting local operations of home countries with the required financial statements and hard corporates operating in Cambodia. Others provide collateral such as buildings and land, the “banked” wholesale funding to local markets for large entities are generally supplied with relatively corporate transactions. The gradual integration of simple, albeit expensive (interest rates typically Basel II and III rules, as an on-going process, may over 10%) loans and working capital facilities. trigger a consolidation of banks. Box 7 - Impacts of the Cap on Interest Rates With the aim to “protect consumers from excessive interest charged by [micro-finance institutions (MFIs)] and to effectively promote the use of affordable loans”168, in March 2017 the National Bank of Cambodia (NBC) imposed an interest rate ceiling of 18 percent annually for loans of any maturity extended by microfinance institutions. Following the implementation of the cap, nominal lending rates of both MFIs and banks decreased, moving from the initial 34.5 and 20.5 percent, respectively, to around 18 percent in both cases. Another impact has been the reduction by 2.5 percent (around 45,000) in the number of borrowers between January and August 2017. Over the same period the average loan size increased by 39 percent, moving from USD 1,795 to USD 2,497, suggesting that fewer small loans were disbursed and MFIs tried to reduce costs and increase the efficiency of their lending operations. Source: Ferrari, A., Masetti, O. & Ren, J. (2018). Interest Rate Caps: The Theory and The Practice, Policy Research Working Paper 8398, Finance, Competitiveness and Innovation Global Practice, The World Bank Group, April, Washington D.C. The trade finance market is biased towards advance (prepaid). One foreign bank source lending. Microfinance institutions may also considered that only 8% of its portfolio toward provide working capital collateralized by land. buyers (Cambodian companies) is made of letters Given that the export sector of Cambodia is of credit. In this context, it is not surprising that dominated by SMEs, notably in the garment and the World Economic Forum, in its 2016 “Global in light manufactures sector, the need for working Enabling Trade Report”, had ranked lack of access capital facilities is high. However, with most of to trade finance 8th in the 10 export constraints of companies having weak accounts, a short credit Cambodia.168 history and little market power over partners in the supply chain (suppliers and buyers), SMEs are cash-strapped in Cambodia. Although official statistics are not available, 90% of imports, including industrial inputs, are paid cash-in- 168 NBC (2017). Prakas on Interest Rate Ceiling on Loan. National Bank of Cambodia, Number B7-017-109-PK. 153 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Box 8 – Conditions of letters of credit in Cambodia The conditions and documentation for letters of credit issuance and approval are well codified by the International Chamber of Commerce, and subject to international arbitration. Countries with same import/export characteristics of Cambodia (textile imports, garment exports) are some of the heaviest users of letters of credit, such as Bangladesh and Pakistan. Fees of letters of credit are reasonable since the guarantee of payment is rarely called. Merchandises are the only collateral involved in most of the world, and most can be resold easily in other markets in case of default. Letters of credit can be opened for values as low as $5,000 or 10,000. Currently, the high cost of finance met by importers lending at high rates is not well fitted for high and exporters reduce the competitiveness of volume imports and exports, which could require producing in Cambodia. The current system, which instead supply chain finance arrangements and has supported the economy until now, it is likely guarantees, instead of outright lending. High to be unsustainable if Cambodia was to expand its volume imports and exports of goods require trade sector. A system based on working capital high volume-low margin finance. Box 9 – Explaining the under-utilization of trade finance instruments In Cambodia, trade finance is mainly used as a form of working capital, which represents its most expensive form. This is due to a variety of factors, from both supply and demand side. On the supply side, local and foreign banks argue that: - The corporate sector has invested too little in financial management and transparency, which prevent setting lending limits. - Audited accounts are rare. - Widespread lack of trust in the bank-client relationship, reflecting insufficient documentation, recent registration of companies, and the recent character of the national credit bureau. - Companies are not aware of the different trade financing instruments, and therefore only request working capital. - Insufficient in-house accounting services.As a result of the above, the “default” becomes a secured-related lending market for trade. The collateral remains mainly land, if not buildings. In Cambodia it is not possible yet to lend against movable assets, such as machinery and other company equipment. On the demand side, corporations argue that: - the lending system is heavily biased against landless, cash-less outward-processing firms such as those in processed foods, garments, and light manufactured business. - The lending tenors are imposed and do not fit the production cycles of certain commodities and goods. - Interest rates are very high relative to risk despite the fact that dollar-based lending is frequent and the financial system is relatively liquid. Successful integrators in international trade are Alternatives to this problem exist, such as also those countries having reduced the financial factoring or forfeiting. As highlighted by the IFC, costs of importing and exporting, resorting to “36% of interviewees are interested in factoring, letters of credit, supply chain finance, factoring, which would enable them to acquire money to forfaiting, credit insurance, all of which carry boost their cash flows. Since factoring is unknown to smaller fees and are under-utilized in Cambodia. many SMEs, it actually requires some marketing to Many of these products are based on guarantees, ensure that entrepreneurs understand the benefits mitigation of payment risks between the buyer regarding cash flows, saving time on collections, and and the seller and other non-lending facilities. The reducing the risk of robbery.”169 current system based on collateralized lending Credit insurance is a popular non-bank is not efficient, draws excessively on banks’ balance sheets relative to payment guarantee and intermediated trade finance. Whilst inter-company mitigation systems, and does not recognize the lending exists in Cambodia, cash-constrained low-risk character of trade finance. companies have no interest or expertise to be bankers for their partner companies. Therefore, 169. IFC (2009). Understanding Cambodian SME needs for financial services and products. International Finance Corporation, The World Bank Group. 154 Chapter 6 they insure their risk. This is commonly taking International Financial Corporation, as part of place in trade finance markets. About $557 their trade finance programs, have either supply million in of short-term credit insurance flows chain facilities, warehousing facilities, or letters of were recorded in Cambodia in 2018, according to credit guarantee facilities which could showcase the Berne Union, the association of export credit such processes. agencies and private insurers. Open account 2. Challenges facing Cambodia’s financing can be insured for small fees, given the competitiveness low default rate on trade finance. At the present moment, there is local credit insurance industry As highlighted in section 6.1, there are a number of ways for viewing competitiveness. The best in Cambodia, although foreign banks have shown approaches tend to be multidimensional and an interest in supplying it in an international trade compared across countries in order to benchmark context if requested by customers. against Cambodia’s peers. Much like the World Economic Forum, The World Bank, the IMD and Access to the appropriate trade finance others, the Bertelsmann Stiftung’s Transformation instruments will be crucial to not only expand Index (BTI) is a helpful comparator of country the country’s competitiveness and ensure a performance in the global economy. It focuses sound and stable business environment, but on three pillars for building competitiveness, also to promote the country’s efforts to diversify namely economic and political transformation, trade. Thus, any cluster of products would need and governance performance. Cambodia’s to carefully take into account the trade financing rankings in the different dimensions vary quite significantly, with sustainability and welfare elements to integrate it: seeds, fertilizer and other indicators performing worse with respect to input finance, storage and warehousing financing, economic transformation. The rule of law, pre-shipment finance – all of which are relatively political participation and stability of democratic commonly supplied forms of finance in the institutions are considered very weak for the international trade of commodity. International political transformation pillar, whereas efficiency banks or trading houses provide for such forms in the use of public sector resources and of finance. Multilateral financial institutions consensus building are considered very low in the such as the Asian Development Bank and the governance index. Figure 22 - The BTI for Cambodia in 2018 Status Index 4.00 # 103 on 1.10 scale out of 129 Socioeconomic Market Level Organization Political and Social Currency and intergration PriceStabilty Stability of Democratic Private Institutions Property 4.0 4.5 3.3 6.0 Welfare Rule of Law Regime 2.0 4.0 2.0 3.0 2.8 7.0 Political 7.8 2.5 Economic Participation 5.0 2.8 2.7 3.3 Performance 2 Political Economic 4 Transformation Stateness 6 Sustainability Transformation 3.57 # 103 8 10 4.43 # 96 International Steering Cooperation Capability Consensus- Resource Building Efficiency Governance Index 3.23 # 113 on 1.10 scale out of 129 Note: The BTI covers the period from February 1, 2015 to January 31, 2017. The BTI assesses the transformation toward democracy and a market economy as well as the quality of political management in 129 countries. More on the BTI at http://www.bti-project.org. Source: Bertelsmann Stiftung, BTI 2018 Country Report — Cambodia. Gütersloh: Bertelsmann Stiftung, 2018. 155 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT According to the World Bank, and despite a number (SWOT), and is based on the literature review of of achievements made in reforms at the border, as SWOTs conducted by international organisations well behind the border, major bottlenecks to the for Cambodia in the last 5 years, and based on business and trade-enabling environment remain. stakeholder feedback. The weaknesses and threats These include high logistics and infrastructure are quite substantial. The weaknesses include costs, unpredictable application of regulations, eroding competitiveness due to weak productivity, a weak private sector, amongst others. This and low levels of human capital, significant costs situation is reflected by the fact that the country is embedded in doing business and trading across ranked as 138th overall in the World Bank’s Doing borders, low levels of innovation, lack of access to Business 2019 (DB) Indicators, behind the regional finance, and governance challenges. The threats average, and only ahead of Lao PDR and Myanmar include an uncertain outlook for the global in ASEAN. economy, the transmission of a slowdown to the Cambodian economy, preferential erosion, and The following table highlights the country’s most importantly, the possible revocation of EBA Strengths, Weaknesses, Opportunities and Threats for Cambodia. Box 10 - Defining Productivity In general, productivity is defined as the ratio of output over input, i.e. how efficiently input resources - capital and labour are used to produce outputs. Productivity is mainly driven by four interrelated components: - Innovation, including the creation of new technologies; - Education to spread such new technologies and develop the capacity of the workforce; - Efficiency to promote the effective and flexible allocation of resources for production in various sectors; and - Infrastructure, both physical and intangible. A top priority for Cambodia will be to stay competitive by enhancing labour productivity - compensating for the rising private sector wages. This can be achieved by improving the quality of basic education and promote vocational and technical skills. Reducing energy costs will also be crucial to attract and compete in high value- added and sophisticated manufacturing. Source: Kim, Y. E., Loayza, N. & Meza-Cuadra, C. (2016). Productivity as the Key to Economic Growth and Development. Research & Policy Briefs from the World Bank Malaysia Hub, The World Bank, Washington D.C., August; World Bank (2017). Cambodia Economic Update: Staying Competitive Through Improving Productivity. Investing in Public Infrastructure and Services. The World Bank Group, Washington D.C., April. The strengths include Cambodia’s integration and global production networks, FDI expectation in the most dynamic regions of the world, remain positive, and continuing policy reforms are continuing efforts to promote foreign direct being pursued energetically by the Government investment, its open economy, and current of Cambodia. preferential market access. Its opportunities include deepening further its linkages in regional 156 Chapter 6 Table 25 - SWOT Analysis of Cambodia’s International Competitiveness Strengths Weaknesses §§ Relatively low wages. §§ Low productivity rates. §§ Existing Economic Openness. §§ Low levels of human capital (i.e. low literacy rates §§ Low import duties, enhancing the ease to and levels of education). access quality inputs. §§ High rate of informality across the whole economy. §§ Existing Tariff Preferences. §§ High cost of starting a business. §§ Integration into Regional Value Chains. §§ High trade costs. §§ Capacity to attract FDI. §§ Low sophistication of the economy. §§ High degree of regional integration. §§ Lack of supply chain linkages between FDI and §§ Access to some of the most dynamic markets of Cambodian firms. the world §§ Weak regulatory enforcement. §§ Positive progress in ASEAN for building §§ Existing IPRs infringement. competitiveness and integration §§ Insufficient access to finance. §§ Low utilization of trade finance instruments. Opportunities Threats §§ Possibility for further integration into §§ Increase in productivity is not keeping up with rising production value-chain. wage, thereby eroding competitiveness. §§ Proactive Government and business-friendly §§ Possible removal of EU GSP (EBA) eligibility. policy. §§ High dollarization of the economy. §§ Strong outlook for foreign investors (foreigners’ §§ Impact of trade wars. expectations). §§ Potential disruption of trade with the UK due to Brexit. §§ Emergence of competitive countries in the region. §§ Preference erosion will wipe out the current buffer Cambodia enjoys with competitiveness through tariff preferences §§ Global slowdown in trade will likely impact on Cambodia. Source: Authors 1) Cambodia remains a low productivity country, as Myanmar. This, linked to a low productivity despite rising wages. Cambodia’s rising wages ratio, might put in risk an industry mostly owned might risk its position as hub for the production of by foreign investors. Therefore, maintaining labour lower-value added garments, especially in a sector cost competitiveness will be crucial, making sure were margins squeeze and there is an increase in that the minimum wage does not consistently competition from neighbouring economies, such exceed productivity growth.170 Table 26 - Productivity Indices (2016) Cambodia LAO PDR Malaysia Vietnam Sri Lanka Total Factor Productivity 1.0 1.4 1.2 1.0 1.2 Labor Productivity 1.9 2.3 1.5 2.3 2.2 (Hours Worked) 171 Labor Productivity 2.0 2.3 1.5 2.1 2.1 (Number of Employment) Capital Productivity 0.7 1.2 1.1 0.7 0.9 171 Source: APO. Note: Base year 2000=1 170. See OECD (2018). Ibid. 171 Labor productivity is the value of goods and services produced in a period of time, divided by the hours of labor used to produce them. Labor productivity measures output produced per unit of labor, usually reported as output per hour worked or output per employed person. This means that an increase in productivity plays a major role in the prosperity of nations, corporations, and individuals. 157 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 27: Minimum wages in ASEAN (USD) Minimum monthly wage (USD) Cambodia 182 Indonesia 102.74 to 257.73 Lao PDR 139 Malaysia 363.50 Myanmar 98.88 The Philippines 144.14 to 288.30 Thailand 276.3 Vietnam 126 to 180 Source: Dezan, Shira & Associates. Available from: https://www.aseanbriefing.com/news/wp-content/uploads/2013/04/ASEAN-minimum-wage.jpg. 2) Cambodia’s education and human capital lag 3) The high level of informality and the high cost behind most countries in the region. This creates of starting a business tampers the local company major constraints on harnessing the opportunities expansion. Additionally, Small and Medium- from the ASEAN Economic Community (AEC). sized Enterprises (SMEs) in Cambodia face several The country has one of the lowest literacy rates major challenges to integrate into the regional in the world (73.9 percent in 2012), and its Human market, including being faced with a weak legal Development Index is one of the lowest in ASEAN. framework and heavy bureaucracy, difficulties The current labour market faces skills mismatches in accessing finance, and low productivity, very and skills gaps largely due to lack of motivation, staff limited participation in regional integration. turnover, and insufficient education and training. Fiure 23 - Top ten business environment constraints in Cambodia 30 28 Cambodia2016 East Asia & Pacific 25 20 16 % of Firms 15 12 10 8 7 7 6 5 5 3 2 0 Practices of Political Inadequately Access to Transportation Corruption Tax rates Access to land Business Electricity the informal Instability educated finance licenses and sector workforce permits Source: WB (2016) 158 Chapter 6 4) The current cost of doing business in Cambodia Currently, Cambodia is specialized in low quality, does not encourage sufficient domestic investment low-sophistication, and highly substitutable and entrepreneurship.The existing barriers to doing segments, lacking of capabilities to move up in business provoke that many entrepreneurs do not the value chain and tap into final and intermediate register their business and therefore avoid paying GVC product manufacturing. In this context, taxes. Informality, by default, makes participating Cambodia lags behind its regional peers with in trade or linking to FDI firms more difficult, which regards to trade facilitation in monetary and time has severe consequences for business’ prospects— terms, which also have increased in relative terms. and for the competitiveness of the economy.172 7) The quality and intensity of supply chain linkages between FDI and Cambodian firms is Figure 24 - Cambodia’s LPI Score, 2018 low, limiting the availability to transfer know- how. Such connections are a crucial channel LPI through which domestic firms can absorb 5 and technology, knowhow, and management 4 Timeliness Customs practices from foreign firms, therefore improving 3 their productivity as suppliers. Additionally, such 2 linkages can be instrumental in accessing new 1 international markets and GVCs. Nevertheless, Tracking & Tracing Infrastructure the current situation shows that foreign firms producing in Cambodia import more than 90 Cambodia 2018 Region: East Asia & Pacific 2018 percent of their manufacturing inputs, using Income: Lower middle income 2018 Cambodia as a platform for low-cost, low- productivity activities with limited value added, 5) Existing trade costs reduce the country’s therefore having a limited potential and capacity attractiveness as sourcing destination. The for absorbing additional capital and knowledge. contribution of transport and logistics to the total 8).Infringement of IPRs remains high. Despite exported value added from Cambodia reached the improvements in enforcement and the 14 percent, representing almost double that in increase in seizures and prosecutions, it has Thailand and three and a half times that in Malaysia been noted that the infringement of IPRs or Vietnam. Implementing additional trade continues to be widespread practice, including facilitation measures will enhance the country’s elements such as software, music, books, films, competitiveness of existing exporters, but will and the trading of counterfeit products, such as also help attract more sophisticated FDI into the cigarettes, alcohol, and pharmaceuticals.175 The US country. A drop in the price of container fees, from (2018) highlights that although Cambodia is not USD 32 to USD 16, for forty feet containers, is a a major centre for the production and export of step in the right direction173. pirated compact discs, digital video discs (DVD), 6) The low sophistication of the economy impedes or other copyrighted materials, local businesses the country to move up in the value chain. The indicate that Cambodia is growing as a source of existing level of sophistication of Cambodia’s pirated material due to weak enforcement.176 In economy, which ranks 119th over 125 countries response, an inter-ministerial committee, named in the Economic Complexity Index174 ,linked to Cambodian Counter Counterfeit Committee, was the high trade costs, hamper Cambodia’s ability established to combat piracy and adopt anti- to participate in regional and global value chains counterfeit enforcement measures. In April 2018, (GVCs). the Cambodia Counter Counterfeit Committee 172 World Bank (2018). Recent Economic Developments and Outlook. Selected Issue: Can Cambodia become an upper middle-income economy by 2030 and a high-income country by 2050? Cambodia E conomic Update. Washington DC. October. 173 https://www.khmertimeskh.com/50574616/container-fee-to-fall/ 174 See Observatory of Economic Complexity, available from: https://atlas.media.mit.edu/en/ 175 See WTO (2018). Trade Policy Review of Cambodia – Report by the Secretariat. World Trade Organization, WT/TPR/S/364/Rev.1, March. 176 U.S. Department of State (2018), Investment Climate Statement 2018. Available from: https://www.state.gov/e/eb/rls/othr/ics/2018/eap/281488.htm 159 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT destroyed 60 tons of fake cosmetic products 9). Insufficient access to finance. Only 22 per that purported to be made in countries such cent of adults have access to a bank account as Japan and South Korea.177 Additional major and 15 percent of private firms borrowed from IPR-related issues include parallel imports from commercial bank, although numbers rise by the neighbouring countries, and backdoor leaking day. While overall domestic credit to the private of genuine products from factories. Enforcement sector is well performing, as reflected by the fact of IPRs appear to also be an issue, given that that it presents 87 percent of GDP in comparison new regulations concerning the procedure for to 130 percent in Vietnam), the financial sector enforcing IP rights have not been adopted and still faces challenges in meeting the demand of existing IP laws are not consistently implemented a trading sector which is growing at double digit by some of the enforcement authorities. rates and composed of a large share of under- served SMEs. Figure 25 - Domestic credit to the private sector from banks (% of GDP) VIETNAM 120 100 80 CAMBODIA 60 40 MYANMAR 20 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: World Bank WDI Box 11 - Trade finance challenges met by food processors in Cambodia Food processors must purchase basic commodities from farmers, invest in milling/processing equipment and deliver processed foods to buyers locally and internationally. In the course of the mission, one rice processor provided a real-life example summarizing well the situation of trade finance in Cambodia. Working capital could be obtained at a relatively high interest rate, above 15% per annum, for purchasing rice from farmers. On the export side, foreign buyers would not pay for the order until they could control quality, which is after delivery. The bank would only accept to endorse the letter of credit from the buyer’s bank on the condition that they make a deposit in cash on endorsement. The endorsement of the letter of credit would not carry full payment by its bank at shipment – only once the importer has paid. In other words, under such practices, the processor is left with carrying some of the credit risk normally to be borne by the banks; in the same cycle, the processor would have to pay for the high interest rates on its working capital. 10) Low utilization of appropriate trade finance informal, prevent their use. Most imports, in instruments. Improving the utilization of letters Cambodia, are pre-paid. Still, letters of credit are of credit will be crucial to enhance Cambodia’s supposed to be available from the main banks. A competitiveness. While letters of credits are foreign bank active in Cambodia argued that less offered by banks, strong obstacles, formal and than 10% of imports are supported by letters of 177 Ibid. 160 Chapter 6 credit, which is consistent with the fact that most The present recommendations are further of imports are paid cash-in-advance. There are complemented with the Action Matrix true obstacles for their use: 3.1. Policy alignment to build (1) a lack of available documentation to support competitiveness their issuance, in part due to the prevalence of One of the core overarching objectives of the land transport, generating less documents than Rectangular Strategy IV is the “Acceleration of sea transport; Governance Reforms”. In order to achieve this, it (2) market power from suppliers originating in will be necessary to establish a strong institutional larger economies (Thailand, Vietnam, China), framework, which will require an alignment of which are in imposing pre-payment of their input plans under the rectangular strategy phase IV, to Cambodian importers; and perhaps most SNDP, amendments to policies/laws and new ones importantly, (such as investment laws, competition & consumer protection, e-commerce), to complete/update (3) perceived uncertainties related to collateral. and adopt Innovation strategy, productivity 3. Medium Term Strategy for masterplan, IDP, etc. In this light, the Rectangular promoting greater competitiveness Strategy IV proposes to focus on: Cambodia is on the path to graduate from its • Institutional reform and capacity building; Least-Developed-Country (LDC) status. However, • Enhancement of cleanliness and integrity in the this chapter has highlighted a series of challenges public administration; hampering the country’s effort in poverty • Strengthening of work efficiency; and reduction, such as an under-enabling business • Strengthening of private sector governance. environment, weak labour productivity, lack of access to trade finance, low levels of innovation, Core activities in this area, aligned to the amongst others. The emergence of competitive Rectangular Strategy IV, and related to regional nations, such as Myanmar, the impact of competitiveness, include: existing trade wars amongst developed nations and the potential removal of trade preferences by • Implementing “Cambodia Industrial the EU, might force the country to adopt a series of Development Policy 2015-2025”, especially measures to keep its competitive advantage and transforming Sihanoukville Province into a remain an attractive market for foreign investors. multi-purpose Special Economic Zone (MPSEZ) along with the conduct of mid-term evaluation; In this context, a series of recommendations are Formulating and implementing the garment and made in order to ensure that Cambodia maintains footwear sector development strategy to improve and reinforces its competitiveness. These can be competitiveness, create value-added, create divided into four main objectives: supporting industries and develop value chain; 1. Building competitiveness through policy Further improving the operation of SEZs to attract alignment; more investment and create industrial bases that 2. Improving the business enabling environment; include agro-processing, assembly, furniture 3. Addressing trade, investment & innovation manufacturing, and household appliances as bottlenecks; and well as souvenir products for tourism sector 4. Making trade finance accessible. • Putting in place the performance-based management system by using Key Performance Indicators (KPIs), particularly for officials at supervision and management levels • Strengthening coordination between ministries and improve policy delivery 161 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT framework. Examples from Rectangular Strategy one-stop entry for registration services, including IV include the strengthening information sharing business registration, tax certificates, business mechanism at all levels of public administration licenses, and other related public services. to enhance management effectiveness and • Enhance judicial service establishing a respond to the demand of public service users in commercial court and strengthen alternative this rapidly changing national and international dispute resolution for commercial disputes. context. • Promote linkages between SMEs and multinational • Improving the M&E system for policy delivery, enterprises. and benefits of investment or trade agreement. • Strengthen firms’ absorptive capacity. Examples from Rectangular Strategy IV include putting in place monitoring and evaluation 3.3. Addressing trade, investment & mechanism to help improve performance, innovation bottlenecks implementation measures, strategic directions Progressive trade liberalization carried out in a and inter-ministerial coordination for the strategic manner has been success in promoting preparation and implementation of government trade across the world, by bringing down tariffs policies and trade barriers, opening new markets to new players. Cambodia has been one of the 3.2. Improving the business enabling largest beneficiaries of one of the most generous environment unilateral preference scheme, the EU’s GSP. The goal of the business enabling environment However, the competitive advantage granted by is “to improve the operating environment for local tariff preferences can only be realised with the businesses (especially small and medium-size ones), right investment and innovation led-enabling help countries attract foreign investment, and help environment. draft regulations that make sure this economic In this context, Cambodia needs to put in place activity will promote equality and protect the the necessary structures to enable the emergence environment.”178 In Cambodia, despite the recent of a competitive business and trade environment. improvements made, businesses still have to deal Those structures should promote local companies with lengthy, complicated, repetitive, uncertain to invest in new technologies and markets, making and unpredictable procedures that continue to them more competitive; generate specialized be a challenge for business environment.179 In this skills, by encouraging the adoption of training context, Cambodia should adopt the following schemes; and stimulate innovation and the recommendations: linkages between academia and private sector.180 • Speed up the process for establishing and One of the key elements to be competitive at a registering a company, and reducing the cost for global scale consists in basing strategic decisions doing so. on sound, comprehensive and reliable trade • Adopt measures to reduce informality, such as information. Particularly, it will be crucial to introducing fiscal incentives, raise awareness enhance the efficiency and coordination of Trade campaigns, introduce sanctions, reduce the and Investment Support Institutions (TISIs), by: interaction with officials, promote more risk management of controls, and streamline business processes for licencing. • Introduce a Committee to oversee an electronic • Developing specialized capacity-building registration portal that facilitates and provide a programme(s) for trade and investment support 178 Bowers, C. (2006). What is the business enabling environment? Private Sector Development – The World Bank Group, May 12. Available from: http://blogs.worldbank.org/ psd/what-is-the-business-enabling-environment 179 Royal Government of Cambodia (2018). Rectangular Strategy for Growth, Employment, Equity and Efficiency: Building the foundation toward realizing the Cambodia Vision 2050 – Phase IV of the Royal Government of Cambodia of the Sixth Legislature of the National Assembly. Royal Government of Cambodia, Phnom Penh, September. 180 Cellich, C. & Burgeous, M. (2012). Trade Promotion Strategies. Business Expert Press, January. 162 Chapter 6 institutions to effectively deliver their services. • Voluntary standards: understand if this is • Aligning capacity-building programmes necessary for your product, the cost and the to the implementation responsibilities process. assigned by the CTISU. • Product placement or distribution channel: • Establishing a formal network of key trade capture and explain the market structure in the support institutions to better coordinate the target country. provision of trade and investment support • Promotion: how to foster and maintain activities, including but not limited to investment commercial relationships with buyers, sales and trade information and export promotion, teams and distributer. Discuss how to attend access to trade information and intelligence, trade fairs and conferences to realize sales among others. • Designing and roll-out a capacity-building programme aimed at trade representatives Similarly, Cambodia should strengthen and diplomats, at overseas Embassies and the network of institutions providing trade trade offices to enable them to provide better information and promotion support by: advice to SMEs and report on opportunities and feasibilities of exporting a selected product to a • Deploying a comprehensive capacity- target market building and performance enhancement • Putting in place a cooperation framework plan for establishing a trade promotion agency to promote the exchange and dissemination of (or better capacitating the trade promotion trade information among government agencies, department) to provide trade information and TISIs, media, academia, research organizations promotion services. and the private sector. • Expanding and supporting current programs provided by other public and private sector Regarding the role of Intellectual Property institutions and provide them specific training on and innovation, it is worth highlighting that operating a trade information service; selecting technological innovations are a critical instrument relevant trade information sources; and selling to improve the country’s competitiveness, as business information and related services. these open new markets and new industrial • Training TISIs in developing in-depth market branches for a new product. Thus, an innovative feasibility studies that examine the steps product, either new or improved, that satisfies exporters of a selected product must take in customer’s expectations offers a door into new order to effectively enter target markets. Vital businesses, new markets without competition as components covered include: long as it retains its innovative advantage. In this • Product specific requirements and Rules of Origin: context, national intellectual property systems how an exporter can prosper in a value chain play a crucial role in helping a business to gain and world by using preferential trade agreements. retain its innovation-based advantage.181 In order Scrutinize the non-tariff measures in a target to strengthen this area and boost R&D initiatives market and the detailed RoO provisions to in the country, Cambodia should: maximize the chance the exporter can actually benefit from existing agreements. • Drive more R&D by establishing innovation • Buyer and product segmentation: what an parks, encourage collaboration between exporter needs to consider when crafting their research and business, establish incentive final product in order to ensure good take up rate schemes for R&D, etc. in target market. • Address gaps in the intellectual property • Labelling and packaging: absorb the crucial protection framework, by expediting the elements that affect customs procedures, outstanding legislation on protecting trade transporting and even branding. secrets, integrated circuit protection, and 181 Kalanje, C. M.: Role of Intellectual Property in Innovation and New Product Development. WIPO, Geneva. Available from: https://www.wipo.int/sme/en/documents/ ip_innovation_development_fulltext.html 163 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT encrypted satellite signals, as required by the One of the different reasons highlighted by World Intellectual Property Organization. financial institutions explaining the low rates of • Ensure the enforcement of intellectual accessibility for trade finance instruments has property rights and strengthen the fight against been the lack of preparation and professionalism counterfeit products. of the funding request. In order to tackle this, one 3.4. Making Trade Finance Accessible of the activities proposed is the promotion of financial education in SMEs and presentation of Access to trade finance is a financial mechanism financial documentation, covering topics such as: essential to bridge the time lag between a product’s shipment from one market and its delivery in How to apply for a loan and financial products and another. It also acts as leverage for those small services available to start-ups, and firms that would otherwise be considered too How to pitch to investors and how to search for risky, enabling them to access global value chains funding. and contribute to the country’s employment and productivity growth.182 Additionally, it will be crucial to increase the awareness of both the financial institutions and In this context, the Rectangular Strategy IV the costumers on the different instruments of has highlighted a series of measures aimed to trade finance, by: improve, more generally, the financial inclusion of the country’s population, by, for example, further • Promoting financial education between banks implementing the “Financial Sector Development on the setting up of LC, factoring, supply chain Strategy 2016-2025”, further developing payment finance, and credit insurance facilities; gateway infrastructure, coordinating the policy • Promote education on the low-risk character of and regulatory framework, strengthening trade finance products, based on ICC publicly institutional capacity and human resources available documentation related to financial and banking sector, etc. • Establish a summary of the different trade finance instruments in a brochure and disseminate it One of the main key actions under this area to be among the main industry association. undertaken is to improve the access to letters of It would also be beneficial to determine, through credit. Letters of credit carry no more risk whether surveys, what is the demand in Cambodia for they are issued in Asia, Europe or Africa. The each different type of trade finance instrument. delinquency rate on these financial instruments is Once demand for one or the other product has one of the lowest of the entire financial industry. been identified, the different actors should be These obstacles can be overcome if the letter of brought together - local and foreign banks, credit (LC) market was working without excessive producer associations, the Ministry of Commerce, requirements. In principle, the main collateral Ministry of Finance and the Central Bank - to in a letter of credit is the merchandise itself. discuss how to develop markets for these products Despite this, the main banks require “hard” and in Cambodia. Multilateral development banks cash collateral. In doing so, the banks are in effect provide education on the use of such instruments, drying up the markets for LCs, making them very and run trade finance facilitation programs. unattractive to use in Cambodia. Such access could be improved by allowing movables (e.g., equipment, inventory) and intangible asset (including receivables) to be permitted as an enforceable security, enabling secured creditors to enforce such security on the event of insolvency. 182. Auboin, M. & DiCaprio, A. (2017). Why Trade Finance Gaps Persist: Does it matter for trade and development? ADBI Working Paper Series, No. 702, Asian Development Bank Institute. 164 The present chapter in its first sections aims at describing the national quality infrastructure system and identifying areas for improvement. Subsequent sections summarize the key SPS and TBT issues that still affect external trade, and put in perspective the country’s status in the regional and international trade agreements. Finally, the last section recommends the necessary updates in the quality infrastructure, to fill the gaps CHAPTER 7 identified and thereby ensuring Cambodia’s better adherence to her international commitments, QUALITY as well as meeting the requirements of trading partners. INFRASTRUCTURE The terms in this chapter adhered to the definitions AND STANDARDS or meanings adopted by the international fora on standards and quality. 2. Introduction to the quality infrastructure system 1. Introduction 2.1. Main components The CTIS 2019-2023 includes this new chapter A quality infrastructure is the system comprising on Quality Infrastructure and Standards in the the organizations (public and private) together aim to simplify the presentations on SPS and with the policies, relevant legal and regulatory TBT issues. In the previous CTIS versions, these framework, and practices needed to support and issues had been covered adequately; however, enhance the quality, safety and environmental the related sections did not include a description soundness of goods, services and processes. The of the discrete technical functions contributing Quality Infrastructure System (QIS) is required to the implementation of SPS & TBT measures. for the effective operation of domestic markets, As a result, readers might have faced difficulties and its international recognition is important to to get a synthetic view on the capacities of the enable access to foreign markets. It is a critical various departments of the Royal Government element in promoting and sustaining economic of Cambodia in this domain, or to appreciate the development, for enhancing Cambodia’s interlocked conditions acting as limitations to competitiveness as well as environmental and Cambodia’s exports. social wellbeing of Cambodians. Standards and quality infrastructure play a crucial In recent years, several international organizations role for the developing or emerging economies (UNIDO, ISO, IEC, ITC,) and development partners eager for more integration in the global economy. (WB, OECD…) have analyzed the QIS concept Cambodia’s productive sectors seek maintaining and described its components. There is wide their competitive position through shifting recognition that the QIS consists of all the seven from trading unprocessed commodities or basic functions listed below: assembled goods, to more processed ones that 1. Setting and implementing a national quality would allow capturing more value. The lack of policy (NQP) certain quality functions or their inefficiency would 2. Setting and implementing a framework for prevent enterprises to establish and demonstrate technical regulations quality of their products, and hence would 3. Accreditation greatly influence Cambodia’s export objectives. 165 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4. Standardization document setting the national quality objectives 5. Metrology and proposing a platform for action (action plans), 6. Conformity assessment: testing, inspection, which all stakeholders may link to their individual certification development plans. 7. Quality promotion and use 2.3. Specific contribution of NQIS to Trade Facilitation 2.2. Organization and Usefulness of the QIS International trade agreements for reducing tariffs The QIS aims at setting national quality objectives, have largely been implemented. At present, non- agreeing on requirements related to the above tariff measures consist of the main issue hindering functions, and then providing acceptable global trade. One of the basic conditions for trade evidence recognized at the international level that is producing competitive and safe products, which products, services, processes, systems, persons, or are matching markets requirements documented bodies conform to such quality requirements. in standards or technical regulations. Non-tariff The QIS is embedded in policy, legal, institutional measures include technical standards, the use of and regulatory frameworks governing its quality and safety regulations, and the modalities operation. These frameworks provide supervision used to assess conformity to requirements. When and orientation functions, assuring thereby used in a way that differs from international best that the QIS effectively produces outcomes, i.e. practice, these NTM can become barriers to trade. acceptable evidence of conformity that satisfy Therefore, harmonization and recognition the needs of the country (fitness for purpose) on a between trading partners of standards and continual basis. conformity assessment results is a way to reduce The QI should operate as a system, meaning the or eliminate trade barriers. There should be different institutions and components should work agreement on the methods used for testing, in a coherent and synergistic manner in order to inspection, and certification; the reports and deliver services at an optimal cost for the country. certificates established in one country should be Finally, the QIS needs to remain dynamic: regular accepted in other countries. While there is a wide review is needed in order to evolve as necessary to use and acceptance of CA results between private meet the changing needs of Cambodia. trading partners (based on the use of international standards or private standards), there is much Defining how the QIS is organized and how the less recognition between Governments. Mutual functions are fulfilled should be directly guided acceptance still tends to be limited in health, by the Government’s economic vision and safety and environmental sectors; despite some policies. QIS bodies operate under their own legal progress noted in regional economic blocs. A well- and institutional mandates, in both the public functioning QIS plays a crucial role in harmonizing and private sectors. However, in developing CA procedures and in promoting acceptance of countries, the Government bears a responsibility CA results at industry and Government levels. If to ensure that the QIS satisfactorily addresses all a country’s QIS is not aligned with international the constituent functions listed above in order to best practices, trade partners would have little fulfil the needs of the country, and that it operates confidence in CA results, and producers may be effectively and in accordance with international unable to join international supply chains. best practices and requirements. It has been shown that an efficient way to assess International experience indicates that the best and align a national QIS is to produce a National way to succeed in improving effectiveness of the Quality Policy. The NQP describes the current gaps QIS is to prepare a national quality policy. The and sets objectives towards better alignment with policy formulation cycle, comprising of wide- international practices. It provides an operational ranging consultations and discussions, results in a 166 Chapter 7 strategic framework for QI development and recommend ‘promotion’ instead of ‘enforcement’. services in support to the demand from private If the intention is to adopt mandatory technical sector, public sector, consumers. The required QI regulation, this should be indicated. E.g. Tourism services can be mapped at each stage of the value Development Strategic Plan 2012-2020 (unofficial chains; then technical assistance can be designed translation), item (181) “Promoting the Movement to enhance cost-effectiveness of such services. of Clean City, Clean Resort, Good service and ….speeding up the measures leading to 3. Mapping of Cambodia’s quality Greenness, Cleaning, Sanitation” The Plan should infrastructure system (QIS) relate to other frameworks for food safety and 3.1. The main functions of the QIS. specific hygiene standards in food establishment, in particular as suggested by Prakas No UATH. 3.1.1. Quality Policy BRK 868, Article 20. Similarly, item (185) reads Cambodia has no National Quality Policy yet. The “All tourism product and services must contain Rectangular Strategy-phase 4 includes some useful national standards and international recognition”. entries such as Item 4. of side 4 of Rectangular The Plan should be more realistic and specify 3. ‘Private Sector and Job Development’ (p. 37), which areas should use standards and how and Items 3, 5, and 6 of Side 1 of the Rectangle international recognition should be gained (e.g. 4. ‘Inclusive and Sustainable Development’ (p. Code of Practices, Quality Labels, Certification 38). However, other policy documents or related schemes for hotels, etc.…) sector plans include none or very few statements 3.1.2. Framework for Technical Regulations related to the quality and conformity of products. When such themes are included, the contents The framework for regulatory work in Cambodia remain usually at a very general level, without is currently incomplete. The main basis for defined targets or with unrealistic targets. In the regulatory work is the ‘Law on the Management absence of an overarching frame of reference to of Quality and Safety in Products and Services’ quality at the national level, it is uneasy for policy- (NS/RKM/0600/001). Many ministries have a makers to avoid inaccurate wording or conceptual section in charge of regulatory and/or legal errors across documents, and to design effective aspects: these sections develop the dispositions implementation modalities. E.g. Agricultural needed to enforce the requirements of the Laws Sector Strategic Development Plan, 2014-2018, when it come to the protection of human and p. 18 “MAFF has …, and established production environmental health, competition and fairness standards and laboratory facilities for key fish in trade, business registration, safety of products, products such as Prohok, dried snakehead and etc. Once drafted at ministry level, a proposed frozen shrimp. Further investment in food safety technical regulation must go through a series of and market regulation functions, especially screening steps involving the ministry and then SPS standards, are required.” The policy should interministerial meetings. Yet in each ministry, the separate more clearly which area should be process to define and adopt technical regulations regulated (hygiene and contaminants) and which appears to be ‘ad hoc’ and not documented. SPS ‘standards’ are considered. No ministry would have published a document explaining to interested parties how they consult E.g. Rice Policy183, p. 9 “MIME through the Cambodia stakeholders and how they prepare and issue a Standard Institute (CSI) shall cooperate with MoC technical regulation. However, international good and MAFF to define grading and standards of regulatory practice suggests that the processes Cambodian milled rice and collaborate with the used to assess, prepare and enforce technical private sector to enforce those standards in the regulations are described and available to all milled rice market.” Standard being for voluntary interested parties. use, in particular for export, the policy should 183 Policy Document on the Promotion of Paddy Rice Production and Export of Milled Rice. 167 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT In MAFF, the draft law on “Quality and Safety of The DoA functions as an accreditation focal point Agricultural Products” was developed in 2013 with that provides laboratory accreditation services the support of USAID to ensure the right framework jointly with their partner accreditation bodies, was applied through the harmonization of all Bureau of Accreditation of Vietnam and Bureau departments roles in food safety of agricultural for Laboratory Accreditation of the Department products, both in the production areas until of Science Services (Min., of Industry, Thailand). As primary processing plant. a focal point, DoA’s role is to provide information to laboratories, receive their applications for The RGC has required using regulatory impact accreditation, and liaise with partners to plan, assessment in a Decision from the Office of Prime arrange and carry out joint assessments. The Minister (Dec. 2010). With the support of an decision for accreditation is made by the Cambodia ADB project184, the Office for Regulatory Impact Accreditation National Council, composed of Assessment was created. However, the current qualified persons. Successful applicants then powers and activity of this Office seem limited, receive two accreditation certificates, one and so does the overall capacity to assess, at from the partner AB (which bears international ministry level, the need and usefulness of existing recognition) and one from DoA (which is and proposed regulations, or to evaluate their nationally recognized). The DoA has enlisted a cost-to-benefit ratio. small number of laboratories (a dozen) and has Under the framework of National Law on carried out a limited number of assessments; to standards, MIH role includes providing a date two laboratories185 have been accredited framework to all ministries concerned to set up jointly by DoA and their partner AB. technical regulations, when they use or refer to The Department of Accreditation is seeking the national standards for products or services international recognition by the Asia Pacific affecting health, safety, environment and in case Accreditation Cooperation (APAC, formerly of economic crisis. APLAC). International practice formalized in Possible consequences of the above shortcoming ISO17011 requires that accreditation bodies must include the existence of numerous regulations demonstrate they can make accreditation decisions that Authorities fail to enforce effectively due to with competence and in full independence, as well insufficient capacity, or regulations that could as having separate arrangements/ mechanism have a low benefit-to-cost ratio, with their to assess the risks related to their activity. Before enforcement (for Government) and compliance DoA could undergo a peer-review from APAC costs (for private sector) possibly higher than to and become a full member of this regional the economic benefit for the Nation. mutual recognition arrangement, they must demonstrate their compliance to ISO17011, carry 3.1.3. Accreditation out a certain number of conformant assessments While previously under the purview of the ISC, the and implement a full accreditation cycle for two accreditation function has now been entrusted laboratories. to the Department of Accreditation (DoA) under The Department of Agro-Industry (DAI) under the Ministry of Industry and Handicraft. The MAFF is the accreditation body to ensure the separation allowed solving the issue of possible quality and safety of agricultural products for conflict of interest for ISC supervising both domestic consumption and export ( e.g. issue the laboratories (NMC and ILCC) and the organization certificate on the quality and safety of agriculture that accredits laboratories. products in line with CamLAPF). Meanwhile, the CamLAPF has been adapted and now follow the ISO17025 guidelines. 184 https://www.adb.org/sites/default/files/linked-documents/38421-02-cam-pam.pdf 185 As shown on the DOA website accessed 12 Dec. 2018 at http://www.da-canc.gov.kh/en 168 Chapter 7 3.1.4. Standardization (NSC - 21 members) chaired by MIH. The NSC mandate includes as well determining voluntary Under the Law on Standards, the Institute of or mandatory standards or standard trademarks, Standards of Cambodia (ISC) is the national and advising the Minister with regard to standards body responsible for the preparation standardization priorities and policies. As of and publication of Cambodian Standards and end 2018, 895 Cambodian standards have been guidelines for products, commodities, materials, approved. They deal in majority with the sectors of services and operations. Besides facilitating the food (40% of total), test methods (20%), electronics preparation of standards under the Standards (18%); and also construction, automotive, rubber, Department, its functions include promoting and wood. Most of the Cambodian standards are standardization and quality (Department adoption of international standards from ISO, the of Information), and providing training and Codex Alimentarius Commission (WHO-FAO), or consultancy services. other international organizations. According to In relation with international linkages, the ISC the list of standards posted on the ISC website186, Department of Information is the TBT national only about 30 texts, of which four codes of enquiry point for Cambodia, as well as the practice for processing of fisheries products, notification authority. ISC represents Cambodia as are not equivalent to international standards. a correspondent member in ISO, with involvement In addition, twenty-one standards have been in five ISO TC (participant). The ISC is also a made ‘mandatory’ (electronic-electrical products, member of IEC’s affiliate program, and the country labelling of food products, PET for bottles, water, leader for the ASEAN Consultative Committee on ice, and a few food items). This is a notable Standards and Quality (ACCSQ). ISC is part of the reduction from the previous list that included joint sectoral committee for electric and electronic until 2015 up to some 151 so-called ‘mandatory equipment, as a signatory to the ASEAN sectoral standards187’. Finally, the MAFF-DAI has promoted mutual recognition arrangement for electrical the standard of agricultural products through and electronic equipment (ASEAN EEE MRA). education and extension service for competing in the markets in line with Cambodian standards The ISC facilitates the preparation of national and the Codex Alimentarius Commission. standards by the ten Technical Committees (plus one on digital economy). ISC is using the ISO/ 3.1.5. Metrology IEC Guide 21 to prepare and adopt standards Presently, the metrology functions are contained and has notified the WTO on Cambodia’s in the National Metrology Center under the acceptance and use of the Code of Good Practice supervision of the Ministry of Industry, as for the Preparation, Adoption and Application mandated in the Law on Metrology. The NMC has a of Standards (Annex 3 of the TBT Agreement). staff of 45 officers organized in four departments: However, the work programme posted on the one for legislative affairs and three for scientific, ISC website is not detailed and not updated. legal, and industrial metrology. The NMC also Furthermore, the ISC website presents neither supervises 25 Metrology Offices in provinces and the standardization process used nor the municipalities, which are in charge of enforcing composition of the various TCs. The publication of legal metrology regulations; however, these these elements is considered as part of the WTO are only gradually being equipped with basic requirements or good practices to avoid creating measurement instruments (support from China). obstacles to trade. The NMC has received significant support from Once the standards have been prepared or UNIDO over the last decade; efforts to build the reviewed, they are approved (or amended or capacity of the petrologists are continuous with cancelled) by the National Standards Council new cooperation projects with Government of 186 Accessed 15 Dec 2018 at http://www.isc.gov.kh/en/detail/view/100?ctype=article 187 The international usage suggests using instead ‘technical regulations’. 169 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT China and the PTB of Germany. The NMC is full and buyers, to ascertain that shipments conform member of APMP and APLMF, member of OIML, to the quantities and basic characteristics stated and member of the ASEAN EMG and ACCSQ WG3. in sales documents. Phnom Penh-based local companies, affiliated to international conformity The central office has industrial metrology assessment groups, include Control Union, Bureau laboratories188 (staff of ten) for length, pressure, Veritas, Intertek, and SGS. The main business mass, volume, and temperature (-10oC to +250oC); lines are textiles, consumer goods, wood, and the three later tests have been accredited by DoA commodities (rice, corn, soybeans…). in 2017. vv Certification The legal metrology department (staff of 20) responsibilities are 1) to verify measuring Public Certification Services instruments used in trade transaction, 2) to verify Mandatory certification is used by the RGC the production of pre-packages, to develop the departments to control the circulation of products system of units of Cambodia. In addition, there deemed dangerous for the public. is also a legal affairs office and a crime control metrology office. The recent focus of legal • The ISC Certification Department administers metrology activity has been on fuel dispensers a Product Certification Scheme based on the and weighting instruments. ISO/IEC 17065:2012, which provides rules for a third-party certification system of determining Besides the NMC, other entities provide industrial conformity with technical regulations (chili calibration services in country (for surveying sauce, vinegar, water…) through product testing instruments) or have a representative office to and the assessment of the factory practices. The arrange calibration in the region (e.g. Endress & Scheme requires licensing of operators wishing Hauser, Intertek). to use the ISC Certification mark; therefore, ISC 3.1.6. Conformity assessment provides licenses for products related to health and safety conforming to regulations. Licenses vv Inspection are issued for an initial period of three years Public Inspection Services and can be extended for subsequent three-year periods provided the obligations under which Several departments have a mandate to ensure the license was granted continue to be fulfilled. inspection of products and production /trading After the issuance of a license, the concerned establishments. This mandatory inspection is products can be affixed with an ISC mark. required as part of the official controls targeting In addition to the above Scheme, the ISC provides goods and products bearing a risk for consumers. commercial certification services for management Mandatory inspection is thus organized at systems (ISO/IEC 9000, ISO22000, ISO14000, different steps of the supply chain: by MAFF for HACCP-GMP), following the same set-up (license primary production and post-harvest sites, by and use of the Mark) as above. The certification MOC for border entry points and up to markets, department of ISC has 13 officers, some of them by MOI and MOH for processing factories and are Lead Auditors for the relevant standards. So restaurants. At MIH, the Regulatory Department far, 15 companies are certified by ISC for their of ISC is on the way of developing the inspection management systems. This certification activity procedures in line with requirements of the is organized according to the standard ISO 17021; standard ISO/IEC 17020. however, the Certification department is not yet Private Inspection Bodies accredited. In contrast, private (voluntary) inspection services • The Ministry of Commerce is in charge of are used in trade transactions between suppliers providing export or pre-shipment certification. 188 See detailed list of capacities in Annex 3 170 Chapter 7 • In respect of hygiene, quality and safety PhD degrees. In 2018, the CTL has tested 5,361 of agricultural products, MAFF has the samples, of which 60% food products, 20% responsibility to issue Health Certificate (animal agricultural products, and 20% petroleum. The products incl. fisheries products), Phytosanitary CTL administers the mobile lab of Camcontrol that certificates (vegetal products) as well as quality has processed about 3,000 food and agricultural and safety certificates (including raw materials, samples in 2018. The CTL is working to prepare semi-process and process products). a QMS and seeking accreditation in the future; • The Ministry of Environment has mandate at present, they ensure reliability of tests results to certify the absence of GMOs and LMOs in though quality assurance and quality control imported goods. plans. MOC has also a range of nine smaller laboratories Private certification Bodies in the provinces190: three are equipped and perform basic food tests (1,200 samples in 2018) As is the case for inspection, private (voluntary) and the others are not yet in operation. certification services are used in trade transactions between suppliers and buyers, to The Industrial Laboratory Centre of Cambodia ascertain compliance of products, services or (ILCC), under ISC (MIH), was created in 1998. Its management system with clients’ requirements main objective the provision of testing services to or standards. Certification of systems is often support the work of other MIH departments in the used to demonstrate the capacity of an operator areas of food and non-food products, control of to produce regularly goods with a given level regulated goods, and quality control systems. The of quality (quality management system) or a ILCC also serves other customers in the private given level of safety (food safety management sector and the community. ILCC has started since systems (e.g. HACCP, ISO 22000). A few private 2016 providing testing services for the control of certification bodies are operating in Cambodia; non-food products; capacity building continues particularly active in the area of agri-food in a new mechanical and electrical and electronics products are Guardian Independent Certification, testing lab, which would start operating in 2020. TUV Rheinland, EcoCert, and Control Union. There ILCC has a staff of 31 officers, they receive about are still a limited number of certified enterprises189 7,500 samples/ year and run on an annual budget in the food sector (ISO22000 for water, HACCP for of about 275,000$. The laboratory is accredited for fish sauce and chilled crabmeat, cassava starch) or microbiology tests by NATA, and for food and water in the manufacturing sector such as construction chemical tests by the Singapore Accreditation (ISO/IEC9000), electrical (ANZ product standard), Council. The range of tests includes heavy metals cement (OHS18000), rubber, and human resource and pesticides residues in food matrices (capacity and training services (ISO/IEC 9000). for 31 organochlorine and organophosphate vv Testing laboratories molecules). Public laboratories The laboratory depends on Government resources allocation and works based on a yearly budget The Camcontrol Testing laboratory (CTL), under submission; while customers pay the test fees the Directorate-General of Import & Export directly to MOC (proceedings go the Treasury). Inspection (MOC), is responsible for testing food These financial procedures are not optimal: the samples for physical, chemical and microbiological budget is not always fully allocated and variations contaminants in support to Camcontrol’s food are not possible, which limits the capacity of the inspection activities in local markets. The CTL lab to adapt rapidly to market opportunities or has 44 analysts, most of them with engineer or specific needs (PT testing, purchasing of reference 189 See JAS-ANZ Accreditation website, accessed 15 Dec 2018 http://www.jas-anz.org/our-directory/certified-organisations?combine=&country%5B0%5D=Cambodia&location=&scope= 190 In Sihanoukville, Phnom Penh port, Poipet, Svay Rieng, Kompong Cham, Prey Veng, Takeo, Preah Vihear, and Boeung Trakaung. 171 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT materials, reagents…). Another issues for ILCC is testing services of SPS related to food safety of the staff turnover. Retaining good staff is difficult agricultural products, issue the certification of SPS while the incentives as Government officials are related to food safety, facilitate the trade activities low and not conducive to deliver high quality and act as the third party to quarantine the other work. Another issue is the need for more financial testing laboratories of agricultural products. autonomy; ILCC submitted an autonomy plan in Currently, CamLAPF is developing their QMS, 2012, which was not followed on by MOI. quality manual, SOPs, program files and work instructions with the ISO17025 guidelines and The Laboratory of the Department of Fisheries seeking towards accreditation. The CamLAPF is Post-harvest Technologies and Quality Control built under the supporting from People’s Republic and the Aquatic animal health laboratory of of China to support the Royal Government of fisheries Administration (MAFF) have a limited Cambodia’s RS4. In addition, MAFF has indicated capacity. The earlier is mainly designed for DAI as the Inspectorate Agency for food safety microbiology in which sufficient and advanced of agricultural products through the Prakas 334 analytical equipment has been provided by RGC MAFF dated on 22 August, 2007. and donors but in-adequate space for installation. The laboratory is being used to support The National Animal Health and Production microbiology test for official control of food Research Institute (NAHPRI), under the General quality and safety of fishery products. Chemical Directorate of Animal Health and Production, tests and drug residues are either used test kits monitors animal health by carrying out serology, or outsourced to other laboratories in/out of the virology, pathology, and bacteriological and feed country. Capacity building for analysts is on- analyses. The NAHPRI has 40 analysts, most of going under UNIDO technical support. The latter them with bachelor or master degrees or PhD. is not able to detect and identify all diseases (OIE Recently this unit has been is equipped with an and NACA listed): only a few tests for a few species Ultra Performance Liquid Chromatograph that for level I and II tests (excluding histo-pathology, enables testing residues of veterinary drugs, mycology etc.) and none for level III tests. pesticides, growth promoters, etc. in products of animal origin and animal tissue, and the quality of The National Agricultural Laboratory (NAL) of veterinary drugs and animal feed. This equipment General Department of Agriculture (GDA-MAFF) would be operational once the capacity of the includes four sections namely 1), analysis of team is developed. The NAHPRI Lab also has fertilizers and pesticide products (verification of capacity to test for some food-borne pathogens formulations), 2) elements in soil (fertility) and such as salmonella spp., E. coli, Staphylococcus water, 3) pesticides residues, and 4) biotechnology aureus, Campylobacter spp. and clostridia. This analysis. This laboratory covers 1,200sq.m., it has 33 lab is currently developing its QMS. officers. Upgraded recently with RGC and Donors support, its equipment includes spectrometers The National Food & Drug Quality Control for analysis of metals, HPLC with ECD and Fluo Laboratory has 40 persons. It carries out tests detectors, and a GC-MS for analysis of pesticides for drugs (assay, uniformity of content, and residues, the later not fully operational (a.o. Dec. dissolution); no food tests are performed. They 2018). NAL has yet to develop a management are preparing their QMS and look towards system and quality assurance programs. accreditation, yet funding is also an issue. Cambodia Laboratory of Agricultural Products and The National Health Product Quality Control Foods under Department of Agro-Industry of MAFF Centre (NHPQCC), under the Ministry of Health (CamLAPF-DAI/MAFF): CamLAPF is named by the performs drug quality control using instrumental declaration nr. 204 dated on 20 April, 2018 on the analysis. It also plays a role in analyzing samples launching of Cambodia Laboratory of Agricultural from poisoning outbreaks. Products and Foods. Its roles are to provide the 172 Chapter 7 The Environmental Laboratory of the Department 3.1.7. Quality promotion and use of Environmental Pollution Control, Ministry of While the other functions or pillars of the QIS Environment has been operating since 1996. The aim at developing and rationalizing the offer of lab is responsible for testing the presence of GMOs services, this last pillar aims at developing the and LMOs. However, it has little if any connections demand side. The use of standards, conformity with the other SPS-related laboratories. assessment services results from the needs of The National Specific House Laboratory of industry (competitiveness and effectiveness), the MAFF is responsible to test rubber and provide public sector (efficient official controls) and the grade as per international trading standards. This public in general and consumer association in laboratory has lost its accreditation when it was particular (value for money, fairness in trade, etc.). relocated in 2017. Cambodia has not yet organized the promotion The MoE laboratory centre for biodiversity and advocacy for quality in a holistic and analysis is equipped to perform basic biological comprehensive manner. For example, there is and chemical tests. no national quality contest in the industry or agriculture sectors, no apex body in charge Private Laboratories of promoting quality and safety issues across There are four major private laboratories in the sectors, and no consumer association in Cambodia, all based in Phnom Penh: Intertek Cambodia. Testing Services lab, Bureau Veritas lab, SGS lab, Separate initiatives have been taken, which need and TUV Rheinland lab. These local companies are to be continued and amplified. owned by the eponym multinational conformity assessment groups. Under the group supervision, -- The Ministry of Health’s National Centre for Health they provides a range of testing and quality- Promotion plays a leading role in delivering food related solutions for industry, where testing mostly safety education to consumers. The Centre is comes as a part of the inspection and auditing actively involved in health education and food services. The analytical range includes analyses safety for the public and schoolchildren, for textile industry (mechanical and chemical -- The Fraud and Deceitful Advertising Repression tests) and commodities such as petroleum, Office, under Camcontrol, has delivered chemicals, minerals, and food and agricultural awareness raising campaigns using seminars products. In addition, smaller laboratories operate explaining the provisions of the Law on in the area of textiles and cosmetics (e.g. Modern Management of Quality and Safety of Products Testing Services). Among the group of private and Services; printed materials covering product laboratories, the five laboratories mentioned labelling and food-borne disease; and TV above are accredited. broadcasts. -- ISC Information department has initiated The Laboratory for Food and Environmental awareness raising program for SMEs and Hygiene (LHAE) of Institut Pasteur du Cambodge industries on the use and implementation (IPC). IPC is a private company maintaining a of standards and conformity assessment large laboratory complex with several specialized procedures that relates to quality and safety of laboratories. In the past, they were partners of industrial products and food and pre-packaged the Ministry of Health in investigations into food- products. borne diseases. The IPC’s Food & Environmental -- At Government level, the Prakas 848 and Hygiene laboratory carries out routine services for the PMO order on Use of Regulatory Impact water testing (microbiology and chemical tests), Assessment triggered the need for inter- and microbiology of food and environmental ministerial collaboration for risk management samples (e.g. food preparation surfaces, air, water, and information; however in the absence of a etc.) 173 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT central operational entity, these dispositions parallel to gaining the capability to maintain have so far be implemented through ad hoc secondary standards in country. efforts. • The legal metrology function, at an early 3.2. Achievements, gaps, and perspectives stage of development has started delivering useful services. Upscaling of the LM delivery Accreditation: The concept of national focal point is depending upon resources (staffs and allows Cambodia to deliver joint accreditation equipment) that would be allocated. services. Cambodia through the Department of Accreditation is not yet a full member of the Inspection: APAC MRA. Given the small size of the market for • The public bodies ensuring inspection are not conformity assessment services in Cambodia, the accredited. Therefore, results of inspection of justification for a local accreditation body is not in export products cannot be used by exporters to economic terms, rather it is to provide a channel ascertain the quantity, compliance or value of for enhancing the performance and competence their shipment by importers abroad. of the laboratories (and later of the inspection and • For inspection of imported products being certification bodies). placed on the domestic markets, the absence of Standards: Good progress over recent years, repeal an accredited management system means that of obsolete standards and adoption of ASEAN the inspection results may be unfit for purpose codes and of a hundreds of international texts or unreliable, especially when the technical (Codex, UNECE, ISO); only about 30 Cambodian departments carrying out inspection have no or standards are not aligned with international texts. poorly written procedural manuals. There is a need to review the older standards (2011- 2014) as a normal practice of standardization. Certification: The ISC should improve information on the TC • The public bodies ensuring certification are not composition, work programme and functioning, accredited, which means they issue certificates so those trades partners may be apprised of the of compliance for products or for management country focus and, possibly, provide support to systems that are not recognized outside of the standardization work. Cambodia. • When public bodies ensure voluntary certification Technical Regulations: is an area where services, they enter in concurrence with existing improvement would be possible. The OPM private certifiers. Since most private certifiers are Regulation on RIA has been only superficially accredited, the public services should also seek implemented. The current process for preparing accreditation, lest they become uncompetitive technical regulations in each Ministry could hence unsustainable. In addition, maintaining become more transparent and more inclusive. mandatory and voluntary certification schemes Finally, very few laws, decrees and technical in the same body would require disposition to regulations have been notified to the WTO either eliminate the risk on impartiality. as TBT or as SPS measures. • The co-existence of regulated certification Metrology: services and adoption of technical regulations in the same organization is not conforming • The NMC has the capacity to ensure traceable to international best practices. It may lead calibration services for the industry. However, to situations of conflict of interest or reduced there is no capacity yet to maintain higher impartiality. precision standards (E1-E2 class) that will allow traceable calibration of the instruments used for Analytical laboratories: industrial metrology. The NMC capacities should • There is an abundance of advanced analytical thus be gradually extended to allow traceable equipment in Cambodia (Phnom Penh); when calibrations in other fields of measurement, in compared to the number of samples processed. 174 Chapter 7 Nevertheless, procuring the instruments of risk-based approaches); necessary to perform advanced tests may Increased demonstration of the effectiveness of be justified by the need to transfer gradually official controls, particularly concerning respects knowledge and practical skills for using these of MRL for contaminants (bacteria, aflatoxins, complex instruments. heavy metals, and pesticides residues) • The level of investment in hard equipment is however a secondary issue. The crucial issue, Use of ASEAN GAP standards as basic requisites for which will determine the success (competence) free circulation of goods, use of HACCP certified of all the labs, is the availability and interest processors), of qualified officers and analysts. Attracting, training and retaining good analysts is a Promotion of ASEAN organic standards in national challenge for public laboratories, since the mandatory requirements for the organic sector. managers have virtually no say on staffs levels, Cambodia seems relatively well positioned incentives, and overall on the technical and to reach the next level of compliance and financial sustainability of their unit. recognition as a reliable trade partner. The QIS • In the above context, gaining and maintaining already consists of crucial functions (accreditation, accreditation is another challenge. The lack of standardization, and metrology) that could be accreditation would cast a doubt on the reliability brought to regional level within a few years. of a laboratory’s results191. Unreliable results may Notwithstanding, extension of the current lead to inadequate decisions, which may affect scope of services (metrology and testing), would either the private sector (export/import denial), require to facilitate the industrial diversification the Government (inaccurate valuation), or the and value-addition. The QIS functions serving consumers (insufficient application of safety SPS compliance are also in place; however, measures). Cambodia would benefit from 1) streamlining the regulatory framework (furthering the use Alignment with ASEAN practices of regulatory impact assessment and actually Until now, ASEAN requirements for SPS or TBT implementing an integrated approach to SPS measures were mildly constraining; most of these system), 2) strengthening the risk- and science- being agreed under a form of voluntary codes of based approaches in particular at Camcontrol, 3) practices or voluntary regulatory frameworks, at developing institutional and individual capacities the exception of the ACD for cosmetics and for across the Ministries. electrical and electronical goods. Alignment with RCEP dispositions A decade ago, a consensual and open-ended There would be no immediate constraints approach to harmonization was certainly resulting from the RCEP agreement. Firstly, the necessary for allowing the less advanced member RCEP process, long and conflict-prone, has so far states (“CLMV” then “CLM”) to ‘catch up’ with the only reached agreement on customs procedures, emerging economies of the bloc. Nevertheless, trade facilitation, government procurement, with the perspective of creating the ASEAN economic and technical cooperation, and small Economic Community, harmonization of the businesses. Secondly, as in any candidate Trade regulatory frameworks will now become more Agreement, nothing in the RCEP could be more pressing. The areas where further necessary demanding than the dispositions of the WTO progress from CLM partners includes agriculture Agreement, which Cambodia is in the process and fisheries, with expected measures covering: abiding to. Full adoption of the ASEAN regulatory guideline, and upgrading of local SPS legal and institutional compliance frameworks (including effective use 191 Unless the laboratory can demonstrate to any interested party, they maintain a management system compliant with the ISO/IEC17025 standard. 175 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4. SPS issues affecting trade of A Food Safety Law is being drafted, which proposes selected commodities the establishment of a food safety authority and a framework to enhance safety and wholesomeness 4.1. Overall situation on SPS measures of food by preventing, controlling and eliminating Cambodia is increasingly complying with hazards throughout the food chain. The draft law international agricultural safety approaches on Plant Protection and Quarantine, still under and requirements recommended by the review, similarly adopts or refers to international International Plant Protection Convention (IPPC), standards and procedures; the draft is under World Organization for Animal Health (OIE), the review, as some issues need to be resolved Southeast Asia Fisheries Development and Centre among MAFF, MoC and MEF. Such efforts to (SEAFDEC), the Association of National Rubber update the legislative SPS framework will further Producing Countries and the International Rubber align Cambodia’s SPS regime to ASEAN’s and Development Board, and the Codex Alimentarius international benchmarks. Commission (CAC). Similarly, the ASEAN common However, the SPS system has yet to reach its full food control requirements (ACFCR, see Annex 8) effectiveness. A range of recent technical reports are gradually complied with. (see Annexes, bibliography) have highlighted In the last five years, Cambodia has made striking persistent problems in the areas of animal progress developing her SPS regime with respect health and epidemic zoonoses, bursts of plant to upgrading and equipping facilities and pests, and alleged contamination of food and formulating pertinent regulations. The former waters by pesticides and heavy metals. The include investment in the testing laboratories of concerned Departments recognize the existence competent authorities and academic institutions; of such issues, and have taken steps to improve establishment of five regional plant quarantine performance in the area of plant and animal health offices across the country to bring SPS inspection (MAFF), food (MOC and MOH), and regulated and certification services closer to end-users; and products (MIH). preparation of a new Law on Animal Health and Production (2016). 176 Chapter 7 4.2. Components of the SPS system 4.2.1. General Dispositions Table 28 – General dispositions for plant health, animal health and food safety Plant Health Animal Health Food Safety Registration Licensing of pesticides Declaration of farms Products listing (MOH) and fertilizers traders (MAFF)Licensing of Licensing of factories for slaughterhouses and regulated products (MOI) SMEs processing factories in Agriculture (DAI/MAFF) (MAFF) Primary Stages Farm: Voluntary GAP Farms Voluntary cert. Residue monitoring (MOC, (GDA) GAHP GAD Farm DAI/GDA MAFF) Residue monitoring Inspection & monitoring Primary Processing, inspection, (GDA-not yet) (GDAH) Residues Good Hygiene Practices (DAI/ monitoring (not yet) MAFF) Production stage Factory: FS (export) Mandatory HACCP Mandatory syst. cert.( ISC mark) certification (fish vessels, and product cert. for regulated landing site) products (MIH) Inspection of processing Voluntary system/ product factories (MOI) certification Transportation For seed and seedlings? Declaration for transport -- (GDA) (GDAH) <………………………………..Declaration of import/ export & document submission (GDCE)……..…………….> <…………………………….Inspection doc+ cargo; sample & tests (Camcontrol)…………..……………………..> Import license for Import licenses for List of Authorized products fertilizers, PPP animals (incl. fish) (MOH) Cross-Border Import license for Animal Health certificate Food Safety certificate (MOH) forestry pdts. (GDAH) Phytosanitary cert. (GDA) Import Certificate for plant quarantine material (GDA) Market Inspection: traders/inputs (GDA) Monitoring the residues of Surveillance Monitoring of hygiene & residues (MAFF) agricultural products based on Prakas 204 (DAI/MAFF) <…………………………………..Markets: monitoring, sampling & testing (Camcontrol)………………………….> 177 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.2.2. Animal products and Fisheries surveillance program activities were ramped Products. up to establish risk-based surveillance of highly pathogenic avian influenza (HPAI) in Kampong The General Directorate of Animal Health and Cham, Kampot, Kampong Thom, Kandal, Production (GDAHP) is responsible for the Mondulkiri, Phnom Penh, Siem Reap, Svay Rieng, inspection of animals and animal products and and Takeo, and TADs country wide; for issuing the Animal Health Certificate (OIE) as • Border surveillance activities were increased well as import permits for animals and animal including additional bilateral meetings/ working products based on risk assessment. The law on groups on animal health cooperation with Animal Health and Production 2016 sets standards Vietnamese and Thai and Lao counterparts; for imports of livestock and refers to regional • Categorization of animal product import standards for exports. This new Law, coupled to risks and development of risk-based standard joint country assessment/ review of sanitary risk operating procedure materials was completed; (Transboundary Animal Diseases) should thus • Biosecurity measure activities completed accelerate regional integration. (Dec. 2017) with households level biosecurity The Fisheries Administration is the national demonstrations in Takeo, Prey Veng, Kampong Competent Authority (CA) responsible for Cham, and Svay Rieng Provinces. managing, controlling and inspecting the safety • -The Office of Aquatic Animal Disease and Health and quality of fish and fisheries products, in order Management was officially created under the to ensure public health protection, and fair trade in Department of Aquaculture Development. It fisheries products. The CA responsibilities include endeavors to increase controls for movement inspection of imports and exports, the issuing and quarantine of aquatic animals. of Health Certificates for export, the licensing • The Fisheries Administration (FiA) has set-up a of operators, and the development of Good certification scheme ‘Quality for Fish and Fishery Aquaculture Practices. However, the institutional products, yet with limited coverage at present. capacity of the FiA and the CA remain weak; Nevertheless, it is set in the coming donor funded testing capacities in particular are too limited. project of 5 years to strengthen the official control There are deficiencies in the disease control system of FiA as CA to be recognized by EU. system (lack of national lists of transboundary • FiA is developing the National Monitoring diseases, low detection capacity), as well as in the Program for residues of aquaculture medicine official controls of establishments, vessels, and and environmental contaminants in farms. The EC FVO mission (in 2005) concluded Aquaculture products. The initial plan for 2018 the system of official controls was not effective has been implemented and now being further and could not ensure a level of protection similar developed with five-year donors’ fund already to that of the EU. Cambodia was included in the promised. list of non-cooperating countries, due to lack of • -Similarly the Department of Post-Harvest progress with the national plan of action against Technologies and Quality Control has set-up IUU fishing. a certification scheme ‘Quality Seal of good aquatic animal products’ for aquaculture Recent progress includes: products, yet with limited coverage at present. • Development of a code of Good Animal Husbandry Practices: not fully translated, it will be submitted Constraints mentioned as a Cambodian Standard; • Border checks of animal/ animal products • Renovation of the NAHPRI laboratory and capacity should be based on updated SPS risk: there is a increased to analyses drug residue with perception that risk management is carried out advanced chromatograph system (UPLC); without proper data and without coordination • Annual trans-boundary animal diseases with other Ministries. 178 Chapter 7 • In the absence of veterinary/ animal protection to develop such protocols. The dispositions are officers at border points, checks are done in a largely inspired from international and regional way that is not effective or suitable to quarantine texts, with some local requirements. or FS purposes. • Development of E-Phyto, linking the delivery of • Allegedly, imports receive much less attention Phytosanitary certificate to the customs single than exports. window and ASYCUDA system (on going); • Finalization of pest lists on banana and pepper, 4.2.3. Plant Products cassava, citrus and mango, and notification to The Plant Protection and Sanitary and IPPC of a list of certain pests on milled rice; Phytosanitary Department (PPSPSD) is responsible • Establishment of a greenhouse for post-entry for control of import/export of plants and plant quarantine testing of imported seeds and products, including i) implementing SPS measures planting materials. for imports, exports and goods in transit, ii) issuing health certificates, iii) carrying out information Key Constraints mentioned: and extension programmes, and iv) providing • The complete SPS system is not harmonized support services for developing quality and between Ministries, and data/information is safety of agricultural produce. The PPSPSD has 85 lacking to make science-based decisions. SPS staffs in offices in Phnom Penh Battambang, Siem & FS arrangements should derive from the reap, Sihanoukville, Stung Treng, and Kompong sub-decree 21 (facilitating trade through Risk Cham. The PPSPSD maintains a small team in the Management); however more multilateral international airports to assist Camcontrol “on-call”. discussion is needed. The last EU FVO report (MR 2014-7206) indicate • No plant quarantine/ veterinary officers present that while the phytosanitary export controls have at border posts, resulting in imports inadequately been organized, there were inadequacies in the checked for pests and diseases. inspection method and outcomes. • The country may face difficulties to control the cassava mosaic disease (outbreak in 2015) and The List of maximum residue limits (MRL) for highly invasive species (golden snails, army worm) products of plant origin, based on ASEAN MRLs, • Traders have experienced issues at the Thai has been established with MRLs for 42 pesticides. border that ‘closes’ administratively (stop Recent achievements include: processing paperwork) at certain cropping periods • The situation on pesticides is very complex • Finalization of National GAP standards for fruits (presence of fake products, obsolete products, and vegetable, adopted from ASEAN-GAP. GAPs mixing of products, mislabeling and misuse). It are to be implemented on voluntary basis. GDA will require updating the practices from farmers has set up plans to train agriculture extension and involving all stakeholders (farmers, dealers, agents, traders, farmers (10,000 persons trained etc.) in implementation of regulations. so far); certification of farms by GDA on going with 100 applications to date; The Department of Agro-Industry (DAI) of • Initiating the development of a framework for MAFF is legally authorized to be responsible organic production (on going); for the food safety inspection of Agricultural • Participation of PPSPD in bilateral working products according to the Prakas nr. 334 dated groups with China, Thailand and Viet Nam on on 22 August, 2007, about the food safety plant quarantine; inspection of agricultural products. Recently, • Conclusion of cross border phytosanitary some programs of DAI is monitoring the safety of protocols with China (banana, corn, cassava, fermented processed products and meat product milled and broken rice) and Thailand & Vietnam surveillance under the supported from national (banana, mangoes, dragon fruit, 8 more in budget program. However, both national and process). There is no overarching framework sub-national level officials have not yet been 179 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT built strongly capacity enough based on the Achievements requirements and guidelines. In addition, the • Establishment of food safety bilateral network draft of inter-Prakas about the for formal justice and working groups with China Thailand and official from DAI. Vietnam, through DDF and Camcontrol officials. 4.2.4. Food Hygiene and Safety192 Issues reported Currently, the organization of official controls for food products is split over two main Ministries. The • Insufficient cooperation between Ministries; Ministry of Health (MoH) is responsible for public MOH is not well associated with risk-based health and food safety issues as it relates to Public controls of Camcontrol and Environmental Health (NCD, food crises, etc.). • Pesticide residues monitoring plan is being The Department of Essential Drugs and Food is developed responsible for food and drug control and is the • Inspection, which is done in cooperation with focal point on the ASEAN Food Safety Expert provincial authorities could be amplified Group. The Ministry of Commerce is responsible, • Responsibilities of Camcontrol (MOC) under the Law on the Management of Quality and Safety of Products and Services (2000), to ensure Camcontrol with total staff of 570 (of which 370 in the quality and safety and consumer protection provinces), is organized in 5 Departments and 27 for food products. The General Directorate of branches nationwide. Export and Import Control (Camcontrol)193 has • Dpt. of Consumer Protection and Fraud thus a wide-ranging mandate (see Annex 6). The Repression, DDF and Camcontrol are members of INFOSAN • Dpt. of Technical Affairs and Public Relation, in and ARASFF respectively, thus linking to ASEAN charge of inspections food safety networks. • Dpt. of Laboratory In addition to the above, ISC (MIH) is responsible • Dpt. of General Policy and Dispute Resolution for hygiene and safety issues for regulated • Dpt. of Competition, to administer Laws on products at factory level. Competition & on Intellectual Property • Responsibilities of the Department of Drugs and Food (DDF) Camcontrol is the SPS enquiry point; also is in charge of the National Codex Committee The DDF includes the Food Safety Bureau (FSB) that (NCC). MOC chairs the NCC, which includes has a staff of 20 people (central) and 100 persons representatives of the industry and other (in provinces). DDF also operates a laboratory (35 Department; there are different thematic working staffs). The FSB is the focal point within the ASEAN groups. Food Safety Network. Camcontrol was responsible for ensuring The FSB is responsible for official controls of food compliance with regulated products both food products sold in restaurants and control of food and non-food both at the border and on the establishments (consumer sector). In addition, for domestic market. Although Camcontrol is no import export, MOH requires registration of food longer stationed at the border, it retained the products and provides lists of ‘authorized’ foods to role for domestic market.. Prior to that, export Camcontrol. FSB is also in charge to deliver Food inspection covers garments, agricultural products, Safety certificate to importers and exporters; rice, wood and processed food. Import inspection however, the inspection of shipments is ensured concentrates on food, agricultural chemicals, by Camcontrol. petroleum, textiles and garments. Domestic 192 In this section, Food refers to processed good. Fresh and live products are described above in § II and III. 193 Although Camcontrol is no longer responsible for inspection at border crossings, it is necessary to analyze the previous roles of Camcontrol in term of food hygiene and safety. 180 Chapter 7 market surveillance targets labelling, quality and safety in chemical contaminants in domestic safety of food and other regulated products, and markets (Dec 2017). commercial fraud. • DDF and Camcontrol organized a joint study tour on food safety for tourism industry and on Border inspections are based on risk: Camcontrol market and import surveillance (Vietnam, 2018). has developed a procedure manual and specific • Operation training for 30 Camcontrol staff sorting criteria, partly based on customs risk members was conducted by ARASFF Thailand profiles, partly based on lists from other countries. Inspection and import/export authorization are Reported Constraints based on documentary checks, in certain cases inspectors carry out sampling for further tests. In There is a need for more inter-ministerial coop- case of doubt, Camcontrol would request feedback eration, bringing each responsible department from related Ministries. High-risk products can be together. downgraded if shipments are found compliant • Role of the Ministry of Tourism. during five consecutive checks. The Prime Minister’s decision (January 2019) to Its main role in food safety is to register, issue remove Camcontrol Officials form border points permits and inspect food outlets, such as food will require a re-organization of both exports and courts and restaurants, in all of Cambodia’s imports controls (see § 8.4.3. below) provinces, thereby ensuring that they comply with MoT standards. Camcontrol operates a laboratory in Phnom Penh for testing of food, cereals and petroleum products. 4.2.5. Biosafety Additionally, Camcontrol also has mobile labs for Cambodia is a signatory of the Cartagena Protocol conducting market monitoring and surveillance on Biosafety (2000). The Ministry of Environment with regard to chemical food safety hazards and is the competent authority to implement the for conducting petroleum quality testing and Law on Biosafety; the Law aims at protecting volume quantity at service stations. Mini-labs the environment against the introduction of facilities are also being introduced at some border living modified organisms (LMOs) or genetically entry points such as Sihanouk port, Poi Pet and modified organisms (GMOs). The Law (chapter Bavet. However, as mentioned in § 3.1, none of the 4) regulates all exports of modified organisms tests are accredited. by prescribing a list of authorized organisms, Recent Progress or Achievements written notification in advance to the importing country, and application for an export permit • In 2015, the Government in collaboration with from the appropriate Ministry. Similarly, import the FAO drafted a new law on Food Safety that of modified organisms requires submission of will complement the Law on the Management a risk assessment report from origin country to of Quality and Safety of Products and Services. the National Steering Committee for LMO/GMOs One of the main dispositions is to create a and Technical Working Group for Risk Assessment Food Safety Authority, which would improve consisting of officials from relevant Ministries. The enforcement of existing regulations that fall Committee issue recommendation to MOE who under the purview of Camcontrol. However, as of makes the decision to allow or deny importation. end 2018, the draft law is still being negotiated at Inter-Ministerial level. 4.3. Remaining SPS issues and potential • Surveillance of food hygiene and safety at improvements restaurants and canteens (with FSB) and on Not all of the issues identified in the previous street food stalls including taking of on-the spot CTIS are still hindering the SPS regime. The samples fragmentation of SPS system across Ministries • Completion of a surveillance program for food 181 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT does not prevent the system to function and Law. This results in a situation where Camcontrol deliver, if in a sub-optimal way. The overlap in is sub-effective in enforcing the risk management implementation of official controls is not very procedures, but can generate useful data; and important. The critical remaining issues are as where the other Ministries are limited in their own follows. responsibilities (animal, plant and public health) due to a lack of data and no visibility on the real I. Lack of systematic risk-based inspection or situation in border areas. In addition, MOC and monitoring in areas of production and processing, Camcontrol are ineffective in notifying194 and with an impact on product quality and safety; circulating SPS information from the regional II. Public inspection and certification are not bodies and trade partners195 to the concerned organized on the base of recognized management Ministries, as well as using such information systems, and therefore the results are not internally. necessarily accepted on export markets and are not fully effective for biosecurity and food safety By contrast, the international approach consists purposes; in organizing the risk analysis across the III. Limited capacity of Departments to discharge sectors, thereby requiring effective exchange the responsibilities under respective Laws; of information and a systemic approach to Iv. Due to limited human and financial resources, the analysis. Once the common risk analysis is laboratory-testing capacity is still insufficient to complete, risk implementation may take place support inspection and certification. separately in different Agencies. The data from monitoring and market surveillance is pooled and 4.3.1. Insufficient use of risk-based analyzed in common, which allows fine-tuning the approaches control and monitoring mechanisms. In addition, cumulated data allows for assessing the impact of The situation originates from the inter-ministerial regulation and modulating their enforcement as Prakas No 868. While this text is effective in necessary. organizing the implementation of SPS system and risk management, a single flaw in the The Inter-Ministerial Committee Coordinating the text has introduced a general weakness in the Inspection of Quality and Safety of Products and framework The Prakas divided the SPS area by Services seems still relatively inactive. The food sectors; and this division covers ALL the aspects safety working group, tasked with improving of risk assessment: risk analysis, risk management, coordination among concerned departments in and risk communication. However, most of the Ministry of Health, also meets infrequently. the important official controls (inspection and For the Cambodian SPS system to reach full monitoring) such as border and market are effectiveness, the Government should re- dominated by Camcontrol:. However, most of the organize the risk assessment to be carried out as official controls (inspection and monitoring) are a joint activity across ministries by a dedicated entrusted to Camcontrol: in consequence, the permanent structure. This would allow placing other Ministries are deprived from data resulting focus on those steps of the food chain where from monitoring and are hindered in carrying out risks are high. This would also improve the risk their responsibilities. Reciprocally, Camcontrol on management, in particular the monitoring the one hand has no sufficient capacity to carry of contaminants. The data resulting from risk out valid risk analysis in each sub-sector (due implementation (inspections and monitoring) to lack of expertise in each specialist field), and in each Ministry should again be transferred for on the other hand has insufficient resources to processing to the body in charge of risk analysis; organize a valid monitoring for the various criteria where they would be processed to update review (hygiene, contaminants, etc.) mandated by the of implementation plans. 194 There is not a single notification of SPS-related measures form Cambodia in the WTO database 195 Finding of the EC FVO mission report 2014-7206 on plant phytosanitary measures. 182 Chapter 7 Finally, building capacity to test and certify end do not have degree-level qualifications and have products is of limited benefit to developing minimal training in risk-based approaches to food countries like Cambodia if production and safety. In this context, there would be a need processing systems are not geared up to produce for continuous professional development and quality products. Discovering contamination and qualification of the inspectors, so they may keep non-compliant food once it is at the border or abreast of developments of risks and methods to on the markets is inefficient. Improved product prevent these. inspection and testing should be backed by For example, Cambodia does not have an active programmes covering the whole food chain to programme of food-borne illness surveillance address the many problems, which are found in and outbreak responses are often limited by the upstream segments. lack of available expertise. Moreover, reports 4.3.2. Sub-optimal inspection and show that there have been hardly any cases of certification activities food being recalled from the market. Traceability mechanisms are limited and there is no national Besides establishing actual collaborations reporting database in place. In recent years, several between Ministries, there is room to improve initiatives for exchange of practices and training the management of inspection and certification have taken place (and ASEAN-led and bilateral activities. None of the Department involved exchanges). There would be a need to pursue and is using a documented management system amplify such individual capacity building in each or formal inspection procedures that would ministry, including at provincial level. be available to the parties inspected. Existing procedures manual are written in very general In addition, the private sector needs to be able terms and do not provide for reliable operational to find info on market access quickly and easily. instructions. There is no good and clear coverage of Food Safety guidance information available in the country Ideally, bodies providing inspection and for the operators, specifically identifying most certification services could be accredited, to relevant hazards and providing control guidance ascertain their delivery of services is reliable and for each product. There is also reported needs for recognized internationally. Public inspection and information on HACCP and for implementation certification bodies should systematically adopt support. management system inspired, and progressively compliant with, the relevant international 4.3.4. Insufficient laboratory capacity standards ISO/IEC17020, ISO/IEC17021 and Several laboratories have been equipped with ISO17065. The first steps in that direction would advanced analytical instruments over the last be to document in full the operating process five years. The capacity to analyses contaminants and the criteria used for decision, formalize the remain yet limited, due to the high level of qualification of staffs, manage documents and qualification and experience necessary to records, and adopt quality control measure for the run properly such complex tools. The issue of on-going work. duplication is not really a problem, considering 4.3.3. Limited capacity for implementing that different lab test contaminants on different agencies matrices (meat, vegetables, food...) and further, that if several labs in the country are working on the The Departments in charge of officials controls same techniques, this would increase the number are usually well staffed at national level but less of qualified analysts and open possibilities for so in the provinces, where monitoring, especially inter-laboratory comparison. However, the critical for quarantine, requires covering large areas. issue is to attract, train and retain a sufficient Cambodian legislation does not stipulate the number of capable analysts, who can absorb the training requirements for inspectors; as a result 183 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT capacity building provided by regional experts. In Legal framework and notifications the Government, there is an internal staff rotation As indicated in § 8.4.2 above, The ISC and policy between departments, which has a direct Camcontrol are the main agency responsible for and negative effect on the delivery of reliable controlling compliance of goods with technical laboratory work. In addition, the human resource requirements. issue could become increasingly a challenge for public laboratories, as better-paid job are It is unlikely that any regulatory registration, increasingly available with the development of conformity assessment or labelling procedure value-adding industries. passed by the Government would consist of a TBT. However, most of the dispositions falling in this 5. TBT issues affecting Cambodia trade category have not been notified to the WTO. 5.1. Trade trends Standards Currently, Cambodia economic output rests The corpus of Cambodian standards has been on four pillars: garments, rice, tourism, and largely increased since the last CTIS. Most of the construction. Cambodia’s export structure has not added texts deal with agricultural commodities changed much during the last decade: the limited and food products. Among the international income base exposes the economy to demand standards adopted for industrial products, 150 disruptions and price shocks, as shown during cover electrical goods (ASEAN harmonized), the global financial crisis that cut into garment 18 cover the construction materials, 12 cover production and exports. Moreover, about 80% chemicals and none yet in the fields related to new of merchandise exports go to slow-growing industrial products. markets in Canada, Europe, and the United States; only 15% of merchandise exports go to Asia. ISC’s role also consists to supervise and provide Cambodia faces thus a challenge of diversifying technical support to the line ministries to help them and upgrading productive capabilities to improve develop standards so they can become Cambodian economic resilience. The government policy, Standards. However, the process of standard setting aimed at transforming the industrial structure to in other ministries (as technical standards or as a a skill-driven industry and connecting to regional base for their own technical regulation) seems still value chains, has initiated recent growth from largely uncoordinated and has resulted in poorly 18 to 29 % in exports other than garments and formulated text (e.g. code of practices for fisheries tourism, including mainly bicycles, electronic and products). Another consequence is the parallel electrical components, accessories and footwear, adoption of Codex MRLs as Cambodian Standards, natural rubber, milled and paddy rice, cassava, and the referencing of a sub-set of ASEAN MRLs by corn, and soybeans. GDA. 5.2. Current TBT-related measures Technical regulations Cambodia would not face many issues in term of The main regulatory requirements for external potential barriers to trade. Actually, the overall trade consists of twenty-two measures notified to weak national capacity to enforce existing the WTO regarding the labelling of food product regulations play against Cambodia when it comes (reg. no 1045 and no 943), one “mandatory standard” to controlling the quality and safety of imports. for chili sauce (reg. no 530), and 14 regulations on parts of vehicles related to the safety of users (based on UNECE standards). There exist additional product technical regulations196 that do not appear in the WTO database; however, these products are hardly relevant in terms of international trade. 196 The list of standards on ISC website mentioned 21 ‘mandatory’ standards including for safety helmets, Portland cement, drinking water, natural mineral water, ice, vinegar, soy and fish sauce, electrical plugs and cables (8 texts), PET bottles used for food, and instant noodles. 184 Chapter 7 Other mandatory requirements have been packaged foods must be labelled in accordance adopted by the ISC for the application and with Cambodian standards on food labelling. use of the ISC Mark, which is meant as a label Consumer protection guaranteeing compliance with the product technical regulations. This label however seems of Legislative framework for consumer protection very limited use, as it offers little value for exporters in Cambodia is relatively complete. The specific and has no recognition within the country. Consumer Protection Law covers the full scope of consumer protection in Cambodia. The Law Licenses on the Management of Quality and Safety of As several other countries, Cambodia requires Products and Services (LMQSPS) of 21 June 2000 licensing of operators and/or products for certain also provides a legal framework for consumer goods that present a risk for consumers, or specific protection in terms of public health, safety, fraud interest or impact on the environment. and deception, including false advertising, for the products and services offered in the country. Imports However, implementation of the law is inefficient -- pharmaceuticals and medical material (MOH) due to overlapping institutional roles and lack -- agricultural inputs such as fertilizers and of coordination among related agencies. The pesticides (MAFF) consumer protection issue has gradually gained -- chemical, electrical-electronical products (ISC) importance in the policy agenda. Nevertheless, -- living modified organisms and genetically there is still no dedicated consumer organization modified organisms (MOE) in Cambodia; no civil society organization is Exports working on general awareness campaigns. -- Primary processed rubber Consumers in urban areas, particularly in Phnom -- Processed wood & non-timber products Penh, have become increasingly concerned about -- Drugs food safety issues. The issues of pesticides, -- Art and cultural products substandard and defective products, and health -- Jewelry and uncut precious stones risks are not taken up by the Cambodian media. Many people are often unaware, or they prioritize Conformity assessment and product certification cost of food over quality. Suppliers of products that could harm public 5.3. Progress and Current Limitations health or safety are required to certify that The framework for TBT does not present measures the products comply with the ISC technical that would be regarded as barriers to trade. There regulations. The ISC ensures product certification has been progress mostly at technical level, with for enterprises producing regulated goods. The the adoption of many international standards, the certification process includes if needed inspection development of capacity for metrology, and the and testing; however ISC capacities are insufficient participation in regional and international bodies to cover all the analyses. In consequence, some on standardization and metrology. However, the tests are outsourced. technical standard framework is still not well Labelling aligned with the perspective of diversification of the industry. The following issues could be Under the Law, labels or marks are not required hindering further growth of the processing for all imports; however, products must have industries. their labels certified and registered with relevant ministries before being imported into Cambodia. • Insufficient understanding on TBT issues, both at the level of Ministries enforcing regulations and Labels for different products are regulated and at the level of companies. This translates in a low certified by different ministries. Imports of pre- 185 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT level of notifications, and a backlog of measures • Cambodia is facing protectionist measures197 that should be posted. from Thailand aiming at limiting the import • Inaccurate wording is used in the definitions for of rice and cassava; this is a breach to ATIGA some technical regulations, e.g. the mention of dispositions. While authorities have tried to ‘mandatory standards’ across official documents ease such barriers through dialogue within the (incl. the National Trade Repository). Cambodian-Thai Joint Trade Committee, the • Missing recognition of the Department of lack of TBT related capacity prevent Cambodia Accreditation with international bodies (APAC), to escalate the issue to ASEAN or to the WTO. which affect the value of their services. While • No significant problems were reported with this is mitigated by partnerships with other documentation for exports although the times countries’ AB, the signatory status of the APAC for acquiring the necessary documentation Multilateral Recognition Arrangement should could be an impediment. Times range from 3-4 be accelerated. days (COO, quantity) to 7 days (phytosanitary • ISC combines the roles of setting technical certificate) or up to 12 days for test reports. regulations (mandatory specifications for • The development boom of the garment industry products) and ensuring mandatory conformity has created a significant waste management assessment: this is not conforming to problem, which is still unresolved to date. In international best practice. The portfolio of addition, the manufacturing sector is now regulated products, except perhaps for water, developing production of shoes, bags and has little if any value for the country in terms of accessories; linked to these products, the leather consumer safety or economic interest. processing sub-sector has been growing fast in • Similarly, the confusion of providing in the same Cambodia. This kind of industry has a significant body both voluntary system certification and environmental footprint (use of water, use of mandatory product certification is confusing for heavy metals and dyes); however, there is no users; it could hinder Certification Department regulation to control the use of specific inputs impartiality when for example, one company harmful for the environment and human health is holding ISC Mark /certificate for regulated (e.g. Azo-dyes and other carcinogenetic dye, product and applies for MS certification. chromium...). Maintaining a position on EU and USA export markets may require exporters to Other issues do not consist in barriers but are demonstrate compliance with environmental impediments to trade, or have a potential to standards or the respect of banned substances. become impediments in the future. 197 Measures include the imposition of a “quality certificate”, guaranteeing minimum moisture and sand content; a requirement of obtaining a transportation permit for the trucking of Cambodian cassava from the border; and various measures to make it difficult for a third party to purchase Cambodian cassava and ship it through a Thai port. 186 The chapter does not examine in detail important cross-cutting issues that are discussed in other chapters. For example, TBT, SPS and certification issues are discussed in Chapter 7 (on quality infrastructure and standards), skills and training in Chapter 3, and trade logistics in Chapter 5. Internationally-comparable production and trade data are used here, in addition to Cambodian statistics. We tend to use mirror data to assess CHAPTER 8 trade, as there is a significant amount of unrecorded trade in all sectors studied here, AGRI-BUSINESS VALUE and we need internationally-comparable data CHAINS FOR EXPORT on import markets for the analysis of market diversification. It is difficult to assess the volume ENHANCEMENT and value of Cambodia’s exports because of lack of reliable, official data that are reported in time. While Cambodia does report its trade data to the 1. Introduction United Nations Statistics Department, those data are not yet available in ITC’s TradeMap for 2017, This chapter examines challenges and opportu- which uses 2017 as the reference year. ITC’s data nities on increased value-added processing and for Cambodia in 2017 are thus based on so-called export diversification for four selected agricultural mirror statistics —those reported by Cambodia’s sectors: Cassava, (milled) rice, rubber, and fruits trade partners— as a second-best solution. and vegetables. Another issue is that official statistics do not take into account informal exports, and thus seriously The Rectangular Strategy IV and the Industrial underestimate Cambodia’s exports. Development Policy 2015-2025 call for the promotion of Cambodia’s agro-processing 2. Milled rice industry through integration into regional and global production chains. The Inter-ministerial Rice is by far the most important agricultural Committee decided in August 2018 to focus product of Cambodia. The rice sector — on processing and new market opportunities production, processing, and marketing— employs for the three largest agro-commodities (rice, about 3 million people, it contributes around 26% cassava, and rubber), and one sub-sector (fruits) of GDP (MAFF, 2017), and is by far Cambodia’s where the Government believes there might be most important agricultural export product. Rice opportunities. is the major staple food; it is cultivated by the large majority of small farmers and is crucial for food Compared to a typical value chain analysis — security and poverty reduction. A survey in 2011 which examines all stages from input provision, among 24 Provincial Departments of Commerce production, processing, to exporting— this revealed that rice is considered among the “Top chapter focuses on the last two stages: value- Ten Products” in 16 Provinces. added processing and exporting. Cultivation in Cambodia is already supported by many initiatives. Milled rice is considered to have an important MAFF has started drafting an Agriculture Sector potential for future exports. Cambodia’s paddy Master Plan (ASMP), which includes a vision and production is more than 10 million tons in road map for the agricultural sector in 2030 and 2017, which exceeds domestic consumption by will provide the basis to prepare MAFF’s five-year around five million tons. This surplus is exported Agriculture Sector Strategic Development Plans mainly as paddy rice or as milled rice through (ASDPs). informal and formal marketing channels. Milled 187 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT rice exports through formal channels increased There are significant opportunities for processing strongly after 2010, when the Royal Government and market diversification for Cambodia’s rice of Cambodia issued a policy on the “Promotion sector, though this depends on adequate milling of Paddy Production and Rice Exports”, from facilities, reduced domestic transportation and about 100,000 metric tons in 2010 to more than exportation costs, and millers’ improved access 625,000 tons in 2018. The rice sector modernized to finance in order to buy sufficient paddy for rapidly and now meets international standards. operating mills all year. Table 29: The rice sector at a glance 118 producers 141 exporters 221 importers World (2017) (paddy rice) (milled rice) (milled rice) Rank and share in world (%)* 1. China (27.6) 1. India (34.0) EU-28 (8.9) 2. India (21.9) 2. Thailand (23.0) 1. China (8.4) 3. Indonesia (10.6) 3. Viet Nam (10.8) 2. Iran (7.0) 4. Bangladesh (6.4) 4. Pakistan (7.7) 3. Saudi Arabia (5.5) 5. Viet Nam (5.6) EU-28 (6.6) 4. UAE (4.3) 6. Thailand (4.3) 5. United States (5.7) 5. Bangladesh (4.1) 7. Myanmar (3.3) 6. Italy (2.6) 6. Iraq (4.0) 8. Philippines (2.5) 7. China (2.1) 7. United States (3.8) 9. Brazil (1.6) 8. Uruguay (1.8) 8. Cameroon (3.5) 10. Pakistan (1.5) 9. Cambodia (1.7) 9. Côte d’Ivoire (2.6) 11. Cambodia (1.3) 10. UAE (1.5) 10. South Africa (2.6) Cambodia 2015 2016 2017 Area (ha) 2,798,449 2,908,564 2,950,852 Production (tons) 9,335,000 9,952,000 10,350,000 Yield (tons/ha) 3.34 3.42 3.51 Paddy surplus (million tons) 5.41 5.60 5.79 Exports of milled rice (tons) 538,396 542,144 635,679 Employment 3 million (estimate). Processing capacity 748 tons/hour in 2015 (39 large processors and exporters). Main export product Paddy rice (informally); Milled rice (informally and formally). Main export markets China, France, Germany, Malaysia, Netherlands, Poland, United Kingdom. In total, 58 markets for milled rice in 2017. Potential diversification Large markets: Iran (7% world market share), Bangladesh (4.1%), Iraq (4.0%), Japan markets for milled rice (2.0%), Philippines (1.9%), Sri Lanka (1.6%), Yemen (1.5%), Kuwait (1.4%), Peru (1.3%), Madagascar (1.3%), Brazil (1.2%), Guinea (1.1%), and Nepal (1.0%)Dynamic markets: Sri Lanka (growth of +28% per year from 2013-17), Nepal (+22%), Peru (+16%), Guinea (+10%), Bangladesh (+8%). Large and dynamic markets: Bangladesh, Sri Lanka, Peru, Guinea, Nepal. Potential products for Rice-flour products (rice flour, rice noodles, egg-roll wrappers and edible rice processing paper, rice-flour cakes and dumplings); liquid rice-based products (rice bran oil, rice-based alcoholic beverages, rice vinegar, rice milk, rice syrup); rice-based convenience foods (puffed rice, rice crackers, canned rice products, quick-cooking packaged rice); rice starch and wild rice stems. Source: Taken from various tables in this chapter, based on FAO, ITC, World Bank, MAFF. * World export and import shares are based on value. 188 Chapter 8 2.1. World rice production and trade and (HS 100610), brown rice (HS 100620), milled rice Cambodia’s position in the world (HS 100630), and broken rice (HS 100640). 2.1.1. Main producers of paddy rice The following sections concentrate on international trade of milled rice for several reasons. Milled rice Global annual rice production exceeds 700 million (HS 100630) is by far the major internationally metric tons, and the main rice producing countries traded rice product, accounting for more than are in Asia. By far the largest producers —and 80% of total world rice trade. More importantly, consumers— are China (more than 210 million exporting milled rice also creates more value than tons in 2017) and India (some 170 million tons). simply selling raw, unprocessed paddy rice — Other important producers are Indonesia, which is currently the case for Cambodia. Bangladesh, Vietnam, Thailand, Myanmar, and the Philippines. The world export supply of milled rice is concentrated on a few countries. India and Thailand are the Cambodia is the 11th largest rice producers in the world’s main milled rice exporters —together world, with 10.4 million tons paddy in 2017 (FAO accounting for more than half of total world data). Cambodia is one of the fastest-growing rice exports in 2017— followed by Viet Nam, Pakistan, producers in the world: Rice production increased and the United States. These five countries by 26% between 2010 and 2017, of which 6% together account for more than three quarters of is due to an increase in the area harvested and world exports (Table 31). 18% in the yield. Yields (3.5 tons/ha) are however much lower those of China (6.9 tons/ha), Brazil, Cambodia is now among the top ten exporters of Indonesia, and Viet Nam. milled rice in the world. Cambodia’s situation has changed dramatically from just a few years ago, 2.1.2. Main exporters and importers of when most of its exports concerned paddy rice. milled rice Cambodia’s recent rice exports are mainly due to Only a small part of world production of rice is traded import duty preferences and investments in rice internationally. World trade for rice (HS 1006) mills and polishing factories. amounted to about 41 million tons in 2016, worth Concerning imports, China is the largest milled rice about USD 20 billion (Table 31). This is only 5% of importer in the world (almost USD 1.5 billion in total world production (of 770 million tons), partly 2017), followed by countries in the Middle East because the main producing countries are also –Iran, Saudi Arabia, United Arab Emirates (UAE), the main consumers and the world rice market is and Iraq— as well as Bangladesh. As a region, fairly protected. the European Union (EU), with its 28 member There exist thousands of different rice varieties countries, is the largest importer in the world around the world, but a major distinction in —especially France, Germany, and the United international trade statistics is made according to Kingdom. China’s imports grew strongly between the different processing steps. The Harmonized 2013 and 2017, at about 15% annually. Other fast- System (HS), which is an international trade growing import markets include Bangladesh and nomenclature covering more than 5,000 product African countries such as Cameroon and Côte items at the most detailed level (6 digits), d’Ivoire. distinguishes four items of rice: Paddy rice 189 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 30: Top exporters and importers of milled rice (HS 100630), 2017 Exports Imports Growth Growth in Growth Growth in Main exporters Value uantity Main importers Value uantity in value quantity in value quantity (Share in world (USD (1,000 (Share in world (USD (1,000 2013-17 2013-17 2013-17 2013-17 exports, %) million) tons) exports, %) million) tons) (%/year) (%/year) (%/year) (%/year) 1. India (34%) 6,641 10,721 -7 0 EU-28 (9%) 1,548 1,793 .. .. 2. Thailand (23%) 4,499 9,967 0 10 1. China (8%) 1,461 3,016 14 16 3. Viet Nam (11%) 2,111 .. -9 0 2. Iran (7%) 1,214 1,294 -18 -11 4. Pakistan (8%) 1,513 3,139 -6 0 3. Saudi Arabia (5%) 957 1,053 -13 -6 EU-28 (7%) 1,298 1,448 .. .. 4. UAE (4%) 754 963 4 9 5. United States (6%) 1,116 1,932 -5 1 5. Bangladesh* (4%) 710 .. 8 3 6. Italy (3%) 504 610 -4 -1 6. Iraq* (4%) 703 .. -7 -10 7. China (2%) 419 1,010 17 36 7. United States (4%) 670 715 -2 6 8. Uruguay (2%) 354 721 -6 0 8. Cameroon (3%) 607 1,398 8 14 9. Cambodia* (2%) 326 534 7 13 9. Côte d’Ivoire (3%) 452 1,062 9 17 10. UAE (1%) 292 290 43 40 10. South Africa (3%) 451 944 -7 -5 (…) World 19,526 .. -5 4 World 17,412 .. -3 40 Source: ITC’s Trade Map. Trade for countries marked with * is estimated through mirror statistics. 2.2. Cambodia’s production, processing, and exports 2.2.1. Rice production in Cambodia substantial new investments has taken place (Table 32). The main actors in Cambodia’s rice value chain are farmers, collectors and processors. Rice is grown in all provinces in Cambodia, though -- Farmers: Rice is a staple food and is cultivated there are mainly two corridors producing the all over the country. Rice farmers tend to be small majority of rice: in the East along the Vietnamese subsistence producers, though there are also border (Prey Veng, Takeo, Kampong Cham, and large farms. It is estimated that the rice sector Svay Reang) and the West along the Thai border employs in total about 3 million people. (Battambang, Banteay Meanchey). The corridors -- Collectors: The paddy from the farms is either produce different varieties: The Eastern provinces sold directly to Cambodian mills, or sold through specialize in high yield IR varieties and the Western a network of collectors, middlemen and traders provinces produce especially aromatic rice. to domestic mills or mills in Vietnam and Cambodian paddy rice production has increased Thailand. Collectors may be agents for millers or rapidly in the last decade, both due to an extension sell to larger merchants. of the harvest area and improvements in the yield. -- Rice millers: Mills used to be small by Cambodia produced 10.4 million tons of paddy international standards —with only a handful rice in 2017, up from 4.0 million tons in 2000 of mills that were able to mill more than 10 tons (Figure 26). This increase is both due to an increase of paddy rice per hour,— but over the past years in the cultivated land (from 1.9 to 2.9 million ha) several larger rice mills have considerably up- and to improved yields (from 2.1 to 3.5 tons/ha). graded their milling equipments, both in terms It took Cambodia –who was a major rice supplier of quality of milled rice and output per hour, and to international markets in the 1960s—more than 190 Chapter 8 20 years to return, and then to surpass, production Rice Federation. Also, a growing number of millers levels of the early 1970s. Since then production now use rice husk gasifiers which contribute to continues to grow dramatically. more economical power generation. Figure 26. Rice production in Cambodia, 1961-2017 The number and size of new individual rice mills —and the corresponding milling capacity— in Cambodia continues to increase dramatically. Until recently very few rice mills in Cambodia were able to process more than 10 tons per hour, but there are now several processors in Cambodia with a milling capacity of more than 50 ton/ hours (Table 32). The combined milling capacity of the 39 rice processors for which information is available from CRF was about 750 tons/hour in 2015, compared to about 320 tons/hour in Source: FAOSTAT. 2012 (Slayton and Muniroth, 2013). In terms of supply capacity, the largest companies can supply 2.2.2. Rice milling in Cambodia 20,000 tons of milled rice per month, and the In SNEC: The value chain of milled rice should be total supply capacity of the 39 largest companies extended. Look at Vietnam and Thailand as an exceeded 220,000 tons/month in 2015. example. Table 32 compares the 39 rice processors for Cambodia’s rice milling sector consists of which information is available in 2015 with export traditional, small-scale mills that typically use values in 2015 and 2018, using MAFF data. Several antiquated technologies and modern, large-scale of the largest exporters in 2018 were not among mills that use modern technology. Outdated the largest rice processors in 2015, which could milling technologies of many Cambodian small- mean that some of them are only trading but scale rice mills cause high processing costs and not processing companies, or that they are new output losses. Recovery rates (about 63% of companies set up since 2015. paddy) of Cambodian rice mill are among the It appears that limited milling capacity is now less of lowest in Southeast Asia, and additional output an issue than underused existing milling capacity losses are caused through high percentages of and inadequate supply chain management, even broken rice. Furthermore, high energy costs — for modern state-of-the-art mills. While increases most rice mills are fueled with diesel— create a in milling capacity due to strong investments further burden on milling costs. In addition, many in recent years are encouraging for the sector’s millers claim that farmers do not store the paddy future export prospects, it now appears the main properly after harvesting, which can lead to poor issue is to address the bottlenecks that prevent quality of paddy for milling. millers from fully using the existing capacity. In recent years however Cambodian rice millers, These are related to adequate access to paddy some of them with international partners, made supply, drying and storage capacities, working considerable efforts either in improving existing capital, supply chain management, and energy rice mills or investing in new rice mills. The and logistics costs. newer rice mills are typically highly automated, -- Paddy supply to millers is irregular in terms computer-controlled facilities with increased of quantity and quality, which is partly capacities, and improved quality management linked to poor post-harvest handling and to meet international quality management inadequate drying and storage facilities. For standards and food safety certifications, such as areas specialized in photosensitive fragrant ISO, HACCP and GMP, according to the Cambodia 191 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT varieties such as Phka Rumduol, harvesting is with foreign paddy buyers (mainly from concentrated over a period of only a few weeks. Vietnam) that are able to offer higher prices. As farmers in those areas typically harvest at the -- Operation costs (electricity, logistics, same time, they all need to dry at the same time, transportation) are high. For example, the cost of which means large drying capacity would be electricity in Cambodia (USD 0.177 per kilowatt necessary for a short time —and be underused hour in 2015) is substantially higher than in for the rest of the year. Given high financial and Vietnam (USD 0.06), Thailand (USD 0.046) operating costs, it is quite difficult to imagine and Myanmar (USD 0.054) — and the recent profitable investments in drying facilities “close reduction in the cost of electricity for rice milling to the farm” in areas where the production is to USD 0.166 per kilowatt hour remains high for concentrated in time. Fortunately, for more millers (CAVAC, 2018). commercial paddy production, a major part of -- Many of Cambodia’s larger rice mills are of paddy is now mechanically harvested (combine comparable size with those in Thailand – yet the harvesters), and paddy is frequently sold fresh Thai mills usually operate 24 hours per day and six (wet), as rice millers are increasingly equipped days per week most of the year. In contrast, most with proper dryers. of Cambodia’s larger mills only work a single 8 -- Rice millers are often short in working capital to 10 hour shift, which reduces efficiencies and (cash flow) and face high credit costs, which profitability of milling operations. Finally, there is restricts their ability to purchase and store often a lack of skilled labor and professional staff sufficient paddy at the main harvest time to service and manage milling and polishing (November/December) to operate their mill for operations. longer than a few months. Even during harvest period, Cambodian millers enter in competition 192 Chapter 8 Table 31: Top Cambodian rice processors and exporters in 2015, and top exporters in 2015 and 2018 Export markets (2015) Exports (tons) Supply Milling capacity capacity N. America S. America Companies Australia (2015) (2015) 2015 2018 Europe Africa (tons/month) (tons/hour) Asia 39 companies listed in the CRF Compendium 222,900 748 36 36 27 23 22 10 377,208 416,793 B.V.B. (Cambodia) Agr. Dev. Co., Ltd. 20,000 80 x 0 0 Golden Daun Keo Rice Mill Co., Ltd. 20,000 65 x x x x x x 17,685* 35,474* Golden Rice (Cambodia) 20,000 55 x x x x x x 47,827* 29,463* Mega Green Imex Cambodia 20,000 8 x x x x 0 0 Baitang (Kampuchea) PLC 10,000 45 x x x x x 35,836* 63,742* Soma Group / Trading Company 10,000 30 x x 0 300 Apsara Rice Co., Ltd. 10,000 20 x x x x x 6,850 51,871* Battambang Rice Investment Co., Ltd. 10,000 10 x 8,056 4,728 Vong Bun Heng Import Export Co., Ltd. 8,000 30 x x x x x x 3,328 516 Loran Group Plc. 7,000 30 x x x x 1,318 0 Khmer Foods Group Co., Ltd. 7,000 15 x 58,260* 38,981* Amru Rice (Cambodia) Co., Ltd. 6,000 16 x x x x 60,861* 44,613* Angkor Kasekam Roongroeung Co., Ltd. 5,000 30 x x x x x 4,211 0 CHYN Rice Import Export 5,000 22 x x x x x x 144 0 Eang Heang Import Export Co., Ltd. 5,000 20 x x x 709 2,831 Phou Poy Dev. Import Export Co., Ltd. 5,000 20 x x x x x x 2,100 1,246 Carma Rice Limited 5,000 12 x x x 386 0 Mekong Oryza Trading Co., Ltd. 5,000 10 x x x 8,395 5,822 Men Sarun Imp. Exp. & Constr. Co., Ltd. 4,000 24 x x x x 0 0 Boost Riche (Cambodia) Co., Ltd. 3,000 18 x x x x x 2,489 404 Lor Eak Heng Sek Meas Rice Co., Ltd. 3,000 15 x x x x x 13,312 2,331 Signatures of Asia Co., Ltd. 3,000 15 x x 13,540 20,327* Fed Rice Battambang Co., Ltd. 3,000 10 x x x x x 100 2,062 City Rice Import-Export Co., Ltd. 2,500 12 x x x x x x 26,556* 55,581* Nikoline Investment Co., Ltd. 2,500 12 x x 13,465 14,468 Hak Se Modern Rice Mill 2,500 8 x x x 0 0 Khy Thay Corporation 2,400 10 x x 6,867 368 Agri Biz Khmer 2,000 16 x x x 0 0 White Gold Import Export Co., Ltd. 2,000 14 x x x x x 17,029 9,480 Domnak Teuk Group Co., Ltd. 2,000 12 x x x x 595 891 Indochina Rice Mill, Ltd. 2,000 12 x x x x 9,176 9,956 MK Agricultural Partnerships Co., Ltd. 2,000 12 x x x x x x 0 0 Sok Keo Import Export Co., Ltd. 2,000 10 x x x x x x 66 510 Kampong Thom Rice Mill Limited 2,000 8 x x x x x x 327 3,674 T.O.T (Trust Our Trade) Co., Ltd. 2,000 .. x x 17,696* 17,154 QC Rice Company 1,000 6 x x 0 0 SMCG Rice Co., Ltd. 1,000 4 x x x x x x 0 0 Tauch Tepich Import Export 500 12 x x x 24 0 HCLP (ABK Rice) 500 .. x x 0 0 Other top ten exporters in 2015 and/or 2018 .. .. .. .. .. .. .. .. 73,958 68,784 International Rice Trading (Cambodia) Co, Ltd. .. .. .. .. .. .. .. .. 25,207* 37,026* Primalis Corporation Ltd. .. .. .. .. .. .. .. .. 0 31,658* SSCORP (Cambodia) Co., Ltd. .. .. .. .. .. .. .. .. 17,207* 100 Crystal Rice (Kampuchea) Co., Ltd. .. .. .. .. .. .. .. .. 31,544* 0 Other companies not listed here .. .. .. .. .. .. .. .. 87,230 140,648 Total Cambodia .. .. .. .. .. .. .. .. 538,396 626,225 Source: Adapted from Cambodian Rice Federation (2015), Cambodian Rice — White Gold, Compendium of company profiles of Cambodian rice exporters. Exports values from from MAFF. * The Top ten exporters in each year are emphasized by an asterisk. 193 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 2.2.3. Cambodia’s milled rice exports Vietnam (Ho Chi Minh City/Cai Mep) are mainly for rice grown in the Eastern provinces, and transport The rise in Cambodia’s rice production translates is typically by river (Phnom Penh and Neang into a sizeable surplus that can be exported, in the Leung) to the Mekong Delta. Finally, exports via form of paddy rice or milled rice. MAFF estimates Thailand (Laem Chabang or Bangkok) are mainly that it has an exportable surplus of about for rice grown in the Western provinces, which so five million tons (up from about 650,000 tons in far requires road transport, though the ‘Western 2004). railway line’ that connects Phnom Penh and Poipet A large part of the paddy produced in Cambodia is city at the border with Thailand was completed in however exported to Thailand and Vietnam in the 2918 is to open in April 2019. form of paddy rice, where it is milled and either Cambodia’s exported milled rice to 58 different locally distributed or further exported to other countries in 2017, mainly to China, France and countries as milled rice. This represents a huge Germany (Table 34 on page 214). Some of those lost opportunity for Cambodian rice millers and markets are among the top ten importers in the traders to add value, export directly, and create world (China, Saudi Arabia, United Arab Emirates, employment locally (IFC, 2015). In addition, limited United States, Cameroon, Côte d’Ivoire, South access to services and information contributes Africa), some are dynamic (China, Senegal, Côte to a lack of awareness and understanding of the d’Ivoire, Cameroon, and Kenya), and most are standards and preferences of the international open —applying zero tariffs for imports from rice market. Cambodia— with the exception of China (27.5%) In the past, almost all milled rice produced by and Malaysia (20%), and the European Union since Cambodian mills had been marketed locally. The January 2019. limited milling capacity until recently restricted China has become Cambodia’s main destination the country overall ability to cope with the for milled rice in recent years, with total farmers’ increasing paddy supply. Even larger mills exports of almost 180,000 tons in 2017, worth had been unable to supply international markets, USD 100 million. Cambodia’s exports to China and Angkor Kasekam —which produces high- have shown an impressive growth between 2013 quality Neang Malis rice under a system of contract and 2017, growing by more than 50% per year farming— had been for years Cambodia’s only in value and 70% in quantity. China is the largest rice mill that constantly supplied international importing market for milled rice in the world markets (especially France) but with very limited (world market share of 8.4%), and extremely quantities. dynamic: its total worldwide imports of milled rice The situation has however improved in recent grew by a sound 14% between 2013 and 2017. years, and there are now more than 80 licensed Cambodia was China’s third-largest milled rice exporters that focus on overseas markets. The main supplier in 2017, after Viet Nam and Thailand. markets are Europe —where Cambodia enjoyed Taken together, the 28 members of the European tariff-free market access under the Everything- Union (EU) remain however the largest importer but-Arms Agreement (EBA) from September 2009 of Cambodian milled rice, in particular France, to January 2019— and increasingly so China. In Germany, the Netherlands, Poland, and the 2018, Cambodia exported 626,225 tons of milled United Kingdom. However, since 18 January rice, mainly fragrant rice (493,597 tons), followed 2019, the EU imposes safeguard measures on rice by long grain white rice, and parboiled rice. from Cambodia and Myanmar, and re-introduces There are three options for rice shipments abroad. import duties of €175 per ton, that will be steadily Exports via Sihanoukville are mainly for rice grown reduced over a period of three years. in central Cambodia, but shipment costs remain high though they are improving. Exports via 194 Chapter 8 Cambodia’s major export competitors are Thailand facilities and funding to support knowledge and Vietnam. Thailand is a main competitor dissemination. In addition, some markets for fragrant rice, while Vietnam is the principal represent logistical challenges (Africa, USA), need competitor for the non-aromatic white rice significant capital for business development markets such as the Philippines and Indonesia (China, USA), or lack confidence that Cambodian (Australian Aid and World Bank, 2015). exporters can deliver large volume and high quality over long term (China). Inconsistent There are a number of constraints for Cambodia’s quality between different mills prevents them exporters of milled rice, including: from cooperating to meet large-scale orders that -- The supply-chain management remains cannot be served by individual mills. inadequate. For example, the practice of mixing varieties both at farm level and during collecting 2.3. Opportunities to grow and move up and storage undermines the ability of small- markets scale millers and exporters to provide consistent The long-term outlook for the rice world market is quality, which renders difficult to meet favourable. Import demand over the next decade international standards on rice specifications and is expected to increase by some of the major SPS. There are however examples of successful consuming countries, including Bangladesh, certifications against quality standards (e.g. Indonesia and certain African countries, where organic rice), which requires commitment of all demand is increasing due to population growth involved stakeholders, from farmers to exporters, and/or where is little area for expansion of and a full traceability system. Examples include production. the Sustainable Rice Platform (SRP), and contract farming agreements of Preah Vihear Meanchey The Cambodian rice sector offers significant Union of Agricultural Cooperatives with AMRU opportunities to grow and add value, despite Rice and Signatures of Asia, which led to organic the many challenges to overcome. These include paddy that is certified against both EU and US market and product diversification. organic standards. 2.3.1. Market diversification -- Transportation costs remain high. For example, the price of gasoline is higher in Cambodia One possibility to add value to Cambodia’s rice (USD 0.90 per litre) than in Vietnam (USD 0.81) sector is to diversify its destination markets, by and Myanmar (USD 0.51), and even though targeting ideally large, dynamic and open markets Thailand’s gasoline price are higher (USD 1.04), that are currently not served by Cambodia. most trucks in Thailand are equipped with LPG whose price is about half of the gasoline price Cambodia enjoys duty-free access in a number in Cambodia (Chan and Kim, 2017). Also, the of major importing countries, especially until reliance on containerized rice exports is at odds recently in the European Union (EU), the world’s with global practices of trading in break bulk rice. largest importer of milled rice. Since September -- Despite improvements, Cambodia’s export 2009 the EU grants all least developed countries infrastructure remains inadequate, with complex, (LDCs) duty-free and quota-free access for rice lengthy and costly export procedures. The large under the Everything-but-Arms (EBA) Agreement. number of government agencies with overlapping With high MFN rates of 175 EUR/ton (average of bureaucratic mandates adds to the cost of doing its 72 national tariff lines) —corresponding to business, reducing export price competitiveness. an ad valorem equivalent (AVE) tariff of 21.5%— -- Many millers have limited knowledge on Cambodia and Myanmar enjoyed until recently export distribution channels and end markets, an advantage of more than 20 percentage points and insufficient trading expertise or initiative, compared to competitors such as India, Thailand, while exporter associations are weak, and lack Vietnam, Pakistan, the United States and China (Table 33). 195 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Cambodia’s strong exports to EU market can be Agreement for 20,000 MT of milled rice and it is attributed to EBA, but since 18 January 2019, the effective in 2018. Lastly, Myanmar and Vietnam EU imposes safeguard measures on long-grain have set a policy to produce fragrant rice to meet white rice from Cambodia and Myanmar for demand in international market. a period of three years. It reinstates the normal Cambodian milled rice exporters thus need customs duty on this product of EUR 175 per ton in to diversify their exports to other important the first year, progressively reducing it to EUR 150 markets where they have favourable market per ton in the second year, and EUR 125 per ton access conditions. Cambodia has also duty‐free in the third year. An investigation has confirmed access for milled rice in Saudi Arabia, the United that the significant increase of imports of Indica Arab Emirates, and South Africa, where however rice at low prices from Cambodia and Myanmar other exporters also enjoy the same 0% tariff rates. has caused economic damage to European In China, Cambodia and other ASEAN exporters producers, whose market share in Europe face an AVE tariff of 27.5%, which gives them a dropped substantially. This is why Cambodian rice tariff advantage of almost 40 percentage points exporters to Europe now need to focus on fragrant compared to other large exporters (that face a rice, rather than on long-grain white rice. tariff of 65%). Cambodia has also a slight tariff CAVAC (2018). Myanmar is an emerging competitor advantage in the United States: its rate is 0.5% for Cambodia rice export to international market compared to 6% for many other exporters. as it re-granted again Everything But Arms (EBA) Some major rice consuming countries in Asia initiative preferential trade regime in 2013 and have fairly protected markets, e.g. Japan and the trade preferences for Myanmar is applied South Korea, and rice is considered a “sensitive retroactively as of June 2012. Therefore, Myanmar product” under AFTA by some ASEAN countries seems to be a large low- cost rice exporter that (Philippines, Indonesia and Thailand) and tariffs competes with Cambodia. Global rice market is remain high. Japan’s MFN tariff is more than unpredictable. In addition, Thailand is seen as 3,000 USD/ton (AVE of 175%), and the non-MFN a main competitor for fragrant rice and Vietnam tariff (for non-members of WTO) even exceeds for white rice (RGC 2014). As a result, Cambodia’s 200%. This is however dwarfed by South Korea export is stagnated between 2015 and 2016. who applies a whopping AVE of more than 500%. Volume of export was 538,396 MT and 542,144 MT State-trading enterprises are also prevalent in respectively, due to those factors including price some markets (e.g. Indonesia). In addition, several of Thai rice failed down. In addition, Vietnam is countries provide price support and subsidies to also competitor that can increase its market share domestic producers. in EU because it just obtained quota for Free Trade 196 Chapter 8 Table 32: Tariffs for the main exporters of milled rice (HS 100630) on the main import markets Main importers (Share in world imports, %) 3. Saudi Arabia (5%) 5. Bangladesh* (4%) 7.United States (4%) 9. Côte d’Ivoire (3%) 10. South Africa (3%) Main exporters 8.Cameroon (3%) (Share in world exports, %) EU-28 (9%) 1. China (8%) 2. Iran (7%) 4. UAE (4%) 6. Iraq* (4%) 1. India (34%) 21.6 65 45 0 0 10 .. 0.5 5 10 0 2. Thailand (23%) 21.6 27.5 45 0 0 10 .. 0.5 5 10 0 3. Viet Nam (11%) 21.6 27.5 45 0 0 10 6.1 5 10 0 4. Pakistan (8%) 21.6 65 45 0 0 10 0.5 5 10 0 EU-28 (7%) 0 65 45 0 0 10 6.1 5 10 0 5. United States (6%) 21.6 65 45 0 0 10 .. 5 10 0 7. China (2%) 21.6 65 45 0 0 10 6.1 5 10 0 8. Uruguay (2%) 21.6 65 45 0 0 10 6.1 5 10 0 9. Cambodia* (2%) 0** 27.5 45 0 0 10 .. 0.5 5 10 0 10. UAE (2%) 21.6 65 45 0 0 10 6.1 5 10 0 Number of NTLs 72 2 1 1 1 2 .. 2 3 2 1 Source: ITC’s Market Access Map. * Trade for countries marked with * is estimated through mirror statistics. * Since January 18, 2019, the EU imposes safeguard measures on rice from Cambodia and Myanmar for a period of three years. It reinstates the normal customs duty on this product of €175 per ton in the first year, progressively reducing it to €150 per ton in the second year, and €125 per ton in the third year. The ad valorem equivalent tariff for the first year is 21.6%. NTLs: Tariffs are actually applied at the national tariff lines (NTL) level. NTL codes are country-specific and more detailed than the 6-digit level of the Harmonized System; they can have eight, ten or even more digits. The EU for example has 72 (!) different NTLs for milled rice. The results reported here at the 6-digit level are the average of individual NTLs. For example, China’s tariff of 27.5% applied to Cambodia reported here is the average of 50% for 1006301090 “Long grain semi-milled or wholly milled rice, whether or not polished or glazed (out-of-quota)”, and 5% for 1006309090 “Other semi-milled or wholly milled rice, whether or not polished or glazed (out-of-quota)”. The tariffs (ad valorem equivalents or AVEs) reported here give thus only an indicative picture. If Cambodia exports mainly long grain milled rice to China, the effective tariff rate would be closer to 50%. Table 34 shows Cambodia’s current export GIZ: The chapter mentions about export destinations of milled rice (HS 100630), as well opportunities, distinguishes export markets potential markets for diversification. For each (preferential, dynamic, and ASEAN markets), importing market, it also shows the main suppliers, and also distinguishes potential products. Hasso i.e. Cambodia’s potential competitors. recommended that those things should be integrated into one table. 197 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 33: Cambodia’s exports of milled rice (HS 100630), and potential markets for diversification, 2017 Cambodia’s exports (mirror data) Imports by partner Growth Import Market Unit Growth Share in Tariff Value in Rank in growth Main suppliers* (Rank in value in value world faced by (USD Quantity quantity world in value (Share in partner’s Cambodia’s (USD/ 2013-17 imports Cambodia 1,000) 2013-17 imports 2013-17 imports, %) exports) ton (%, p.a.) (%) (%) (%, p.a.) (%, p.a.) 58 current export destination markets Total 325,950 534,194 610 7 13 .. 100 -3 .. IND (34), THA (23), VNM (11) 1. China 100,538 177,801 565 52 71 1 8.4 14 27.5 VNM (61), THA (26), KHM (7) 2. France 51,521 70,492 731 2 10 13 1.9 -3 0** ITA (30), ESP (16), KHM (16) 3. Germany 31,038 57,725 538 1 5 17 1.5 -2 0** ITA (29), BEL (16), NLD (14) 4. Malaysia 25,527 38,738 659 -15 -7 11 2.0 -10 20 VNM (41), THA (35), IND (10) 5. Netherlands 17,092 27,694 617 -10 -5 40 0.6 -2 0** THA (18), KHM (16), IND (14) 6. Poland 12,161 26,919 452 -8 -6 61 0.3 -3 0** KHM (25), MMR (18), ITA (17) 7. United Kingdom 11,787 21,358 552 15 22 21 1.4 -2 0** ITA (30), IND (16), ESP (12() 8. Czech Republic 10,060 17,243 583 11 17 63 0.3 -2 0** ITA (31), KHM (22), MMR (11) 9. Hong Kong 8,923 14,224 627 69 87 20 1.4 -7 0 THA (69), VNM (12), USA (6) 10. Italy 7,892 12,259 644 9 18 52 0.4 3 0** IND (23), THA (16), KHM (12) 11. Brunei Dar. 7,250 7,523 964 .. .. 94 0.1 -7 0 THA (52), KHM (36), IND (9) 12. Belgium 5,209 7,307 713 8 9 47 0.4 -4 0** THA (19), ITA (18), NLD (14) 13. Spain 3,479 6,084 572 -17 -16 58 0.3 -1 0** THA (34), ITA (19), FRA (10) 14. Singapore 3,384 3,977 851 4 7 27 1.1 -12 0 THA (44), IND (28), VNM (10) 15. Denmark 3,332 4,520 737 75 87 75 0.2 -9 0** DEU (20), ITA (15), THA (13) 16. Sweden 3,252 4,511 721 6 14 53 0.4 -2 0** ITA (15), IND (14), BEL (12) 17. Portugal 3,058 4,478 683 2 7 100 0.1 -4 0** ESP (34), KHM (21), MMR (8) 18. Russian Fed. 2,681 4,408 608 -18 -9 44 0.5 -13 0 IND (30), THA (25), PAK (14) 19. Greece 1,915 3,502 547 31 39 110 0.1 -12 0** ITA (22), BEL (19), KHM (16) 20. Bulgaria 1,626 3,385 480 13 11 114 0.1 -6 0** GRC (32), ESP (25), KHM (15) 21. United States 1,424 1,367 1042 -7 -6 7 3.8 -2 0.5 THA (62), IND (24), PAK (3) (…) 31. Senegal 518 700 740 .. .. 119 0.1 14 10 THA (76), VNM (10), IND (7) 37. Saudi Arabia 224 340 659 -21 -19 3 5.5 -13 0 IND (75), USA (10), PAK (7) 44. Cameroon 82 96 854 .. .. 8 3.5 8 5 THA (85), IND (7), MMR (3) 46. UAE 72 19 3,789 3 -25 4 4.3 4 0 IND (77), PAK (15), THA (3) 47. Kenya 68 150 453 -1 -9 19 1.4 8 35 PAK (61), THA (24), CHN (11) 52. South Africa 16 25 640 -61 -35 10 2.6 -7 0 THA (65), IND (26), UAE (3) 53. Côte d’Ivoire 13 25 520 -36 -60 9 2.6 9 10 IND (26), VNM (24), CHN (23) Selected potential markets for diversification: Large, dynamic, and/or open markets Iran 0 0 .. .. .. 2 7.0 -18 45 IND (69), PAK (19), THA (4) Bangladesh 0 0 .. .. .. 5 4.1 8 10 IND (53), THA (30), VNM (15) Iraq 0 0 .. .. .. 6 4.0 -7 .. IND (69), VNM (10), URY (6) Japan 0 0 .. .. .. 12 2.0 -6 170.2 USA (58), THA (40), AUS (1) Philippines 0 0 .. .. .. 14 1.9 5 35 VNM (57), THA (32), PAK (8) Sri Lanka 0 0 .. .. .. 15 1.6 28 52.4 IND (73), MMR (19), PAK (7) Yemen 0 0 .. .. .. 16 1.5 -12 0 IND (62), THA (21), PAK (14) Kuwait 0 0 .. .. .. 18 1.4 0 0 IND (91), THA (3), USA (2) Peru 0 0 .. .. .. 23 1.3 16 0 URY (61), BRA (21), THA (14) Madagascar 0 0 .. .. .. 24 1.3 6 0 PAK (41), IND (25), MMR (22) Brazil 0 0 .. .. .. 25 1.2 -3 11 PRY (51), URY (31), ARG (11) Guinea 0 0 .. .. .. 26 1.1 10 10 IND (89), USA (7), CHN (3) Nepal 0 0 .. .. .. 28 1.1 22 10 IND (100), USA (0), CHN (0) Source: ITC’s Trade Map. * ARG: Argentina, AUS: Australia, BEL: Belgium, BRA: Brazil, CHN: China, CIV: Côte d’Ivoire, DEU: Germany, ESP: Spain, GRC: Greece, IDN: Indonesia, IND: India, ITA: Italy, KHM: Cambodia, LAO: Lao PDR, LBR: Liberia, MMR: Myanmar, MYS: Malaysia, NLD: Netherlands, PAK: Pakistan, PRY: Paraguay, SGP: Singapore, SVN: Slovenia, THA: Thailand, UAE: United Arab Emirates, URY: Uruguay, USA: United States, VNM: Viet Nam, ZAF: South Africa. **Since January 18, 2019, the EU imposes safeguard measures on rice from Cambodia and Myanmar for a period of three years. It reinstates the normal customs duty on this product of €175 per ton in the first year, progressively reducing it to €150 per ton in the second year, and €125 per ton in the third year. The ad valorem equivalent tariff for the first year is 21.6%. 198 Chapter 8 Concerning diversification markets, Cambodia There is also significant potential in the is not at all present in several potential markets production and export of organic and fair-trade that are large or dynamic. In terms of size, Iran, rice. Organic rice can strengthen food security as Bangladesh, Iraq, Japan, the Philippines, Sri Lanka, farmers are enabled to grow their crop without Yemen and Kuwait are among the 20 largest chemical fertilizers. Although still a niche market, importers in the world. In terms of dynamism, Sri traceability “from farm to fork” will require strictly Lanka, Nepal, Peru, Guinea, and Bangladesh grew monitored contract farming which is relatively by at least 8% per year between 2013 and 2017. new to Cambodia. The experience of Preah Vihear These markets appear as potential diversification Meanchey Union of Cooperatives with AMRU markets for milled rice from Cambodia, though Rice suggests that this is feasible. Also, a small more research needs to be undertaken to better portion of organic rice is certified as Fair Trade and understand the country-specific requirements commercialized by Ethiquable in France. and distribution channels, and the potential for niche markets. Rice by-products during milling, especially husk and bran, represent another opportunity Many importing countries apply non-tariff for value addition. Rice husk, the coating on a measures for rice, particularly sanitary and grain of rice, is generated during the first stage of phyto-sanitary (SPS) measures. Even in ASEAN, rice milling. 100 kg of milled white rice results in trade in rice is covered by more protective roughly 28 kg of rice husk, which can be turned AFTA conditions. For instance, China has placed among others into solid fuel (e.g. in loose form, stringent SPS measures in place, which require briquettes, and pellets) that can be used with regular inspections by MAFF. The complexity of rice husk gasifiers to generate power. Rice bran these procedures means that Cambodian exports is produced during the second stage of milling of rice to China had for some time effectively been (polishing process), when the bran layer is removed suspended, though the situation has changed from the brown rice kernel. 100 kg of paddy rice dramatically over the last years, partly due to will generate 5−10 kg of bran, which has a high investments in milling capacity and upgrading by nutritive value. The conventional use of rice bran investors, including from China. is as ingredient for animal feeds, in particular ruminants and poultry, though advances in 2.3.2. Product diversification and stabilization techniques in recent years has led to branding new uses for bran and its derivatives, most notably There are significant export opportunities for bran oil for cooking and waxes for cosmetic premium fragrant rice, but Cambodian exporters products (IRRI Knowledge Bank). need successfully build internationally-known Finally, there are opportunities in exporting brands. Global demand for premium fragrant derived rice products, some which are already rice continues to be strong, and Cambodia can produced in Cambodia. These include rice-flour build on the reputation its premium fragrant products (rice flour, rice noodles, egg-roll wrappers rice, which won the title of “World’s Best Rice” and edible rice paper, rice-flour cakes and in 2012, 2013, 2014 and 2018. The commercial dumplings); liquid rice-based products (rice bran brand name “Malys Angkor” (which includes oil, rice-based alcoholic beverages, rice vinegar, varieties such as Phka Rumduol, Phka Rumdeng, rice milk, rice syrup); rice-based convenience foods and Phka Romeat) was registered by CRF with the (puffed rice, rice crackers, canned rice products, Department of Intellectual Property in 2018, with and quick-cooking packaged rice); and other rice the specific intention to improve the reputation of products such as rice starch and wild rice stems Cambodian rice abroad. Also, the varieties Phka (Ricepedia.org). Rumduol, Phka Rumdeng, and Phka Romeat have been DNA-mapped, which means their purity IFC (2015). Given the recent progress in sector and authenticity can be guaranteed, and this organization, productivity, and quality yield, and could potentially be extended to other premium the accolades (including being awarded World’s aromatic wet-season photo-sensitive rice varieties. Best Rice at the World Rice Conference the past three consecutive years) that have accompanied 199 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT these gains, Cambodian rice is well-placed to meet mark of certification, and consider the creation the aforementioned expectations of international of a protected geographical indication (PGI) for importers. It is time for exporters and sector specific, limited regions in the country. Cambodian representatives to visit new markets, initiate trial millers should also work hard to develop quality shipments, and establish valued relationships. and lower costs. Mills should have farmers under In order to maximize the chances for success, contract to provide consistent rice quality and the sector should first have established a clear aim for near 100 percent capacity utilization at identity (i.e., a brand). Cambodia should develop the mill. It is clear that ensuring high quality and a unique fragrant/high-quality rice product name, reliable supply form the basis for increased trade. 2.4. SWOT analysis of Cambodia’s rice sector Table 34: SWOT analysis of the rice sector in Cambodia Strengths Weaknesses §§ Post-harvesting / Processing §§ Post-harvesting / Processing §§ Established capacity of modern rice mills §§ Inconsistent paddy quality and poor post- harvest handling. with capacity of over 2 million ton/year. §§ Inadequate advanced drying and storage facilities prevents regular §§ Marketing / Export paddy supply to large mills. §§ Cambodian fragrant rice is competitive §§ Lack of skilled labor and professional staff to service and manage with Thai rice. milling and polishing operations, and weak supply chain management. §§ Geographic proximity to China and §§ Inadequate access to finance forces local millers to compete for paddy Singapore (reducing shipping/freight costs rice with buyers from Thailand and Vietnam. and time). §§ Irregular supply of paddy, high operation costs (electricity, logistics, §§ Top ranking in global assessment of rice transportation, and sea port access), and insufficient working capital quality in recent years. reduce profitability of milling operations. §§ Growing international reputation and §§ Limited and under-utilized capacity of modern mills reduces the size of branding of Cambodian premium fragrant exports that can be handled. rice, which won the “World’s Best Rice” §§ Marketing / export award in 2012, 2013, 2014, and 2018 (and §§ Practice of mixing varieties undermines the ability of exporters to landing second in 2015, 2016 and 2017). provide consistent quality, which renders difficult to meet international §§ Supporting infrastructure and policy standards on rice specifications and SPS. §§ Introduction of Policy on the Promotion of §§ Inadequate export infrastructure, with complex, lengthy and costly Paddy Production and Rice Export in 2010 export procedures. The large number of government agencies with has encouraged investors to significantly overlapping bureaucratic mandates adds to the cost of doing business, boost milling capacity. reducing export price competitiveness. §§ Government support in the form of §§ Limited knowledge on export distribution channels and end markets, investments in storage facilities, tax and insufficient trading expertise or initiative. exemptions, and special credit lines to §§ Some markets represent logistical challenges (Africa, USA), need aid processors acquire supplies at harvest significant capital for business development (China, USA), or lack time. confidence that Cambodian exporters can deliver large volume and §§ Increased public expenditures on high quality over long term (China). agriculture, irrigation, R&D, and rural §§ Reliance on containerized rice exports is at odds with global practices development. of trading in break bulk rice. §§ Improved railway, port and export §§ Lack of Cambodian brand that is internationally well-known. infrastructure. §§ Supporting infrastructure and policy §§ International environment §§ Few cooperatives to help organize farmers, limiting access to extension §§ Preferential market access in main services (e.g. on good agricultural practices), market information, importing markets (EU, China). Duty-free finance, and reducing bargaining power. access by the EU (EBA under the EU GSP) §§ Weak exporter and producer associations, and lack of facilities and has been a key driver of rapid export funding to support knowledge dissemination. growth since 2009, which however has §§ Poor market information services, and insufficient technology come to an end for a period of three years. platforms for data management and knowledge dissemination. 200 Chapter 8 Opportunities Threats §§ Post-harvesting / Processing §§ Post-harvesting / Processing §§ Continued expansion and modernization of Cambodia’s milling §§ Increases in electricity costs could place sector will increase output and lower costs. millers under further cost pressure. §§ Use of alternative, cost-competitive technology (e.g. rice husk as bio- §§ Marketing / Export fuel) can lower electricity costs. §§ Without ability to reliably produce large §§ Processors are willing to delve into different/exotic products. quantities of uniform milled rice access to §§ Improved supply chain management to reduce the risk and costs of international markets will be restricted. doing business for producers and millers. §§ Export of fragrant and non-aromatic rice §§ Development of providers for postharvest services (warehouse receipts, exports will continue to grow only if modern drying). milling capacity continues to expand and §§ Marketing / Export rice exporters open new markets beyond §§ Good prospects for increased exports of fragrant rice to China. their current main targets. §§ Large rice importing markets with strong growth outlook are nearby §§ International environment —including Indonesia, the Philippines, and China. §§ Global rice markets are unpredictable and §§ Break bulk barging down the Mekong River would significantly often subjected to significant government improve competitiveness of Cambodian rice exports. intervention. Possible disruption in world §§ Potential to become a leading exporter of high-quality fragrant rice. markets (e.g. food crisis). §§ Growing international recognition of Cambodian fragrant rice, §§ Return of India and Thailand as dominant building on its “World’s Best Rice” award. rice exporters likely to weaken global prices. §§ Domestic policy support §§ Recent massive government support in §§ Continued strong government support. Thailand to subsidize rice farms to convert to §§ Improved export procedures lead to reduced costs and time to export. organic practices (with a target of 150,000 to §§ Increasing value addition through geographical indications. 200,000 ha). §§ International environment §§ Thailand is a major competitor for aromatic §§ Global trade in milled rice is expected to remain at near record rice exports, and Vietnam for non-aromatic volumes over medium term. rice exports. §§ Demand by China (a net importer) continues to be strong over the §§ New competition from Myanmar, Suriname, long-term. and African low-cost producers due to §§ Increasing global demand for fragrant, brown, and organic rice. improved local rice production. Myanmar §§ Potential to win market share from Thailand, while Vietnamese benefits from similar duty-free preferences. fragrant rice is not competing with Cambodian fragrant rice. §§ Increased local production of fragrant rice §§ Markets are interested in origin and traceability of products, value (China, USA), and stronger competition from GMO-free (Europe) and ‘non-intensive agriculture’ (Europe, USA). Vietnam for fragrant rice in China. §§ Markets in Europe and the USA have an appetite for certified organic §§ Market determined by political forces rice and for new/exotic brands. (China). §§ Significant ethnic market opportunity. §§ End of preferential access to EU markets §§ New opportunities for market diversification (Africa, Middle East). (EBA), where sales may have already peaked. Source: Based on CTIS (2014), IFC (2015), GIFT (2016), Goletti and Sovith (2016), MAFF and CAVAC (2018), and interviews with stakeholders in December 2018. 3. Rubber diversification (DTIS, 2007). A survey in 2011 among 24 Provincial Departments of Commerce Rubber has long been a major commercial crop and revealed that rubber was among the “Top Ten export earner for Cambodia, and the sector has the Products” in five Provinces: Kampong Cham, potential for increased exports and value addition. Kratie, Pailin, Ratanakiri and Stung Treng. The natural rubber sector plays a key role in the socio-economic development of Cambodia: it A strong increase in rubber prices on generates about 77,000 jobs, alleviates poverty, international markets during the past decade and contributes to environmental protection has generated considerable interest from both by creating green canopy and preventing domestic and foreign investors in the sector in soil erosion. Rubber is among the 19 product Cambodia. However, the rubber business is risky: and service sectors with potential for export Rubber has high potential income, but rubber 201 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT trees yield latex only at least five years after challenges, there are significant opportunities planting, and income is uncertain because prices for processing and market diversification for the are very volatile. The outlook for the global natural rubber sector in Cambodia. rubber sector is favorable, and despite the many Table 35: The rubber sector at a glance World (2017) 30 producers 99 exporters 177 importers Rank and share in world (%)* 1. Thailand (32.3) 1. Thailand (36.7) 1. China (27.8) 2. Indonesia (25.5) 2. Indonesia (31.1) 2. United States (11.1) 3. Viet Nam (7.7) 3. Malaysia (6.7) 3. Malaysia (10.0) 4. India (6.8) 4. Viet Nam (5.7) 4. Japan (7.6) 5. China (5.7) 5. Côte d’Ivoire (5.1) 5. India (4.3) 6. Malaysia (5.2) 6. Lao PDR (1.6) 6. South Korea (4.0) 7. Côte d’Ivoire (4.1) 7. Myanmar (1.3) 7. Germany (3.4) 22. Cambodia (0.1) 8. Cambodia (1.2) 62. Cambodia (0.0) Cambodia 2015 2016 2017 Total area planted (ha) 388,955 432,735 436,339 Area tapped (mature trees only) (ha) 111,232 126,861 170,230 Production (dry rubber) (tons) 126,861 145,200 193,286 Yield (kg/ha) 1,141 1,143 1,135 Exports (tons) 128,047 145,100 188,832 Price for Malaysian RSS (USD/kg) 1.37 1.38 1.67 Main producing provinces Kampong Cham, Kratie, Kampong Thom, Ratanak Kiri, Mondul Kiri. (1) Rubber Estates(previously State Owned Rubber Plantations and Economic Types of plantations Land Concession) and (2) Rubber Smallholdings Plantation size From about 2 ha (smallholders) to more than 13,000 ha (Chup). Employment About 77,000, of which 49,000 (production) and 18,000 (post-production). Uup to 2018, 147 processing factories and handicrafts including 41 for TSR, 94 Number of processors for RSS, 1 for “CL:Concentrated Latex” and 11 for RW: Rubber Wood. Processing capacity About 150,000 tons per year. Mainly CSR L and CSR 5, but also CSR 10 and CSR 20 (strong world demand) as Main processed products well as RSS and CL Main export product “Technically specified natural rubber (TSNR)” (HS 400122). Main export markets Vietnam, Malaysia, and China. In total, 17 export destinations in 2016. Large markets: Germany (4.3% world market share), Brazil (2.1%), Turkey (2.1%), France (2.1%), Russian Federation (1.9%), Poland (1.5%), Canada (1.5%), Romania (1.4%), Slovakia (1.4%), Czech Republic (1.3%), Belgium (1.0%). Potential diversification markets Dynamic markets: Philippines (growth of +1,000% per year from 2013-17), (for TSNR) Belgium (+63%), Egypt (+40%), Czech Republic (+21%), Pakistan (+18%), Slovakia (+10%). Large and dynamic markets: Russian Federation, Slovakia, Czech Republic, Belgium. Industrial products (conveyor belts, rubber rollers, etc.), automotive products (fan belts, radiator hoses, etc.), latex products (rubber gloves, toys hygienic Potential products for processing products, etc.), adhesives, birth control (condoms), medical products (surgical gloves), furniture (rubberwood), foam mattresses, artificial flowers. Source: Taken from various tables in this chapter, based on FAO, ITC, World Bank, and annual report of GDR (2017) MAFF. * World export and import shares are based on value. 202 Chapter 8 3.1. World rubber production and trade Thailand and Indonesia are the main exporters of and Cambodia’s position in the world natural rubber (HS 4001). Thailand and Indonesia are the world’s largest exporter of natural rubber, 3.1.1. Main rubber producers each exporting rubber worth USD 5 to 6 billion Asian countries, in particular Thailand and in 2017, and together account for more than two Indonesia, are the leading natural rubber thirds of world exports (Table 37). Other main producers in the world. By far the largest producers exporters are Malaysia, Viet Nam, and Côte d’Ivoire. of natural rubber are Thailand (4.6 million tons in While Thailand is the dominant exporter in natural 2017) and Indonesia (3.6 million tons), together rubber latex (world market share of 75%), natural producing more than 50% of world output. rubber in smoked sheets (69%), and natural rubber Other large producers are Viet Nam, India, China, in primary forms or in plates, sheets or strip (27%), Malaysia, and the Philippines. Côte d’Ivoire and Indonesia is by far the world’s largest exporter of Myanmar are rapidly emerging as significant technically specified natural rubber (TSNR). producers of natural rubber. Cambodia has emerged as a main player in the Cambodia is among the top natural rubber world rubber market in recent years. With exports producers in the world, although its position is worth USD 299,394,841 in 2017, Cambodia was the not clear, as FAO reports much lower values than 8th largest exporter of natural rubber (HS 4001). MAFF. Cambodia is the 22nd largest natural rubber Cambodia exports mainly technically specified producer according to FAO, but would be on the natural rubber (TSNR) (HS 400122) (USD 154 11th place when using data from MAFF’s General million, rank 6 in the world) and ribbed smoked Directorate of Rubber. sheets-RSS (HS 400121) (USD 24 million, rank 5). 3.1.2. Main rubber exporters and On the import side, China, the United States importers and Malaysia are the three largest importers of natural rubber (HS 4001) in the world. China’s International trade statistics distinguish five natural rubber imports represented almost USD types of rubber products depending on their 5 billion in 2017, corresponding to a world market processing steps. The Harmonized System (HS), share of 28%. China’s imports are roughly of the which is an international trade nomenclature same size than the combined imports of the United covering more than 5,000 product items at the States, Malaysia and Japan. China imports mainly most detailed level (6-digits), distinguishes four technically specified natural rubber «TSNR», which items of rubber products: Natural rubber latex, is Cambodia’s main export rubber product. whether or not pre-vulcanised (HS 400110); Smoked sheets of natural rubber (HS 400121), also called “Ribbed smoked sheets (RSS)”; Technically specified natural rubber (TSNR) (HS 400122); and Natural rubber in primary forms or in plates, sheets or strip (HS 400129). The world market for natural rubber198 (HS 4001) represented more than 9 million tons, or USD 11.8 billion in 2016. World exports for technically specified natural rubber (TSNR) is by far the main traded products, with world exports totaling more than 6 million tons, worth USD 8.5 billion, while Smoked sheets of natural rubber (880,000 tons) and Natural rubber latex (1.6 million tons) were each worth about USD 1.4 billion. 198 HS 4001 also includes a fifth product: Balata, gutta-percha, guayule, chicle and similar natural gums, in primary forms or in plates (400130). 203 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 36: Main exporters and importers of natural rubber products, 2017 Exports Imports Growth Growth in Growth Growth in Main exporters Value Quantity Main importers Value Quantity in value quantity in value quantity (Share in world (USD (1,000 (Share in world (USD (1,000 2013-17 2013-17 (%/ 2013-17 2013-17 exports, %) million) tons) exports, %) million) tons) (%/year) year) (%/year) (%/year) HS 4001 Natural rubber, balata, gutta-percha, guayule, chicle and similar natural gums, in primary form World 16,424 .. -12 2 World 17,688 .. -10 1 1. Thailand (36.7) 6,024 3,662 -9 2 1. China (27.8) 4,917 2,793 -9 2 2. Indonesia (31.1) 5,105 2,838 -9 1 2. United States (11.1) 1,968 972 -9 1 3. Malaysia (6.7) 1,094 616 -17 -7 3. Malaysia (10.0) 1,771 1,113 -10 2 4. Viet Nam (5.7) 937 .. -22 0 4. Japan (7.6) 1,339 703 -12 -1 5. Côte d’Ivoire (5.1) 841 662 1 25 5. India (4.3) 756 410 -6 5 8. Cambodia* (1.2) 202 .. -3 0 62. Cambodia* (0.0) 3 .. 9 17 HS 400110 Natural rubber latex, whether or not prevulcanised World 2,038 .. -7 3 World 2,058 .. -12 -1 1. Thailand (74.7) 1,523 1,186 -5 4 1. Malaysia (34.3 706 323 -11 -1 2. Viet Nam (5.7) 117 .. 5 0 2. China (32.0 659 494 -1 10 3. Malaysia (3.8) 78 33 -10 -1 3. United States (3.0 63 55 -8 3 4. Guatemala (3.3) 68 51 -4 4 4. Iran (2.6 53 28 -25 -16 5. Netherlands (2.1) 44 23 35 30 5. South Korea (2.2 46 33 -9 0 59. Cambodia* (0.0) 0.2 0.2 -76 0 33. Cambodia* (0.1) 3 .. 10 17 400121 Smoked sheets of natural rubber World 2,062 .. -12 -3 World 2,208 .. -12 -3 1. Thailand (69.3) 1,430 709 -14 -5 1. China (31.0) 684 331 -13 -4 2. Myanmar (7.8) 162 114 -7 18 2. Japan (12.8) 282 132 -13 -4 3. Indonesia (6.4) 132 66 -8 0 3. United States (12.5) 275 118 -3 7 4. Viet Nam (6.3) 129 .. -3 0 4. India (4.9) 109 56 -27 -19 5. Cambodia* (2.3) 47 .. 12 0 5. Malaysia (4.1) 92 57 -21 -10 7. Lao PDR* (1.2) 24 11 -18 -14 45. Cambodia* (0.0) 0.2 0.1 0 0 400122 Technically specified natural rubber (TSNR) World 11,648 .. -13 2 World 11,588 6,042 -10 2 1. Indonesia (42.6) 4,960 2,766 -9 1 1. China (26.2) 3,035 1,680 -13 -3 2. Thailand (24.8) 2,886 1,584 -8 3 2. United States (13.9) 1,614 793 -10 0 3. Malaysia (8.7) 1,009 580 -17 -7 3. Japan (8.7) 1,008 547 -11 0 4. Côte d’Ivoire (6.4) 743 478 -2 16 4. South Korea (5.4) 625 344 -12 0 5. Viet Nam (5.9) 690 .. -26 0 5. India (5.2) 606 331 4 15 6. Cambodia* (1.3) 154 .. -5 0 75. Cambodia* (0.0) 0.2 .. 18 0 400129 Natural rubber in primary forms or in plates, sheets or strip (excluding smoked sheets, TSNR) World 665 .. -9 13 World 1,820 .. -7 7 1. Thailand (27.5) 183 183 -17 2 1. China (29.6) 538 288 100 124 2. Lao PDR* (26.2) 174 .. 245 285 2. Malaysia (26.3) 478 428 6 19 3. Côte d’Ivoire (13.3) 88 165 130 221 3.Taipei, Chinese (7.3) 133 69 -12 -3 4. Philippines (10.2) 68 94 8 26 4. Spain (6.1) 110 60 -4 9 5. United States (5.1) 34 9 -9 -6 5. Iran (4.0) 73 39 16 44 28. Cambodia* (0.2) 1 .. -26 0 Source: ITC’s Trade Map. * Countries with mirror statistics. The item “Balata, gutta-percha, guayule, chicle and similar natural gums, in primary forms or in plates, ...” (HS 400130) is not shown here. 204 Chapter 8 3.2. Cambodia’s production, processing, than 400,000 hectares that could be planted to and exports rubber should the ELC holders decide to invest, and this would provide the potential to achieve The value chain for natural rubber can be segmented a total planted rubber area for Cambodia of over into the following value-adding stages: input 800,000 hectares. provision, cultivation, harvesting, collecting, -- Rubber smallholder plantations. Household- processing, storage, and export. Only a few major owned rubber plantations started in 1990, processing activities add value before the rubber and have increased rapidly largely due to the products are sold to their final market. On a government policy of providing parts of state- global level, the main use is in the transportation owned plantations to farmers employed by the industry (especially for tires), health care, industrial government. Rubber smallholdings represented or construction, and apparel and footwear. an area planted of 156,000 hectares in 2017. Cambodia processes and exports natural rubber mainly in the form of and Technically specified Long‐term statistics show important ups and natural rubber (TSNR) and “Ribbed smoked sheets downs for Cambodian rubber production since (RSS)”. the 1960s, although there are differences in 3.2.1.Rubber production in Cambodia terms of magnitude and years for which there are official data between MAFF and FAO data (Figure There are two categories of rubber plantations 27). Rubber has been planted in Cambodia since in Cambodia: Rubber Estates (previously state- owned rubber estates – SORE) and Economic 1910, and large‐scale rubber plantations were Land Concessions on the one hand and Rubber introduced in the early 1920s. By the mid‐1960s, Smallholdings on the other hand. Cambodia produced more than 50,000 tons of -- Rubber Estates include previously state-owned natural rubber, and was among the ten largest rubber estates (SORE) that have subsequently producers in the world. However, output declined been privatised — except for those still in the sharply in the 1970s during the Vietnam War and hands of Cambodian Rubber Research Institute the Khmer rouge period. Production resumed (CRRI). There are currently nine private companies gradually, but it was only in 2012 when the peak that own and operate these plantations which of 1967 (53,000 tons) was attained. It should be are in Kampong Cham, Tbong Khmum, Kratie noted that FAO data is significantly lower and and Rattanakiri provinces. Privatised state- increasingly so— than MAFF data. owned enterprises accounted for 52,000 ha in The total area under cultivation in Cambodia 2017. was more than 436,000 hectares in 2017, -- The government provided areas under 10,000 according to the General Directorate of Rubber ha as economic land concessions to foreign (GDR) in MAFF. The area for tapping was more and local investors to develop rubber and than 170,000 ha in 2017, producing more than other industrial crops, leading to a rapid 193,000 tons of natural rubber —of which almost increase in the plantings under ELCs since their 100% is exported. The immature area, of about introduction in 2007. In 2017, ELC companies 266,000 ha, is used for maintenance, i.e. either for have planted more than 227,000 ha and they replanting areas or for new planting areas. It takes are mostly in Kampong Thom, Preah Vihear, at least five years before newly planted trees can Kratie, Rattanakiri, Mondulkiri and Stung be tapped, suggesting that Cambodia’s rubber Treng provinces. According to MAFF, there production will likely double over the next years. remain significant areas under ELCs of more 205 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Figure 27: Natural rubber production in Cambodia, 1922‐2017 processing, so most inputs for processing have to be imported. Some factories operate only at 50-80 percent of their capacity because of the insufficient supply of rubber. -- Insufficient linkages between smallholder producers and larger rubber plantations: These insufficient links prevent smallholders to operate as out-growers, as there is often non-compliance on the procedures for processing latex from the use of incorrect acid treatment mainly by smallholder producers. Source: Based on MAFF (2011), referring to Association des planteurs de -- Lack of sufficient processing facilities: The ability caoutchouc au Cambodge (APCC), SONEXIM (1967); update for 2017 from MAFF Annual Report (2018); FAO FAOSTAT. to transform dry natural rubber into finished products that can be used domestically and The world market price for natural rubber has internationally is still limited due to lack of strongly fluctuated over the last ten years, which investment, technology and a skilled workers is a challenge for rubber producers, in particular and professional staff. It appears that many smallholders. The world market price for natural processors lack knowledge about fumigation rubber has shown strong increases followed by on rubber products before exports. As a result, rapid declines. For rubber producers, the strong production and exports concern mainly semi‐ fluctuation of prices makes investment decisions processed products (dry rubber), which are difficult, as rubber trees yield latex only at least then further transformed into final products in five years after planting. In addition, smallholders countries such as Viet Nam, Malaysia and China. have less information than traders and are price -- High processing costs: Processing costs in takers, and they are thus particularly vulnerable Cambodia are USD 125 to 150 per ton which is to price fluctuations and disadvantaged in price higher than neighbouring countries possibly negotiations. due to the higher costs for energy —which is There are also a number of other constraints for often produced by generators— as well as high rubber producers in Cambodia (see the SWOT transport costs of up to USD 25 per ton to the analysis in Table 40) that however go beyond the border and then USD 45 onward to Ho Chi Minh scope of this chapter to be discussed here. City. -- Finally, it appears that the rubber processing 3.2.2.Rubber processing in Cambodia industry is overly focused on latex products— MAFF estimates that there are more than representing a highly competitive, yet very small, 140 processing factories operating in Cambodia. segment of the global rubber trade. Traditionally, processing natural rubber in Cambodia was mainly done by former state‐owned 3.2.3.Cambodia’s rubber exports rubber plantations, and the private processing Cambodia’s natural rubber is exported to only industry is relatively new (around 2003). The a few markets, mainly Viet Nam, Malaysia, increasing number of private plantations and and South Korea. The Vietnamese market has smallholders provide opportunities for processing long been the leading export destination for rubber. Cambodian natural rubber. China is the world’s There are a number of constraints for rubber largest consumer, accounting for almost 40% of processors, including: the global production, but is for the moment a small destination market for rubber produced in -- Lack of local up-stream rubber industries: There Cambodia (see Table 39). are no domestic supporting industries for rubber 206 Chapter 8 The main exporters of natural rubber products access (EIC, 2007). Many countries, including are processing companies, who sell on their own the United States, the European Union, Japan, account, typically to brokers in Singapore or Thailand, India and China, require certification by Malaysia, or in the case of foreign affiliates, to their international accredited laboratories. The National mother companies, which are often located in Specific Laboratory House (NSLH) in the Cambodia Vietnam and China. Large Cambodian companies Rubber Research Institute (CRRI) established a export rubber to China or Malaysia through national certification laboratory to test and certify Vietnam, while small companies sell rubber to crumb rubber as Cambodian Specified Rubber Vietnamese companies for export to China. (CSR) as per international standards. There are three main channels for the export of There are a number of major constraints for palletized crumb rubber: through Vietnam via rubber marketing and exports (see also the road to Ho Chi Minh City Port, through Phnom SWOT analysis in Table 40): Penh Port, or through Sihanoukville Port. Exports -- Inadequate export infrastructure: Only few via Ho Chi Minh Port seem to be the preferred experts and companies that know how to export channel of Cambodian rubber exporters. export rubber; lengthy processing of export Though the Port is not the cheapest option, it has documentation; and unpredictable export a number of advantages, including the proximity transaction costs (including formal fees). to Tbong Khmum (the largest rubber producing -- Limited international recognition of Cambodian province), the size of the port, the fact to be served Specified Rubber (CSR): The Association of by larger ships and connected to more export Rubber Development for Cambodia (ARDC) destinations, and its straightforward procedures provides inadequate coordination of the rubber and quick methods of payment. sector and has not been successful in achieving According to MAFF, at present the volumes of recognition of Cambodian rubber on the world Cambodian rubber officially exported is not large market. enough to allow direct export to the mayor tire -- Limited experience in international marketing, manufacturers who require minimum regular export distribution channels and end markets. shipments of 500 tons per month from suppliers. Even the largest exporters have little knowledge However, with the rapid expansion of rubber about the end users (since exports go to production in the coming years, Cambodia should intermediaries in Singapore, Malaysia, and be able to adapt to these market requirements, Vietnam). Limited knowledge on alternative provided the sector is restructured and better markets. In the past, there was little opportunity procedures are adopted for the processing. to diversify exports to new partners. Exporters A part of this adaptation will also necessarily have difficulties applying for a certificate of include an increased environmental and social origin for export rubber product to overseas responsibility that is a growing concern for the markets. They are not aware of which CO should tire manufacturers, and this will necessitate the be used for exports to difference regimes. adoption of a traceability process, which in turn will -- Poor logistics and transport infrastructure. There require stable contractual relationship between are high costs of transportation from the more producers and the exporters/manufacturers. remote rubber production areas and CSR non- compliant procedures for transportation. There Cambodian rubber is classified according to the are large volumes of semi-processed rubber Cambodia Standard Rubber (CSR). In the past, being informally exported to Vietnam for final the lack of certification by an internationally processing, grading and labelling as Vietnamese recognized, accredited laboratory prevented rubber. Cambodian rubber from having broad market 207 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 3.3. Opportunities to grow and move up Cambodia has tariff‐free access for technically markets specified natural rubber in the European Union, the United States, Japan, Korea, Malaysia, Brazil, The outlook for the global natural rubber sector is Turkey, and the Russian Federation, though regarded as favorable, although the global market Cambodia’s main competitors also enjoy 0% tariff has been in a state of slight oversupply for the past rates on these markets (Table 38). In contrast, few years —affected by the growing tapping area tariffs are high in China (20%), the world’s largest of natural rubber in the main producing countries, importer, and in India (20%), where Cambodia has as well as some slowdown in the growth rate of the a slight tariff advantage (4% compared to its main tire manufacturing industry— and the oversupply exporters). is expected to remain until 2020. The Cambodian rubber sector offers significant opportunities to Cambodia’s economic integration has grow and add value, despite the many challenges deepened since entry into ASEAN in 1999 and to overcome. These include market and product its commitments under other regional free diversification. trade agreements (FTAs) and the global trading system. Cambodia has currently six FTAs in 3.3.1. Market diversification effect (ASEAN; ASEAN with: Australia and New One possibility to add value to Cambodia’s Zealand; India; Japan; China); one signed but not rubber sector is to diversify its destination yet in effect (ASEAN with Hong Kong), and the markets by targeting markets that are currently Regional Comprehensive Economic Partnership, not served at all by Cambodia, typically large, which is currently under negotiation. These dynamic or open importers. agreements give Cambodia preferential access to major markets for its exports. Lower tariffs on Cambodia has favorable market access rubber products under the ASEAN‐China FTA will conditions in most important markets for natural thus stimulate greater exports from Cambodia. rubber. Though there are several rubber products Cambodia needs to improve the quality of rubber that are internationally traded, the following processing to meet the demands of China’s market examines only technically specified natural rubber and provide competitive prices. (TSNR), which is Cambodia’s main export product. Table 37: Tariffs for the main exporters of Technically specified natural rubber (TSNR) (HS 400122) on the main import markets Main importers (Share in world imports, %) 2.United 5. India (5.2) 4. South 6.European 7. Malaysia 11. Russian Main exporters (Share in world exports, %) 1. China 3. Japan 8. Brazil 9. Turkey (26.2) States (13.9) (8.7) Korea (5.4) Union () (4.3) (2.1) (2.1) Fed. (1.9) 1. Indonesia (42.6) 20 0 0 0 20 0 0 14 0 0 2. Thailand (24.8) 20 0 0 0 20 0 0 14 0 0 3. Malaysia (8.7) 20 0 0 0 20 0 0 14 0 0 4. Côte d’Ivoire (6.4) 20 0 0 0 20 0 0 14 0 0 5. Viet Nam (5.9) 20 0 0 0 20 0 0 14 0 0 6. Cambodia (1.3) 20 0 0 0 16 0 0 14 0 0 European Union 20 0 0 0 20 0 0 14 0 0 8. Cameroon (1.0) 20 0 0 0 20 0 0 14 0 0 9. Guatemala (0.9) 20 0 0 0 20 0 0 14 0 0 12. Singapore (0.8) 20 0 0 0 20 0 0 14 0 0 Number of NTLs 1 1 1 1 1 1 7 1 1 1 Source: ITC’s Market Access Map. * Trade for countries marked with * is estimated through mirror statistics. 208 Chapter 8 Concerning current markets, Cambodia’s 3.3.2.Product diversification exported technically specified natural rubber Another possibility to add value to Cambodia’s (TSNR) to 11 different countries in 2017, mainly rubber sector is to diversify its production and to Viet Nam, Malaysia and South Korea (Table 39). move downstream and transform the semi‐ These markets tend to be large (Cambodia is processed products into final goods, instead already present in the five largest markets in the of exporting them in semi-processed form. world: China, United States, Japan, South Korea, Cambodian processors currently export their and India); dynamic (Viet Nam’s imports grew by semi‐finished products (dry rubber), which are 13% per year between 2013 and 2017); and/or then further transformed into final products in open (most large importers apply zero tariffs for countries such as Viet Nam, Malaysia and China. imports from Cambodia). The exceptions are China Natural rubber is used as a raw material in the (20%) and India (which applies a tariff of 14% to manufacturing of industrial products (conveyor Cambodia and 20% to other large exporters). belts, rubber rollers, etc.), automotive products Cambodian exporters may try to increase volume (fan belts, radiator hoses, etc.), latex products through existing and new distribution channels. (rubber gloves, toys hygienic products, etc.) and Concerning potential markets for diversification, adhesives. Rubber can also be used for birth Cambodia is not at all present in several markets control (condoms), medical products (surgical that are large (Germany, Brazil, Turkey, France, and gloves), furniture (rubberwood), foam mattresses, the Russian Federation), or dynamic (Philippines, and even artificial flowers. Belgium, Egypt, the Czech Republic, and Pakistan). However, Cambodia’s ability to transform dry These markets appear as potential diversification natural rubber into finished products that can markets for TSNR from Cambodia, though more be used domestically and internationally is still research needs to be undertaken, for example limited, due to lack of downstream investment in to conduct market profiles that also take into using natural rubber as main material to produce account qualitative information about e.g. the finished products technology and a skilled labor requirements and distribution channels in a force. Cambodia has a very low captive rubber particular target market. This would also help to consumption and lacks a significant tire industry. better understand the potential for niche markets. As a result, Cambodian companies needed to be part of a global supply chain of the leading companies (e.g. Michelin, Bridgestone). This requires attracting one or several foreign lead investors that can bring the required capital, technology and distribution network — which in turn requires to seriously tackling the main issues that still hamper Cambodia’s competitiveness of the rubber sector. 209 Table 38: Cambodia’s exports of Technically specified natural rubber (TSNR) (HS 400122), and potential markets for diversification, 2017 Cambodia’s exports (mirror data) Imports by partner Market Share in Tariff Value Growth in Growth in Rank in Import growth in Main suppliers* (Rank in Unit value world faced by (USD Qty value 2013- quantity 2013- world value 2013-17 (%, (Share in partner’s imports, Cambodia’s (USD/ton imports Cambodia 1,000) 17 (%, p.a.) 17 (%, p.a.) imports p.a.) %) exports) (%) (%) 11 current export destination markets Total 154,022 ..** .. -5 100 -10 IDN (43), THA (25), MYS (9) 1. Viet Nam 106,073 ..** .. 8 12 1.8 13 0 KHM (50), LAO (26), IDN (15) 2. Malaysia 39,512 24,684 1,601 -8 3 7 4.3 -16 0 VNM (28), CIV (26), IDN (13) 3. South Korea 4,330 2,544 1,702 -12 -2 4 5.4 -12 0 IDN (55), THA (25), VNM (12) 4. Spain 2,171 1,236 1,756 69 100 13 1.8 -7 0 IDN (43), CIV (11), SGP (9) 5. India 1,296 746 1,737 3 18 5 5.2 4 16 IDN (69), THA (15), VNM (10) 6. China 298 180 1,656 -70 -66 1 26.2 -13 20 THA (53), IDN (25), MYS (17) 7. United States 138 60 2,300 .. 35 2 13.9 -10 0 IDN (75), THA (10), LBR (4) 8. Japan 71 38 1,868 140 109 3 8.7 -11 0 IDN (79), THA (18), VNM (2) 9. Italy 49 20 2,450 .. .. 14 1.7 -3 0 IDN (30), THA (15), FRA (12) 10. Greece 46 20 2,300 .. .. 48 0.1 2 0 VNM (29), THA (27), IDN (21) 210 11. Hungary 37 20 1,850 .. .. 25 0.8 -13 0 IDN (58), THA (15), SGP (11) Selected potential markets for diversification: Large, dynamic, and/or open markets Germany 0 0 .. .. .. 6 4.3 -3 0 IDN (22), CIV (22), MYS (21) Brazil 0 0 .. .. .. 8 2.1 -6 14 IDN (51), THA (24), CIV (12) Turkey 0 0 .. .. .. 9 2.1 -6 0 IDN (61), THA (15), MYS (11) France 0 0 .. .. .. 10 2.1 -10 0 IDN (41), CIV (18), THA (11) Russian Fed. 0 0 .. .. .. 11 1.9 7 0 IDN (61), MYS (16), THA (14) Poland 0 0 .. .. .. 15 1.5 5 0 CIV (48), IDN (28), LBR (3) Canada 0 0 .. .. .. 16 1.5 -4 0 IDN (64), LBR (13), THA (6) Romania 0 0 .. .. .. 17 1.4 -1 0 DEU (35), IDN (34), THA (10) Slovakia 0 0 .. .. .. 18 1.4 10 0 THA (31), MYS (29), IDN (25) Czech Rep. 0 0 .. .. .. 20 1.3 21 0 MYS (25), IDN (24), THA (19) Belgium 0 0 .. .. .. 22 1.0 63 0 IDN (81), CIV (12), VNM (3) Pakistan 0 0 .. .. .. 30 0.4 18 3 IDN (94), VNM (4), MYS (1) Egypt 0 0 .. .. .. 33 0.3 40 2 IDN (50), THA (28), MYS (21) Philippines 0 0 .. .. .. 40 0.1 1,041 0 IDN (51), MYS (31), THA (18) Source: ITC’s Trade Map. * CIV: Côte d’Ivoire, IDN: Indonesia, KHM: Cambodia, LAO: Lao PDR, LBR: Liberia, MYS: Malaysia, SGP: Singapore, THA: Thailand, VNM: Viet Nam, ** Mirror data significantly underestimate Cambodia’s exports in quantity to the world in 2017, as Vietnam did not report quantities in 2017. However, Vietnamese imports from Cambodia in value increased from USD 62.3 million in 2016 to 106.1 million in 2017. Applying that ratio to 2016 quantities suggests that Vietnam imported roughly 80,000 tons from Cambodia in 2017, which would bring Cambodia’s total exports in 2017 to about 110,000 tons. 211 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 3.4. SWOT analysis of Cambodia’s rubber sector Table 39: SWOT analysis of the rubber sector in Cambodia Strengths Weaknesses §§ Supporting infrastructure and policy §§ Institutional and managerial weaknesses. §§ Strong commitment by RGC and donor §§ Lack of coordination between GDR, agro-industrial plantations, communities to promote crop diversification and smallholder rubber producers. and rubber planting. §§ High entry barriers to industry, given large financial outlay over §§ Attractive FDI environment with lower cost several years (5-7 years) before trees mature and yield latex. (and more available) land compared to §§ Vulnerable to price fluctuations and limited access to credit to traditional rubber exporters such as Malaysia. re-invest in sector. §§ Increased public expenditures on agriculture, §§ Insufficient linkages between smallholder producers and larger R&D, and rural development. rubber plantations to enable them to operate as out-growers. §§ Improved railway, port and export §§ Processing infrastructure. §§ Lack of local up-stream rubber industries. §§ International environment §§ Insufficient linkages between smallholder producers and larger §§ Cambodia’s LDC status affords it tariff-free rubber plantations. access for natural rubber exports to the EU, §§ Lack of sufficient processing facilities. US, Japan, Korea—all major importers. §§ Lack of high skilled workers and professional staff. §§ WTO and ASEAN membership. §§ Rubber processing industry is overly focused on latex products— §§ Proximity to China, the world’s largest representing a highly competitive, yet very small, segment of the importer of rubber. global rubber trade. §§ Marketing and exports §§ Inadequate export infrastructure: Small number of experts and companies that know how to export; lengthy processing of export documentation; and unpredictable export transaction costs. §§ Limited international recognition of Cambodian Specified Rubber The Association of Rubber Development for Cambodia (ARDC) provides inadequate coordination of the rubber sector and has not been successful in achieving recognition of Cambodian Specified rubber on the world market. §§ Supporting infrastructure and policy §§ Absence of policy on promotion of small rubber plantations. §§ Reliance on imported inputs often leads to shortages of fertilizers and pesticides. §§ Lack of adequate training programs. §§ Inadequate rural infrastructure and high transportation costs. §§ Poor market information services for smallholder rubber plantations. §§ Cambodian Specified Rubber (CSR) not trusted by international buyers, often requiring exports to be independently tested by Singapore laboratories. 212 Chapter 8 Opportunities Threats §§ Processing §§ Processing §§ Improved quality of processed rubber would significantly §§ Slow development on agro-industries and add to the sector’s profitability and farm-gate prices. processing. §§ Encouraging processors to diversify away from latex to other §§ Marketing and exports natural rubber forms may create new market opportunities. §§ Continued perceptions of Cambodia as a supplier §§ Marketing and exports of low grade, poor quality natural rubber products. §§ Recent accreditation of Cambodia’s rubber testing laboratory §§ Possible end of preferential access to EU markets (EBA). should allow for broader market access and domestic export §§ International environment certification against international standards. §§ Risks arising from competition from neighboring §§ Policy support countries. §§ Improved export procedures would lower cost and time for §§ Price fluctuation and high-risk investment. exporting. §§ Low potential investment from RGC and private §§ Increasing value addition through certification of natural companies. rubber. §§ Lack of private sector/potential investors §§ International environment participation. §§ World rubber consumption in an upward trend. §§ Cambodia’s industry overshadowed by regional §§ Strong outlook for global natural rubber trade backed competitors that dominate global production by reliable and growing demand from global auto and trade in natural rubber—Thailand, Indonesia, manufacturers. Malaysia, China, and India. Increasing interest among potential foreign investors in Cambodia’s rubber industry. Source: Based on EIC (2007), MoC (2010), CTIS (2014), MAFF (2018), and interviews with stakeholders in December 2018. 4. Cassava Domestic consumption remains very limited. Cassava is receiving special attention from RGC Cambodia is the world’s eighth largest producer under its Cambodia Industrial Development of Cassava. Cassava is the country’s second largest Policy, 2015-2025.199 Further, the RGC is working agricultural crop after rice. Cassava is an industrial on the formulation of a Cassava Development crop and gives rise to a very well-developed value Policy focusing on upgrading the export value chain with multiple uses and applications ranging chain through investment in domestic processing from human and animal food to consumer and of cassava. An Inter-ministerial Working Group is industrial products as well as bio-fuels. By some being formed under MoC’s leadership to prepare estimates, between 90 and 95% of Cambodia’s a draft for submission to the Council of Ministers. cassava production is dedicated to exports. 4.1. Cassava’s global value chain The Cassava global value chain is wide ranging and complex, as shown in Figure 28.199 Cassava CassavaValue Chain Hay Cassava (Viewed Through HS-6 digit Codes) HS-230890 Crop Animal Farming: Fresh Leaves for Ruminant Undenaturated Animals (e.g. cattlle) or Beverage Dried Leaves or Silage for Animal Feed Ethanol (cassava Monogastric Animals (chips with alcohol) (e.g. pigs) corn, soy) HS-220710 Fresh Bioethanol + Gasoline. HS-230990 Cassava Biodegradable Plastics Animals Farming Roots Denaturated Tubers and Ethanol Chips HS-220720 HS-071410 Processed Food and Animal Household Cooking Feed from Tapioca Flakes, Starch Flour, Softings.... Residue HS-190300 Paper, Cardboard HS-230990 Cassava Starch Residue Pharmaceutical Compound/ Native Biomass Pellets or Vitamins Starch Biogas (for energy) (from roots Cosmetics or chips) Cassava Starch Residue Modified Starch Cassava HS-110814 Fertilizer Textile and Leather Products Starch HS-350150 Other Starch Residue Residue Product Opportunities HS-230310 Industrial Products (glues, paints, cement...) 199 Cambodia Industrial Development Policy, 2015-2025, Council of Ministers, March 6, 2015 213 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.2. World demand and supply of cassava potential export markets for Cambodia’s cassava and its derivatives: Key importers and derivatives, by products and destinations, is largest exporters summarized in Table 41. Because the market for cassava is global and A key point is that market access preferences of Cambodian domestic consumption of cassava Cambodia for most Cassava derivatives are quite derivatives remains quite limited, the formulation limited in key markets (China, ASEAN) and time- of a sector development strategy and policy bound in EU. In EU, once Cambodia loses EBA, must be based on a close understanding of world it may find itself at a competitive disadvantage import demand and export opportunities. An against Thailand and Viet Nam as they benefit analysis of world demand for cassava derivatives from favorable zero-tariff quotas as a result of (at HS-6 digit level) focusing on the largest and/ various bilateral negotiations or FTAs. Preferences or fastest-growing importers combined with an in India – a relatively new market for Cambodia – analysis of world supply by the largest exporters, may also disappear following LDC graduation. 214 Table 40: World Demand for Cassava Derivatives, Key Importing Countries, Top Exporting Countries Largest and/or Fastest World Imports in Top Exporting Countries Cambodia’s Market Opportunities Derivatives Growing Importing 2017 (2016) 2017 2016 prices Countries, 2017 Cassava “Native” $1.4 billion China (53.2% of world Thailand (55.0%) Starch production offers high value added potential at $350/MT for “native” Starch ($1.5 billion) imports) Viet Nam (40.7%) starch compared to $35/MT for fresh tubers. Cambodia has a significant tariff (HS-110814) ASEAN: Indonesia, Malaysia, advantages in India (0% or 15% depending on buyer) over GSP countries (45%) Philippines (19.3%) and in EU (0%). EBA DFQF would disappear in EU with LDC Graduation (or earlier India, Bangladesh (fast if EU withdraw EBA benefits) putting Cambodia at a disadvantage. Thailand growing) already benefits from a negotiated 10,000 MT tariff free quota in EU; Viet Nam, a EU (fast growing) 30,000MT tariff free quota under EVFTA. More limited tariff advantages in ASEAN and China. In Bangladesh, Thailand appears to have a tariff advantage over Cambodia. Emerging demand for organic certified native starch in EU and other developed markets for use in organic gluten-free foods. Growing demand in India and Bangladesh mostly for industrial use in garments and packaging. “Modified” Starch $3.4 billion EU (over 30%) EU (over 50%) HS-6 Code does not distinguish between Cassava and other modified starches. (HS-350510) ($3.2 billion) China (10.9% of world Thailand (21.1%; almost Price of modified starch may range from $700 to $1,200/MT depending on the imports and fast growing) exclusively cassava type and grade. Based on exports by Thailand, China, and Viet Nam, modified (HS code does not (all modified Japan (10%) modified) cassava starch is dominant in South East and East Asia. China, Japan, Korea, and distinguish source starches, not only US (5%) US (12.2%) Indonesia are key importing markets in the region. Japan, Korea, Indonesia apply material) cassava) Korea (3%) China (almost exclusively zero tariffs for import for modified starch from within the region under various Indonesia cassava modified) FTAs. Zero tariff in the US as well. EU applies a 13.5% tariff on cassava modified Russia Viet Nam (almost starch from Viet Nam and Thailand whereas Cambodia would benefit from Saudi Arabia (fast growing) exclusively cassava zero tariff. Viet Nam will benefit from a tariff free 1,000MT quota under EVFTA. Bangladesh, India (fast modified) Cambodia benefits from a tariff preference in India. Growing demand in Saudi growing) Arabia due to use of modified starch as lubricant for off-shore oil and gas drilling. 215 Starch Residues $1.6 billion Indonesia (14.0% of world USA (42.3%) The HS-6 Code does not distinguish between cassava and other starch residues (HS-230310) ($1.6 billion) imports) EU (over 30%) (e.g. corn, others) so it is difficult to identify which country imports what source (HS code does not Korea (7.6%) China (12.4%) residue materials. Residue by-products from cassava starch fetch possibly distinguish source (all starch residues, Egypt (5.5%) Thailand (3.4%) somewhere around $175-$250/MT. Again, significant value added over fresh material) not only from Mostly EU countries (fast tubers. Cambodia has no capacity to pelletized solid starch residues at present. cassava) growing) Some but limited tariff preference for Cambodian producers in many markets. Cassava Fresh $2.4 billion China (61.0%) Thailand (49.0% of world Cambodia’s current dominant export – perhaps around $400 million to $500 Tubers and Dried ($2.7 billion) Thailand (15.6%) exports) million. Cambodia needs to diversify away from exports targeting primarily Chips Viet Nam (13.9%) Cambodia (27.5%) China (directly or indirectly via Thailand and Viet Nam.) Exports at $35/MT (HS-071410) Fast Growing Importers: Viet Nam (13%) average price for fresh tuber. Average price of dried chips ranges around $160/ Diverse group of countries MT. Opportunities to focus on export of dried chips and pelletized cassava (not for chips used in Animal Feed yet produced in Cambodia) for the animal feed market in other countries. No in Animal Feed tariff advantage over Thailand and Viet Nam in China (all zero tariff.) Very small tariff advantage in EU (0% for Cambodia vs. 2% for Thailand and Viet Nam.) Tariff advantage in India (0% for Cambodia vs. 8% for Thailand and Viet Nam.) Animal Feed $15.4 billion EU countries (about 30%; EU (over 45% of world Very large global market and growing especially in emerging economies where (HS-230990) ($14 billion) also fast growing) exports) rise in consumer income leads to rising demand for meat. Cassava is one among ASEAN: Thailand, Indonesia, USA (10.3%) many ingredients in animal feed. The three ASEAN countries listed in the third Viet Nam (approximately China (7.1%) column import $1.2 billion in 2016. Cambodian price for pig and chicken animal 8.5%) feed estimated around $500/$600 MT. There is import/export among ASEAN Russia, Japan, India (2% to countries and Cambodia may already be exporting small quantities of animal 3% each) feed to Viet Nam. If focus remains on exporting cassava as an ingredient in animal Bangladesh, Saudi Arabia, feed, price of dried chips ranges around $160/MT; price of pelletized cassava India (fast growing) ranges around $200/MT. Small tariff advantage in India compared to Thailand and Viet Nam. No tariff advantage in Indonesia or Viet Nam over other ASEAN producers under AFTA. 216 Bioethanol $2 billion Canada (30.5%) US (71.0% of world Investors are likely to invest based on initial commitments from wholesale or (HS-220720) ($2 billion) India (13.0%) exports) retail buyers. Opportunity for domestic substitution if Cambodia shifts to E5 or (HS code does not Philippines (8.4%) EU (approximately 25.0%) E10 gasoline blends. Growing demand in the region due to China nationwide distinguish among Korea (5.6%) shift to E10 by 2020. Vietnam in process of shifting to E5. Prices range between source materials) $700 and $900/MT. Investment in distilleries is quite large to reach competitive export scale. Undenaturated $6.2 billion EU (approximately 40%) EU (45.0% of world Ethyl Alcohol ($5 billion) Brazil (14.5%) exports) (HS-220710) USA (11.2%) US (21.8%) (HS code does not Japan (7.4%) Brazil (11.7%) distinguish among source materials) Tapioca Flakes, $80 million Does not appear to be a promising export market as local producers prefer to use Grains, Siftings imported native or modified starch to produce those derivatives domestically. (HS-190300) 217 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.3. Cambodia’s production and export -- Conversion ratio of Fresh Crop to Fresh Tuber: supply capacity 1.3 – in other words, 1.3 MT of fresh cassava produces 1 MT of fresh tubers A schematic overview of 2016 Cambodian -- Conversion ratio of Fresh Crop to Dried Chips: cassava derivatives production and exports can 2.5 – in other words, 2.5 MT of fresh cassava be developed using COMTRADE quantity or price produces 1 MT of dried chips export data combined with a quantity-approach -- Conversion ratio of Fresh Crop to Native Starch: (Figure 29).200 That approach converts all export 4.2 – in other words 4.2 MT of fresh cassava quantities back to the original fresh cassava crop should produce about 1 MT of Native Starch volumes using conversion ratios: follows: -- Conversion ratio of Fresh Crop to Ethyl Alcohol: 10 – in other words 10 MT will produce 1 MT of Ethyl Alcohol Figure 29: Estimated Cambodia Cassava Exports: Derivatives and Destinations, 2016 2016 Estimated Cambodia Cassava Exports: Thailand, 2.1 million MT (mostly Chips) = Derivatives and Destinations 5 million MT Cassava Crop (Quantities Based on TradeMap Data) Viet Nam: 2.9 million MT ( mix of Fresh Tubers and Chips) Fresh Cassava Roots/ Tuber and = 4 million MT Cassava Crop Chips HS-071410 China: 82,000 MT ( Chips ) = 200,000 MT Casava Crop Cassava Native Starch China: 33,000 MT = 150,000 MT Casava Crop (from roots or chips) HS-110814 Other Destinations: 6,000 MT = 25, 000 MT Cassava Crop Undenaturated Ethanol (Cassava alcohol) HS-220710 Korea: 7,400 MT = 74,000 MT of Cassava Crop Dernaturated Ethanol HS-220720 Korea: 1,200 MT = 12,000 MT of Cassava Crop Estimated Total Cassava Crop Hong Kong: 1,200 MT = 12,000 MT of Cassava Crop Used for Exports: 9.5 Million MT Estimated Export Value: $550 million In short: -- The total value of exports in 2016 could be estimated at approximately $550 million (using -- Approximately 9.5 million MT to 10 million MT of mirror data) fresh cassava crop were used as base inputs for Cambodia’s cassava derivative exports in 2016 -- Fresh tubers and dried chips are the dominant Cambodia’s production capacity of main Cambodian exports – Fresh tubers are exported derivatives is summarized in Table 42. Data on mostly to Viet Nam and dried chips mostly to production capacity shown in the table were Thailand, Viet Nam and China, with the first two collected by means of a comprehensive survey re-exporting some of the chips they buy from conducted in late 2017, with some updating in Cambodia to China late 2018. The most noticeable trend is the need -- The rest of the export value chain for Cambodia for investment in processing and new interest of cassava remains underdeveloped200 foreign investors in the starch sector. Because of the significant amount of unrecorded, informal exports of cassava source materials and derivatives to neighboring countries, it is impossible to arrive at an 200 exact value of cassava-related exports. The approach used to estimate trade flows in this section relies on direct and mirror data reported by Cambodia and its main trading partners in the COMTRADE data base. 218 Chapter 8 Table 41: Cambodia’s Cassava Main Derivatives Producers 2017 Location Nominal Annual Months Producers Actual 2017 Production (Province) Production Capacity Operating Fresh Tubers and Chips Fresh tubers are produced by hundreds of thousands of farmers. Small local traders buy fresh tubers from farmers or dried chips from farmers and local processors and, in turn, sell to larger consolidators/traders that process fresh tubers and store dried chips. In turn, they sell to large Cambodia-based producers of starch or animal feed and/or export tubers and chips to Viet Nam, Thailand, and China. There are between 50 and 60 large dried-chip silos with an annual capacity of approximately 40,000 MT each in the Battambang/Pailin area (meaning about 5 million MT in fresh tubers equivalent.) Because much exports to Viet Nam are fresh tubers, the number of large dried-chips silos in the Kampong Cham/Kratie area is likely to be far smaller. Fresh cassava production in 2017 is estimated at 12 million to 13 million MT. Native Starch 40,000 MT Approximately 40,000MT BAI (Khmer) Battambang 6/7 months 300 MT/day (70% export market) Hunan ER-Kang 30,000 MT Battambang 6/7 months 10,000 MT (China) 150 MT/day HLH Agriculture Kampong 30,000 MT 25,000 MT 9 months (Singapore) Speu 120MT/day (70% export market) TTY Kampong 30,000 MT 20,000-25,000 MT 6/7 months (China) Cham 200/250 MT/day (80% export market) New investment. Expected 35,000MT of native starch. Korean investor engaged in food 35,000 MT Sing Song (Korea) Kratie 6/7 months processing and trading in Korea. 240 MT/day Commercial operations started in 2018 Q4. Initial exports to China and Taiwan. New investment in 2 plants by HK investors. Each plant to consume 2 plants @ 100,000MT 500,000MT of tubers and produce Pursat native starch per Target 9 100,000MT native starch and Green Leader (HK) Tbong plant. First plant to months 30,000MT modified starch. Also, Khmum open March 2019 100,000MT of biomass pellet and 50,000MT of feed. Long term plan by investors: total of 10 plants New investment by Thai company heavily invested in sector with 4 plants in Thailand (335,000 MT/ Oddar Planned capacity not year combined nominal capacity) Thai Wah (Thailand) Not known Meanchey known and 1 plant in Vietnam (40,000 MT/ year nominal capacity) + minority interest in a second plant in Vietnam A few more smaller plants (e.g. annual capacity below 20,000 MT.) Current nominal export supply capacity is approximately 135,000/150,000MT to rise to 180,000/200,000 MT once Sing Song is fully operational. Much larger once Green Leader is operational. Commoditia’s 2016 Report estimates domestic consumption of starch at between 60,000 and 80,000 MT originating mostly from small plants and some production from larger plants. For instance: 219 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 15,000 MT Thai Meng Battambang 6/7 months 8,000 MT 80 MT/day Kampong 20,000 MT Seang Phong 6/7 months Not producing in 2016 Cham 100 MT/day Kampong 20,000 MT Sun Ath 6/7 months Not producing in 2016 Cham 100 MT/day Kampong 15,000 MT Kim Heng 6/7 months 8,000 MT Cham 80 MT/day Tbong 15,000 MT Ly Hong Leng 6/7 months 8,000 MT Khmum 80 MT/day Specialty Starch: Organic Native Starch AMRU Kampong 2020 target: 50,000 Production by contract farmers Chhnang MT of organic tubers. from 1500ha under Social Land Initially, organic Concession (SLC). At trial stage. tubers will be To meet USDA and EU Organic processed to organic standards. Component in gluten- starch in Thailand free and organic processed foods. Specialty Starch: Modified Starch Sing Song (Korea) Kratie 18,000 MT 6/7 months Planned as part of new starch 120 MT/day factory. Target markets: Japan and Korea. In contrast to native starch which can be produced and stored, modified starch can only be produced based on buyer orders and technical specs unique to each order. Green Leader (HK) Pursat 2 plants @ 30,000MT 9 months See above. Within the 2 planned Tbong starch plants described above. Khmum Planned 30,000 MT per plant. Thai Wah (Thailand) Oddar Capacity not known Not known Not known Meanchey Starch Residues No evidence of a structured sector as of yet partly because the production of starch remains limited. For now, starch producers seem to focus on using residues as an energy source for the production of electricity to run plants and heat to dry starch. Green Leader plants will have capacity to process residues. Biofuel - Ethanol MH-BioEnergy Kandal 60,000 MT Approximately 10,000MT in 2016 Ethanol/ Seo Won Distribution Co., Ltd. (Korea) May build an ethanol plant. Trial phase working with contract farmers to IDEMITSU (Japan) produce tubers to assess reliability of supply. Green Leader (HK) Might look into building new ethanol producing plant Undenatured Ethyl Alcohol Not researched Animal Feed 220 Chapter 8 360,000 MT/year 100/150 MT/day in Approximately 500,000 MT/year. Kandal and Kandal All domestic sales: 70% for CP own CP (Thailand) 12 months Pailin 180,000 MT/year 80 pig and chicken farms; balance to MT/day other Cambodian producers in Pailin Current production about 50,000 MT/year. Planning pig farm in Kampong 100,000 MT/year CJ (Korea) 12 months Cambodia. Some limited export Speu 8,000 MT/month of finished product to Vietnamese market. Kandal (PP Consumes 35% of production for Special 120,000 MT/year its own chicken and pig farms in Betagro (Thailand) 12 months Economic 10,000 MT/month Cambodia; balance sold to other Zone) Cambodian producers Kampong Green Feed Unable to secure interview Cham Possibly 2 other small plants NTBs: When dealing with derivatives for industrial use (native and modified starch), Cambodian producers must meet technical requirements set by buyers and users. For “modified” starch, technical specs are specific to each buyer’s order. National standards are mostly lacking for Cambodian cassava. When dealing with derivatives destined to animal and human consumption, Cambodia must meet the same SPS regulations and requirements as those applying to any other exporting country for the same derivatives in the same market. A report prepared by an SPS expert for UNDP- stability and predictability might be one used in Cambodia in December 2017 observes that201: Thailand’s starch sector – namely for processors to source materials from a combination of three -- Very few (if any) processors in the sector are main suppliers: their own farms, collectors, and certified for GMP, HACCP, or GHP farmers cooperatives. Several Cambodia-based -- The use of GAP-compliant farming methods processors already use some such combination, is extremely limited, while countries that have including operating their own farms. BAI implemented those in cassava production have operates a 2,000 ha farm; HLH, 11,000 ha; AMRU, been able to improve land productivity and 1,500ha in a Social Land Concession (SCL) to better control the spread of plant diseases. MAFF produce organic cassava; Thai Wah, 4,000 ha. is attempting to introduce GAP but, thus far, it Green Leader has a small 500 ha pilot farm in has been mostly NGOs that have implemented Pursat. such schemes in limited areas. -- RGC’s monitoring and surveillance capacity at the farm level is very weak. Cambodia lacks ability to control risks associated with plant diseases (a significant amount of seedlings come from Viet Nam or Thailand) and lacks capacity for surveillance of risks associated with sale and herbicides, pesticides, and chemical fertilizers (including dangerous or banned products.) -- Supply Chain Management: One of the key issues for successful investment in starch processing is predictable and stable sourcing of raw materials by processors. Ongoing UNDP work on supply management in Cambodia suggests that the best approach to achieving 201 UNDP, Cassava SPS Technical Report, December 2018 221 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 4.4. SWOT analysis of Cambodia’s cassava sector Table 42: SWOT analysis of Cambodia’s cassava sector Strengths Weaknesses §§ Cassava has many end-uses: human and animal §§ Cambodia exports remain dominated by unprocessed food, bio-fuel (ethanol, bio-mass, etc.), industrial cassava tubers, which are highly perishable, or semi- products, others. Cassava produces the best processed dried chips which are low-return products modified starches in term of chemical and physical §§ Significant disease in new seedlings, low quality cassava properties (viscosity in particular.) Modified plantings, and poor post-harvest handling make it difficult starches are used extensively in industrial sector. to maintain yields or meet export specifications in higher- §§ The roll-out of E-10 gasoline in China from three value markets. Lack of good farming practices (GAP), provinces to nationwide is creating huge demand very limited monitoring and surveillance capacity by RGC for ethanol. The introduction of E-5 gasoline (especially monitoring of pests and diseases; surveillance of nationwide in Viet Nam is also creating new herbicides, pesticides, chemical fertilizers). Weak investment demand in R&D and inadequate extension services to support use §§ Cambodia’s cassava exports enjoy some tariff of higher yield varieties or improve crop management preference advantages in China, EU, and emerging practices. importing countries such as India, Bangladesh §§ Poor preparation, drying, and storage of cassava chips (food processing and textile industries) and Saudi reduce quality and value. Arabia (modified starch as lubricant for marine oil §§ Low capacity of Cambodian farmers and processors at all drilling) stages of the value chain to meet core SPS requirements §§ Cassava is adaptable to diverse climates and soil §§ Absence of sustained seller-buyer relationships between varieties. Cassava can be grown as a single crop farmers and processors makes for unpredictable supply in or inter-cropped—offering an additional income term of quantities. Competition from Thai and Viet traders source. for raw cassava undermines sustainability of seller-buyer §§ Rising global demand has encouraged increased relationship. Insufficient number of intermediate structures plantings and improved long run income returns (such as cooperatives) to negotiate between farmers and to farmers – notwithstanding some cyclical domestic processors. downturns. Hundreds of thousands of small §§ Until now, low investment in processing facilities, despite farmers grow cassava, with average size farms sectors growth and new export opportunities. However, between 1 and 3ha. emerging interest from new foreign investors in investing in the full value chain from fresh tubers all the way to modified starches, bio-ethanol, and processing of residues §§ SME starch processing investors have limited experience and skills in supply chain management, market research, export marketing plans, export promotion, etc. §§ Lack of a sector association that can be a point of entry (information, contacts, etc.) into the Cambodian markets for foreign buyers interested in Cambodian cassava derivatives §§ Lack of Cambodian product standards consistent with international standards 222 Chapter 8 Opportunities Threats §§ Cambodia’s land yield for cassava roots ranges §§ Maintaining poor cassava farming practices can lead to somewhere around15 MT/ha. Mechanization serious depletion of soil quality, erosion, falling yields and and better farming practices (following GAP lower farm profits. methods + stronger Pest Risk Management) §§ Rising labor costs during planting/harvesting. About $7 or $8 should help raise land productivity higher per day for farm labor ($180 or so per month) unless matched §§ Mechanization of local cassava chipping would by increasing labor productivity significantly lower seasonal labor costs, reduce §§ Current dominance of Thai and Vietnamese traders impedes wastage from perished stock, and improve efforts to shift production to more local channels for value farmer’s margins. adding and generating higher returns to rural communities. §§ Development of domestic starch (Native and §§ Limited market information leading to farmers’ continued modified) processing capacity near main acceptance of lower farm-gate prices despite higher regional production areas will increase competition for and international prices. cassava crop, improve farm-gate prices, and §§ Exposure to future policy changes in China can have sizeable contribute in major ways to Cambodia’s economy. impact on Cambodia owing the size of the Chinese demand §§ Scope to diversify exports of processed cassava for bio-ethanol and starches. to other Asian markets—especially China, §§ Forthcoming changes in market access preferences for Japan, Indonesia and Malaysia as well as “new” Cambodian cassava derivatives could put downward importers (India, Bangladesh, Saudi Arabia, pressure on the sector’s trade competitiveness others.) 4.5. Policy Recommendations buyers and investors -- Continue to encourage new processing 1. Strengthen the Implementation of Modern investment (in addition to new investments from Process Standards to Improve Quality through Korea, Thailand, and HK) to localize large-scale the Entire Cassava Value Chain; Develop Product production of native and modified starch and Standards to Help Promote the Uniqueness of ethanol as well as diversify production of cassava Cambodia Starch and Starch Derivatives derivatives towards higher value products -- Introduce GAP farming practices and GMP or 3. Identify New Export Markets (destinations and HACCP methods in processing products) Opportunities; Strengthen Export -- Develop product standards, especially for starch. Skills of SME Cassava Derivatives Producers Standards should follow international cassava -- Strengthen supply chain management starch standards but also reflects unique mechanisms between growers and starch properties of Cambodian starch producers to ensure reliability and quality -- Strengthen MAFF’s monitoring capacity of -- Diversify export products and export diseases and pests and surveillance capacity destinations. While consolidating presence in for use of pesticides, herbicides, and fertilizer at East and South Asian markets, Cambodia needs farming level; Develop Ag research to introduce to open up new markets for processed derivatives disease and pest resistant varieties in Cambodia including in Europe, South Asia, Gulf countries -- Along with GAP and multi cropping, encourage -- Develop program to support export-skill mechanization of farming to increase land capacity building among SME starch processors productivity that have very limited experience in export 2. Encourage the Creation of a Cassava Private marketing, supply chain management, export Sector Apex Organization to Structure the promotion, etc. Private Sector and Serve as Access Point for 4. Improve Trade Facilitation Procedures for Information about Markets, Prices, Processing Cassava Derivative Exports Opportunities by Current Sector Players and -- Provide Cassava starch processors with trade New Foreign Buyers and Investors facilitation procedures similar to those extended -- Encourage the creation of a private sector-led to rice millers through the Ricer Single Window Cambodia Cassava Producers and Processors Association to provide an entry point for access mechanism to sector information and networking working opportunities for current actors and new foreign 223 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 5. Fruits and vegetables and the most promising vegetables were tomato, cabbage, cucumber, lettuce, rocket, and carrot. The fruits and vegetables sector is important for The final top prioritized value chains with potential nutrition and food safety, it generates rural income, for processing and exports were rice, maize, and and alleviates poverty. A survey in 2011 among 24 cassava, and only mango and banana were part of Provincial Departments of Commerce revealed into the final eight prioritized value chains. More that fruits and vegetables are among the “Top Ten recently, other observers, including USAID (2019), Products” in 19 Provinces. consider longan as another candidate with export potential. There is a rapidly increasing demand and imports for fruits and vegetables in Cambodia, with In contrast, vegetables do not seem to have any potential for processing and exports, especially significant export potential in the near future. for fruits such as mangoes and bananas. However, They are important from a nutrition and food only mangoes, bananas, and to a certain degree safety point of view, and are mainly considered longan seem to have an immediate potential for as important for import substitution, though exports, though with limited opportunities for with potential for processing. The production further processing, while vegetables are mainly of vegetables only meets an estimated 30 to 40 seen as having potential for import substitution. percent of domestic demand (BD Link). For the formulation of the Crop Master Plan (CMP) This section will thus focus on three fruits with for MAFF, Goletti and Sovith (2016) prioritized export potential: mango, banana, and —to the a long initial list of crop value chains. The most extent that there is information available— promising fruits were (in decreasing order) mango, longan. banana, papaya, avocado, durian, and jackfruit, Table 43: The mango and banana sectors at a glance Mangoes (2017) 103 producers 135 exporters 189 importers Rank and share in world (%)* 1. India (38.5) 1. Mexico (15.5) 1. United States (22.9) 2. China (9.5) 2. Viet Nam (11.8) 2. Viet Nam (8.2) 3. Thailand (7.6) 3. Netherlands (10.8) 3. Netherlands (8.0) 4. Indonesia (5.1) 4. Thailand (9.4) 4. Germany (6.9) 5. Mexico (3.9) 5. Brazil (7.0) 5. United Kingdom (6.0) 6. Pakistan (3.3) 6. Peru (6.5) 6. China (5.8) 7. Brazil (3.1) 7. India (6.2) 7. France (4.6) 8. Bangladesh (3.0) 8. Spain (2.9) 8. Canada (3.7) 9. Egypt (2.7) 9. Philippines (2.8) 9. UAE (3.4) 10. Malawi (2.6) 10. China (2.4) 10. Spain (2.9) 39. Cambodia (0.1) 34. Cambodia* (0.4) 120. Cambodia (0.0) Bananas (2017) 131 producers 116 exporters 167 importers Rank and share in world (%)* 1. India (26.8) 1. Ecuador (26.7) 1. United States (17.6) 2. China, mainland (9.8) 2. Philippines (9.4) 2. Belgium (9.5) 3. Indonesia (6.3) 3. Costa Rica (9.4) 3. Russian Fed. (7.9) 4. Brazil (5.9) 4. Belgium (9.4) 4. Germany (7.0) 5. Ecuador (5.5) 5. Colombia (7.7) 5. Japan (5.9) 6. Philippines (5.3) 6. Guatemala (7.2) 6. United Kingdom (5.5) 7. Angola (3.8) 7. Netherlands (4.1) 7. Netherlands (4.2) 8. Guatemala (3.4) 8. United States (3.9) 8. China (4.0) 9. Colombia (3.3) 9. Germany (2.9) 9. France (3.7) 10. Tanzania (3.1) 10. Honduras (2.2) 10. Italy (3.5) 52. Cambodia (0.1) 49. Cambodia (0.1) 154. Cambodia (0.0) Source: Taken from various tables in the chapter, based on FAO, ITC, World Bank, MAFF. * World export and import shares are based on value. 224 Chapter 8 5.1. World mango and banana production 80,000 tons in 2017. For bananas, Cambodia is and trade, and Cambodia’s position ranked 52th out of 131 producers in the world, producing almost 138,000 tons of bananas in 5.1.1. Main producers of mangoes and 2017, down from 158,000 tons in 2010. bananas 5.1.2. Main exporters and importers of India and China are the world’s largest producers mangoes and bananas of mangoes and bananas in the world. India’s mango production (19.5 million tons) in 2017 The largest exporters in the world of mangoes represented almost 40% of world production, (and guavas and mangosteen) are Mexico and followed by China (9.5 million tons), Thailand, Vietnam, followed by the Netherlands, Thailand, Indonesia, and Mexico. India is also the world’s and Brazil, together accounting for more than half largest banana producer, accounting for almost of world exports (Table 45). Cambodia is a small 27% of world production (30 million tons in 2017), player, exporting about USD 11 million worth of followed by China (11 million tons), Indonesia, mangoes, but is extremely dynamic, with exports Brazil, and Ecuador. doubling between 2012 and 2017. The largest importers are the United States (more than USD Cambodia’s position in the world for mangoes 650 million), Vietnam, the Netherlands, Germany, and bananas appears still limited, despite the United Kingdom, and China. conflicting statistics. For mangoes, Cambodia is ranked 39th out of 103 producers in the world, Ecuador is by far the largest exporter of bananas, producing almost 69,000 tons in 2017, up from followed by the Philippines and Costa Rica. 57,000 tons in 2010, according to FAO data. Cambodia exports only about USD 7 million, but However, the FAO estimates could be dramatically it is extremely dynamic: exports more than tripled underestimated, as MAFF reported mango between 2012 and 2017. The largest importers production of 1.3 million tons in 2015, from are the United States (more than USD 2.5 billion), 65,000 ha of plantation. Also, the PDAFF of Oddar Belgium — a main re-porter, as is also the case Meanchey province estimated the production for Germany and the Netherlands— the Russian of mangoes in that province alone to be above Federation, and Japan. Table 44: Main exporters and importers of mangoes and bananas, 2017 Exports Imports Growth Growth in Growth Growth in Main exporters Main importers Value Quantity Value in value quantity in value quantity (Rank, and share in world (Rank, and share in world (USD (1,000 (USD million) 2013-17 2013-17 2013-17 2013-17 exports, %) imports, %) million) tons) (%/year) (%/year) (%/year) (%/year) HS 080450 Fresh or dried guavas, mangoes and mangosteens World (135 exporters) 2,939 10 2 World (189 importers) 2,862 .. 6 3 1. Mexico (15.5) 455 12 8 1. United States (22.9) 656 509 7 5 2. Viet Nam (11.8) 347 49 .. 2. Viet Nam (8.2) 235 .. 23 .. 3. Netherlands (10.8) 317 11 11 3. Netherlands (8) 230 159 1 5 4. Thailand (9.4) 275 7 -4 4. Germany (6.9) 197 84 9 10 5. Brazil (7.0) 205 8 10 5. United Kingdom (6) 171 85 13 12 6. Peru (6.5) 192 12 8 6. China (5.8) 167 77 -8 -13 7. India (6.2) 182 -2 -9 7. France (4.6) 133 62 12 14 8. Spain (2.9) 85 13 16 8. Canada (3.7) 106 66 3 2 9. Philippines (2.8) 83 -1 -6 9. UAE (3.4) 98 88 2 -3 10. China (2.4) 70 93 65 10. Spain (2.9) 83 44 12 12 34. Cambodia* (0.4) 11 101 .. 120. Cambodia*(0.0) 0.01 .. -50 -53 225 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT HS 080390 Fresh or dried bananas (excluding plantains) World (116 exporters) 11,100 3 81 World (167 importers) 14,386 21,665 1 6 1. Ecuador (26.7) 2,959 6 4 1. United States (17.6) 2,529 4,814 2 1 2. Philippines (9.4) 1,049 -3 -18 2. Belgium (9.5) 1,369 1,409 -4 0 3. Costa Rica (9.4) 1,043 7 6 3. Russian Fed. (7.9) 1,140 1,544 3 4 4. Belgium (9.4) 1,038 -9 -2 4. Germany (7) 1,013 1,416 -3 1 5. Colombia (7.7) 857 5 5 5. Japan (5.9) 850 986 2 0 6. Guatemala (7.2) 795 7 5 6. United Kingdom (5.5) 788 1,163 -1 1 7. Netherlands (4.1) 461 29 35 7. Netherlands (4.2) 608 660 28 27 8. United States (3.9) 428 -2 2 8. China (4) 580 1,039 8 12 9. Germany (2.9) 319 -3 0 9. France (3.7) 526 670 -1 1 10. Honduras (2.2) 250 -2 -5 10. Italy (3.5) 509 758 -1 3 49. Cambodia* (0.1) 7 241 .. 154. Cambodia* (0.0) 0.001 .. .. .. Source: ITC’s Trade Map. * Countries with mirror statistics. Longan is part of the item HS 081090 “Fresh tamarinds, cashew apples, jackfruit, lychees, sapodillo plums, passion fruit, carambola, pitahaya and other edible fruit.” This item is not examined, given its heterogeneous nature. 5.2. Cambodia’s production, processing, and banana chips) and exporting (mainly fresh and exports bananas). Processed bananas have less stringent requirements from buyers but offer lower prices for SNEC: The study doesn’t cover supply chain. Value producers, while fresh bananas earn higher prices chain and supply chain should go together. The but require higher investments in handling and paper states repeatedly that there is a lack of distribution capacities to meet the requirements market information, yet doesn’t provide solutions. of retailers (Duke University CGGC, 2018). MoC should take a lead in this task. 5.2.1.Fruits and vegetables production in The value chain for mangoes can be segmented into Cambodia the following value-adding stages: Input provision, production, processing (dried, treatment/SPS), The main fruits and vegetables produced in packaging (fresh) and cold storage, distribution, Cambodia are bananas (about 138,000 tons and marketing and sales/exports. Cambodia is in 2017), mangoes (69,000 tons), oranges primarily present in the production stages of the (65,000 tons, and pineapples (25,000 tons), mango value chain (mainly small and medium according to FAO data (Table 46). While banana farms, though more recently there is increasing production appears to have slightly decreased investment for large-scale production), with between 2012 and 2017, mango production limited packaging and processing (mainly dried increased from 60,000 to almost 69,000 tons. and packed mangoes) and exporting (mainly However, MAFF estimates Cambodia mangoes fresh mangoes). production at 1.3 million tons in 2015. Other main produced fruit crops include oranges, pineapples, The main segments of the banana value chain grapefruit, and lemons. Unfortunately, the are provision of inputs, production, packaging, breakdown provided by FAO is not very detailed, distribution, ripening (for fresh bananas), especially for “fresh vegetables, not elsewhere processing (e.g. dried, chips or frozen), and specified” which is by far the main produce under marketing and sales, including exports. As is the the heading fruits and vegetables (542,000 tons case for mangoes, Cambodia is mainly present in in 2017), but also for “fresh fruit, nes” (which the production stages of the banana value chain might include longan). USAID (2019) reports that (mainly small and medium farms, though there is Cambodia produced about 26,000 tons of longan, increasing investment for large-scale production), mainly in Battambang and Pailin, grown by about with limited processing (mainly dried bananas 1,000 farmers, and that production has increased 226 Chapter 8 strongly over the last years. There appears to be in the North-West area can be an asset to ensure growing interest in longan production, given high supply for a longer period of time during the year. margins for farmers. The Keo Romeath mango variety has become the most popular mango variety over the last years, The fruit and vegetable sectors are highly both for local use and Cambodian export. Yields fragmented and dominated by smallholders, appear high by international comparisons, and with limited large-scale production, although Keo Romeath mango can be harvested up three this may change with recent investment in the times per year. However, farmers tend to apply sector. Many smallholders have only a few trees, excessive doses of chemicals to mango trees typically grow produce for personal consumption, (chemical induction of out-of-season flowering, and sell the surplus at local markets, Phnom Penh generally using Paclobutrazol), raising concerns traders, or Thailand or Vietnam for those farmers about food safety and labor health in intensive that live near the borders (BDLINK). Large-scale mango orchards, with a tremendous amounts of commercial production is still limited, though pesticides (Golleti and Sovith, 2016). there are some large-scale orchards in the northwest, and there has been recent investment, Some observers suggest developing more including by foreign investors. Overall, supply is diversified orchards and farms rather than mono- unreliable, which means that perhaps half of all cropping of mangoes or bananas. With a network fruits and vegetables consumed in Cambodia are of smallholders’ orchards, there is a potential to imported. reach significant volumes without putting too much constraint on the collection logistic. More Mango trees are grown in all 25 provinces diversified farms/orchards could also relief the in Cambodia, with a cultivated area of some pressure of diseases and pest attacks, and be a 65,000 ha in 2015, up from 24,000 ha in 2010 factor to reduce the use of chemicals which are (MAFF). Kampong Speu is by far the largest mango a huge obstacle to reach more profitable export producing province, followed by Kampot, Siem markets. It could also improve the resilience of Reap, Battambang and Kratie. The slight difference farms, as more diversified production would lower of production timing in Kampong Speu area and the vulnerability to technical and market hazards. Table 45: Cambodia’s production of selected fruits and vegetables (tons) 2012 2013 2014 2015 2016 2017 1. Cassava 7,613,697 7,550,140 8,324,617 9,090,587 9,830,665 10,577,812 2. Rice, paddy 9,290,940 9,390,000 9,324,000 9,335,000 9,952,000 10,350,000 3. Maize 950,909 927,000 550,000 400,000 663,000 750,000 (…) 5. Vegetables, fresh nes 628,000 606,393 534,841 537,158 539,681 542,204 8. Bananas 139,616 138,489 137,816 137,520 137,499 137,660 10. Fruit, fresh nes 73,000 72,044 74,909 74,358 74,510 74,749 12. Mangoes 59,890 61,646 63,402 65,158 66,915 68,671 13. Oranges 64,435 64,517 64,599 64,681 64,764 64,846 17. Pineapples 22,706 23,072 23,439 23,806 24,172 24,539 24. Grapefruit (incl. pomelos) 3,166 3,191 3,216 3,241 3,266 3,291 25. Lemons and limes 2,725 2,766 2,808 2,849 2,890 2,931 Source: FAO, FATSTAT. Notes: Not elsewhere specified. 227 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 5.2.2. Fruits and vegetables processing in mangosteen. Hyundai is also planning to set up Cambodia another facility for drying and freezing mangoes to produce derived products, such as juice and jams. The fruits and vegetables processing sector in Exports will be based on Hyundai’s international Cambodia is still in its infancy, and there is very distribution network, targeting in particular the little value-added processing on Cambodian Korean and Japanese markets. Finally, it was fruits and vegetables at a commercial level. reported that MAFF is about to sign an even larger There are only few small companies involved investment deal (USD 40 to 50 million) for mango in processing, which includes dried mango or exports with Chinese firm Weighai Dragon Union banana, jams, preserves, juice, and snacks such as Agriculture Co Ltd, who plans to package mangoes banana chips. However, these products are mostly from Kampong Speu province for exports to China for domestic use and there are not yet any major and Japan (Freshplaza, 2018). brands of Cambodian companies. 5.2.3. Cambodia’s fruits and vegetables There are a number of constraints for post- exports harvesting and processing fruits and vegetable in Cambodia, including: weakly organized Cambodia’s formal exports of mangoes appear supply chains for most fruits and vegetables; for the moment limited, as mangoes are typically limited R&D and capacity building on knowledge exported informally by individual traders to and technology for post-harvest technology, Vietnam and Thailand, where they are packaged processing and product development; limited or processed —for example into juices and jams to capacity of drying, cold chain and storage facility; disguise their Khmer origin—, and then exported and a lack of sufficient agro-processing facilities. to China and other countries. While MAFF reported The lack of sufficient and modern processing and an export volume of about 9,000 tons in 2015, packaging equipment means that farmers often informal exports to Thailand and Vietnam are have to sell to middlemen, often from Vietnam and estimated to be 20, 000 tons to 30,000 tons per Thailand, at prices that are only a fraction of their year (Goletti and Sovith, 2016). Direct exports value in lucrative markets, such as China, Japan, have traditionally been blocked by limited pest and South Korea (Phnom Penh Post, 17 January control capacity and hygiene-related issues, 2017). including critical sanitary and phytosanitary (SPS) certification, according to In Chayvan, president This however is starting to change due to new of the Kampong Speu Mango Association investment, especially from China and Korea. (Phnom Penh Post, 17 January 2017). As a result, For example, agro-industrial conglomerate Mong Cambodian farmers have to sell their mangoes to Reththy Group (MRG), together with a partner Thai and Vietnamese brokers for as little as 800 riels company from Singapore, set up a mango (USD 0.20) per kilo, which is only a fraction of their processing (washing, grading, and packaging) value in destination markets. plant in Preah Sihanouk province in 2013 (Phnom Penh Post, 17 January 2017). In 2018, a local Cambodia formally exported about subsidiary of Hyundai Corporation from South USD 11 million worth of mangoes to nine Korea invested about USD 4 million for a washing, destination markets in 2017, mainly to Vietnam processing and packaging facility and distribution and Thailand, followed by the European Union centre in Kampong Speu province (Asiafruit, 2018). (France, Czech Republic, United Kingdom, It will use mangoes grown on Hyundai’s 400 ha Luxembourg), Hong Kong, Norway and the Russian plantation, as well as Mao Legacy’s 2,000 of mango Federation (Table 49). Exports concern both fresh farms, and plans to offer adequate SPS procedures and dried mangoes. In 2016, Cambodia seemed to process 1,700 tons of mangoes in the first to have also exported to other markets, including year of operation, and eventually 50,000 tons Korea, China, and the United States, mainly in the of fruit annually, including coconut, durian, and form of dried mango (Lun, 2017). 228 Chapter 8 Cambodia’s banana exports are smaller Lastly, Cambodia also lacks a developed food (USD 6.5 million) and go to only three markets, processing industry - only 10% of Cambodia’s almost exclusively to Vietnam, with limited agricultural goods are processed. Likewise, amounts going to Germany and France (Table 50). much of Cambodia’s agricultural exports are raw products (cashew nuts, mangoes, rubber, and Concerning longan, some 1,500 tons worth about cassava), headed to Thailand and Vietnam, where USD 2 million are exported to Thailand, where they they are processed. This results in a significant loss of potential value add for Cambodia. Local are likely to be sorted, packaged, and possibly industries for products like cassava starch, rubber processed into dried or canned longan, before products or processed fruits are still nascent but being re-exported to China, the world’s largest remain open to venture investors, and remain a consumer of longan (USAID, 2018). mostly untapped market. There is a myriad of constraints for marketing and exporting fruits and vegetable in Cambodia. These 5.3.1. Market diversification include: Another possibility to add value to Cambodia’s -- Limited linkages between producers and traders. fruits and vegetable sector is to diversify its -- Porous borders with Thailand and Vietnam. destination markets —by increasing export -- Inadequate export infrastructure: Small number of volume on existing markets, and/or by targeting experts and companies that know how to export; lengthy processing of export documentation ; and markets that are currently not served at all by unpredictable export transaction costs. Cambodia, typically large, dynamic or open -- Lack of access to market information, especially on importers. import requirements of trading partners —fruits Cambodia has favorable market access conditions and vegetables have different and product-specific in the major import markets for mangoes and requirements. bananas. Cambodia has duty‐free access for the -- Cambodia’s mango shipments have been routinely top ten importing markets for mangoes and blocked before making it to the international bananas. market, as the mangoes are not of a high enough -- For mangoes, the European Union, the United quality to meet the SPS requirements of destination States, Canada, the United Arab Emirates, Saudi markets. Arabi, and Hong Kong offer zero or near zero -- Limited experience in international marketing, and duties for Cambodia, though this is also the knowledge on export distribution channels and case for its competitors (Table 47). In contrast, end markets. Cambodia has a tariff advantage compared -- Limited market access due to limited trade to its competitors in Vietnam (except for other facilitation with regional and oversea markets, and ASEAN member countries and China) and China weak bargaining power. (also except for other ASEAN countries). -- For bananas, the United States, Canada, the 5.3.Opportunities to grow and move up United Arab Emirates, and Saudi Arabia apply markets zero duties for Cambodia and its competitors (Table 48). Cambodia has a tariff advantage The Cambodian fruits and vegetables sectors offer significant opportunities to grow and add between 7 and 18 percentage points in the value, despite the many challenges to overcome. European Union, and on average 10 percentage Given its natural endowments and growing effort points in Japan and China. In contrast, tariffs to enforce strict norms and standards, Cambodia are high (30%) in South Korea, for Cambodia has potential to produce high-quality fruits and but also for example for the Philippines, which vegetables, and could develop into a high-end, however does not prevent the Philippines from niche exporter, especially for tropical fruit for having a market share of 80% in the Korean which world trade is expected to expand over the market (Table 50), next decade. 229 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 46: Tariffs for the main exporters of guavas, mangoes and mangosteen (HS 080450) on the main import markets Main importers (Rank, and share in world imports, %) 11. Saudi Arabia 2. Viet Nam (8.2) 1. United States 15. South Korea 16. Switzerland 120.Cambodia* 8. Canada (3.7) 12. Hong Kong Main exporters 6. China (5.8) (Rank, and share in 9. UAE (3.4) world exports, %) EU-28 (22.9) (2.1) (2.0) (1.9) (1.6) ( 0.0) EU-28 0 2.6 25 15 0 0 0 0 7.2 0.25 7 1. Mexico (15.5) 0 0 25 15 0 0 0 0 30 0 7 2. Viet Nam (11.8) 0 2.6 .. 0 0 0 0 0 18 0 7 4. Thailand (9.4) 0 0 0 0 0 0 0 0 24 0 7 5. Brazil (7.0) 0 0 25 15 0 0 0 0 30 0 7 6. Peru (6.5) 0 0 25 0.6 0 0 0 0 9 0 7 7. India (6.2) 0 0 10 8.7 0 0 0 0 25 0 6.3 9. Philippines (2.8) 0 0 0 0 0 0 0 0 24 0 7 10. China (2.4) 0 2.6 0 .. 0 0 0 0 22 0 7 11. Ghana (2.0) 0 0 25 15 0 0 0 0 30 0 7 34. Cambodia* (0.4) 0 0 0 0 0 0 0 0 24 0 7 NTL 2 3 3 5 1 1 6 3 3 1 3 Source: ITC’s Market Access Map. * Trade for countries marked with * is estimated through mirror statistics. Table 47: Tariffs for the main exporters of fresh or dried bananas (HS 080390) on the main import markets Main importers (Rank, and share in world imports, %) 19. Saudi Arabia 154. Cambodia* 11. Canada (2.8) 1. United States 3. Russian Fed. 12. South Korea Main exporters 14. Argentina 5. Japan (5.9) 8. China (4.0) 18. UAE (1.0) (Rank, and share in world exports, %) EU-28 (17.6) (7.9) (2.5) (1.7) (1.0) (0) 1. Ecuador (26.7) 7.6 0 3 10 10 0 30 0 0 0 7 EU-28 0 0 4 16 10 0 0 10 0 0 7 2. Philippines (9.4) 9.8 0 3 0 0 0 30 10 0 0 5 3. Costa Rica (9.4) 7.5 0 3 10 4.7 0 30 10 0 0 7 5. Colombia (7.7) 7.5 0 3 10 10 0 12 0 0 0 7 6. Guatemala (7.2) 7.5 0 3 10 10 0 30 10 0 0 7 8. United States (3.9) 17.8 0 4 16 10 0 0 10 0 0 7 10. Honduras (2.2) 7.5 0 3 10 10 0 30 10 0 0 7 11. Mexico (2.1) 9.8 0 3 0 10 0 30 3.8 0 0 7 13. Côte d’Ivoire (1.4) 0 0 3 10 10 0 30 10 0 0 7 49. Cambodia* (0.1) 0 0 0 1 0 0 30 10 0 0 7 NTL 2 1 2 3 1 1 1 1 1 1 1 Source: ITC’s Market Access Map. * Trade for countries marked with * is estimated through mirror statistics. 230 Chapter 8 One possibility to add value to Cambodia’s fruits Aldi (all Germany). These buyers seek enhanced and vegetable sector is to diversify its destination cost competitiveness, consistency, and product markets by targeting markets that are currently differentiation from their global supply chains. not served at all by Cambodia, typically large, -- Concerning potential markets to diversify dynamic or open importers. banana exports, Cambodia is not at all present in the major import markets in the world: the -- Concerning potential markets to diversify United States, Europe (Belgium, United Kingdom, mango exports (Table 49), Cambodia is not Netherlands, Italy, Poland, and Spain), the at all present in several markets that are large Russian Federation, Japan, China, and Canada, (United States, Netherlands, Germany, China, which all offer duty-free or near zero tariffs to Canada, and the United Arab Emirates), or Cambodia (Table 50). dynamic (Spain, South Korea, Italy, Poland, Iran and Oman). These markets appear as potential diversification markets for mango exports from These markets appear as potential diversification Cambodia. It should be noted that the global markets for mangoes and bananas from Cambodia, mango sector operates as a buyer-driven value though more research needs to be undertaken, chain, and large supermarkets are the leading for example to conduct market profiles that also actors in the key export markets for the sale of take into account qualitative information about fresh mango (Duke University CGGC, 2017). The e.g. the requirements and distribution channels in largest global food retailers are Wal-Mart Stores a particular target market. This would also help to (US), Tesco (UK), Carrefour (France), Costco (US), better understand the potential for niche markets followed by Schwarz Group, Metro Group, and 231 Table 48: Cambodia’s exports of guavas, mangoes and mangosteen (HS 080450), and potential markets for diversification, 2017 Cambodia’s exports (mirror data) Imports by partner Market Growth in Growth in Rank in Share in Import growth in Main suppliers* (Rank and share Value (USD Quantity quantity Tariff faced by value 2013- world world value 2013-17 (%, (Share in partner’s in Cambodia’s 1,000) (tons) 2013-17 (%, Cambodia (%) 17 (%, p.a.) imports imports (%) p.a.) imports, %) exports, %) p.a.) 9 current export destination markets Total 10,897 .. 101 .. .. 100.0 6 .. 1. Viet Nam (60.8) 6,626 .. .. .. 2 8.2 23 0 THA (96), KHM (3), CHN (1) 2. Thailand (26) 2,831 23,711 164 198 36 0.3 123 0 IDN (43), KHM (37), PHL (19) 3. France (8.8) 962 187 101 123 7 4.6 12 0 PER (23), ESP (15), ISR (13) 4. Hong Kong (3.0) 330 71 .. .. 12 2.0 -8 0 THA (35), PHN (33), AUS (20) 5. Czech Rep. (0.7) 75 33 -51 -20 34 0.3 23 0 BRA (28), DEU (20), PER (17) 6. Norway (0.4) 40 6 -5 -6 25 0.7 2 0 PER (31), BRA (25), PAK (10) 7. United Kingdom BRA (19), GHA (13), PER (12) (0.2) 22 4 41 19 5 6.0 13 0 8. Luxembourg (0.1) 7 1 .. .. 51 0.1 5 0 PER (27), BEL (22), BRA (16) 9. Russian Fed. (0.0) 4 1 .. .. 20 0.8 2 0 BRA (48), THA (15), PER (11) Selected potential markets for diversification: Large, dynamic, and/or open markets United States .. .. .. .. 1 22.9 7 0 MEX (56), PER (11), ECU (9) Netherlands .. .. .. .. 3 8.0 1 0 BRA (34), PER (32), CIV (6) Germany .. .. .. .. 4 6.9 9 0 BRA (34), PER (26), ESP (7) China .. .. .. .. 6 5.8 -8 0 THA (90), TWN (4), AUS (3) Canada .. .. .. .. 8 3.7 3 0 MEX (51), PHN (12), BRA (8) United Arab IND (40), PAK (17), KEN (11) Emirates .. .. .. .. 9 3.4 2 0 Spain .. .. .. .. 10 2.9 12 0 BRA (46), PER (29), MEX (6) Saudi Arabia .. .. .. .. 11 2.1 4 0 EGY (34), YEM (24), IND (14) Portugal .. .. .. .. 13 2.0 11 0 BRA (42), ESP (41), NLD (15) Belgium .. .. .. .. 14 1.9 1 0 NLD (37), CIV (11), SEN (9) South Korea .. .. .. .. 15 1.9 16 24 THA (66), PHN (17), PER (6) Switzerland .. .. .. .. 16 1.6 8 0 PER (27), BRA (16), ESP (14) Singapore .. .. .. .. 17 1.1 1 0 THA (44), MYS (16), AUS (14) 232 Japan .. .. .. .. 18 1.1 -8 0 MEX (36), THA (26), TWN (17) Italy .. .. .. .. 19 1.1 16 0 NLD (36), ESP (16), FRA (10) Poland .. .. .. .. 21 0.8 22 0 ESP (34), BRA (18), DEU (17) Kuwait .. .. .. .. 22 0.8 3 0 IND (45), EGY (30), YEM (5) Austria .. .. .. .. 23 0.7 7 0 BRA (30), PER (22), DEU (13) Malaysia .. .. .. .. 24 0.7 -1 5 THA (92), PAK (3), PHN (2) Iran .. .. .. .. 26 0.6 12 25 PAK (99), IND (0.4), ITA (0.3) Oman .. .. .. .. 27 0.6 12 0 YEM (29), PAK (23), UAE (17) Source: ITC’s Trade Map. * AUS: Australia, BEL: Belgium, BRA: Brazil, CHN: China, CIV: Côte d’Ivoire, DEU: Germany, ECU: Ecuador, ESP: Spain, FRA: France, GHA: Ghana, IDN: Indonesia, IND: India, ISR: Israel, ITA: Italy, KEN: Kenya, KHM: Cambodia, MYS: Malaysia, NLD: Netherlands, PAK: Pakistan, PER: Peru , PHN: Philippines, SEN: Senegal, THA: Thailand, TWN: Taiwan, UAE: United Arab Emirates, YEM: Yemen. Table 49: Cambodia’s exports of fresh or dried bananas (HS 080390), and potential markets for diversification, 2017 Cambodia’s exports (mirror data) Imports by partner Market Growth in Import Value Growth in Rank in Share in Tariff faced (Rank and share in Quantity quantity growth in Main suppliers* (USD value 2013- world world by Cambodia Cambodia’s exports, (tons) 2013-17 (%, value 2013- (Share in partner’s imports, %) 1,000) 17 (%, p.a.) imports imports (%) (%) %) p.a.) 17 (%, p.a.) 3 current export destination markets Total 6,500 0 241 .. .. 100.0 1 .. 1. Viet Nam (98.4) 6,394 0 .. .. 61 0.1 183 0 KHM (68), LAO (28), THA (5) 2. Germany (1.6) 104 9 .. .. 4 7.0 -3 0 COL (35), ECU (25), CRI (22) 3. France (0) 2 2 .. .. 9 3.7 -1 0 CIV (27), CMR (20), COL (13) Selected potential markets for diversification: Large, dynamic, and/or open markets United States .. .. .. .. 1 17.6 2 0 GTM (40), CRI (20), ECU (13) Belgium .. .. .. .. 2 9.5 -4 0 COL (34), CRI (17), ECU (13) Russian Federation .. .. .. .. 3 7.9 3 0 ECU (96), MEX (2), CRI (1) Japan .. .. .. .. 5 5.9 2 1 PHN (81), ECU (14), MEX (2) United Kingdom .. .. .. .. 6 5.5 -1 0 COL (27), DOM (17), CRI (15) Netherlands .. .. .. .. 7 4.2 28 0 PAN (38), CRI (20), DEU (14) 233 China .. .. .. .. 8 4.0 8 0 PHN (71), ECU (17), VNM (4) Italy .. .. .. .. 10 3.5 -1 0 ECU (42), COL (25), CRI (18) Canada .. .. .. .. 11 2.8 0 0 GTM (46), CRI (20), ECU (12) South Korea .. .. .. .. 12 2.5 8 30 PHN (79), ECU (10), GTM (5) Poland .. .. .. .. 13 1.9 -1 0 ECU (43), COL (16), CRI (16) Argentina .. .. .. .. 14 1.7 4 10 ECU (79), BOL (16), PRY (4) Spain .. .. .. .. 15 1.3 1 0 CRI (32), CIV (23), COL (13) Sweden .. .. .. .. 16 1.3 0 0 ECU (31), DOM (23), CRI (18) Czech Republic .. .. .. .. 17 1.0 7 0 CRI (22), COL (13), ECU (12) United Arab Emirates .. .. .. .. 18 1.0 15 0 PHN (50), ECU (35), IND (12) Saudi Arabia .. .. .. .. 19 1.0 -1 0 PHN (70), ECU (23), LKA (3) Ukraine .. .. .. .. 20 1.0 -19 0 ECU (57), CRI (25), Col (11) Greece .. .. .. .. 21 0.9 5 0 ECU (76), CRI (10), COL (9) Austria .. .. .. .. 22 0.8 -2 0 ECU (31), COL (27), PER (14) Portugal .. .. .. .. 23 0.8 4 0 ESP (56), CRI (21), COL (16) Romania .. .. .. .. 24 0.8 29 0 POL (22), BEL (20), FRA (15) Switzerland .. .. .. .. 25 0.7 -1 0 COL (36), ECU (17), PAN (17) Turkey .. .. .. .. 26 0.7 -2 146 ECU (84), CRI (10), GTM (4) Finland .. .. .. .. 27 0.7 4 0 CRI (73), PER (13), ECU (12) Iraq .. .. .. .. 28 0.7 60 .. ECU (57), PHN (20), KWT (13) Denmark .. .. .. .. 29 0.5 -5 0 DEU (61), SWE (20), NLD (10) Chile .. .. .. .. 30 0.5 6 0 ECU (99), BOL (0), PHN (0) Norway .. .. .. .. 31 0.5 -7 0 CRI (39), ECU (36), COL (15) New Zealand .. .. .. .. 32 0.5 8 0 ECU (76), PHN (16), MEX (7) Slovakia .. .. .. .. 33 0.5 10 0 ECU (21), CMR (14), CZE (14) Source: ITC’s Trade Map. * BEL: Belgium, BOL: Bolivia, CIV: Côte d’Ivoire, CMR: Cameroon, COL: Colombia, CRI: Costa Rica, DEU: Germany, DOM: Dominican Republic, ECU: Ecuador, ESP: Spain, FRA: France, GTM: Guatemala, IND: India, KHM: Cambodia, LAO: Lao PDR, LKA: Sri Lanka, MYS: Malaysia, NLD: Netherlands, PAN: Panama, PER: Peru, PHN: Philippines, POL: Poland PRY: Paraguay, SWE: Sweden, THA: Thailand, VNM: Vietnam. 234 Chapter 8 Chapter 8 5.3.2.Agro-processing and product and snacks; packaging, canning or bottling; to development finally establishing trade linkages with high-value destination markets such as China, Japan, Korea, Cambodia’s fruits and vegetable sector needs to the United States and the European Union, which move into commercial and export oriented agro- however require stringent SPS compliance and processing, especially for fruits, as this appears therefore imply investment along an integrated still limited for vegetables. There are opportunities value chain and SPS trade agreements with for investment at every level of the supply chain, destination markets. in particular for large or SME investors for agro- processing and product development. This In terms of product upgrading, there is an ranges from supplying contract farmers with increasing global preference for organic and better seeds and inputs to ensure consistent environmentally-friendly produce, for which niche quality and yields; cold chain transportation and markets in developed countries are willing to pay a cool storage for fresh, perishable produce; drying, premium. Here again there are clear opportunities freezing or otherwise processing fruits into for Cambodia’s fruits and vegetable sector. derived products, such as jams, preserves, juice, 5.4.SWOT analysis of Cambodia’s fruits and vegetables sector Table 50: SWOT analysis of the fruits and vegetables sector in Cambodia Strengths Weaknesses §§ Domestic policy support §§ Post-harvesting and processing §§ Rapidly improving infrastructure (roads, §§ Weakly organized supply chains for most fruits and vegetables. electricity, irrigation). §§ Limited R&D and capacity building on knowledge and technology §§ CamGAP standard approved by MAFF in for post-harvest technology, processing and product development. 2010, though not implemented for all fruits §§ Limited capacity of drying, cold chain and storage facility. and vegetables. §§ Lack of sufficient agro-processing facilities, although this is starting §§ Interest and support for fruits and to change due to new investment, especially from China and Korea. vegetables are fast growing among local §§ Marketing and exports and international communities. §§ Limited linkages between producers and traders. §§ International environment §§ Lack of access to market information, especially on import §§ Cambodia’s LDC status affords it tariff-free requirements of trading partners —fruits and vegetables have access for natural different and product-specific requirements. §§ fruits and vegetables exports to the EU, US, §§ Cambodia’s mango shipments have been routinely blocked before Japan, Korea. making it to the international market, as the mangoes are not of a §§ Proximity to China, the world’s largest high enough quality to meet the SPS requirements of destination importer of fruits and vegetables. markets. §§ Cambodian mango varieties appreciated by §§ Limited experience in international marketing, and knowledge on buyers in neighboring countries and China. export distribution channels and end markets. §§ Limited market access due to limited trade facilitation with regional and oversea markets, and weak bargaining power. §§ Supporting infrastructure and policy §§ No specific national policy on (indigenous) fruits and vegetables. §§ Poor marketing and transportation infrastructures. §§ Weak producer associations. §§ Weak institutional capacity, lack of policies and regulations, and weak enforcement of existing regulations for compliance with SPS requirements and food safety. §§ Limited statistical information for fruits and vegetables (e.g. production, exports. 235 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Opportunities Threats §§ Processing §§ Processing §§ Increased scale of agro-processing. §§ Slow development on agro-industrial processing. §§ Improved quality of processed fruits and vegetables. §§ Marketing and exports §§ Marketing and exports §§ Possible end of preferential access to EU markets (EBA). §§ Potential to become a reliable supplier of high quality §§ Supporting policy fresh and processed fruits (e.g. mangoes, bananas, §§ Weak or arbitrary enforcement of regulations related longan) for the global market. to SPS and food safety, agrochemicals, seed, organic §§ Geographic indications (GI) labelling of Cambodian certification. mango to supply niche markets. §§ International environment §§ Protocol on phytosanitary for banana exports China §§ Strong competition and imports from neighboring signed in 2018. countries (e.g. Vietnam for vegetables). §§ Supporting infrastructure and policy §§ Prices volatility (e.g. for mangoes). §§ MAFF is developing an Agriculture Sector Master Plan. §§ Implementation of roadmap for national GAP scheme. §§ International environment §§ Strong outlook for global fruits and vegetables consumption and trade. §§ Increasing demand in export markets for quality mango products. §§ Increasing interest among potential foreign investors in Cambodia’s fruits and vegetables industry, especially from China. Source: Based on Goletti and Sovith (2016), MAFF (2017), USAID (2019), and interviews with stakeholders in December 2018. 236 base comprising of Bicycles, electrical + electronic components assembly and misc. light manufacturing. The overall manufacturing sector has benefited significantly from the openness to investment and trade facilitated through conducive industrial policies, preferential market access to the EU and the ASEAN region, proximity to input-sourcing markets (which has enabled integration in regional value chains and reduced lead times), and the success of Special Economic Zones (SEZs) for the light-engineering sectors, among other factors. The Cambodian light-industries sector is currently at a critical juncture in its developmental CHAPTER 9 trajectory. In the past decade, the Government’s efforts to liberalize the investment climate LIGHT INDUSTRIES for foreign investors in the sector have paid dividends. Sectors such as Bicycles and electrical FOR EXPORT + electronic components assembly are growing rapidly from an exports perspective, and DIVERSIFICATION AND investment activity is expected to ramp-up ENHANCEMENT further as highly industrialized nations such as Japan seek to further outsource their assembly operations. The potential for value addition and enhancement is high. Light-industries represent 1. Introduction a high-potential conduit of trade-led growth for A favourable medium term national economic Cambodia, through which the country can realize outlook is buoyed by all-round performance, its vision of transforming the industrial structure especially within the manufacturing sector. from a labour-intensive-industry to a skill-driven industry by 2025. Cambodia is the 17th fastest growing economy in the world in terms of GDP growth rate, and For the purpose of this chapter, the following sub- the fastest in SE-Asia. A real GDP growth rate of sectors202 are included within the scope of the 7.25% in 2018(e) beat regional powerhouses such light-Industries sector: as Vietnam and Thailand, and medium-term GDP 1. Bicycles growth projections are forecasted to hold steady 2. Electronic components assembly at around 7%. Strong performance in exports, 3. Packaging tourism, construction, and FDI has helped to 4. Other light manufacturing (Miscellaneous prod- maintain the growth trajectory set in the past ucts aimed at businesses as intermediate prod- decade. uct or end-consumer use) Industries have played an important role in this growth story, primarily led by the export-focused Garments and Footwear sectors, and to a much smaller but high-potential light-manufacturing 202 Garments and Footwear sectors have been excluded given that the focus of this chapter is on diversification within light-industries sector. Food-processing is covered under the scope of Chapter XX on Agri-business value chains. Although garments, footwear and food-processing are not included in the core scope of this chapter, these sectors will certainly benefit from the various interventions and solutions proposed which are wide-ranging and cross-functional in nature. 237 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Figure 30: Light Industries – CTISU scope CTISU SCOPE: LIGHT-INDUSTRIES Electonic and Other light Bicycles electrical Packaging manufacturing components HS 8712 HS 8544 HS 4821 (Bicycles and other (Paper or HS 95 (Toys, (Insulated wire, Cycles,inc. games, sports delivery tricycle, cable and other paperboard labels of all kinds) rquirsites) not motorized) electric conductors) HS 8504 HS 4819 (Electrical transformers HS 73 X Garments (cartons,boxes, cases, static converters) (Articles of iron or X Footwear bags and other steel) X Food Processing packing containers) HS 8501 (Electric motors HS 3923 and generators) HS 94 (Articles for the (Furniture, lighthing conveyance or sign, prefabricated packaging or buildings) HS 8517 goods, of plastics) (Telephone sets) HS 8536 (Electrical apparatus for switching or protecting circuits) Source: author The business case for firms locating to Cambodia is varied- while bicycle assembly operations in 1.1. Sector overview the Bayet SEZ benefit from close proximity to Vietnamese parts suppliers (who had to reorient The bulk of current activity is predominantly themselves as a result of the decline of the sector occurring in the SEZs. The SEZs account for in their country), the electrical + electronic the vast majority of light-industries203 firms components assembly sector benefits from tight regardless of sector, and as such the growth of integration in the ASEAN regional value chain and light-industries can be charted since 2005 when market, along with a concerted drive by Japanese, the legal framework for the SEZs was established. Chinese companies to outsource certain parts of There are currently 22 SEZs operating the country their supply chains. employing approximately 115,000 workers204 across all sectors. Firms are primarily foreign- In all cases, the special provisions offered by the owned, export-oriented. Companies include SEZs have influenced their decision. i.e. there is those from Japan, Thailand, South Korea, Malaysia, evidence that the location and the provisions and Singapore. The main Cambodian input to offered by the SEZs result in a significant this value chain is labor. Within the SEZs, there enhancement to the business environment which is a relatively higher degree of diversity of light- has contributed to the investor due-diligence in industries firms (bicycles, shoes and pouches, favor of Cambodia. electrical and electronic parts, motorcycle parts, automobiles and plastics, bolt nuts, coils and The vast majority of firms are assemblers. transformers, electrical locks, and clock parts, Intermediate inputs are imported to the SEZs, misc. home furnishings, toys etc) than outside, and the end product is exported after assembly. where the mainstay of the manufacturing sector Outside of the SEZs there are no lead firms (or any is still garments. other identifiable firms) operating for the sectors. The production values equal the export-values .The term light –industries is defined per the scope definition included in this chapter) which does not include garments, footwear and food-processing. 203 . Data provided by the CDC representative in the CTISU Interministerial committee (valid May 2019). 204 238 Chapter 9 given that 100% of production especially for the (through graduation to a middle-income country bicycles and electrical+ electronic components status), but even in the short term as evidenced sectors is exported from the SEZs. While each by the EU review and possible withdrawal of light-industry sector has its nuances, by and large Cambodia’s EBA status (and accompanying EU Cambodia’s positioning within the light-industries trade preferences). Additionally, ongoing trade value chain is at the lower-end. negotiations by regional rivals may also improve their trade preferences standing. These factors Within the trading portfolio, Bicycles constitute may have an impact on the investment entry and the top exports in the light-industries category, expansion plans investors. This poses a particularly followed by electronics and electrical components. strong risk to certain light-industry sectors such as The overall export share of light-industries is still bicycles due to its heavy dependence on the EU quite low and close to 4%. The role of preferential market. tariffs in driving exports growth within the Light- Industries sector is evident. The US, EU and ASEAN Overall, Cambodia’s goods based exports have markets, offering tariff-free advantages for most almost doubled in value between 2013 and of the light industries basket, overwhelmingly 2017, and light-industries is one of the sectors dominate the market-portfolio. where diversification and volume based growth has occurred. Light-industries exports in 2017 The key markets are those dictated by Cambodia’s amounted to just above USD 1 Billion, up from market access preferences such as the EU, US, and USD 466 million in 2013. Despite the growth ASEAN. As mentioned earlier, one of the factors that over the past decade, light-industry exports still favors Cambodian investment and export climate constitute a small proportion of the export basket – favorable trade preferences – may change. This (just above 5 per cent in 2017). may occur not only in the medium-long term Figure 31: Light Industries – CTISU scope Bicycles(HS 8712) Insulated wire (HS 8544) Electrical transformers, static converters (HS 8504) Electric motors and generators (HS 8501) Telephone sets (HS 8517) Electrical apparatus for switching or Protecting electrical circuits (HS 8536) Paper or paperboard labels of all kinds, whether or not printed HS 48210 Cartons, boxes, cases, bags and other Packing containers, of paper (HS 4819) Articles for theconveyance or packaging of goods, of plastics (HS 3923) Toys, games and sports requisites (hs 95) Articles of iron or steel (HS 73) Furniture; bedding,mattresses, mattress supports(HS 94) 0 100 200 300 400 Source: ITC’s Trade Map. undue risk to their supply chain (in terms of on- time delivery, quality compliance etc) Cambodian SEZs are primarily investment- b. The relatively low value-added manufacturing enclaves, export-oriented and have limited to no base of firms has not required them to actively backward or forward linkages with the domestic seek out supplier relationships. i.e. cost-reduction economy. Two main contributory factors exist: is not a main factor for these firms, but rather a. Absorptive-capacity of Cambodian SMEs has more importance is attributed to maintaining not developed to the extent that investors can quality and on-time delivery of inputs. reliably forge supplier relationships without 239 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT SEZ firms do not sell to the domestic market, soft and hard infrastructural support offered primarily due to their export-oriented nature but within the SEZs, and the low cost of Cambodian also because firms may be eligible to pay taxes labor led to a locus shift of assembly operations once they cater to the domestic markets. from Vietnam to Cambodia. Parts manufacturing operations have stayed in Vietnam, following a ADB research suggests that along with the period of severe challenges and re-alignment. valuable socio-economic contributions of the SEZs (primarily employment), there may be a The Bavet area, located 5 km to the Cambodia- demonstration effect as well that may result in Vietnam border- is the centre of bicycle-assembly increased light-industry activity outside the SEZs. operations in the country. There are 4 firms (Asia This will however only be visible in the long term Leader International, A&J, Speed-tech and Smart- and other factors such as quality and pace of SME tech) currently operational within two SEZs in development initiatives, skills enhancement etc Bavet (Tai Seng SEZ and Manhattan SEZ). will most likely play a part as well. Bicycle-assembly constitutes the main operations 1.2. Bicycles of the bicycle sector. The main operations related to component-assembly (un-finished but The key driving forces in favor of foreign investors mounted cycles to be fully assembled onsite at (primarily Chinese firms) coming to Cambodia were client location) although there is some movement the establishment of the SEZs and the downturn up the value chain in terms of frame-assembly of the (normally more competitive) Vietnamese (value addition in terms of finishing). Bulk of the bicycling sector primarily due to anti-dumping inputs required for bicycles are imported from duties applied by the EU. The coinciding events, the ASEAN region including from Malaysia, China, accompanied by Cambodia more favorable trade Vietnam, Taiwan, Singapore, Japan and Indonesia. status, the tax incentives and increasingly improve Some packaging may be sourced locally. Table 51: Bicycles Trade Statistics Growth Top current export % share Light Exports Exports % share in Imports rate in markets of global industry (2017) Growth rate Cambodia’s (2017) value exports / sub- US$ in value (’13- Market Applied export US$ Million (’13-‘17) global export sector Million ‘17) % p.a. (share) Tariff basket % p.a ranking DE (36.3%) 0 UK (21%) 0 Bicycles $413 m -1% $8.7 m -7 % BE (11.2%) 0 2.2% 4.6 % / 5th (HS 8712) US (6.1%) .5 AT (4.1) 0 Source: ITC’s Trade Map. Cambodian contributions to the value chain is primarily caters to the ASEAN market. Cambodian primarily limited to labor, and recent assessments cycles are primarily positioned in the lower end of of the value chain have not identified any domestic the market segment in the EU. Cambodia benefits component manufacturers. Given the weak supply from regional accumulation within ASEAN for of skilled labor in the country, these firms typically the purposes of the required 30% domestic import talent from their home countries content requirement for the EU market, which has helped Cambodia develop its status as a leading The main markets for bicycles is the EU, while assembler. the electronics components assembly sector 240 Chapter 9 1.2.1. Electrical + electronic components As indicated below, the main exported product assembly is insulated wires and cables. There is significant trade deficit in a number of products exported Similar to the bicycles sector, foreign firms involved in this portfolio. Thailand and Japan are the two in assembly of electrical + electronic components largest importers of insulated wires and cables are predominantly housed in the SEZs. As in the exported by Cambodia. case of other sectors operating within the SEZs, electronic component assembly firms have Some diversification and move up the value limited to no connection with the domestic chain ladder has occurred, but on a limited economy. They import raw materials from their basis. Japanese investments have stepped up in original production hubs such as Thailand, and recent years in the Phnom Penh, Bavet City and their involvement with the Cambodian supply Poi pet City SEZs. These investments are linked chain is limited to labor. The country’s proximity to production of electronic circuit boards and to the ASEAN electronic product manufacturing smartphone screens. hub, combined with the low labor costs and The top HS4 code categories in the electrical + strong market access preferences have been electronic components sector exhibits moderate driving factor for companies. growth rates in international markets, which is a favorable sign for investors. Table 52: Electrical + electronic components trade statistics Exports Imports Top current export % share Imports Exports Growth Growth markets % share in of global Light (2017) (2017) rate in rate in Cambodia’s exports/ industry US$ US$ value value Market Applied export global sub-sector Million Million (’13-‘17) (’13-‘17) (share) Tariff basket export % p.a. % p.a ranking TH (56.2%) 0 Insulated JP (21%) 0 wire $185.6 18% $157 9% KO (14.8%) 0 1% 0.2 %/55th (HS 8544) VT (3.4%) 0 CN (2.8%) 0 Electrical CN(63.7%) 0 transformers, HK/CN(18.4%) 0 static $76.9 300% $83.7 14% VT(7.4%) 0 <1% 0.1%/51st converters (HS 8504) FR(3.6%) 0 Electric CN(37.6%) 0 motors and HK/CN(28.5%) 0 $75.5 7% $12 -12% <1% 0.1%/41st generators VT(19.8%) 0 (HS 8501) JP(5.4%) 0 Telephone HK/CN(96.8%) 0 sets (HS $66.4 179% $344 6% <1% -/63rd 8517) CN(2.4%) 0 Electrical JP(40.5%) 0 apparatus for CN(27.8%) 0 switching/ protecting $15.8 32% $41.9 7% <1% -/69th electrical TH(24.7%) 0 circuits (HS 8536) Source: ITC’s Trade Map. 241 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 1.2.2. Packaging but rather the sector can build strong forward linkages with other sectors that have high export A strong business case exists for promoting potential. The high import-dependency on and pursuing development in the packaging packaging and labelling, coupled with strong sector – the sector offers one of the highest growth exhibited in the consumer products sector opportunities for forward linkages with other within Cambodia offer a strong value proposition product sectors which could translate into cost- to develop packaging and labelling capabilities. savings (for instance from reducing dependency The fast-growing food and beverage sector and on imported packaging material) and increased indeed the overall agro-industry sector is one competitiveness for those sectors (given that such candidate which can forge strong linkages many markets have mandatory packaging and with the packaging sector. Once the SME base labelling requirements). Packaging (‘packaging starts developing, the packaging and labelling equipment for export’) is one of the priority sector will find a ready market in multiple sectors sectors noted in the IDP as well. including other light-industry segments. From a pure export sense, Cambodia is not a The packaging and labelling sectors can play an significant player in the Packaging sector as important part to develop a competitive SME indicated in the table below. Indeed, in all packaging base. Developed markets such as the EU and US segments, whether paperboard or plastic based, have strict packaging and labelling requirements the absolute import figures outnumber exports that can serve as barriers to entry if not carefully by factor of 6 times, with imports from Vietnam, considered. Packaging itself can serve as a value- Thailand and China. Cambodia imports the vast added component to a product. Sound packaging majority of packaging and labelling material and labelling capabilities within the country mean for its industrial and consumer needs, and local that SMEs may have access to diverse options as manufacturing is limited to few international firms well as incur lower procurement costs which can including from Japan. These firms primarily cater be translated to lower operational costs. to the SEZ firms, garment factories, and more recently to the fast-evolving food and beverage Finally, from a sustainability angle, it is in the industry in Cambodia. country’s interest to develop a conducive regulatory framework involving packaging Future development of the sector will likely assist and related standards that focus on ensuring in reducing the high imports of packaging in the environmentally friendly packaging, reusability country in the short-medium term, rather than of packaging etc. There is currently 1 standard functioning as a pure packaging exports sector. i.e. developed for plastics packaging, and none for it is unlikely that Cambodia will become a leading paper/cardboard-based packaging. packaging exporter at least in the medium term, Table 53: Packaging Trade Statistics Top current export markets Exports % share Exports Imports Import Market Growth % share in of global (2017) (2017) Growth rate (share), Applied Light industry sub- rate in Cambodia’s exports US$ US$ in value market Tariff sector value export / global Million Million (’13-‘17) % growth (’13-‘17) basket export p.a CN(27.8%) 0 %p.a. ranking TH(24.7%) 0 Packaging (HS 4821) $756K 7% $83.2 m 9% Packaging $5.6 m 33% $39.8 m 8% (HS 4819) Packaging US (72%) 0 $36.2 m 8% $ 125 m 2% <1% 0.1%/76th (HS 3923) JP (20%) 0 Source: ITC’s Trade Map. . Red fill color indicates trade deficit. * May primarily constitute re-exports 242 Chapter 9 1.2.3. Other light-manufacturing to the low base from which production and ex- ports have ramped up. In some cases such as HS Cambodia has also started developing a compe- 94, there is possibly significantly high re-export tency in miscellaneous light-manufacturing prod- activity occurring as well. Toys manufacturing has ucts such as toys, misc. articles of iron and steel picked up in recent years and may offer a strong (springs/screws/bolts etc.), and furniture, light- contender for growth in the coming years, given ing products etc. As the accompanying table in- that it is the only product segment in this category dicates, exports have ramped up in recent years which is trading on a surplus. although the high growth rate may be attributed Table 54: Misc Industries Trade Statistics Top current export Exports Import % share Exports Imports markets Growth Growth % share in of global (2017) (2017) Market Light industry sub- rate in rate in Cambodia’s exports US$ US$ (share), Applied sector value value export / global Million Million market Tariff (’13-‘17) (’13-‘17) basket export growth %p.a. % p.a ranking JP (20%) 0 Other light US (41.5%) 0 manufacturing - Toys, JP (16.5%) 0 games and sports $42.4 m 34% $32.9 m 13 % <1% NA/57th requisites DE (11.2 %) 0 (HS 95) CA (6%) 0 Other light US (50%) 0.1 manufacturing- $29 m 39% $298.3 m 3 JP (11%) 0 <1% NA/91st Articles of iron or steel (HS 73) IT (6%) 0 Other light US (75.6%) 0.3 manufacturing- Furniture; bedding, $103.1 34% $ 106.3 m 3% CA (8.3%) 0 <1% NA/61st mattresses, mattress m supports, * MX (6%) 9.1 (HS 94) Source: ITC’s Trade Map. Yellow fill color indicates trade deficit. * May primarily constitute re-exports 2. Barriers to growth 2.1. Structural issues within garments sector Cambodia’s national development framework Garments is the principal manufacturing sector, including the Rectangular Strategy IV and the and its contributions to the GDP (18% share), Industrial Development Policy (2015-2025) have export-portfolio (80% of national export earnings), highlighted the growing cognizance among manufacturing output (80% share) as well as policy-makers regarding the potential of the total employment (>600K workers) highlight Light Industries sector, especially in terms of the sector’s importance from both economic export-led growth. Before this potential can be and socio-economic perspectives. Cambodia’s realized however, important constraints currently 550+ garment factories are mainly foreign facing the overall light-industries value chain owned and tightly integrated in the global value must be addressed. The external environment for chain. The currently stable export performance Cambodian industry has now changed and there belies a number of risk factors, endogenous and are several factors that are serving as headwinds exogenous, that may result in an erosion of the and threaten the growth trajectory. sector’s competitive position in international 243 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT markets. The main challenges in brief are as for future growth of non-garments/footwear follows: light manufacturing segments. This also poses significant challenges to the Government’s -- The heavy dependency on the global quota vision to modernize Cambodia’s industrial sector regime for access to markets means that from a labor-intensive industry to a skill-driven disruptions as well as external shocks such as industry. TVET curricula and infrastructure us roll-backs to preferential treatment (already also in need of a revision to reflect light-industry a concern in the case of the EU EBA) in target concepts. An important need exists for facilitate markets can result in severe economic and workforce development in aid of higher value- employment related setbacks. These risk factors addition and flexibility. can become economic existential threats, and -- Continuous minimum wage increments the lack of diversification in the manufacturing for garments manufacturing since 2013 is sector limits options to mitigate them. beneficial for workers, but need to be weighed -- Stagnating productivity is a significant cause carefully against the impact of the bottom of concern, and will likely remain a long-term lines of companies and investors, especially challenge. The sector needs capital-intensive the Government has to set supporting policy to investments with capable investors willing to offset any extra cost. Since companies will not form supplier development relationships. This be able to reduce fixed costs such as electricity, in conjunction with a robust TVET oriented skill- the operational cost increase will ultimately development strategy, will be the equation that be transferred to customers. In the face of stiff enhances productivity sustainable. However this competition from Bangladesh and Myanmar’s will take time and effort over a long-term basis. garments sectors, any price increases may hurt As the regional competitiveness in the baseline Cambodia’s competitive positioning. Existing/ textile sector is not very complex, investors are potential investors as well will be keeping more likely to move to Africa given the rising this in mind as part of their due-diligence on wage structure and stagnating productivity. investment/expansion plans. -- Skills development: The key workforce challenge -- Labor-market pressures owing to the demo- facing light-industries is that of skills rather than graphic skewed towards a young population quantity. Given the labor-intensive nature of (50% under the age of 22) make it clear that the activity in the sector (even within the SEZs), the Cambodian economy will need multiple growth overall skills base of the workforce is low. Low poles rather than focusing solely on Garments. worker productivity and skills have proven to be -- A downturn in the garments sector will inevitably barriers for SME growth in the light industries lead to an adverse spill-over impact on the sector. Existing studies for the bicycle sector note rest of the manufacturing sector as well. The that SEZ firms face significant issues in procuring manufacturing sector has benefited from the local skilled labor, and instead of devoting government’s open policies towards investment time and resources in training programs, and this is reflected in the dominance of investors opt for importing skilled workers. The skilled in each of the manufacturing sectors, whether labor shortage has implications on decisions garments, bicycles or electrical + electronic- on whether further investments for growth components. The linkages between sectors may and value-addition should be made in these not be apparent, but investors are continuously factories. Cambodia needs a flexible workforce scanning the overall landscape as part of their that can adapt to new skills that are transferrable due-diligence and risk assessment. A downturn to different sectors, and are aligned to best in the garments sector may have a spillover- practices. The human capital in skewed towards effect on investor-confidence on other sectors as low-skilled and labor-intensive work (even in the well. garments sector) with the severe skills-mismatch 244 Chapter 9 The above factors make it evident that while integration with the ASEAN value chain. Driven the garments sector will remain essential to the by opportunity and considered deliberation, Cambodian economy and in the short-medium Cambodia’s positioning as an assembler has paid term, growth within the manufacturing sector dividends, but has not resulted in any meaningful will be inevitably dictated by the garments sector, relationships between SEZs and local-firms. any erosion of the sector’s competitiveness due In the absence of this trickle-down of expertise to factors will have an important bearing on not and technology, the SEZ operations are essentially only the sector, but also the overall manufacturing enclaves and have not facilitated the growth of sector as well as on the national economic bottom- the SME base in the country. There is however line performance. cognizance within the government regarding the 2.2. Backward linkages between SEZ and urgency to build SME capabilities so that they can domestic suppliers. become suppliers to the SEZ firms. The SEZ model, while successful in terms of 2.3. Limited innovation and technology spurring export-based activity for sectors such as flow bicycles and electronics components assembly, In comparable economies that have managed to has largely proved ineffective in facilitating successfully leverage investment for upgrading investor and local-supplier linkages. The spill-over national value chains, joint-ventures have played effect expected from SEZs has not materialized an essential role through technology-transfer amidst perceptions that that SEZ rules are unclear and sharing of best-practices. In an environment as to which procedures must be followed to allow where the country cannot organically foster trade with firms outside SEZ, making subcontracting the technological innovation from inside, relationships with firms located outside the zone joint-ventures are frequently the predominant uncertain, costly, and time consuming.205 This is mechanism for facilitating this. This is especially not the only reason however. The lack of SMEs the case for the light-industries sector where a fair with adequate absorptive capacities to fulfil on- degree of process efficiency and technological time order delivery with the expected quality is a prowess is required. significant risk for investors. On the demand-side, SMEs are frequently unaware of how to approach Partnerships have not occurred within the SEZs investors and their particular requirements, (primarily manufacturing) or outside SEZs within as there are limited investor-SME supplier the garments and food-processing sector. In the development initiatives in place. spirit of promoting the investment environment, joint-ventures are not a mandatory requirement It must be noted that the lack of supplier-linkages for investment. There is an important requirement is not a criticism of the SEZs but rather a natural to promote joint-venture activity even while consequence of the type of industry (assembly preserving the above freedom of choice for operations with an established inputs supply investors. side in neighbouring countries). Additionally, Cambodia has by choice positioned itself in the 2.4. Institutional support for light- lower-value added end of the global and regional industries value chain spectrum focusing on labor- vs. capital- intensive operations, and assembly- vs. Institutional support for Cambodian firms in value-added manufacturing activities. This model the light-industries sector in terms of trade has worked well given the combination of low information, market intelligence and in-market labor costs and ample workforce supply, proximity support is lacking. There is no viable SME sector to inputs suppliers, duty-free market access (with demanding for such support and the SEZ firms have the benefit of regional accumulation), and tight their own distribution and marketing channels, and do not require it. Unlike the garments sector, 205 Cambodia´s CTISU 2014-2018 Full Report, page 254 245 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT where some trade promotion support from the numerous, and the under-developed state of the Ministry of Commerce and Ministry of Industry SME base means that the TPO services have not and Handicraft has emerged, light-industries been in need to enhancement. Current exporters are still very much unsupported in this aspect. within the SEZ have their own distribution and A wide range of areas where support is required marketing channels and so have not requested include: Relevant and up-to-date information on this support to a significant degree, and garment global market trends related to Bicycles, electrical exporters have also over time developed their + electronic components, toys, packaging and own sales and business development channels. other light engineering segments; Any changes However, in anticipation of an exporting SME base to mandatory market entry requirements in key emerging in the light-industry sector, the export markets; In-market support through a system of promotion function would need considerable commercial attaches well-informed regarding the review and support. light-industries sector. 2.7. Energy constraints 2.5. Standards and accompanying In fact, without the promise of reliable and enforcement capability relatively lower cost electricity supply in the For the electronics sector, 150 standards exist - 116 SEZs, it is unlikely that foreign investors would developed in 2016 alone, primarily focusing on have been able to commence operations in household electrical products. There is 1 standard the manufacturing sector. The Government has developed for plastics packaging, and none for worked to expand Cambodia’s power system paper/cardboard based packaging. No standards significantly from 2011, that is becoming more exist for bicycles/components as such. independent. Up to 2018, hydropower facilities representing 1330 MW as well as 538 MW of coal- Given the weak supply side dynamics in the fired generation and 65 MW of renewable energy sector, the absence of standards is not a significant included 10MW of solar power generation. The barrier to scale, but standards development will Royal Government of Cambodia has established take on increasingly importance once SME activity a strategic plan to reduce tariffs and the cost of starts ramping up adoption of national standards electricity supply in the country from 2015-2020 which are in line with regional and international and as result can eliminate to the gap of tariff standards will help promulgate the best practices between downtown and rural areas. in the sector and assist in market penetration. A continuous review is necessary to identify Despite recent price reductions, cost of electricity the main gaps relate to standards in line with is still significantly higher than neighbouring developments of the sector, and related standards countries, and has a heavy impact on the bottom should be developed. line profitability of companies. This is an important area requiring to be addressed. Although the 2.6. Export promotion/in-market support government has recently announced measures to efforts subsidize electricity costs (anecdotally estimated Currently, the Ministry of Commerce’s Directorate at USD 50 million) for investors inside the SEZs, this General for Trade Promotion functions as the de- does not resolve the challenge faced by SMEs who facto trade promotion organization (TPO) and will likely operate from outside the SEZs. Costly provides some trade information based support and unreliable electricity access will certainly pose to exporting firms, however the level and scope a high barrier for SMEs to enter an power intensive of services would need to ramp up significantly sector such as manufacturing, especially if they once the SME base starts developing. This is want to increase the level of value-addition in because SMEs require much more hand-holding, their product which requires electricity powered the number of SMEs requesting support will be machinery. 246 Chapter 9 3. Options for future growth 3.1. Investment promotion for productive growth A new paradigm for value-addition and diversification within light-industries is required. Since the establishment of the first SEZ in 2006, the light-industries sector has been hitherto The key question facing the sector is on successful in attracting investment in a relatively navigating the delicate balancing act of pursuing diverse range of sub-sectors. As reviewed in this opportunities to enhance the value capture and chapter and by several separate studies, the spill- value-addition of light industry sub-sectors/ over impact of these investments on the domestic products while maintaining existing growth supply chain has been negligible. While continuing through the ‘import-assemble-export’ model. the current investment promotion efforts is key, i.e. how to develop capabilities in core light- efforts must be taken to also review how these industries development in addition to light- investments can be used to promote productive industries assembly, which is where Cambodia’s SME growth. Given the early stage/nascent stage specialization currently lies. This is the anticipated development status of the sector, it is important goal for diversification and value enhancement that investors are encouraged to ensure human within the sector in the short-medium term. capital development locally, in a way that helps their bottom-line, and is not burdensome. The high export potential of the light-industries sector should be taken into context of high Focused investment promotion for foreign parts import dependency for the raw-material, weak manufacturing firms is a necessity. It is unlikely SME base, high concentration of markets and an that the parts and component manufacturing uncertain positioning in the global quota system, activity can begin from the ground up given low productivity levels and the fact that true the nascent state of the sector. Instead, entry diversification will require an expanding from of foreign firms with enabling conditions for solely ‘assembly operations’ to a movement up facilitating supply to SEZ firms and exports, and the value-chain ladder at least in the medium- may help develop additional value-added activity long term basis, which will requires significant in the sector as well as local skills-development. strategic planning and resources allocation on This can be accomplished by supporting joint- one hand and development/adherence to quality venture activity. standards, fostering innovation and investment, 3.1.1. Promote joint-ventures (JV) re-hauling the skills infrastructure among other areas. The ASEAN-CLMV countries have been the focus of attention for manufacturers from China/Hong- Based on the review conducted for the Cambo- Kong, Japan and other countries and Cambodia dian light-industries sector, it is clear that careful in particular currently has the locational, labor- planning will be required for unleashing the po- cost advantage and potential to be an alternative tential of the sector along the following dimen- production base in the light-industries sector sions, which if nurtured properly can function as (bicycles, metal forming/cutting, electronics levers of growth. There are five levers of growth: assembly etc), and to participate in the regional 1. Investment promotion for productive growth value chain of ASEAN Economic Community. The 2. SME development for light-industries (business past decade has demonstrated this potential. incubation) Besides this, the preferential trade access to U.S. 3. Skills development (focusing on TVET) & other developed markets is a great pull for 4. Access to finance JV’s in light engineering amongst other sectors, 5. Export promotion and in-market support although there is some uncertainty regarding this (including Public procurement) factor over the medium-long term The following key recommendations apply for promoting joint-ventures in the sector: 247 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 1. Arrest the slippages in the Ease of Doing Business 3.1.2. Expedite the ongoing update to the Index of World Bank206- this is the first parameter, investment law and ensure that SME an investor looks at while considering a joint- specific provisions that may assist venture location. investment in the light-industry sector 2. Create testing, design and common facility with positive spill-over effects are centres appropriate to the targeted product included groups in light engineering sector e.g. bicycles, The existing investment law is dated to 1994 and toys, electronics, sports goods, fashion design in need to a review in order to reflect the current (to boost the garment sector), machined and economic reality. The revision to the investment fabricated parts etc. law should include aspects of joint-ventures, 3. Establish a Tool Room cum Training Centre to investor-SME linkages, and investment guarantee support light manufacturing. schemes and include light-industries within the 4. Establish dedicated Centres to produce skilled scope. manpower in high technology areas like CNC Programming and Computer Assisted Design. 3.1.3. In the medium-long term facilitate 5. Create a Logistics Zone in SEZ’s to provide development SEZs as target markets, Customs Bonded Warehousing facility, logistics with robust local supplier linkages support for re-export as well as activities like component assembly, labelling, packaging and Support industries are critical for the viability of repackaging, testing & repair. Multiple successful manufacturing sector in Cambodia. The presence case studies such as the Bahrain Logistics Zone of SEZs as defacto target markets within the can serve as examples. country’s borders is an excellent opportunity to 6. Make efforts on war footing to improve the develop supplier relationships with light industry existing backward industrial and transport firms. Currently, this is not feasible due to the lack infrastructure. of absorptive capacity of SMEs and the overall lack 7. Leverage commercial-attaches in Cambodian of institutional shepherding between investors- diplomatic and trade representations in key SMEs. These linkages must develop naturally target markets who can liaise with potential rather than forced. investors. Support industries to provide parts, components, 8. Foster development of talented human capital- assemblies and services must be readily well educated, tech savvy and bilingual. available and collaboration among SMEs will 9. Ensure that the regulatory structure can be well be a prerequisite if they are to develop the understood in a transparent and easy manner by absorptive capacity for supplying to investors. potential JV partners, especially those who are One of the most effective method is to set up a not familiar with Cambodia, and rapid support Sub Contract Exchange that acts as a Clearing is available for answering investor queries. House between Buyers and Suppliers of parts, 10. Ensure uninterrupted power supply to industries. components & services. A trusted third party (an 11. Urgently adopt measures to enhance labour industry association or SME Promotion Agency) productivity across sectors through improved undertakes rigorous profiling of local firms quality of vocational training and awareness with respect to their technical expertise, supply creation. Put in place appropriate industrial capacity, skill sets etc. and co-ordinates with large dispute resolution mechanisms- bad labour industrial companies in SEZ or other industrial relations and frequent strikes in certain sectors areas to match the capacities/skill sets of supplier have recently been a cause of concern for the companies with the requirements of buyers for investors. parts, components, assemblies or services. The SMEs also gain from the managerial and technical 206 Cambodia has slipped three notches in the World Bank “Ease of Doing Business Index”, ranked at 138 out of 190 countries as per 2019 report released by the World Bank recently. The Kingdom was ranked 135 in 2018 and 131 in the previous year. 248 Chapter 9 expertise of large firms and over a period of time technology search and assessment process. can grow into trusted suppliers to other large SME policy is required with the following tenets: firms in the region. International actors such as an updated SME policy/strategy is required UNIDO have extensive experience in this regard. which should be drafted to address policy issues 3.2. SME vdevelopment affecting SME’s and to provide a legal framework to define formal small and medium enterprises in The business case for the developing a formal manufacturing as well as service sectors. Salient SME base in Cambodia and especially in the features would include the following: SME Board/ light-industries sector is solid and urgent. Council. Leveraging Public Procurement as an There are multiple considerations related to important domestic market, penalty for delayed entrepreneurship, informal -> formal transition payment to SMEs, incentives for innovation and incentivization, and skills-development related activities e.g. Innovation Vouchers. among others. Inter-SME collaboration is essential to the success Requirements are needed to develop a uniform SME of the sector: in order for Cambodian SMEs to definition across the public sector: there is currently grow, they will need to grow together. The current no standardized definition of SMEs in Cambodia and fragmentation in the SME sector does not bode the definition term usage varies between different well for future growth. There is an important ministries. This is not ideal given that a standard need to develop horizontal linkages which will definition would be the fundamental starting help small firms to compete, grow and cooperate point for policy development and measurement of with large firms. By working together, firms can data related to SMEs. A common definition is thus gain the benefits of collective efficiency, enabling required with urgency. them to link with larger producers and break into National Entrepreneurship Policy distinct from national and global markets. SME Policy/strategy: there is a need to evolve a One mechanism strengthen collaboration within national entrepreneurship policy that will take the light-industry SME sector include establishing a holistic look at all aspects of entrepreneurship a light-industries sector association, which should development and building of a vibrant be a private sector driven initiative undertaken entrepreneurship ecosystem in Cambodia. The when there are adequate SMEs active in the sector. key issue for Cambodia is creation of formal Such a platform would help drive advocacy for the enterprises. Most economies realize that ad hoc SME base, and also help promote good ideas for efforts to expose youth to entrepreneurship will the sector’s development. not be sufficient to build a strong entrepreneurial culture. Entrepreneurship/enterprise education 3.3. Skills development (focusing on TVET, must be integrated in the school curriculum at all business incubation) levels from primary school through to university For light-industries, a robust TVET infrastructure and awareness need to be created about will be a key ingredient for success. Considering opportunities for starting own business instead that every year approximately 300,000 young of being job seekers. A national entrepreneurship Cambodians will enter the workforce pipeline, strategy will help to structure and elevate this universities will not be able to cater to this focus into an implementable plan. demand. Indeed, the bulk of the workforce would Technology Upgradation Support is an important require technical skills at the TVET level given priority: an autonomous Council of Scientific & Cambodia’s positioning within the regional and Industrial Research or equivalent institution should global value chains. be established to work for technology upgradation Two key planning and policy documents – the in the light-industries sub sector. The Council strategic Planning on TVET for the next 5 years can also provide assistance to entrepreneurs in 249 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT and National Employment Policy are due to be for light-industry SME exporters: institutional updated in the short term, led by MOLVT. support must be developed to help SME exporters understand evolving market trends, quality and The TVET curricula requires a significant overhaul. price among other market entry requirements, Light-industry sectors such as Bicycles and buyer preferences as well as understanding how electrical + electronic components assembly to manage non tariff barriers/ barriers behind would benefit from dedicated courses for each borders. The Ministry of Commerce’s export sub-sector in addition to fundamental courses promotion role and capabilities would need on engineering and workmanship. Standards to be significantly enhanced in terms of scope for Light-industry sub-sectors along with other of sectors covered, depth of services provided, industry sectors will be required, especially and linkages within key target markets through information to maintain uniformity across TVET dedicated commercial officers/attaches. The institutions. cooperation between MOC and MoIH in terms of The commendable work in terms of improving export promotion would also need to significant collaboration between various public sector ramp up in anticipation of SME growth. bodies (National Training Board) , sectors skills Develop government as the market: The local councils, tripartite committees, inter-ministry market will grow at a gradual pace, however there focal points group) in aid of TVET should be is a strong domestic market that can be tapped by continued and gaps in terms of coordination SMEs. Government is the largest buyer of goods should be addressed. and services in every country. Enabling local An apprenticeship program is essential to provide SMEs to access a share of public procurement is TVET students with industry-expertise during an effective method to develop the sector. This these studies and also to keep the TVET curricula is done in almost all developed and developing relevant. Industry players including investors and countries. For instance, The Small Business local SMEs should be involved in TVET curricula Administration of USA utilizes set-asides for development and management. Strong linkages helping small firms access and win federal prime have to be fostered with the private sector. A contracts. Government purchases that have an feedback loop between the public sector-private anticipated dollar value exceeding $3,000, but not sector – TVET institutions is essential to avoid skills over $150,000 are automatically reserved or set- mismatch issues and wastage of resources. aside for small businesses. This allows SMEs to have a market within the public procurement which is Incubation facilities are required to help start- aligned with their ability to absorb and deliver. ups in the light-industries sector. Incubators to Such a scheme could also provide for a minimum develop new light engineering products should allocation of a certain percentage (typically 5 to be set up on priority. These Incubators should be 10%) of the budget of all government entities for supported by Banks and provide shared space procurement of goods and services from SMEs. and common facilities. Mentoring support should be made available to companies being mentored. Some countries also have products reserved for exclusive procurement from SMEs by government 3.4. Export promotion and in-market entities. These are not limited to developing support countries. USA, Japan, Korea, India, South Africa, Growth in the Cambodian light-industry sector Brazil amongst others have practiced Set Asides/ will need to intimately follow a market-driven Reservations in government purchase for a approach. i.e. market-demand will dictate the long time, and such procurement is used as an evolution of the growth trajectory and market- important tool to develop SMEs. There is currently development will need to be a priority. no such program existing in Cambodia. Enhance trade-information and in-market support Develop the domestic market initially by 250 Chapter 9 targeting the high import product segments: a such as Toys offer strong potential for long-term judicious mixture of focus towards the domestic growth. Even if pace and contribution of these and international markets is recommended. Even sectors to trade and overall GDP is currently with the knowledge that export-led growth is much lower than garments and footwear, the ultimately going to assist Cambodia’s economic Cambodian experience has shown that well- growth trajectory, the domestic market cannot be timed efforts to develop the sector can pay ignored for two reasons: dividends, signalling absorptive capacity exists in the sector. Case in point is the proactive action 1. The high trade deficit exhibited by Cambodia in 2005 taken by the government in establishing requires some rebalancing, because exports the SEZs and encouraging investment in tandem with inordinately high imports will stem growth. with efforts to gain global preferential quota 2. Second, the import categories can themselves access. This has yielded results for the bicycles become market opportunities for SMEs in sector in particular. Driven by preferential case they are able to supply the same goods tariff advantages in markets such as the EU, at reasonable costs and good quality – a lofty Cambodia’s exports of bicycle parts have goal and one for the medium-long term, but still increased to more than 75 percent of the total possessing merit. This is especially relevant in the light-industry exports (when the garments case of light-industries which are geared towards sector is excluded). consumer products as well as intermediate • A high state of readiness to engage in goods for other manufacturers. An ideal sector to light-industries. With the experience of the test this approach could be Packaging given the garments and bicycles sectors, Cambodia has significantly high packaging material imported demonstrated that it can play a leading role as by exporters. an assembler within the respective global value chains. While it is positioned in the lower end of This recommended drive towards the the global value chains, the successful experience domestic markets should not be construed as nevertheless is a testament to the determination protectionism, and indeed there is little scope for of policymakers and the competence of its protectionism in a liberalized economy such as workforce to undertake this challenging activity Cambodia. It is rather a market opportunity for and maintain growth for over a decade. Given SMEs who will face significant challenges initially that the workforce has already demonstrated in directly tapping into the international market. a readiness to engage in light-industries, The Cambodian consumer base is also unlikely diversification within the light-industry segment to absorb for long cheap substitutions given the should not be too challenging. There is ample market trends towards consumers preferring high labor available in the country and while the quality products, therefore SMEs will have to build overall skills base is not aligned with the needs up their quality management capabilities. of complex manufacturing (such as those in the heavy manufacturing sectors), the workforce 4. Conclusion can be relatively easily re-trained and reoriented Overall diversification is fast becoming a necessity to fit the needs of light-manufacturing sectors. rather than simply an option, and light-industries • Light-industries sector development will are a strong candidate. The business case for the contribute to SME development. Light-industries Cambodian economy to develop light-industry are naturally aligned with, and constitute a sectors as new growth poles in addition to fertile sector for SMEs to engage in. This SME Garments is strong: base, which typically acts as an engine of job- creation, innovation and commercial activity in • Light-industries segments such as bicycles, domestic and international markets, as well as electrical + electronic components assemblies, a buffer against downturns, is very small overall and miscellaneous manufacturing segments within Cambodia’s private sector ecosystem, and 251 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT is virtually non-existent for the manufacturing Light-industries will be an essential component sector. The critical challenge of the missing of Cambodia’s growth story going forward. The SME layer in Cambodia can be addressed if the above points serve as a strong argument in favor light-industries sector is adequately developed. of achieving diversification and value-addition Development of a competent SME base will within Cambodia’s manufacturing sector and also help investors to forge local supplier indeed the overall industrial base. The recent relationships, something that has not occurred experience with attracting investors to SEZs at all in the case of current investors. Light- has demonstrated that investors recognize industries are ideally placed to help enhance the the benefits offered by Cambodia’s strategic current labor-intensive, low-value capabilities positioning and the intrinsic value proposition of the SME sector, especially with the help of a offered by the labor cost advantage. A significant supportive business environment that assists ramp-up of activity in the bicycles and electronic SMEs develop their supply-side (human-capital, components sub-sectors is testament to this. The technology etc.) and market-entry capabilities. key challenge will be to maintain this investment • Impact on domestic-markets development focus and diversify the base to include SMEs and trade-deficit reduction. Light-industry who ultimately hold the key to driving the products such as processed-food, bicycles, toys, sector’s competitiveness. Cambodian firms –and mattresses, packaging, cater heavily to end- the sector at the aggregated level- will have to consumers. The packaging sector has significant experiment and decide their positioning within potential to leverage forward linkages with the regional and global value chain. Eventually export oriented sectors and assist them to as firm capabilities increase, the sector will move both meet market entry requirements as well up the current lower value added positioning in as enhance value addition of the overall the favor of more complex and higher value added products thus helping the companies’ and products, although the transition may take time. economy’s bottom line. Therefore, in addition The role of the SME base in this regard will be to the export focus, companies may find the essential, and ultimately they will be responsible domestic market attractive as well for some of for the rate of overall diversification and value their products. On a broader scale, this may also enhancement within the economy. have an impact of reducing the significant trade deficit. 252 Attracting foreign direct investment (FDI) remains a top priority for the government. The Rectangular Strategy since its inception in 2004 has focused on attracting FDI as a means to achieve socio- economic development of the country. Phase 4 of the Rectangular Strategy now more broadly and ambitiously aims to achieve a ‘new transformation’ Chapter 10 to an upper middle income country through enhancing the rule of law, creating quality jobs for the youth, taking full advantages of technological SERVICES developments and digitalization among other factors recognizes the importance of favourable environment for business and investment as a TRADE key factor in the overarching environment for implementing the Strategy. Cambodia’s investment climate is generally open, but there is room for improvement not least in terms of regulatory quality and performance. A 1. Introduction look at selected services sectors reveals a similar picture also in terms of trade and domestic Cambodia is one of the world’s fastest growing measures. economies and among the most liberal in East Asia. Two decades of economic modernization Creating more jobs especially for the youth is one of and regulatory reforms, which saw the country’s the strategic objectives of the current government. accession to the WTO in 2004, led to an impressive The sectors considered here – as a small selection economic growth and to the country’s upgrade of examples of a wide range of promising sectors from low-income to lower middle-income – are fast growing, forward looking sectors with status in 2016. Cambodia’s openness, its young indeed a significant potential to show the way population and agile work force attracted and towards more and better employment for young continue to attract a flow of foreign capital and people in particular. Both imports and exports of foreign skills to invest in and develop the country’s services can make important contributions. fast-growing industries across a range of sectors, including tourism, infrastructure, construction, 2. The Contribution of Services to the telecommunication and manufacturing. Economy Cambodia recorded the largest improvement among its ASEAN neighbours since 2007 in WEF’s Figure 32: Cambodia’s GDP Composition by Sector Global Competitiveness Index. Within this impressive development services are a new, or newly recognized, source of growth. They are prominently acknowledged as such by the government in its Rectangular Strategy for Growth, Employment, Equity and Efficiency, now in its fourth phase identifies a potential for export diversification through services. There are strong linkages between services and Source: World Bank Data, https://data.worldbank.org/ investment and other development focuses. 253 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Much of Cambodia’s economic growth in the miss important elements, and generally do not last two decades has been driven by its services adequately reflect value added, not least because sector. In 2017, services were the main contributor services embedded and embodied in goods do to the GDP accounting for 39.67 percent while the not get recorded as such. This may explain the contribution of agriculture and industry stood at modest values attached to Cambodia’s exports 23.38 and 30.87 percent respectively as illustrated of services in certain sectors where transactions, in Figure 33 below: especially in modes 1 and 4 (cross-border supply and supply through the temporary presence Figure 33: Contribution to employment by Sector of natural persons), may not be recorded or be identifiable in payment flows. This may be relevant for trade in the three services sectors considered in focus here, namely IT and IT-enabled services (ITeS), animation and FinTech, as much as in others such as entertainment and cultural services and professional services. 3. Selected Services for Export Source: World Bank Data, https://data.worldbank.org/ Diversification Cambodia trades in and exports services across a wide range of sectors and subsectors to the region The services sector was the largest contributor and worldwide. Many appear to represent growth to employment in 2018 absorbing 47.39 percent potential as much as potential to diversify exports. of Cambodia’s (formal) labour force and a major This chapter considers three of them: Animation, contributor to reducing the gender gap in ITeS, and FinTech. The selection is inspired by employment, as almost half of those employed in those sectors identified as ‘Key and New Sources the services sector are women. of Growth’ in the recent Rectangular Strategy, Cambodia is a net services exporter. Available Apart from the perhaps most obvious potential statistics suggest that exports of commercial in and with IT and ITeS, creative industries services generated USD 4.5 billion in 2017 while including animation, promise not only growth services imports amounted to approximately USD but also youth employment and cross-cutting 2.25 billion. Tourism remains Cambodia’s largest inspiration effects while FinTech has proven its services export sector, accounting for 83.5 percent importance for socio economic development of total (measured) commercial services exports including in the context of financial inclusion in 2016: of the unbanked domestically in Cambodia and elsewhere. In addition to tourism, Cambodia exports a multitude of services including transport services In addition to tourism services, other services (12.94 percent), other business services (2.76 sectors including professional services, percent), Information and Communication engineering services, transport and logistic Technologies (ICT) (1.41 percent), construction services are not only key for the socio-economic services (0.41 percent), cultural and recreational development of the country but have significant services (0.18 percent) and financial services (0.14 export potential. Cambodia’s economic growth percent). and growing FDI inflows created an increasing demand for qualified providers of professional These numbers significantly understate the reality. services including legal, accounting, auditing and Services trade statistics are difficult to compile taxation services in recent years. While most of and are still often incomplete and unreliable. these services are currently supplied to foreign Even in the best of cases services statistics 254 Chapter 10 investors operating in the country, providers of The Cambodian animation industry thus has the professional services including legal services, for obvious potential to grow, and grow significantly, example, are projecting themselves into regional tapping into the growing global demand for markets while accounting and taxation services, animated content. Cambodia could further especially those provided by multinational develop the sector and join some of its regional companies operating in Cambodia, export their peers in becoming a more broadly recognized services to international clients. Cambodia’s outsource destination for animated content, in construction and other engineering services addition to developing original content. also service clients in and beyond the Mekong This represents a significant potential to create region. These services sectors and others need future-oriented jobs for young people. Animation to be studied, nurtured and developed as part of is not only creative but also highly work intensive. Cambodia’s drive to develop a services economy. It can provide high quality jobs with distinct 3.1. Animation Services development potential to agile and creative youth without the prerequisite of significant formal Animation services, a subset of audiovisual education. This means rural communities can services, are a creative industry that encompasses engage and benefit more readily. a wide range of animated content (motion picture) production, including 2D animation, 3D To realize these potentials certain challenges such animation, motion graphics, stop motion and as size and scale-up needs have to be addressed. visual effects (VFX), as well as related distribution Cambodian studios are currently too small for and projection services. global production companies to outsource to them in earnest. Scaling up however requires Animation is a fast growing, forward-looking facilitated access to talent, the capacity to train and global industry with a worldwide annual and most crucially access to funding for training growth rate of 2 percent. In 2018, the global and human resource development. Given the animation industry recorded an output value long cycles in film and animation projects a better of approximately USD 259 billion, which is access to flexible finance generally is a sina qua expected to rise to USD 270 billion by 2020. To non for effective scale-up. Credit must become supply the growing global demand for animation, more accessible, and not subject to immovable multinational studios and broadcast companies assets and other collateral not available to many have sought collaboration and coproduction in the industry. with global partners to explore wider market opportunities and reduce costs. Asia has become 3.2. Information Technology Enabled a prime outsourcing destination for animated Services (ITeS) content. In 2017, about 90 percent of American Information Technology (IT) services include IT television animation was produced in Asia. applications and engineering services that enable Cambodia is home to a few but high-quality organizations to create, manage and optimize providers of animation services producing content access to information and business processes. IT in particular for export markets in the region and enabled services (ITeS) encompass a wide range globally including Ireland, France, Belgium, Spain, of services delivered over electronic networks, the US, China, Malaysia and Australia. Although including business process outsourcing (BPO), the sector is still in its early stages, it has already among others. made headlines internationally. The Cambodian IT and ITeS have experienced a rapid growth over co-produced animated movie ‘Funan’ won the the past decade with increasing technological top prize in the main competition section at advancement, digitalization and businesses’ the Annecy International Animation Festival in willingness to outsource their back-office, client 2018. relation and other business-related operations to 255 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT more efficient and cost-effective destinations. The and infrastructure (i.e. data analytics, artificial IT services industry recorded an output value of intelligence, cyber security, advanced services USD 1.011 trillion in 2017. The US is the largest IT from cloud infrastructures and distributed ledger services market, followed by Europe and Japan, technologies). while India is the world’s top sourcing destination. The growing Internet penetration, rapid The BPO services market recorded an output value development of digital technology and increasing of approximately USD 195.2 billion in 2017 and availability of data are driving growth of the is forecasted to reach USD 343.2 billion by 2025. FinTech market globally and in Cambodia. The North America is the largest BPO market followed global investment in FinTech companies is by the EU. estimated at USD 57.9 billion during the first half Cambodia ranks third among LDCs in the ICT of 2018. development Index and 54th in FDI and technology The global FinTech industry is forecasted to keep transfer (2017), higher than most its regional growing in the upcoming years especially in (non-LDC) partners. Currently, Cambodia’s the Asia-Pacific region due to the region’s large ITeS industry provides IT outsourcing services population, rapid GDP growth and growing including software and app development, coding middle class. and data processing, data analysis and document processing services to local and international The FinTech sector in Cambodia is growing fast. clients in the US, Europe and the region. With over 50 active start-ups, FinTech, is in fact, the most crowded segment in the tech start-up Capitalizing on the growing global demand for sector in Cambodia. ITeS outsourced services, Cambodia has a great potential to position itself as an outsource Mirroring global trends, money payments and destination for ITeS services, especially those transfers are the FinTech services with the highest that are labour intensive. Cambodia’s low adoption rate in the country (50 percent), followed telecommunication cost, quality Internet and its by insurtech (20 percent), mobile banking (13 young and agile labour force (once trained) are percent), accounting services (10 percent) and distinct advantages but realizing this potential digital currencies (3 percent). Currently, most requires the industry and government to work of Cambodia’s FinTech services target domestic together on addressing pertinent challenges clients both individual customers primarily with including regulatory challenges and access to mobile banking and electronic payment services talent and innovative work force in addition to as well as commercial clients including banks enhancing the exposure of Cambodian service and SMEs with a wide range of services including providers to opportunities in export markets and payroll and disbursement, digital accounting, rebranding Cambodia as an outsource destination. credit scoring, credit matching and other services. 3.3. FinTech Cambodia’s FinTech industry has great expansion potential. The majority of Cambodia’s population FinTech refers to banking and financial services lives in rural areas and is mostly underserviced delivered through the use of technology. These by traditional financial institutions. The gap can be provided to the marketplace or to the between financial services needs and formal financial services industry itself. FinTech services supply, estimated at USD 24 billion in 2017, offers typically include technology solutions for significant opportunities for FinTech companies. banking (deposits, lending and equity); payments, transfers and forex; digital currencies; wealth Expanding the FinTech industry not only benefits and assets management; personal financial Cambodia’s GDP growth but improves the management, and insurance (also referred to as financial inclusion of large segments of society. insurtech), and related enabling technologies Therefore, encouraging the development and use 256 Chapter 10 of FinTech as part of promoting the development in sectors such as computer and related services. of the banking and financial sector is among the Cambodia is also a party to several regional “GATS priorities of Cambodia’s government. plus”-type agreements including those concluded between ASEAN and Australia-New Zealand, Exports of Cambodian FinTech services, apart China, India and Korea and participates in the from transferring remittances across borders, Regional Comprehensive Economic Partnership is still in its early stages. The complexity of (RCEP) negotiations. complying with financial regulations in export markets and the need to collaborate with 4.1. Level of Openness: Animation financial institutions including banks in these Like many other countries Cambodia did markets are part of the challenge. Efforts to not undertake commitments to liberalize foster regulatory cooperation and regulatory audiovisual services in its multilateral and convergence with regional partner governments regional trade agreements. Going even further and their regulators will assist in foster exports Cambodia (again like many others) reserved of Cambodia’s FinTech industry. the right to confer national treatment to works 4. Level of Openness and Policies to covered by co-production agreements in its list Attract Investment of MFN exemptions under the GATS – a one-off list of reservations from the otherwise applicable Cambodia is an open economy with a liberal and obligation to treat all foreign animation services relatively-investor friendly policy and regulatory and providers equally. regime. Its services market is the second less trade restrictive in the East Asia and the Pacific region. Cambodia’s recent TPR highlights three restrictions in the sector. These are local content requirements Cambodia has made far reaching liberalization for commercial advertisements, restrictions commitments under its multilateral and regional on broadcasting times for foreign dramas and trade agreements as part of a drive to develop (overall) screen quotas for foreign movies. These its services economy with the support of foreign restrictions, adopted as part of broader measures capital and talent. Under the General Agreement aimed at developing the local media and movie on Trade in Services (GATS), Cambodia liberalized industry, limit the broadcasting of imported the majority of its services sectors leaving the (foreign) audiovisual/animated content in the cross-border supply of services and consumption country. abroad largely free of restrictions, and removing market access limitations on foreign ownership Apart from these restrictions, Cambodia’s applied in all but a few of the committed services (sub) regime especially in regard to the commercial sectors (tourism, telecommunication and a few presence of foreign investments in the sector is professional services (dental and legal services)). more liberal. The country’s top animation studio, Likewise Cambodia promised to treat foreign iThink Asia, is a locally incorporated foreign providers in the committed sectors like national investment. providers (national treatment) largely across 4.2. Level of Openness: IT and ITeS the board, with only a few exceptions related to land ownership (no ownership but land lease), Under the GATS, Cambodia has undertaken access to subsidies, and the requirement to commitments to liberalize computer and related train Cambodian staff as a prerequisite to seek services, including IT and ITeS services eliminating investment incentives. limitations on market access and national treatment. It made similar commitments in its AFAS Cambodia’s commitments under the ASEAN schedule of commitments. The reality appears to Framework Agreement on Trade in Services confirm this approach, as IT and ITeS services are (AFAS), as it stands in the shape of the 9th package, traded freely into and out of Cambodia. partly go beyond its GATS commitments including 257 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Cambodia’s liberal policies on trade in ITeS e-economy as a key objective including through services reflect successive governmental policies enhancing regulatory and policy frameworks for and strategies to develop the sector and promote online business and enhancing e-banking and private investment in the sector to enhance its raising e-banking literacy among the population. competitiveness and export potential. Those In 2017, the National Bank of Cambodia (NBC) include the National Development Plan (2014 - introduced a licensing framework for payment 2018) which foresees the development of the ICT service providers that facilitates and clarifies sector through private investment in broadband FinTech business’ license application. While Internet, cloud technology and software the Cambodian Investment Board (CIB) offers development. The Industrial Development Policy fiscal and administrative incentives for investors (2015 - 2025) refers to ICT as a priority and strategic looking to support technology start-ups including industrial sector that could tap into regional value platforms that provide B2B and C2B payments, chains pledging to promote and facilitate private mobile security, accounting and alternative investment in the sector. Similar directions for the lending products. development of the ICT sector through private 4.4. Investment and Immigration Policies investment were pronounced in the country’s ICT Policy (2017 - 2020), the ICT Master Plan 2020 and Cambodia’s liberal services regime is further the National Science and Technology Master Plan complemented by a liberal investment regime (2014 - 2020). - one of the most open in the world and the second most open in Southeast Asia after 4.3. Level of Openness: FinTech Singapore. Foreign investment in Cambodia is Save for prudential regulations, Cambodia’s permitted in virtually all services sectors with financial services sector is largely liberalized. few restrictions on foreign ownership including Several foreign providers of financial services movie production and television (51 percent operate in the country including regional FinTech local equity participation), dental services (joint companies. venture requirement), telecom services (local share holding up to 49 percent) and travel In the WTO, Cambodia has undertaken agencies (foreign equity participation limited to commitments to liberalize insurance and 51 percent). insurance-related services removing market access and national treatment limitations on In addition, Cambodia has one of the lowest overall licensed providers of insurance services. Banking rates of corporate taxes in the region and the and other financial services are also largely investment incentives regime is relatively simple liberalized. Providers of cross-border banking and generous. Ensuring access to incentive and services are required to reinvest deposits taken support schemes for SME service providers in from the public in Cambodia. Foreign banks can promising sectors promises significant returns provide banking services in Cambodia if they are for the economy. locally incorporated or are branches of foreign Cambodia’s flexible immigration policies allow banks. Cambodia’s commitments under AFAS foreign managers, technicians and skilled labour to largely reflect those under the GATS. obtain business visas (up to 12 months) and work This approach appears to extend to FinTech. permits (valid for a year, may be renewed), as well The Government considers the FinTech sector as residency visas for the spouses and dependants a “game changer” in supporting financial of those foreign nationals. Some restrictions apply inclusion. Several initiatives and policy statements on the recruitment of foreign staff including an by the government over the past two years are economic needs test, which however does not directed to support and promote the sector. The appear to operate as an obstacle, and the general ICT Master Plan 2020 foresees the promotion of the requirement that the foreign workforce does not 258 Chapter 10 exceed 10 percent. competition policy and competition law in Cambodia. This matters greatly for services. Cartel The overall climate, in other words, is rather positive behaviour, abuse of dominance and other anti- for foreign investment and foreign services trade competitive practices remain mostly unregulated. into Cambodia. That said, a number of challenges remain virulent, which especially in cumulation Equally if not more important for many service may act as severe deterrence: regulatory providers are intellectual property rights (IPR). challenges including weakness in interagency Reforming and upgrading the application, coordination, incomplete regulatory framework, registration and enforcement mechanisms of weak IPR protection, dispute settlement, inter intellectual property rights is key to enhancing agency coordination in addition to shortage in the competitiveness of sectors such as IT, ITeS and skilled labour, among others. animation services which thrive on innovation and creativity. Effective IPR protection matters 5. Challenges at Home for Cambodian providers as originators, for Cambodia made significant steps to modernize example of animation artists and their studios or its services economy and reform the supporting software/app developers and their businesses; frameworks – policy, regulatory, institutional, but it arguably matters even more for Cambodia educational, business ‘cultural’ and other. But many as an outsourcing destination – including in challenges remain that often work in concert to animation, ITeS and FinTech – as foreign and make progress difficult – arguably unnecessarily multinational clients require effective protection difficult, not least as many appear to be low- of their IPR. The current IPR regime is reportedly hanging fruits. This affects services businesses, weak on copyright protection especially for many of which are by definition low-capital SMEs, foreign copyrighted material, and generally on more than others. Challenges include in particular enforcement. There is also no law yet on trade those related to regulation and regulatory secrets. frameworks; talent and human resource As to more sector-specific legislation, efforts development; access to finance and appropriate need to be channelled to reform, upgrade and financing tools; intra-agency coordination and adopt legislation on e-commerce and secure cooperation; and public-private dialogue and transactions. Without strong, clear and up-to- cooperation. date legislation businesses lack the framework for 5.1. Regulatory Framework(s) reliable development and growth also because foreign clients will be hesitant to engage otherwise. The weak regulatory framework is a major The current e-commerce law dates from 1996 and challenge affecting service industries in Cambodia deals primarily with postal services. A new draft including lack of transparency and predictability in reportedly exists, but has not yet been enacted. The the implementation of regulations, discretionary same applies to a (more recent) draft law on secure application of regulations, frequent changes transactions and a new telecommunications of administrative practices and incomplete law. Issues like reported possible inconsistencies information on regulatory requirements. This is of between the secure transactions law and the civil particular concern to services businesses, which code hold up progress, which is unfortunate and rely on regulatory frameworks more than others. calls for an urgent search for technical solutions. Other regulatory challenges underscored by Progress, such as the Decree on Digital Signatures services stakeholders include the need to of January 2018, is needed. complete and upgrade the regulatory and Equally important is to complete the regulatory legislative framework, both general and sector- framework on cyber security and data specific. protection/privacy, issues reportedly not An important weakness is the absence of a general addressed in the draft legislations on e-commerce 259 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT and secure transactions. The twin deficits in terms of both technical and managerial skills acts data protection and cyber security operate as as a clear brake on growth in the selected sectors an important deterrent to foreign investors and the services economy at large. and outsourcing clients, and hence affect the The skills shortage, weak exposure to creative transfer of technology and know-how, especially content and the gap between academia and but not only in IT and ITeS. In the absence of a the market are key challenges facing the three data protection law companies currently have to services sectors. Resourceful young talents are protect data only through internal procedures responding through – sometimes impressive and processes, a second-best approach. The – self-learning, but this can compensate only absence of regulation on electronic transactions, partly for the shortage in learning and training data protection and privacy, consumer protection structures, especially those that address market for online purchases, and cybercrime prevention needs. reduces consumer trust in digital services, hence affects growth of the local market, which in turn Most effective training and talent development affects export capacities. in animation, IT/ITeS and FinTech today has to be provided by the businesses concerned – a Cambodia also largely lacks a regulatory major challenge for SMEs generally, and a near- framework on FinTech, except for isolated rules impossibility for start-ups. This acts as a significant such as a Prakas on the Management of Payment brake on the speed of the industries’ growth. Service Providers adopted by the NBC in June 2017. In animation, for example, major outsourcing contracts require small ‘armies’ of several hundred A third concern is dispute settlement. The animators. The demand and potential are clearly domestic court system is seen as deficient there, but without external support provided by services businesses. The need to develop or funded by government, donors or creative alternative mechanisms for commercial disputes credit institutions even those businesses that has been recognized in principle, but there’s a need have admirably developed their own animation to revitalize efforts to develop an independent, curricula and conduct systematic large scale in competent and efficient commercial arbitration house training of hired staff will take years to gain system. critical mass. Opportunities for clearly profitable 5.2. Talent scaling-up in this promising Cambodian services industry are missed as a result. A dynamic, competitive services economy thrives on talent. This applies in particular in the Industry insiders in the IT, ITeS and FinTech sectors three sectors under consideration. Producers of tell a similar story. Academic and vocational animation services capitalize on skills generated training curricula are outdated and usually do from several industries including visual arts, not match the requirements of the market, and cinema, television, video gaming, graphic design, the number of graduates in IT-related disciplines software development, web/mobile design and (around 4000 every year) are not sufficient to grow application development. In addition to IT related IT-related sectors fast enough. Again, companies technical expertise, innovation and agility are key provide in house training and capacity building, to developing ITeS and FinTech services. but cannot compensate for the twin deficits in education and access to finance and funding. Cambodia’s young population is a crucial but still raw asset at this stage, an asset that needs to be Laudable efforts are under way, including by the trained and developed to realize its significant National Institute for Post, Telecommunication potential to contribute to the economic and ICT (NIPTEC), a part of the Ministry of development of the country and to its services Telecommunications, but the industry needs sector. The limited trained human resources in more immediate responses. Ideas shared by 260 Chapter 10 insiders include incentive schemes, possibly 5.4. Inter-Agency Coordination and including tax incentives for companies to train in Cooperation house, especially if the training is matched with Services are regulated and managed, and retention (train & create jobs). Donors and their related policies developed, across multiple funding arms could play an important role here, government agencies. This translates into an including by directly supporting (or investing increased need for agency coordination and in) services businesses that invest in training. cooperation, including in developing regulatory Other ideas include targeted efforts to bring in frameworks. Working in silos, as it is traditionally foreign universities, especially on FinTech where done in Cambodia (as it is in many other places) theoretical underpinnings are important. is not efficient. A case in point are arguably the 5.3. Access to Finance needed legislative improvements in the related areas of e-commerce, secure transactions, cyber Access to finance is one of the main challenges security and data protection, which would for SMEs generally, but in particular those in ideally benefit from intensive cooperation and services industries where the ‘working capital’ cumulative initiative. often consists primarily of ideas, IP, know-how, talent and other goodwill – all difficult to use 5.5. Public-Private Dialogue as collateral, unless approached creatively by Perhaps more than other services sectors, in financing institutions. particular highly innovative and fast-developing Difficulties in accessing financing limit service sub-sectors, require intensive interfacing and businesses’ access to technology and sufficient cooperation between the public and private talent. Operators are forced to heavily rely on sectors. scarce and expensive private financing, which Cambodia’s service providers in the three sample inhibits necessary developments, expansion sectors stress the need to further institutionalize, potential and scale up. The example of Cambodian strengthen and foster private sector representation animation studios which could scale up quite in public discourse and policy making. The ICT readily if financing or funding (including for rapid Federation could be encouraged and supported talent development) were more readily available in stepping up activity while the recently established stands for many other similar cases in Cambodia’s FinTech Federation should be promoted and services industries. strengthened. Animation does not yet have an The issue has been recognized as a major challenge, umbrella body. Key players in the sector are advised however. The government’s Rectangular Strategy to consider establishing an institutional structure states the aims to establish a Small and Medium as those are key tools to develop and formulate Enterprise Bank. Key will in any case be to develop sectoral support projects and ensure systematic tools to secure loans other than asset collaterals and sustained liaison with the government on so that services businesses including SMEs can policy making and export promotion. access finance. Lending against contracts and This is particularly important in Cambodia where the backed-up business plans should be encouraged private sector has traditionally had comparatively and supported, possibly backed by governmental/ limited participation in the policy-making process. donor-supported guarantees. Other models Allowing the business community to have a explored elsewhere, such as the ‘Circular 331’ meaningful voice in the regulatory process scheme of Lebanon’s Central Bank which backs up however is crucial in the complex world of 21st equity investments in IT businesses by local banks, century services sectors in particular, both to could be adapted to Cambodia. ensure relevance and quality and to support the implementation and enforcement of laws and regulations. 261 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 5.6.Barriers to Services Exports through unilateral preferences that could benefit from justification under the WTO’s LDC Services Services from Cambodia face a variety of Waiver; or simply through better local regulation, market access restrictions, regulatory and other facilitated access to support or infrastructure, or challenges in their export markets, some of other measures that could be induced through which could be addressed through or under engagement with foreign governments. trade agreements, cooperation agreements or other bilateral, regional and global agreements; The LDC Services Waiver in a Nutshell One can distinguish five types of services preferences: What is the LDC Services Waiver? The LDC Services Waiver is a legal tool adopted by the 1. Market access: exemptions from quantitative WTO that enables WTO Members to grant measures, including those that bar foreigners preferential treatment to services and service entirely or limit the number of services providers suppliers originating in LDCs without extending or the volume of services trade; this treatment to all WTO Members. 2. Domestic regulation: exemptions from or Why Services Preferences? The majority of facilitation of regulatory or administrative LDCs already export a multitude of services in requirements relating to licensing, qualifications, nearly all modes of supply. Many LDC services standards, etc.; are competitive and innovative but they face 3. Taxation, social security and other contributions: a great number of obstacles on their way to exemptions from taxes and other charges or actual or potential foreign clients, including facilitated processes; regulation, taxes and charges, visa and work 4. Financing: access to funding support mechanisms; permits, and classical market access restrictions 5. Promotion and other support: dedicated Many of these obstacles may seem negligible, support measures or preferential participation but are significant in relation to the specific in existing ones; for example, free advice, circumstances of LDCs service, such as size, tutoring, or access to helpdesk functions. capital base, cash flow, and their regulatory and educational environment at home. Many measures may also seem adequate and fair How can Cambodia and its services industry when seen from a distance but a closer look benefit from the LDC Services Waiver? will often reveal that such measures affect LDC Cambodia is an LDC and as such is entitled to providers disproportionately. preferences granted by WTO Members. Over 2000 preferences were notified by WTO Members What services really need is a targeted removal but many of those preferences might not provide or reduction of the myriad small and sometimes truly additional access to foreign markets nor larger obstacles and challenges that impede reflect actual preferences as measures are in their ability to effectively access markets they most cases applied on a non-discriminatory can otherwise service perfectly well. basis. However, the Waiver remains a potentially What are Services Preferences? Unlike trade important tool for Cambodia’s service and preferences for goods, preferences for services services trade policy makers as they engage will usually not create margins, but rather target market governments in removing actual facilitate trade where a healthy potential exists obstacles to Cambodia’s services exports. but where firms cannot overcome threshold Provided the needs are clearily identified and challenges. Services preferences stimulate articulated, foreign government may well be activities that generate wider benefits for inclined to grant special access to Cambodian developing economies, while carrying virtually and other LDC providers in the future. no costs for importing nations. 262 Chapter 10 Key barriers to Cambodia’s services exports through remote means, i.e. mode 1, occasionally, include: but importantly, do need to travel to meet clients or participate in important events (e.g. film • Local content, film funding, co-production: festivals, exhibitions, fairs) or client meetings Funding for films in important film producing abroad. They may need to cross borders as intra- markets is heavily state driven, which corporate transferees sent to an establishment often translates into a strong local content abroad, contractual service providers requirement where the use of national inputs (employees of a company not resident in the is a precondition for access to financial support target market), or independent professionals, by the state (film funding, tax relief, etc.). This depending on the contractual construction. significantly limits the marketplace not only for Cambodian service providers often encounter movies but also input services that are, or could challenges in obtaining the necessary access be, provided by Cambodian service providers to permits to markets including the US, the UK and international productions. This matters greatly others. Delays can be a major problem, as speed for animation where outsourcing of production is often of the essence in IT service contracts, and steps across borders on a ‘mode 1’ basis is widely delayed travel and unreliable access can have a practiced. major impact on delivery and hence contracts more generally. Such local content requirements are often • Local partnering requirement & access effectively modified through co-production to grants, subsidies and tax breaks: Local agreements, but these again impose specific partnering requirements are a limitation to requirements that often exclude third party incorporate a foreign company in certain inputs. Their impact on third parties is markets and in others are a barrier to access to sometimes even worse than ‘pure’ local content public funding programs or public procurement requirements. This is because bilateral co- tenders. Singapore, for instance, offers a production agreements often require all or support package for ICT startups where three of a fixed share of inputs of production services programs under the package require 30 percent (including studio and post-production work) to of local partnering and at least one is subject to be provided in the coproduction parties, hence 51 percent local shareholding. effectively excluding third party audiovisual • Challenges in tendering on government service inputs. procurement tenders: Governments are Cambodia is currently party to only one film among the biggest consumers of IT services. co-production agreement, namely with France Government procurement is thus a crucial sales (2013). The result is a disincentive for film avenue. Cambodian providers when bidding producers from film producing countries with for governmental contracts often face strong state funding to cooperating with (outsource local preferences, which often translate into part of the production to) Cambodian studios requirements to work with local partners. These like in the case of ‘Funan’. partnering exercises can be heavy and risky. The experience of concluding a co-production • Exposure: Cambodian service providers agreement with France should be emulated experience the challenge of gaining enough and policy makers are advised to promote exposure to clients and cooperation partners the conclusion of coproduction agreements worldwide. A boost to exports in the selected with other film producing and film sponsoring services sectors could come from connecting countries. Cambodia’s services to opportunities worldwide including through the supported participation • Physical Market Access and Visas: IT and in trade fairs, trade delegations and film festivals FinTech professionals and animation producers, abroad. while often providing the bulk of their services 263 institutions with the objective to improve coordination of e-commerce development and in response to obligations taken by Cambodia under different negotiation fora. E-commerce in Cambodia is not yet perceived as a potential source of exports – in particular for agricultural commodities, handicrafts and garments, as it Chapter 11 remains constrained to retail shopping, almost entirely for a small, domestic customer base. E-commerce development should be replaced E-COMMERCE in the broader context of Cambodia’s transition to become a digital economy (Figure 34). For the purpose of this chapter, e-commerce refers to operations established by companies to sell goods and services online. The OECD definition of 1. Introduction e-commerce is followed which mandates that the order placement must occur online, but payment The potential for e-commerce development is and order-facilitation can be handled offline, significant in Cambodia, promising to diversify which allows for flexibility in developing country the economy, provide new jobs, and increase contexts where online payments are not common. financial inclusion, as well as contributing to improved lives and livelihoods. Cambodia is in a Figure 34: Cambodia’s GDP Composition by Sector stage of development in which e-commerce is becoming visible, with an IT-hungry urban middle Broad Scope: Digitalised Economy class that has emerged over the past 10 years, and Narrow Scope: Digital Economy with 60 per cent of the population below the age Core: Digital (IT/ ICT) sector of 25. Cambodia has considerable advantages e-Business that could be leveraged to create ICT jobs and Digital e-Commerce Hardware services Industry 4.0 benefit the national economy. Yet E-commerce is manufacture Software & IT consulting platform Precision agriculture relatively undeveloped compared to Cambodia’s Information economy services Telecommunications Algorithmic economy Sharing economy neighbours. Impediments to e-commerce Gig economy development include lack of widespread internet infrastructure, limited audiences, delivery system Source: World Bank challenges, lack of standardized electronic payment solutions. Other impediments include • Other components of Cambodia transition to the high cost of electricity and a lack of trained ICT a digital economy only partially covered here professionals. include (see chapter 12 for more details on Increased interest among Government entities Industry 4.0 and Digital Economy in Cambodia): for coordination of efforts and development of a • E-businesses / services which focuses on the conducive framework for e-commerce, stemming digitization of operations within value chains. from negotiations, commitments and increasing Here the extent to which ICT technologies are pressure from private sector to regulate the sector used within a value chain such as agriculture are and derive revenue from it. Government-led considered. coordination of e-commerce development efforts • Social media shopping: this refers to the role picked up in 2017. In recent months, interest in of social media platforms and services such as e-commerce has risen again, prompting the RGC Facebook that are enhancing communications to intensify consultations among Government and facilitate buyer-seller interactions. 265 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT • Government-led services: this refers to policy measures and associated targets to expand e-government services and its anticipated role ICT infrastructure and develop ICT human capacity. in enhancing the government’s service delivery In addition, the Cambodia e-Government Master for citizens and businesses in a geographically Plan 2017-2022 has been drafted, although not challenging environment, and building yet adopted. The draft outlines programs to consumer behavior/confidence in conducting provide quality information and digital services, online transactions. in collaboration with prospective beneficiaries; • Digital Financial Services (DFS): this refers to connect with people on public policies and electronic money transactions (mobile banking decisions, in particular through social media; and and mobile money, credit card and debit card increase government efficiency by establishing usage etc.). basic foundations for digital government and a government portal on which ministries can host their services. 2. Policy, Legal and regulatory framework for E-commerce Numerous institutions across the Government are tasked with implementing these policies 2.1. Policy and national coordination for and strategies. These agencies include: Ministry e-commerce of Economy and Finance (MEF), Ministry of Post In recent years, the Cambodian authorities have and Telecommunications (MPTC), Ministry of issued several policy documents related to Commerce (MOC), Ministry of Information (MOI), digital economy and e-commerce, in line with and Council for the Development of Cambodia international good practice. In March 2018, the (CDC). A working committee on Digital Economy Cambodian Government announced its plan to has also been established in 2018, with the be ready to transform into a digital economy by objective to streamline efforts by the Government 2023, considering that digitization of the economy to move towards a digital economy and promote drives innovation and fuels job opportunities and the development of digital SMEs in a coordinated economic growth. way. More efforts of the government to prepare and adjust relevant policies and regulations to To achieve this goal, Cambodia requires an enabling seize all opportunities, to boost the growth of policy framework and a supportive regulatory, e-commerce, and to minimize any risk that can among other priorities. The Royal Government of be caused by technology will also need to be Cambodia has already identified an e-commerce considered. as one of the most significant components to be enhanced for boosting economy as stated in the Several business-related factors explain the National Strategy Development Plan 2014-2018, renewed interest by the Royal Government: the Cambodia ICT Master Plan 2020, and in the • Growing concerns among Government agencies Rectangular Strategy Phase IV, an overarching about the loss of revenue generated by informal policy document for the Cambodian government and unregulated online commercial activities in its 6th mandate. This strategy outlined that the (e.g., Facebook and Instagram shops) with, “Fourth Industrial Revolution” will become a key in corollary, the lack of data and statistics on determinant of all aspects of socio-economic e-commerce. development. • Strong call from the private sector for the Other key policy documents include the launch Government to increase coordination and avoid in 2014 of the Cambodia ICT Master Plan 2020 overlaps on e-commerce development and which aims to improve ICT industry and human improve formalization of the sector, in particular resources development, internet connectivity, as regards status of e-commerce vendors and cybersecurity, and government e-services, the e-marketplaces Telecoms and ICT Policy in 2016, which outlines • Growing consumer protection concerns as 266 Chapter 11 MOC, as the agency responsible for consumer paper-based and electronic forms of exchange. protection, does not have the mandate, means Such laws have been adopted by 145 countries, of and capacity to address consumer complaints. which 104 developing or transition economies. An e-commerce law is expected to be reviewed and 2.2. E-commerce laws and decrees passed by the National Assembly early 2019. The current draft law contains 12 chapters, divided into 90 articles. The draft law on aims to establish The development of e-commerce in Cambodia a comprehensive legal framework related to e- has been hindered by a lack of regulation: foreign transaction. The main content of the Draft Law and domestic Investments in e-commerce and on E-Commerce are: E-Commerce, E-Signature, subsequent adoption by firms is constrained E- Government, intermediary or service provider, by the lack of a supportive legal framework for online consumer protection, online personal e-transactions, data protection and privacy, information protection, unsolicited message, consumer protection for online purchases, and e-payment, e- evidence, and penalties. The cybercrime prevention. e-commerce law shall protect both investors and As shown in the table 56 below, Cambodia consumers and settle differences when problems is the only ASEAN nation that does not have happen. The law will cover e-payment (under yet an electronic transactions or eCommerce jurisdiction of the National Bank of Cambodia) law. A prerequisite for conducting commercial and state punishment for those who violate the transactions online is to have e-transaction laws law. that recognize the legal equivalence between Table 55: E-commerce Legislation Adoption by ASEAN Member States Consumer protection e-transactions / Data protection Cybercrime (including online e-commerce law and privacy law law consumer protection) law Brunei Yes No Yes Yes Cambodia Draft No Draft Draft Indonesia Yes Yes Yes Yes Lao PDR Yes No No Yes Malaysia Yes Yes Yes Yes Myanmar Yes No Yes Yes Philippines Yes Yes Yes Yes Singapore Yes Yes Yes Yes Thailand Yes Yes Yes Yes Vietnam Yes Yes Yes Yes Source: Summary of Adoption of E-Commerce Legislation Worldwide, UNCTAD Despite this, recent progress in the legal framework for e-commerce includes: • Law on Telecom - 2016 • Sub Decree on Registration of Company operated ICT –21/07/2017 • Sub Decree on Capacity Building, Research and Development (CRBD) –21/07/2017 • Sub Decree on Tax Incentives for SMEs in Priority Sectors - 2017 • Sub Decree on Digital Signature –29/12/2017 267 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT As a move in the right direction, the Sub-Decree 2.3. Regional and International № 246 on digital signature aims to regulate and Commitments promote the use of digital signatures in Cambodia. The Cambodian Government support to the A “Digital signature” is defined as the data which is development of an e-commerce ecosystem linked to an electronic message used to confirm is influenced by commitments taken during the identity of the digital signatory and to verify multilateral (WTO) and regional (ASEAN, RCEP) the original status of the electronic message. trade negotiations. With increased internet To be considered as a digital signature, it must connectivity, rising smartphone penetration, properly and specifically affirm the identity of and growing availability of internet access and the digital signatory, confirm the original status new payment options, electronic commerce of the electronic message, and certify the time (e-commerce) has gained momentum in ASEAN. and date that the digital signature was executed. Discussions and negotiations on e-commerce The Sub-decree seeks to manage the use of have accelerated in recent years. digital signatures in a secure and efficient way. Digital signatures could prove useful for both Cambodia’s participation in and commitment to public and private institution, with applications the e-ASEAN framework that calls for, among other when registering a business online, using the targets, a robust legal and regulatory framework Automated System for Customs Data (ASYCUDA), for e-commerce. Cambodia’s participation in the Financial Management Information System ASEAN negotiations in trade in services, including (FMIS), paying taxes, registering vehicles and real e-commerce (ASEAN Framework Agreement on estate, as well as for online banking platforms and Services – AFAS), in the ASEAN Trade in Services e-commerce, among others. Agreement (ATISA) and the on-going negotiations in the framework of the Regional Comprehensive Last but not least, concerns by formally Economic Partnership (RCEP) that include China established e-commerce businesses on unfair will have a strong bearing on the Cambodia competition, added to the perception of revenue e-commerce ecosystem. loss by the Government by failing to account for a largely informal sector pushed the Government Recognizing the potential benefits of e-commerce to consider taxation of e-commerce operations, to businesses, particularly for small and medium- in line with similar moves among ASEAN member sized enterprises and start-ups, ASEAN Member states. The absence of a proper registration States (AMS) committed to create a conducive system and rules for e-commerce players (vendors environment for the growth of e-commerce and marketplaces) further complicates the issue. through, among others, advancing trade rules At the present time, while taxes on e-commerce in ecommerce and building up greater digital is being developed regionally and globally, connectivity within the region. To this end, Cambodia has no actual mechanism to collect the ASEAN Agreement on e-Commerce was fiscal revenue from e-commerce operations. This endorsed by the ASEAN Economic Ministers at is made even more complex as MEF or MOC do the 50th ASEAN Economic Ministers’ Meeting not define what type of online business is defined and signed at the side-lines of the 33rd ASEAN as e-commerce. Consequently, it is not possible to Summit & Related Meetings in November 2018. define what type or size of a business transaction The Agreement builds on past agreements and would be subject to tax obligations in the future. incorporates modern elements including (i) As Cambodia’s e-commerce is still at an early cross-border transfer of information by electronic stage of development, it might not be wise to means; (ii) location of computing facilities; and (iii) decide to impose a tax immediately. Instead, the cybersecurity. The Agreement’s objectives are (i) to Government preference is to design policies and facilitate cross-border e-commerce transactions; regulation to help the sector grow smoothly and (ii) to contribute to creating an environment of move informal businesses to the formal sector. trust and confidence in the use of e-Commerce; 268 Chapter 11 and (iii) to deepen cooperation among ASEAN the present provisional moratorium on customs Member States to further develop and intensify duties on electronic transmissions; It could also the use of e-Commerce to drive economic seek to promote the adoption of a reasonably growth and social development in the region. high de minimis value for cross-border shipments The Agreement contains provisions on Domestic from LDCs that are contracted by e-commerce Regulatory Framework Transparency Cooperation and which would be exempt from customs duties. among Member States, Facilitating Electronic Currently many OECD members have different Transactions and Trading, Cross-Border Data and de minimis standards for such shipments. The Information Flows and Location of Computing introduction of a worldwide common de minimis Facilities, Logistics, Consumer Protection and on imports from LDC MSMEs would help spur the Privacy and Technology Neutrality. development of MSMEs and provide them with an important competitive advantage, especially ASEAN is only a first step for Cambodia. as low value / low risk shipments that fall in the Regional trade agreements increasingly include de minimis category are the predominant form of e-commerce provisions. This risks fragmentation MSMEs e-transactions. Finally, Cambodia might of the international regulatory environment for also consider joining the discussions of “Friends e-commerce with implicit barriers arising for of E-commerce for Development” (FED), which is Cambodia (as well as ASEAN) e-commerce external a grouping of a number of developing countries trade. A multilateral agreement is protection in the WTO that arranges periodic meetings on against such a risk, again emphasizing that CLM e-commerce topics. October 2017. should consider promoting a WTO Agreement on e-commerce. 2.4. Government Strategy for an E-commerce Uptake At the WTO, discussions on e-commerce in the framework of the WTO prior and during As highlighted in the 2017 UNCTAD eTrade the 11th Ministerial Conference, resulting in Readiness report for Cambodia and the 2018 Cambodia supporting the MC11 Statement on World Bank “Benefitting from the Digital Economy” Electronic Commerce. It gained additional speed Cambodia Policy Note”, the Cambodia digital and in January 2019 when 76 partners decided to e-commerce ecosystem is developing fast, yet start negotiations to put in place global rules on is still incomplete. Before Cambodia can benefit electronic commerce. Despite the fast increase from the age of digitalization, the lingering in electronic transactions, there are no specific barriers need to be removed. A comprehensive multilateral rules in the WTO regulating this digital economy strategy and a five-year road map type of trade. Business and consumers instead should be developed to incentivize investment have to rely on a patchwork of rules agreed by in digital infrastructure, improve digital literacy, some countries in their bilateral or regional trade promote entrepreneurship and innovation, agreements. WTO rules on e-commerce will aim to and build trust in the use of online services. The enhance opportunities and address challenges of Rectangular Strategy IV covering the period 2018- e-commerce in both developed and developing 2023 provides the political platform and thrust to countries. The Government of Cambodia, should move forward in building a robust, shared vision play an active part in international efforts by for a Digital Cambodia, relying on four strong LDCs to streamline the rules on e-commerce components: and in working on removing national barriers • Strategy for a Digital Cambodia (enhancing to e-commerce. The benefits of e-commerce for current work by MPTC and MIH on Digital SMEs) development are evident and should aid the further • Digital Government Strategy: It could be integration of Cambodia, into the multilateral beneficial for the Government to establish a trading system. Cambodia could take a proactive Coordinating Agency for Digital Development— stance in promoting a decision to make permanent similar to those established in the United 269 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Kingdom, Singapore, Malaysia, and Thailand— the Ministry of Transport and Public Works, the to drive the preparation of the framework and Ministry of Industry and Handicraft, private sector its implementation. Successful implementation and other stakeholders. The strategy will focus on of the strategy also requires reforms specific to seven policy areas for e-commerce development, e-government. namely: • Digital Skills Strategy (including acceleration the -- E-commerce vision for Government and upgrade of secondary and tertiary education Businesses curricula and emulating the achievements of -- Legal and Regulatory Framework for e-commerce the National Institute of Posts, Telecoms & ICT – (including formalization of e-commerce vendors (NIPTICT) and marketplaces, consumer protection, Online • An e-commerce strategy, to ensure increased IP, taxation options, business associations) broadband availability and affordability is used -- ICT infrastructure for e-commerce for productive goals, generating employment, -- Trade logistics and trade facilitation (including revenue and foreign trade. deminimis thresholds for cross-border e-commerce, paperless trade, first-mile and last- While the government should play a facilitator and mile delivery, return logistics) coordinator role with the above, all stakeholders -- Electronic payment solutions and Digital have a role to play in Cambodia’s transformation Financial inclusion into a digital economy. The government should -- Access to Financing for SMEs and Digital SMEs create an enabling environment and demonstrate (including on role of business accelerators, digital leadership to encourage the adoption business incubators and venture capitalists). of digital technologies. Firms should invest in digital infrastructure and upskill their employees to facilitate the development of local talents 3. ICT-Infrastructure and Internet in the ICT and tech start-up industry. And non- Penetration governmental organizations and schools could The rapid expansion and coverage of the mobile provide education and training to bridge the Internet has contrasted with the slow development digital divide. of fixed broadband Internet. The introduction of The Ministry of Commerce has taken the lead fibre-based broadband has provided a boost to in the formulation of an e-commerce strategy, commercial and residential customers. Despite building upon the foundations created by the this initial uptake, fixed line telephone and/or fixed UNCTAD eTrade Readiness report for Cambodia broadband Internet are hardly used, considered and the RSIV goals and KPI on a digital Cambodia. by many customers and private companies as too Cambodia, with one the fastest-growing internet expensive and not reliable. connectivity in the Asia-Pacific region, is at a crucial stage where E-commerce development is Cambodia Internet and Mobile Penetration potentially viable but still untapped. The Ministry (MPTC data, 2018): of Commerce considers the development of an • 121% Mobile Phone Penetration e-commerce strategy as the launching pad to • 84% Internet Penetration promote and foster e-commerce development • 7 Million social media (Facebook) users in Cambodia. It is expected that the e-commerce • Broadband coverage in urban areas: 100% strategy will be launched during the first of 2019. • Broadband coverage in rural areas: 70% Its formulation will be Government-owned and driven with strong stakeholders engagement. Cambodia ICT Infrastructure (MPTC data, 2018): The Ministry of Commerce will lead this process The ICT sector is considered one of the backbone in cooperation with line ministries, ​in particular services industries in Cambodia, providing the Ministry of Posts and Telecommunication, important economic and social benefits. Besides the newly formed National Logistics Council, 270 Chapter 11 its direct contribution to the economy, ICT allows • MCT (Malaysia-Thailand-Cambodia) people to stay connected and is considered an • CFONC : AAE-1 essential facilitator of economic growth in other • -Fixed Subscriptions. (2017): 0.84% sectors of the economy. Fixed-line broadband market penetration has not • Mobile Operators: 6 (3 share more than 90% of grown significantly over the last five years, with the market) penetration increasing from a very small base • Fixed telephony operators: 8 from 0.1 per cent of Internet users in 2012 to 0.6 • Internet Service Providers: 36 per cent in 2017. Over the next four years to 2022, • Land Fiber Optical Network: 46,600 Km growth is expected to continue but overall market -- Including Viettel Cambodia: 26, 000 Km penetration will remain low. In contrast, there has -- Including Cambodia Fiber Optic Cable Network been the rapid expansion of mobile broadband (CFONC): 19,000 Km Internet services on the back of the large-scale -- Including Telecom Cambodia: 1,600 Km launch of 4G services by the numerous mobile • Sub-Marine Cable Networks: operators. Table 56: Ranking of selected economies in the UNCTAD B2C Index 2018 Country Ranking in UNCTAD B2C E-Commerce Index 2018 Singapore 2 Malaysia 34 Thailand 43 China 63 Brunei n/a Vietnam 69 Indonesia 90 Philippines 92 Lao PDR 98 Cambodia 118 Myanmar 125 Cambodia rank among ASEAN members, as operators. However, even as digital adoption measured by the UNCTAD B2C e-commerce surges among the Cambodian people, with index, has remained low with little evolution mobile penetration and subscriptions reaching over the past 5 years, partly due to a weak legal new heights, internet penetration is still low across and regulatory framework for e-commerce and the country. As a result, smartphone adoption challenges in logistics and distribution as seen in is growing at a fast pace, mobile eCommerce table 57. in Cambodia enjoyed fast growth over the past few years as mobile internet access is affordable. In line with what is being observed in other in Mobile money transfer and mobile payments the region (Lao PDR, Myanmar) Cambodia is a options have grown rapidly in popularity, even in mobile-only country when it comes to broadband the countryside (money transfer and remittances Internet. There has been a rapid expansion of from migrant workers), fuelled by the large size of mobile broadband Internet services on the back of unbanked population and the very limited used the largescale launch of 4G services by the mobile of debit/credit cards. 271 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Similarly for business online presence, digital Wing has built its partnership with public adoption at the firm level also remains low. sector, local and foreign banks in order to Fewer than one-quarter of businesses had a web extend its money transfer service both local and presence in 2017, well below the world median of international consumers. It has also begun to 46 percent. Cambodia also has a very low number offer cashless payment solutions. Adding to the of secure servers per million people. local money transfer market, the company further provides the services such as phone top up, bill 4. E-commerce eco-system payment and online service payment. Wing also Over the past ten years, the e-commerce provides funds and disbursement solutions to the ecosystem development in Cambodia has been corporate sector. Small and medium enterprise largely driven by the private sectors initiatives. and companies can use Wing’s payroll and The subsequent sub-chapters will illustrate the disbursement services for their employees. current “composition” of Cambodia’s e-commerce PiPay is another payment platform that is sector. competing with Wing. Pi Pay has started 4.1. E-payment Gateways to transition to a payment infrastructure provider model where the company is building E-payment is the most developed e-commerce partnerships with businesses to expand payment sub-sector. Wing, Pipay, Paygo, GetLoy, infrastructure across the nation. Pi Pay currently PostTransfre, Ecash and are the main stakeholders has 250,000 e-wallet users; 50,000 users covering which form a relatively complete and competitive Phnom Penh, Siam Reap and Sihanoukville and e-payment landscape. To follow the global trend 50% market penetration. The company plans to of electronic payment, more banks have started expand services to rural areas in 2019. Pipay’s offering payment solution apps which has made eventual goal is to implement a business model cashless payment a popular experience for many that is similar to similar to PayTm and WeChat consumers. Moreover, International partners like Pay where users though their services can gain Alipay and WeChat-pay, have sought partnerships access to vouchers and enable them to review with local companies to offer their e-payment of goods/services. PiPay endeavours to expand services. their partnerships network with with UPI’s such as There are still barriers such as low bank account Alipay and VISA. ownership rate, cash on delivery preference, and It has also been observed that partnership building trust which prevent e-commerce from booming. with public sector and cooperation with other However, based on the experience of other industries are better ways to extend e- payment countries’, e-payment will rapidly bridge the application and provide broader services. For ex. users and market, and promote the expansion of Wing and the Phnom Penh City Bus Authority e-commerce exponentially. (PPCBA) have run a successful trial of payment Wing (launched in 2009) is the leading mobile for city busses using a special Wing card. Pi Pay money and electronic payment service provider signed a partnership with the Ministry of Public in Cambodia. Wing provides channels for Works and Transportation where users can pay for Cambodians to send and receive money anytime, public transport, vehicle registration and several anywhere with the use of a mobile phone. It other services via the Pi Pay app. was crowned No. 1 as the “Best Mobile Payment 4.2. Logistics and Delivery Solutions Cambodia 2017” in the Global Banking & Finance Awards, Its services have been extended Logistics in Cambodia continues to remains from C2C money transfer by using mobile phone a critical barrier for e-commerce, especially to B2B and B2C mobile payment solutions. last mile delivery and high cost. In terms of last mile delivery, infrastructure issues such as 272 Chapter 11 underdeveloped transportation pathways and in the countryside. Given these positive trends it lack of physical addressing system hinder the can be forecasted that mobile e-commerce will provision of logistical services. Further, logistic be dominant form of e-commerce in the future start-ups, particularly the small enterprises among individual users. without access to large capital financing face the 4.4. Cross-border E-Commerce obstacle of a less-transparent taxation system. With the popularization of internet, advancement Currently, the provider of logistics and delivery of cross-border logistics and improvement of consists of state-owned enterprises (for ex. online payment, cross-border e-commerce B2C Cambodia Post), foreign logistics companies (for markets across the world are growing. As a product ex. Kerry Logistics), and local small start-ups (for of consumer era, cross-border e-commerce ex. Joonaak). Cambodia Post offers all range of is not only a new model of foreign trade but domestic and international post services from an effective pattern to broaden marketing collecting and processing to distribution of channels overseas and achieve transforming and mail and parcel. Kerry Express (offered by Kerry upgrading of foreign trade. Besides breaking the Logistics Cambodia), KH Express and small start- barriers between states and develop international ups focus on the provision of last mile delivery trade into non-boundary trade, cross-border service B2B, B2C and C2C. e-commerce also brings about a tremendous The demand for logistics has been increasing change in global trade. recently. Current logistics providers cannot meet There are three trade models in cross-border the need of market. However, the market gap e-commerce models, including (1) international has not been filled up due to the infrastructure marketplace platform like Alibaba(B2B), issues and start-ups/MSME predicaments. In Aliexpress and eBay(B2C), offer buyers products fact, thousands of unorganized private drivers in online and deliveries to Cambodia; (2) platforms Cambodia are a potential resource that has not like Fado168(B2C,O2O) allows costumers make been fully explored to expand last mile delivery purchases from Amazon USA and Amazon Japan; coverage. Kiu Ship provides solution for cross-border B2B 4.3. Mobile E-commerce e-commerce (3) Apart from web based shopping platforms, Cambodian people generally conduct Soaring smartphone adoption and mobile the cross-border transactions by using social internet penetration gave an impetus to mobile media like Facebook platform, or using phone e-commerce booming in Cambodia. As seen calls. According to MoC, there are no official in many developing countries, Cambodia’s statistics on export and import of cross-border e-commerce market mainly relies on mobile e-commerce networks due to the backward ICT infrastructure and household computer ownership (10.5%). 4.5. Cross Border E-commerce Challenges Cambodia’s mobile broadband has grown sharply Logistics and Last Mile Delivery over the past five years from a small base to a mature market. The most pressing logistical challenges have been outlined in section 3.2. In addition to these At present, approximately 67% of the population barriers the lack of a physical addressing system has the Internet access, and most of them get as well as the inefficiency of customs clearance for access to internet via smart phones. It is expected partially for less-than-container loads contributes that 90% of the population will get connected to to inadequate logistical service inefficiency. the Internet by 2020. In Cambodia, mobile internet To address these observations, currently, the access is affordable for the masses, with costs Cambodia Posts is piloting a custom declaring below the global average. Mobile money transfer system along with ACYCUDA, aiming to promote options have grown rapidly in popularity, even cross border e-commerce through tax clearance. 273 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT E-payment for Cross-border E-commerce The Government has been encouraging Cambodian’s to utilize digital payment solutions Most of e-commerce transaction requires bank to promote e- commerce. The National Bank of account, Visa/Master card, or e-payment solution. Cambodia (NBC) notes that Internet banking/ With 33% of the population having a bank account, mobile banking and mobile payment services most customers are excluded from cross border (most notably Wing and PiPay) have been gaining e-commerce. Moreover, the existing cashless popularity among consumers due to possibility of e-payment solutions in Cambodia are mostly providing them better access to their funds and not accepted by the cross-border e-commerce facilitate real-time trade transactions. However, the platforms. prevalence of a lack of trust in online transactions/ English language skills and ICT Illiteracy financial institutions among consumers and the presence of an unbanked or underbanked Most of cross-border e-commerce market places population is a significant bottleneck to overcome. are written in English and reserved for those who can fairly communicate in English. In addition, the Inefficient and expensive logistics represent buyers should be familiar with new technology a significant barrier preventing e-commerce tools and applications provided by the platform development. The lack of a digital postal code such as account sign up, provide personal system and presence of numerous logistic information, payment tool details and the delivery companies (DHL, Kerry Express, Joonaak Delivery) address - which are not possessed by the masses. complicates logistic co-ordination. Last-mile delivery in Cambodia involves heavy reliance on 5. Cambodia E-commerce Market MSME’s and is very cost intensive especially for analysis small merchants. 5.1. Cambodia E-commerce Market Another notable challenge is the presence of Analysis Overview poor e-commerce skills development due to very Cambodia current engagement in e-commerce low e-awareness and institutional support for is still nascent but, it has tremendous potential to digitization. However, a dynamic youth population contribute to the economic growth of the country. is changing this trend due to their comfort with Currently, Cambodian consumers maintain a online services and their capacity to “spread the strong preference for traditional markets and their word” across generations. The Government has financial markets rely on cash. The current demand started to digitize itself by promoting adoption of for e- commerce is limited to goods and services e-services and e-payment through the movement that customers cannot access through traditional of trade and business related procedures online. channels and/or very niche sectors (handicrafts, While key barriers are slowing the adoption of garments, tourism, and catering-related services). e-commerce in Cambodia, the government and However, social media platforms such as Facebook private sector have taken progressive actions have provided an attractive channel for small to address these bottlenecks. The Ministry of entrepreneurs to buy overseas products and sell Commerce has recently prepared an e-commerce them online. This type of “e-commerce” is the law which is awaiting ratification from parliament. most popular and is very informal. The Facebook Following approval and implementation of channel provides current e-commerce ventures these legislative articles, a strong e-commerce with access to 15,000 consumers. Cambodia has regulatory environment will be present and local e-commerce platforms such as MyPhsar, thereby attract leading e-commerce stakeholders Khmer24, Iknow, and Mall855 but access to these and investors to catalyze and unlock the nation’s portals are less when compared to Facebook due e- commerce potential. to its perceived “less user friendliness”. 274 Chapter 11 The Ministry of Post and Telecommunications creating a niche in the last mile delivery sector (MTPC) has established a Capacity Building and and has been using social media to provide Research Development (CBRD) Fund to promote logistic services for e-commerce related the mobilization of young talent and promote activities. They are currently developing a mobile tech-startups in the country. Telecom operators application and website to increase the scope of have provided USD 6.5 million dollars to this their business and promote visibility. fund and the government has contributed an additional USD 0.5 million. Two projects viz. an Other leading digital innovators appearing in Innovation Center and Technology Center have last few years include: been approved under this R&D fund. The former • Blockchain: Cryptoasia will support tech start-ups adopt innovative • Accounting/banking/invoicing: Kiu, Morakot technologies and practices while the latter (in • Comparison: SPEAN partnership with Metfone) will support R&D of • Payment and Remittances: AMK, KB Global, products and services in the market. Further, DaraPay, BongLoy, Wing, TrueMoney, Ly Hour the MTPC and Ministry of Education are working Pay together to promote entrepreneurship via the • Alternative finance: Karprak, Bima, Agribuddy establishment of Smart Labs throughout the country. The implementation of effective solutions to The Ministry of Public Works and Transportation address e commerce bottlenecks and identification (MPWT) will be finalizing its Master Logistic Plan of the synergies between e-commerce and 2018-2025 which aims to promote infrastructure Cambodia’s key economic activities will enable and capacity building efforts in Cambodia. There the nation to become an innovative marketplace are currently 75 pipeline projects (budget ~USD for e-commerce. 19 billion) to fulfill strategic goals with different 5.2. Business to Business (B2B) ministries serving as implementing agencies and the MPWT will serve as an overall project co- The B2B market in Cambodia has yet to mature and coordinator. China, Japan, ROK and Vietnam have has tremendous potential. According to a 2016 been heavily engaged in this strategy. World Economic Forum survey conducted in 2016, Cambodia’s use of ICT in the B2B transactions was The private sector is also conducting its own evaluated with a score2 of 4.73, which is only slightly activities to facilitate e-commerce development better Lao RPC, Myanmar, and India. The current in the country. A few telling examples of recent trends for B2B e-commerce focus on consumption innovations include: product marketplaces such as clothes, foods, • Pathmazing in conjunction with Salesforce handicrafts, jobs and transportation. Recently, offers its client access to advance ERP and CRM B2B e-commerce has begun expanding into new services. Further the company develops mobile sectors such as technology, electronic devices applications and B2B platforms to provide and business information. As ICT infrastructure, online services (for ex. online meal booking) services and e-commerce continue to develop and provision of bulk materials to clients. and expand in Cambodia, it can be expected that Pathmazing launched in 2017 the E-commerce dedicated B2B marketplaces will emerge. platform “Tesjor” an application to enable a 5.3. Online Retail Market (B2C, C2C) wide range of online services from food ordering to hotel booking and reserving transportation. According to a WEF survey conducted in 2016, The app integrates mandatory cashless payment Cambodia has a score of 4 in the use of ICT in the systems, a first in Cambodia which usually relies B2C transactions, which ranks the second last on cash on delivery. among 12 Asian countries. Although the trade • Joonaak Delivery is an SME which has been volume is still small, online shopping has become 275 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT popular in recent years. This observation can be 6. Key Opportunities E-Commerce ascribed to the boost in B2C and C2C transactions Presents on domestic and international e-commerce platforms due to a growing adoption of mobile Despite the small e-commerce market share in payments. However, the majority of e-commerce Cambodia, this sector has been identified as the merchants in Cambodia still prefer to use social key driver of economic growth for the country in media platforms, most notably Facebook, as their the future. The positive trends for e-commerce primary sale portal because they have more visits adoption such as leapfrog of smartphone owning on their merchandise from their fans/friends rate, affordable internet access, and online when compared to a web-based platform. In shopping habit developing allow the country to terms of payments, cash on delivery (CoD) is still embrace e-commerce. Both public sector and the preferred payment option among consumers private sector have realized that e-commerce due to its convenience and appeal to clients which has brought huge opportunities to the economic don’t have access to a bank account or e-payment. growth in many aspects, including investment, CoD popularity is further supported by the lack of domestic market, second and tertiary industries, performing online transaction on social media. MSMEs etc. Theoretically, Online-to-Offline (O2O) commerce While there are gaps and barriers in Cambodia’s employ in-store pick-up of items/services e-commerce sector, these challenges indicate purchased online and enables items purchased the presence of market opportunities. For ex the online to be returned at a physical store. Currently growing adoption of e- payment modalities and in Cambodia, due to high reliance on cash the increase in logistics project development have payment and poor logistics - some local customers attracted a large number of investors, start-ups feel more convenient to make a purchase in brick- and entrepreneurs across Cambodia and globally and- mortar stores after obtaining online selling to contribute to the growth of the e-commerce information. With the successful launch of the sector. Innovative service oriented businesses like local online payments such as Wing and PiPay, Pipay (e-payment) and Grab (e-transport) have O2O business models have begun to promote been emerging in multitude. online ordering and offline pickup. Meanwhile, demographic advantages in 5.4. New Emerging E-business Activities Cambodia such as an increasing youth population Due to the increase of internet penetration will greatly influence the adoption of e-commerce and smartphone utilization in Cambodia, new which is ascribed to this generation’s high emerging e- business activities viz. payment/ acceptance of technology. Further, the newly- remittance; financing/insurance; accounting/ forming middle class’ demand for inter-connected invoicing; mobile banking, financial comparison life will prop up the e-commerce market, and will and blockchain have been gaining traction in directly promote the economic growth and social the country. Payment/remittance accounts for development. 50% of these new activities. Yet, Cambodia faces 6.1. Capital Investment Opportunities challenges that are slowing e-commerce business development such as the lack of local B2B and B2C Cambodia’s Foreign Direct Investment (FDI) platforms – due to the presence of a very large increased by 831.7 USD million in June 2018 (all informal commerce market, the poor e-commerce time high), compared with an increase of 820.2 fulfilment and logistics networks and absence of USD million in the previous quarter. Based on our return policy (e.g. reverse logistics). survey and secondary data, most of the successful e-commerce related enterprises and innovative start-ups rely strongly on foreign investments. A large number of foreign capital investments and international e-commerce giants are prepared to 276 Chapter 11 invest in e-commerce and ICT in Cambodia once share technology, build partnerships and work an e-commerce law is implemented. The sectors with government to increase their adoption foreign investors intend to invest are presented as among businesses and consumers. Such a follows: platform is a cost-efficient as all licensed Fintech companies can be integrated at a one-time setup • B2B and B2C platform marketplace cost. Large-scale B2B and B2C platform marketplaces 6.2. Domestic E-business Market will integrate manufacturers, small vendors, Opportunities individual users, e-payment and delivery • Government Opportunities providers into one network. Alibaba has expressed keen interest to offer it services to e-commerce Cambodia has a draft e-commerce law which is stakeholders. yet to be ratified by Parliament. This is ascribed • Logistics due to the fact that that e-commerce grows based on connectivity (mobile and internet), Logistics is one of the weakest links in e-commerce which has leapfrogged very fast. This growing eco-system, contains tremendous potential. The connectivity accelerates the growth of other Ministry of Public Work and Transportation has sectors, such as e-payment, stock exchange, etc. been coordinating with logistics stakeholders Thus, e-commerce has to include all the growing in China, Japan and the Republic of Korea to relevant sectors, such as capital market, requiring implements its Master Logistic Plan 2018 – 2025; more time for the e-commerce law. However, which aims to revamp existing and build new through interviews conducted with stakeholders logistic networks. Further, the government should a common recommendation noted was the formal explore opportunities to create incentives for establishment of an e-commerce regulatory logistic companies to use eco-friendly means to framework to stimulate e-commerce growth provide their services. Development of conducive locally but, attract foreign investors to boost the policies to promote clean environment through a investment in this sector. reduction of CO2 emission will greatly contribute Marketplace business and on demand services to the global environmental conservation are creating opportunity for entrepreneurs. mandate. Meal Temple, has been testing the The Government will need to establish this utilization of electric bikes for more than 8 months regulatory framework provide these services and has been able provide smooth logistical (this is an example highlighting the importance services while decreasing by 70% our carbon foot and necessity of an e-commerce law). If there print on logistic. are legal methods to ensure simple registration • Fintech of service companies, it will facilitate financial inclusion as well as boost opportunities for self- Cambodia’s developing Fintech sector has started employed and entrepreneurs, especially women. to attract the attention of foreign investors. There Recommendations to facilitate fast business is still scope to expand this market. For ex. the registrations include the provision of virtual office Cambodian Fintech Association and Singapore services; VAT and Tax ID; Assistance with obtaining Fintech Association have worked together to licence (cryptocurrency, wallet, marketplace, and provide short term financing for their clients as others); obtaining certified company documents well as develop programming culture in Cambodia in English; implementing an online accounting – especially for e-commerce applications. The system; and assistance with opening bank Government can promote the integration of account. digital payment solution by building a central platform connecting all fin-tech companies to 277 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT To facilitate the development of skills in is also important that a regulatory framework e-commerce, the establishment of provincial is established to monitor how entrepreneurs, Center for excellence’s can be used to train owners and consumers declare income through workers to be employed in high value-added an online platform. manufacturing. Further, such institutions should A trending international sector where e-commerce provide solutions to commerce such supporting has the potential to be implemented is the gaming merchants in inventory and warehouse industry. Consumers are increasingly making in- management which are key aspects to consider app purchases of virtual products such as online when engaging in e-commerce. credits and virtual coins. The global market size of To stimulate engagement in e-commerce, the this sector in 2018 was US$ 20 billion and training Ministry of Economy and Finance (MEF) has people to develop gaming apps to be sold on confirmed that they will not impose tax on either digital market places can provide them with skills local or cross border e-commerce in both short such as 3D design, Animation, Marketing which are and medium term. transferrable. Further, given Cambodia growing and dynamic youth population, the promotion of The Government should also explore the the online gaming sector can serve as a conduit to opportunity to promote regional e-commerce increase trust in other digital systems. co-operation by discussing potential areas of collaboration with regional groups such as ASEAN, • Digital Marketing GMS and Mekong Lanchang Cooperation. Such an initiative can assist Cambodia to attract more With more Cambodian joining internet, traditional investment from other e-commerce stakeholders. advertising methods through mainstream media such as TV are transitioning to online marketing where • Online Retail Marketplace many young Cambodians reside. Digital Marketing Companies such as MangoTango assist their client Online marketplace platforms like MyPhsar, to develop digital marketing strategies. For example, Khmer24, Iknow, and Mall855 have obtained MangoTango worked with a Japanese insurance customers’ acceptance. They provide products company Daiichi to conduct market analysis on and services such as art, books, clothes, household perception of life insurance among consumers in devices, vehicles, electronic devices, jewelleries, Cambodia. MangoTango helped them to develop real estate and jobs. This market will appeal to a brand, logo, lifestyle message. They are currently more investors with more and more customers working on developing an advertising strategy for get used to online shopping. Daiichi’s services through tactical channel (TV, radio) • Other Online Service Platforms and digital channels (social media, digital ads) 6.3.Cross-border e-commerce It is important the “e-commerce” not be limited to retail and exchange of goods – the scope must Cross-border e-commerce has not been exploited. be expanded to cover different service sectors. An Cross-border e-commerce enables local enterprises example is the popularity of PassApp and Grab ( to extend their economic activities beyond borders in online platforms offering private transportations) order to pursue opportunities elsewhere. Moreover, is a successful case of combination of foreign cross-border e-commerce will facilitate and reshape investment and local feature. The mode is the imports and exports. Additionally, The China-led highly replicable for other services like food Belt and Road Initiative provides new opportunities delivery, entertainment etc. These models for Cambodia to leverage resources and international should be expanded to other sectors, including cooperation to support the development of the nursing, teaching, farming, etc. While actions cross-border e-commerce sector. are taken to increase the “online population” it 278 Chapter 11 6.4.Traditional Industry Opportunities strengthening SEZs to attract foreign investment, encourage technology transfers and broaden E + tourism: In recent decades, tourism has become export markets. The majority of investors in SEZ’s one of the most important service industries are Japan, China, Thailand and Taiwan. SEZ’s in in the global economy and the government is Cambodia mainly focus on light manufacturing in developing active and innovative policies to build the electronics, automotive and garment sector. a competitive, inclusive and sustainable tourism There are currently 5 SEZ’s in Cambodia with the sector. Internet and e-commerce can stimulate largest located in Sihanoukville. The utilization of tourism growth by providing online services for e-commerce to export the outputs of the SEZ’s tourism experiences, by supporting innovative presents an opportunity as well as ensures that the online approaches to tourism development SEZ’s build and maintain a suitable ICT capacity to and marketing and by influencing the image of keep pace with technological advances. destinations. The potential for value creation from this emerging relationship lies in the integration Opportunities for MSMEs: in Cambodia, 90% of of touristic experiences with online services. the local MSMEs are micro with no more than 10 employees. The e-commerce MSMEs usually do E + Agro value chain development and regional online business through Facebook or Instagram. trade: Cambodia’s main agro products include The protection for both seller and customers rice, mango, cashew and etc., among which through social media e-commerce is not rice particularly generates an estimated 70% of guaranteed with the absence of the e-commerce total country production during the wet season. law. The approval of the law will regulate the Internet/e-commerce plus agro industry will trade and boost the social-media e-commerce help to improve image and competitiveness of growth accordingly. The business opportunities the industry, and support the growth of the agro for MSMEs include: industries and exports. • Ability to join E-commerce marketplaces to SEZ development: establish ICT industry increase their business activity potential agglomeration: The Government’s National • Improved Social Media e-commerce Services Strategic Development Plan 2014-2018 aims • Improved access to various delivery and courier to “mobilize human, financial and institutional options resources to support the establishment of new • Ability to participate in Cross-border E-commerce industries” – which includes instituting and 279 coordination ensures not only timely production – and therefore the elimination of waste – but also ensures the maintenance and harmonisation of standards throughout the production process. The implication is that the concept of i4.0 can be applied across the entire economy and not limited to the manufacturing sector. There can, in Chapter 12 principle, be a Health i4.0, and Education i4.0, even a Government i4.0 in which supply chains can be DIGITAL identified, interconnected and standardised to achieve a high-quality outcome of services. This TRANSFORMATION is especially relevant to the banking and financial services sector where Fintech – the use of digital AND INDUSTRY 4.0 technologies and software to provide automated and innovative consumer-centric services – is making inroads. In a report on the Outlook for 2019, the National Bank of Cambodia affirms its commitment to fostering i4.0 for the financial 1. Introduction sector in line with the 2016-2020 Financial In the 2018 Rectangular Strategy Phase IV (RS4), Sector Development Strategy. A report suggests the Royal Government of Cambodia set “readiness managing government cash-flow and reducing for the digital economy and the Fourth Industrial the printing of bank notes are two immediate Revolution” to be one of the four priorities for benefits. economic diversification and new sources of A somewhat complementary concept of growth207. The term ‘Fourth Industrial Revolution’, Globalisation 4.0 was the theme of the 2019 alternatively Industry 4.0 or just i4.0, in the words of World Economic Forum in Davos, by which is the ‘’United Nations in Cambodia’ website, “refers meant the leverage of international broadband to the development of advanced technologies, communications to create global markets for such as 3D printing, robotics, biotech, quantum services, for the “things that we do, not just the computing, enhanced communications networks things that we make.” This is not so new in the and infrastructures (the Internet of Things) and sense that the outsourcing of activities such as new production management know-how.” The accounting and payments, and teleconferencing emphasis is on i4.0 as the use of productive new are already well-established. What is being technologies that are Internet-connected, and suggested however, is that whereas Industry as such reflects the origins of the term arising 4.0 threatens the job of blue-collar workers, for from the Industry 4.0 Working Group in Germany example through the use of robotics, Globalisation in 2012. This was to provide a techno-logical 4.0 will bring increasing competition to white- architecture for Germany’s industrial production collar jobs, especially where artificial intelligence processes: technically based upon automation (AI) is involved. Off-shore insurance, off-shore and computerisation, and logically based upon a accounting, off-shore e-commerce, off-shore fully networked supply chain. IT service centres, may all be transformed by The logical component is as important as the automated processes. Given it is a low-cost technical because it constitutes a management country, Cambodia could well attract a share of philosophy of a highly coordinated array of sub- globalised services as a source of future growth, production processes – the supply chain – that but if and only if Cambodia’s infrastructure – result in the end-product itself. This level of notably broadband, logistics and power supplies 207 http://cnv.org.kh/wp-content/uploads/2012/10/Rectangular-Strategy-Phase-IV-of-the-Royal-Government-of-Cambodia-of-the-Sixth-Legislature-of-the-National- Assembly-2018-2023.pdf (p.27) 281 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT is sufficiently upgraded and further progress is advantages of offering inter-operable services made towards a business-and-innovation friendly begin to outweigh the advantage of stand-alone environment. networks and cross-industry interconnectedness is offered. To take just one example, in the world Industry 4.0 is also closely aligned to the much of computers, the classic case is of the previously broader concept of digitalisation because the incompatible operating systems of Mac and PCs. underlying technologies are digital. Digitalisation The networked industries in Cambodia remain usually refers to an economy in which nascent and such regulatory intervention could technologies and socio-economic activities are be premature, although encouragement should interconnected through the Internet to create a be given to inter-operable platforms. The mobile myriad of different connected systems, such as phone market is a good example of a market payment systems, social media platforms and gaining maturity in which the interconnectivity smart city management systems. A technical and interoperability of basic services is a given. committee has been set up under the Supreme The interconnectivity and interoperability of National Economic Council to formulate a digital emerging services, such as mobile payments and economy policy, and according to the Ministry of remittances, should follow. Posts and Telecommunications, Cambodia should be a predominantly digital economy by 2023. 2. Cambodia’s Potential and Challenges The most important feature that brings digitalisation into close alignment with i4.0 is the The distinction between the more industry- creation of interconnected systems of production specific meaning of i4.0 and the more general or services and of data analytics drawing upon many meaning of digitalisation is important to different systematic sources of data, otherwise Cambodia, because both developments have known as Big Data. The greater the degree of a role to play. For example, while the Cambodia interconnectedness the greater the prevalence Industrial Development Policy 2015-2025, of compatible protocols and standards which which has a focus on technology transfers and are the technological foundation of i4.0. Further, infrastructure investment, does not refer to i4.0, from a policy point of view, interconnectivity that and its only passing reference to automation is gives rise to systems should be accompanied to speed up the registration of IP to encourage by interoperability between systems, for two investment in technology, it does list digitalisation reasons. First, it breaks down barriers of entry as one of the four pillars of industrial policy and for smaller systems to reach a wider audience sets it as a responsibility of the Council for the and so promotes competition which stimulates Development of Cambodia (CDC).208 At first innovation. Second, it offers customers wider sight, the role of Industry 4.0 would seem to be choice, for example, if the ATM systems of banks premature in Cambodia where manufacturing is are interoperable then customers can transfer closer to Industry 2.0 and the use of information funds between different banks. Governments and communication technologies (ICT) sparse. are often confronted with a decision whether to Most of Cambodia’s manufacturing is in light require interoperability of systems, for example of engineering, such as bicycles, and in the garment ATM networks, or simply to encourage it but leave sector. Both are dominated by international firms, the outcome to competitive market forces. As with making Cambodia heavily reliant upon foreign most regulation, the decision will depend upon direct investment (FDI). The garment sector, the anticipated socio-economic impact of the which is the leading export industry, typically outcome. Typically, in the first phase of intensive only uses the in-house technologies of global competition, collaboration between service firms while relying heavily upon cheap labour for providers is scant, each trying to capture a share of cutting and stitching apparel. The same applies the market. As the market matures, the commercial for footwear production. In agriculture, which 208 http://www.mih.gov.kh/File/UploadedFiles/12_9_2016_4_29_43.pdf (pp.15, 33) 282 Chapter 12 is dominated by small rice farms, technology Yet leapfrogging from i2.0 to i4.0 is not out remains basic. And all factories in Cambodia, in altogether of the question in at least some sectors. whatever sector, must contend with expensive The example of automation in the garment sector and not totally-reliable supplies of electricity, and is referenced below. Despite low-labour costs the contrary to global best practice, the industrial increased productivity and quality of machine or residential consumer has to pay additionally cutting and stitching using computer-aided for the supply of renewable energy, for example, design- computer-aided manufacturing (CAD- from solar power or hydro-power, rather than get CAM) is, according the Garments Manufacturing compensated for adding it to the grid. i4.0 dictates Association in Cambodia (GMAC), increasingly that power supplies should be as much part of demanded by international buyers of high- the automation process as the machines using end fashions. This suggests that the impact the power. In 2019 the Government announced on employment will be driven largely by the an electricity subsidy of USD50 million,209 but this composition of demand. Should Cambodia only scratches the surface of the problem which capture a larger share on the high-end garment will require a thorough review of energy policies. markets the impact will be greater, whereas low- At the other end of the spectrum is Okra Solar, an labour costs will remain Cambodia’s competitive Australian-founded technology company based in advantage in the lower ends of the market. Cambodia “on a mission to see 100% of the world’s According to a report by the UNDP, garment population with access to stable electricity by workers in Cambodia, of whom 70% are women, 2025.” Okra Solar has created two mini-grids using maybe less vulnerable to automation than workers solar power energy-sharing systems in Cambodia in sectors such as engineering, due to the fragile to supply local dwellings. Further, in January 2019 nature of the materials, but the evidence does the Gideon Group announced USD488 million suggest higher-end production poses greater investment in a solar plant in Kandal province risks. Examples from other sectors are cited below, after the Ministry of Mines and Energy gave a such as the automation of rice milling. green light to a feasibility study. The ASEAN Secretariat (2018) compiled the following set of indexes for an Assessment of ASEAN Readiness for the Fourth Industrial Revolution.210 Cambodia currently comes close to the bottom on each index, which cannot come as a surprise given Cambodia’s low starting point. The important issue is how rapidly can Cambodia adjust. 209 https://www.khmertimeskh.com/50561137/electricity-subsidy-to-boost-manufacturing/ 210 Assessment of ASEAN Readiness for the Fourth Industrial Revolution, to be published 2019 283 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT Table 57: Assessment of ASEAN Readiness for the 4th Industrial Revolution WEF Global Cornell INSEAD DII Global Industry WEF Networked KPMG Change Readiness Competitiveness WIPO Global 4.0 Readiness Index Readiness Index Index 2017 Index 2017-2018 Innovation Index 2016 2016 ASEAN 2017 Member Rank (out of Rank (out of Rank (out of Rank (out of Rank in ASEAN Rank in ASEAN Rank in ASEAN Rank in ASEAN Rank in ASEAN Rank (out of Index (Score) Index (Score) Index (Score) Index (Score) Index (Score) States 137 countries) 127 countries) 120 countries) 139 countries) 136 countries) Brunei 46 4.52 5 71 32.89 5 - - - - - - - - - Cambodia 94 3.93 8 101 27.05 8 115 1.5 7 109 3.4 8 85 0.48 7 Indonesia 36 4.68 4 87 30.10 7 41 3.10 4 73 4.0 4 39 0.57 3 Laos 98 3.91 9 - - - - - - 104 3.4 7 111 0.41 9 Malaysia 23 5.17 2 37 42.72 2 22 4.4 2 31 4.9 2 37 0.58 2 Myanmar - - - - - - - - - 133 2.7 9 106 0.41 8 Philippines 56 4.35 7 73 32.48 6 44 3 5 77 4.0 5 45 0.55 4 Singapore 3 5.71 1 7 58.69 1 1 6.6 1 1 6.0 1 4 0.80 1 Thailand 32 4.72 3 51 37.57 4 38 3.4 3 62 4.2 3 63 0.51 5 Vietname 55 4.36 6 47 38.34 3 91 2.1 6 79 3.9 6 81 0.49 6 Source: Compiled by the ASEAN Secretariat The key to i4.0 is how rapidly can digital processes be engaged in systematic end-to-end The World Economic Forum found only 25 manufacturing and in the provision of services. countries – five from Asia – out of 100 assessed It may well be that a shift towards linked i4.0 were i4.0-ready, with Cambodia far from.211 technologies will occur not in the traditional But, as discussed below, there are important manufacturing sectors but in areas of trade- developments in two areas that Cambodia can in-services and commerce. An example that is take advantage of. First, the use of digitised appearing elsewhere in the world is in retailing. technologies and automated processes is In reaction to the death of bricks-and-mortar spreading. Second, there are interesting visions shops under the onslaught of online shopping, arising to create localised ‘SME clusters’ that can a new ‘omni-channel’ shopping is emerging that experiment with an i4.0 supply chain technologies, combines the most valuable of both. Algorithms such as sensors and the Internet-of-Things (IoT), using customer recognition technology identify and the use of blockchain to stabilise prices using the preferences of regular customers from the smart contracts and to verify rules of origin. In a moment they enter the store to be served by a more conventional sense, the digitalisation of human. In the case of checkouts, “Smart trolleys Cambodia is already happening in leading sectors, fitted with image recognition … allow customers notably in the availability of mobile phones and to grab what they need from the supermarket Internet, and in terms of payment systems, despite and leave without scanning the bar codes.” This Cambodia remaining a largely unbanked society technology is not rocket science, although it often in which cash is the preferred means of payment. sounds like it – or maybe better said that rocket For example, there is widespread use of mobile science is becoming very familiar given that a phones by younger people working in towns to smartphone contains more processing power remit money to their families in rural areas. WING than the Apollo space craft that landed on the payment booths are many in the towns to make moon in 1969 – but for it become popular requires these transactions where only a mobile phone broadband connectivity and an online (mobile) number and an ID are required. The transactions payments system for checkout, which in turn are instantaneous. requires customers with payment accounts: there 211 https://cdri.org.kh/wp-content/uploads/Industry-4.pdf 284 Chapter 12 are plenty in the cities of Cambodia. Physical stores Cambodia imports Foton electric vehicles from face thin margins in light of online competition, so China, and assembles Volkswagen E-Green electric i4.0 technologies that can ramp-up productivity, golf buggies but has no design or manufacturing requiring fewer staff, more targeted sales and capacity. The electric Angkor Car was designed greater customer convenience – for example, it in Cambodia by local mechanic Nhean Phaloek could be combined with delivery services – may be and prototype development was supported by a prime candidate for the future in Cambodia, and local businessman Seang Chan Heng, and while the demonstration effects on other commercial the car is available for tourist transportation in sectors such as Fintech could be significant. Siem Reap, apparently no production has so far been forthcoming. Although some components 3. Driving i4.0 and Digitalisation have been produced in Cambodia, most have As a recent briefing on Cambodia by the CDRI come from China, Japan and Germany, and there notes, accelerating digital innovation, the is no local supply chain to support large-scale lowering of trade barriers and falling transport production. However, in 2017 a South Korean costs have combined to encourage multinational company did propose the manufacture of auto corporations (MNCs) to access low-cost locations, parts in a Special Economic Zone – see below. contributing to the growth of global value chains The digitalisation of Cambodia is being driven by (GVCs), improved efficiency and competitiveness. a combination of FDI and local capital. In some The big question is what drivers can help Cambodia sectors, such as garments, FDI dominates and make the shift from digitalisation to i4.0. As seen in the more advanced factories fully-connected above, Cambodia does not start from a highly systems using computer-aided design (CAD) competitive position of readiness, and the CDRI and computer-aided machines (CAM) for cutting briefing suggests, in common with many similar and sewing, have been introduced, automating papers, eight areas in which the government of processes and replacing labour. In others, such Cambodia can make a difference.212 They are: as the burgeoning shared economy including creating a conducive business environment to taxis and tuk-tuks and goods deliveries such as attract FDI and start-ups, improving the transport food, both FDI and local capital are prominent. and logistics infrastructure, streamlining customs In rice farming, powerful local interests often procedures and border management, the further combine with international partners or overseas development of special economic zones (SEZs), aid agencies to diversify the crop into higher strengthening linkages between local supply valued added fragrant varieties, creating forward chains and GVCs, creating high quality human linkages to international markets, mid-chain capital and more vocational training, fostering linkages to automated factories for milling grain, a technology and science culture and practice, and backward linkages to small farmers. Two and promoting Cambodia as a prototyping and factors are widely cited as driving investments in piloting hub within ASEAN. the Cambodian economy in the direction of i4.0 Policies such as these may indeed attract and digitalisation: that it is an open economy, and investment into Industry 4.0, and the advantage to it is a young economy in the sense of a plentiful Cambodia lies in enhanced levels of productivity supply of young workers, most of whom speak – and therefore competitiveness – which requires English, who are familiar with digital technologies either economies of scale, or a very high- and platforms such as smartphones and social value specialised product. But to create either media. This is not to argue that a generation of Cambodia would need to attract and develop local digital natives have sufficient skill sets to support supporting supply chains, outside of agriculture the digital transformation of Cambodia, let alone something that is mainly absent at present. the design and programming skills to develop Electric vehicles are a case in point. Car4You i4.0, but it does make Cambodia an increasingly attractive market for investment in the region, 212 CDRI (2018) Cambodia Outlook Brief: Moving Up Value Chains for Industrialisation, Digitalisation, Growth and Development https://cdri.org.kh/wp-content/uploads/OB2017e.pdf 285 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT because despite its size, Cambodia can be a 5. Agriculture platform for exports. Rice, cassava, pepper are three of the major This chapter will use these frameworks to crops produced by Cambodian farmers, typically examine the current structure of Cambodia’s main on small family-run farms. The average size of economically active areas, notably the key export smallholdings is about half a hectare, unsuitable sectors of garments, tourism, footwear, rice and for industrial farming, and even small-scale light engineering, along with role of telecoms, technologies such as sensors that could provide Internet provision and of government, including early warnings of crop and fish pond conditions e-government. may require difficult-to-secure microloans. For small farmers to earn the average of garment 4. Industry 4.0 and Cambodia’s workers’ wages they would need to produce up Nascent Digital Economy to six hectares of rice annually. The way forward The list of new and emerging interconnected as offered by international donors and local NGOs, information and communications technologies is for small farmers to diversify into high value- (ICTs) that can be associated with i4.0 and a digital added crops, such as organic farming and fresh economy is almost endless; but they all involve vegetables. For larger farms the mass cultivation labour-saving interconnected and programmable of rice or cassava and pepper is possible at machines and devices that joined together into something closed to an industrial scale, especially interoperable systems or connected through for the mechanised production of cereals. But platforms offer precision in the production of again, this implies the need to plant higher quality goods and services with a guarantee of increased value-added crops such as fragrant varieties of rice productivity and standards of high quality. It such as Jasmine Rice, Neang Minh Rice, Medium should be noted that productivity here implies Grain Rice. The process of switching crops from physical outputs. Markets determine prices and rice to, say, pepper requires technical information therefore determine the measure of productivity that is not common knowledge but could be in terms of costs and revenues, and only when the easily made available with the appropriate means business case is made is industry ready to invest. of communications. For example, the ADB has For example, if the price of rice fluctuates too far, been supporting an e-Agriculture Platform for investments in capital goods will be considered Kampong Cham Provence, which is at the centre too risky, but by securing quota access to the of rice growing in Cambodia. The project involves markets of the European Union investment has channels of communications using mobile phones been forthcoming. – 80 per cent of farmers are thought to have mobile phones, 20 per cent of them smartphones An important feature of these new technologies is – kiosks, desktop, call centres, TV and radio among that they can be applied to any sector of industry others. The project, implemented by Ernst & or the economy. They all use digital language and Young on behalf of the ADB, itemises the typical protocols and are clustered around the Internet, intermediaries – from farmer to markets, trader, which is what economists call a General-Purpose processor, exporter to consumer – along the Technologies (GPT), meaning that its impact is supply chain which not only reduces the revenues felt upstream and downstream within each sector available to farmers, but creates inefficiencies that and across all sectors. The invention of electricity add to the cost of the final exportable product. and the internal combustion engine would be Also active in promoting innovation in farming examples of a GPT. The following sections examine in these provinces and ICT4AG is CAVAC in the potential use of these technologies in different partnership with the Australian government and leading sectors of Cambodia’s economy. Their many private companies. widespread adoption would propel Cambodia as a digital economy towards i4.0. 286 Chapter 12 5.1. Rules of Origin and Blockchain quota requirements, involving both international and local investors in rice processing and exports, Blockchain technology is seen as being one essentially milling but also in food processing, way to disintermediate and connect the farmer such as rice cakes and sweets, contract farming to directly to the end-market. One important guarantee farmers an income for their crop, and reason why blockchain may be considered an the adoption of technology to raise processing appropriate technology for Cambodia is because productivity and standards. For example, Angkor of Rules of Origin requirements. The smuggling Kasekam Roongroueng (AKR), Cambodia’s largest of rice from Vietnam and Thailand into Cambodia mill is described on its website as “state-of-art is of concern, but rice has its own ‘DNA’ giving technology with own establishment of contract Cambodian rice a unique signature, which could farming supply chain of non-chemical finest be sanctioned in a blockchain supply-chain, and premium ‘Neang Malis’ rice, well known an important safeguard.213 One such project worldwide.” Golden Rice is another processor, also is ‘Blockchain for Livelihoods from Organic describing its mill as “state-of-the-art machinery Cambodian Rice’, or Blocrice, a project supported and technology for drying, milling and packaging by Oxfam Cambodia, started in 2018 with 50 rice.” Milling machines are usually imported, but organic rice farmers participating. The aim is to the Mekong Business Initiative (MBI) through the spread country-wide and the goal is contract Mekong AgTech Challenge (Match) has started farming using blockchain to validate the origins of Cambodia’s first agricultural start-up accelerator the rice and through smart contracts, giving small programme to encourage local product and farmers greater assurance. Another initiative is the use of such technologies. Between 2013-2015 a IFC’s promotion of the Sustainable Rice Platform project run by Waste-to-Energy was completed (SRP) designed to introduce contract farming and to promote the local production of rice husk raise farming standards to meet European Union gazifiers (RHG) which turn rice husks into useable quota requirements. The IFC is working with many energy. The project covered nine provinces with Cambodia companies involved in industry-scale nearly 3,000 direct beneficiaries, ranging from rice agriculture. One such is Amru Rice working with millers, husk gasifiers technology manufacturers 27 agricultural cooperatives and 5,000 farmers in to producers. Preah Vihear province “through assisted quality production up to EcoCert organic standards The majority of Cambodian small-scale farmers through farming contracts that assure them of do not have the resources to invest in agricultural sure market and a premium price 30 percent or technologies, for example, in the use of drones more higher than prevalent commercial paddy and wireless sensors, nor do many small millers prices.” Another partner of the IFC is Mars Food, have the opportunity to upgrade to state-of- “owner of the world’s largest rice brand UNCLE the-art fully-automated machines. According to BEN’S®” working with local rice miller Battambang Dr. Mey Kalyan of the Royal University of Phnom Rice Investment Co (BRICo), with the objective of Penh and senior advisor to the Supreme National “improving famers’ adoption of technology and Economic Council, the answer for small farmers climate smart agriculture practices, the project is is a “niche market, not volume” while for larger expected to result in a 20 percent increase in yield farmers it is “scale, not strategy”. But as far as and a 25 percent increase in income by 2025. technology goes, in a digital age i4.0 in agriculture can mean automated processes and small-scale 5.2. i4.0 and Milling Internet-of-Things, such as sensors, connected As with other sectors, such as garments and irrigations systems and even the use of drones for light engineering, the move towards i4.0 is field surveillance, monitoring and management. being driven by the potential for exports. The ingredients are quality and standards to meet EU 213 https://www.moc.gov.kh/TradeSwap/userfiles/file/uploadedfiles/Job/Rice%20Sector%20Support%20Project%20Brochure7_17_2015_14_48_15.pdf 287 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT 5.3. SME Clusters the Ministry of Commerce as a means of keeping Cambodia competitive. To further encourage Demonstration projects are one way to spread the automation and productivity growth, the ideas and the information, and social media could Garment Manufacturers Association of Cambodia become a powerful tool in this respect, and there (GMAC) in 2017 launched the Cambodia Training are numerous websites of individual farm projects Centre Institute (CGTI) with assistance from an aid but fewer farming community sites. One such is agency from France. According to the GMAC the the Cambodia Organic Agricultural Association pace of introducing new technology is dictated (COrAA) which aims to “raise awareness on by the brands themselves, with higher-end global environmental, economic, social, and health fashion brands requiring industrial cutting and related benefits of organic farming.”214 COrAA is sewing of the highest quality. The smaller number Cambodia’s first Certification Body. But the most of locally-owned companies are usually producing radical proposals for demonstration projects for the lower end of the market. involve the idea of ‘SME clusters’, a concept which brings together farmers and other SME Other i4.0 developments that can be seen in businesses in close locational proximity to each Cambodia’s garment sector are post-production other to form a physical as well as a logical supply- logistics, such as storage and warehousing, sales chain, using agricultural raw materials to process responding instantaneously to market fashions into higher value-added products. From inputs and the management of stocks. The systems such as rice, maize and bamboo, for example, require IT and high-level IT staff positions, can come outputs such as cakes, cosmetics and such as programmers, while at the lower level cooking oil from maize, construction materials maintenance staff are in demand. According to from laminated bamboo, and many other the GMAC, most of the technician posts are trained products. The most ambitious project proposal on-the-job (OTJ) while staff for more advanced is coming from Woodbridge, a housing and positions still come from overseas. construction conglomerate who are breaking Despite the shift towards automation, employment ground to build the first such cluster with the aim in the sector in Cambodia has increased over of bring i4.0 into play. “(The) model changes the recent years from 500,000 to around 700,000 game. It is not a typical SME cluster, we create a employed in nearly 800 factories, but ultimately creative and innovative cluster model which itself automation will displace labour. The ILO estimates is an ecosystem.” A critical aspect of this concept over 80 per cent of jobs in Cambodia’s textile, of an SME cluster is therefore on-site access to clothing and footwear (TCF) could be lost to connected and automated i4.0 technologies. automation. But unless driven by investment in 6. Garments i4.0 technology by foreign-owned firms involved in higher-end products, 80 per cent seems too Garment prices globally are subject to secular high an estimate. If Cambodia can succeed in decline due to the relocation of manufacture from growing its other manufacturing sectors, such as low cost countries such as China and India to lower light engineering, and its commercial and services cost countries such as Bangladesh, Cambodia, sectors, labour displacement will morph into Myanmar and Vietnam, and to rising productivity labour redistribution. For example, according to owing to increasing automation in the production the Royal Government’s Tourism Development process. In the case of Cambodia, in recent years Strategic Plan 2012 – 2020, there is a need for an the basic wage has risen from below USD100 a extra 500,000 tourism professionals.215 However, month to USD170 a month from January 2018, for the immediate future, factories are spreading placing growing pressure on thin margins that out across Cambodia to locate close to labour will further encourage automation, the growing supplies. use of digital technology being encouraged by 214 https://www.facebook.com/pg/Cambodian-Organic-Agriculture-Association-COrAA-101302199967897/about/?ref=page_internal 215 Royal Cambodian Government (2012) Tourism Development Strategic Plan 2012-2020 (p.34) 288 Chapter 12 Funding for automation is coming mostly from with a “One Service, One Standard” and a “One foreign investors, notably from China, Hong Staff, One Skill” approach and encouraging the Kong, Malaysia, Japan, South Korea, Singapore use of ICTs in tourism (e-tourism), which could also and Taiwan, but also from across the border with stand for eco-tourism that government would like Vietnam. Cambodia’s quota access to markets to see developed. Also introduced is a national in Europe and the US are the big attraction – for competition “Clean City, Clean Resort, Good example, 45 per cent of footwear exports go to Service, Best Hospitality.” Further improvements Europe and 25 per cent to the US – and while may come from a programme launched in 2017 some imported yarn is turned into fabric local, by the ADB and the Australian Government, the most of the fabrics are imported so rules of origin Mekong Business Initiative, which is supporting need to be strictly observed to safeguard those start-ups in the tourism sector through the quotas. Foreign ownership of textile factories is Mekong Innovative Start-up Tourism (MIST) over 90 per cent. platform. 7. Tourism But the most direct way to elevate standards is through competition and the demonstration Travel & Tourism contributed almost 33 per cent effects of international hotel management of Cambodia’s GDP in 2017, with foreign receipts entering Cambodia, a process that has been averaging 20-30 per cent of total export earnings well under way for several years. This points to for the past decade. Tourism lends itself to digital a segmentation in the market. For the budget systems, notably websites, booking and payment traveller local hotels and hostels are plentiful. platforms. In Cambodia all these exist, often run For tour groups and overseas visitors there are by foreign travel platforms by companies such middle-range hotels, and most have Internet. But as TripAdvisor and Agoda.com, but also by many the lucrative end of the market is for business local tour companies. Visitor numbers have been travellers and the market for MICE (meetings, boosted in recent years by a growing number of incentives, conferences and events), in luxury international flights into Cambodia, especially hotels and resorts that offer digital facilities, from from the Asia-Pacific region. In 2017, the largest broadband Internet to audio-visual conferencing number of tourists were from China, followed by and business centres. Overseas travel companies, Vietnam, Laos, Thailand and then South Korea. such as Hanoi-based Tran Thanh Num, are moving Tourists from neighbouring countries would into Cambodia to provide for this market, catering also come by road transport where Customs and for business travellers from Asia-Pacific, India and Excise border controls have been significantly China, Turkey and Japan and Hong Kong among improved following closer coordination with others. the Ministry of Transport and the introduction of visa-upon-arrival. In addition, by 2018, seven The pattern of development is familiar in local airlines have been licensed to cater for the Cambodia. Digital technologies are being used growing tourist market.216 There are also specific to support the sector, especially at the high sectors of tourism that could be candidates for end where a growing number of international growth, such as health tourism. For example, operators and hoteliers are involved. And catering clinics offering non-complex dental treatment are for individual tourists, mobile app developers are well represented in Cambodia’s towns. appearing, such as the Angkor Audio app which provides in 14 languages audio-visual guides of Despite these advances, the tourism sector Angkor Wat and other temples while threatening remains challenged with issues of staff to disrupt the human guide business, and a professionalism, and uneven standards of hygiene BookAngkorTukTuk.com platform. Travel and and cleanliness. A government Tourism Reform tourism, already well established in Cambodia, is Plan 2015-2018 has tried to address these issues set not only to grow but to become a significant 216 Royal Cambodian Government (2012) Tourism Development Strategic Plan 2012-2020 289 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT part of Cambodia’s digital economy, especially as Penh and plans to develop an automotive an foreign exchange earner. SEZ, producing car parts and bringing in other investors to produce spare parts. After garments 8. Light Manufacturing and footwear, bicycles are Cambodia’s largest In 2017, according to the Asian Development Bank, manufactured export. Of Cambodia’s USD430 Cambodia’s manufacturing continued to grow by million exports of electrical and vehicle parts in over 9 per cent, “with a slowdown in garments 2017, around USD355 million were bicycles. In and footwear off set by stronger growth in 2017 Cambodia shipped 1.42 million bicycles, a emerging industries: electrical parts, automobile 9 per cent increase over 2016, becoming – ahead components, bicycles, milled rice, and rubber.” of Taiwan – the largest supplier of bicycles to the Foreign-invested factories were driving much of European Union under the EU’s ‘Everything But this growth, incentivized by foreign trade quota Arms (EBA) preferential tariffing scheme which, agreements with the European Union and the under the Rules of Origin, requires over 30 per United States, contract pricing for local producers, cent of locally-produced inputs. Most of the FDI and an abundant supply of young, and therefore into bicycle manufacture comes from Taiwan adaptable, low-cost labour with English as their which has transferred much of its production to second language. On-the-job (OTJ) training is also Cambodia. Cambodia is also the third largest and more prevalent among foreign-owned companies. fast growing supplier of bicycles to the United For example, typically Japanese manufacturing is States. Chinese companies, who have invested more complex, and “requires a more highly skilled heavily in the Battambang SEZ, close to the border labour force than the garment sector. This has with Thailand, are also shifting their production resulted in much higher investment flows from to Cambodia. China’s Trek and Kent bicycle Japanese firms being channelled into human manufacturing companies both announced plan resource skills training and development…” also to produce in Cambodia, Trek planning 200,000 “resulting in higher wages for workers.” made-in-Cambodia and a supplier of Kent is building a 500,000-square-foot factory.217 Japanese FDI especially has been responsible for the growth of the electronics sector in Although Cambodia’s light engineering sector Cambodia, mostly in Special Economic Zones remains mostly at the level of assembly with little (SEZ), notably around Phnom Penh – the Phnom local manufacturing of parts and components, it Penh SEZ employs around 20,000 workers – and is attracting significant investment from overseas the strategically-located areas of Bavet City and from companies that have a strong interest in Poipet along the Vietnam and Thailand borders. productivity, quality and price to benefit from Products include circuit boards and smartphone trade quotas. This FDI is capable of accelerating screens and represent a significant development the adoption of i4.0 and digital technologies in of Cambodia’s potential as a platform for these sectors and in local factories that supply components and assembly. For the Poipet SEZ, them because they will insist upon price and Japan’s Sumitronics Manufacturing (Cambodia) quality. But ultimately, it is about how government reached a memorandum of understanding with and the private sector position the economy Thailand-based B. Grimm Power Company to in the sense of opening up options for private build power transmission lines from Thailand to investment, options which range from a low cost the SEZ, thus tackling one of Cambodia’s current of doing business to market incentives to create bottlenecks. new growth sectors either as new industries or as new products and processes within existing Other major investors in Cambodia’s manufacturing industries. sector include South Korean, Chinese and Taiwanese companies. In 2017, a South Korean company bought 100 hectares of land in Phnom 217 https://www.bicycleretailer.com/industry-news/2018/11/12/trek-kent-and-others-look-cambodia-bike-production#.XBXbd_ZuKBQ 290 Chapter 12 9. Hard and Soft Infrastructure for a percentage of per capita GNI is 1.1 compared Trade, a Digital Economy and i4.0 with 2.7 average for ASEAN, and for 1GB is 2.2 compared with 5.4 average for ASEAN. Although The transition to a digital economy and the 4G networks exist in all provinces, these figures adoption of i4.0 technologies and work processes relate primarily to 3G, and the percentage of the requires a framework of hard and soft and population covered by 3G is 80 per cent compared infrastructure. Hard infrastructure comes in the with 87.6 per cent average for ASEAN, so 2G form of ubiquitous broadband fixed and wireless handphones, notably Nokia, are still widely used. telecommunications networks, and uninterrupted electricity power and water supplies. One of the Cambodia is much further behind in terms of features of a digital economy is the availability of fixed lines, partly because of the legacy of land data on a scale that allows intelligent machines mines which always made the construction of a to learn and discern patterns for analysis and fixed line network more hazardous than a wireless action, and that data is increasingly stored in network. Fixed-broadband subscriptions per the cloud in large-scale data centres that require 100 population is only 0.6 compared with 11.3 broadband connectivity and guaranteed sources average for ASEAN while fixed-broadband prices of power and cooling water, or alternatively with as a percentage of GNI at 13.5 is only slightly edge computing, using network architectures below the ASEAN average of 14.5. that store and process information from sensors An important boost to Cambodia’s digital capacity and the Internet-of-Things (IoT) at the periphery came with the opening of Cambodia’s first two of the network as a distributed computing model. submarine optical fibre cables in 2017: the Cambodia is far from all of this, especially where Malaysia-Cambodia-Thailand (MCT) cable that power and water are concerned – in the case of connects to the pan-Pacific Asia-America Gateway power customers have to pay the electricity utility (AAG) cable linking Southeast Asia to the United for bringing renewable sources into the grid as if States and the Asia Africa Europe-1 (AAE-1). These it were compensation, the reverse of global best cables land at Sihanoukville, using 100 Gbps practice – but giant strides have been made with technology with a designed capacity of 30 Tbps telecommunications. and 40 Tbps respectively, although it is common 9.1. Telecoms, Internet Capacity and the for less than 10 per cent of the capacity of a fibre Digital Dividend cable to be lit. The spur of a third fibre cable, the South-East Asia – Japan Cable 2 (SJC2) with a The telecoms market in Cambodia is competitive, designed capacity of 144 Tbps is due to land in with six cellular operators and two fixed line 2020. operators. According to a report from the World Bank Group218, by mid-2018, the mobile The area where capacity is most lacking is in rural penetration rate or teledensity in Cambodia and remote areas, especially high-speed Internet was 124.9 compared with an average for ASEAN access. The digital dividend which should see countries of 98.9, although this does not imply 700Mhz frequencies in the UHF band become everyone has a mobile phone as multiphone available when the TV ASO/DSO (analogue ownership will inflate the teledensity and the switch-off/digital switchover) occurs will offer listed subscribers of mobile networks may include a more effective way to cover these areas, but duplications and expired subscriptions, but these according to an interview with the MPTC, the 2020 factors will also be present in the ASEAN average. due date may not be met. Not least among the More telling is that active mobile broadband problems of the switchover is the need for citizens subscribers in Cambodia stand at 50.2 compared to upgrade their TV sets to digital, which will be an with the ASEAN average of 47.4 and mobile unwelcome expense to many households. Maybe broadband prices for 500 MB of data capacity as the government will be able to ease the process 218 http://documents.worldbank.org/curated/en/100841543598854492/pdf/128267-REVISED-Digital-Economy-web.pdf 291 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT with a credit voucher system financed from the Nevertheless, these are frameworks necessary sale of the spectrum. for a steady adoption of digital technologies in industry and commerce. The World Bank Group 9.2. Digitalisation and Public Policy report219 shows that digital adoption remains The shift from manual to mechanised, and low in Cambodia with only the Lao Republic from analogue to digital, creates opportunities and Myanmar in ASEAN trailing. Besides the to leapfrog into i4.0. Leapfrogging is certainly necessary governance framework, leapfrogging possible through the adoption of i4.0 technologies, into a digitalised economy requires sets of not least because Cambodia does not have an industrial standards to be put into place to ensure overhang of legacy investments in i3.0, but to interconnectivity, interoperability, security and achieve results a framework of governance needs international recognition for the purposes of trade, to be in place. For example, legislation recognising cross-border payments and the sharing of data. the legality of digital signatures and the non- The World Bank Group suggests the following repudiation of smart contracts to facilitate the use areas for Cambodia to achieve internationally- of blockchain, as well as a Personal Data Privacy recognised national standards: the architectures Act, cyber laws strengthening data protection of networks, the technical specifications of and e-commerce legislation. The creation of networks, the protocols of networks, the security an effective e-Government framework is also of networks, the information standards, ICT service essential. Currently, each government department management standards, data management and has its own approach to setting up a website and data sharing standards, and data centre and cloud populating it with information and applications, standards. described by the Ministry of Commerce as “piecemeal”. For example, the Ministry has for three years been testing a Single Window for conformity to Rules of Origin (but apparently not yet for wider trade issues) with Customs and Excise, but no other ministries are yet ready to connect. Figure 35: Digital Adoption Index (and sub-indexes) relative to global average 2 Standard deviation Difference 1.5 1 0.5 0 -0.5 -1 -1.5 -2 Myanmar Lao PDR Cambodia Indonesia Philippines Vietname Thailand Brunei Malaysia Singapore Digital Adoption Index Business sub-Index People sub-Index Government sub-Index Source: World Bank, 2018 219 http://documents.worldbank.org/curated/en/100841543598854492/pdf/128267-REVISED-Digital-Economy-web.pdf 292 Chapter 12 These are not easily achieved without considerable state-owned SME start-up bank, similar to the support from specialists. It would serve Cambodia existing Rural Development Bank, with an initial well if multilateral support in combination capital of USD100 million. with private sector specialists could advise and From the private sector the Smart Axiata work with the Royal Government of Cambodia, Digital Innovation Fund has been particularly including the leading universities and research active in supporting innovation and start-ups institutes, such as the Institute of Technology of in partnership with the investment advisory Cambodia and the Royal University of Phnom firm Mekong Strategic Partners (MSP). With the Penh, to achieve a degree of technology transfer creation of the ASEAN Economic Community (AES) in terms of knowledge and expertise. In some from January 2018, Cambodia is also emerging as cases, this will involve knowledge of technologies, a pole of attraction for regional investors, such in others legal knowledge. For example, there are as the Thailand investment fund ‘500 Tuk Tuks many benchmarks of international best practice ll, 500 Startups’ that is “aggressively” seeking to to follow for personal data privacy legislation invest in start-ups “particularly in Cambodia.” and cyber security laws. To advise the Prime Additionally, there are workspaces and incubators Minister of Cambodia with technical analysis starting to spread across Cambodia. For example, and recommendations regarding policies and in Phnom Penh the Impact Hub, part of a strategies for rapid and sustainable socioeconomic global network of incubators, has developed a development, the Government has set up a platform in partnership with Smart to roadshow taskforce under the auspices of the Supreme opportunities to university students. The platform National Economic Council (SNEC), a body that is also marketed through Facebook. An interesting brings together the public, private and academic feature of the Impact Hub, which has over 350 sectors, including Dr. Mey Kalyan of the Royal local members of its ‘Entrepreneurs Club’ is that it University as Senior Advisor. Dr. Mey Kalyan is also is especially looking to overseas returnees, young the Chair of Cambodia Development Research Cambodians who have been abroad to study and Institute (CDRI) Board of Directors. have acquired IT knowledge and skills along the Financial support for innovation and for start- way. Proposals supported by the Impact Hub ups is a further requirement of leapfrogging. include a Start-up Visa in order for tech companies Although of quite recent vintage, several start-up to easily offer jobs and training, start-up funds and support funds have emerged. Fintech, which ranging from USD10k – USD100k to foster early is showing early signs of growth in Cambodia, is stages of growth, possibly with government receiving support from the Ministry of Finance. acting as underwriter, and a simplification of According to a study in 2017 by the Asian the business registration process which can be Development Bank (ADB)220, by significantly lengthy and cost up to USD2k. expanding digital financial services Cambodia In many developing Asian economies, could stimulate economic growth and increase multinational IT companies such as Microsoft, GDP by about 6 per cent. In 2018 the Ministry of Hewlett Packard and Cisco provide vocational Economy and Finance announced it was working training programmes, but so far only Cisco has with the General Department of Taxation to create done so in Cambodia, and that from its base in a policy framework to support and guide SMEs in Thailand. Page 17 of the Cambodia Job Outlook tax-related issues, and at the same time planning 2018 published by the National Employment a tech start-up and SME centre to be built within Agency reveals that among 15 skill sets employers ministry grounds. “Three floors will be dedicated have difficulty filling, ‘basic computer literacy/ to SME development, and will have, among other using IT’ comes only seventh in the list. This facilities, an incubator, an accelerator and a co- suggests that IT skills shortages are a demand working space.” To help student develop IT skills, as well as a supply problem, and that addressing the Ministry of Posts & Telecoms has launched management knowledge of innovation and a USD1 million fund, and in December 2018 the IT is equally important as assisting students Prime Minister announced the setting up of a 220 https://www.adb.org/sites/default/files/publication/222061/financial-inclusion-se-asia.pdf 293 Cambodia Trade Integration Strategy 2019-2023 FULL REPORT at secondary – only 30 per cent of schools direction if this leads to increased efficiencies. have computers according to the MPTC – and Soft infrastructure needs e-Government and tertiary education levels. The paucity of IT skills legislation to support the spread of digital trade, in Cambodia is certainly a break on digital commerce, data protection and the promotion of transformation, and with relatively few qualified payment systems. In 2014, KOCERT, the Korean aid graduate students many employers look to On- agency working in cooperation with the MPTC, the-Job (OTJ) training for technician levels grades, proposed five pilot projects for government to while relying upon overseas staff for more skilled pursue: a technical framework for government, work, such as programming. However, they do not CamCERT enhancement for cyber-security, get government funding for this, and because of e-commerce promotion, a tourism network, and poaching, many employers are reluctant to invest an education development programme. These money on workers only to see them leave for a should be revisited to monitor their progress, competitor. A direct subsidy or a tax break would assess their impact and consider their extension help to insure against loss. to other areas to maintain a momentum of innovative thinking across government. 10. Conclusion The creation of the ASEAN Economic Community While Cambodia is lacking most of the (AEC) in 2018 should be of long-term benefit to development of Industry 3.0, it nevertheless has Cambodia, but the shorter-term gain is likely to an opportunity to leapfrog in stages towards be more regional foreign investment coming Industry 4.0. There are likely to be two key drivers into the country. Foreign investment has been to this. First, the pattern of demand for products instrumental in the adoption of i4.0 in sectors and services led by large investors. For example, such as garments, and is beginning in rice milling, if the demand for higher-end garments grows including plans for the use of blockchain to this is likely to include i4.0 technologies in their guarantee rules of origin and quality of crops, and making. If foreign multinationals choose to locate is entering the arena of IT start-ups, in areas such supply chains in Cambodia to produce high-end as hailing apps and in tourism, all vital foreign engineering products, like electric vehicles, then exchange earning sectors. Cambodia has gained this is likely to involve i4.0 technologies and i4.0 considerably from adopting an open approach management practices. Second, is the need to to its economy and to trade, remarkably gaining strengthen various hard and soft infrastructures. World Bank low-middle income status in 2015, Hard infrastructure requires ubiquitous access to and to maintain the momentum the government broadband Internet, primarily but not exclusively needs now to adopt i4.0 ways of thinking and to over wireless mobile networks – 5G will eventually adapt them to its own operations and services provide the technology for this leap – and a more to the community. Besides the general reforms reliable water and electricity supplies at lower needed to foster a digital transformation of tariffs assisted by inputs of renewable energy Cambodia’s economy, set for 2023 (see above) into the grid, especially if Cambodia is to develop a specific set of policies aimed at encouraging data centres to support Special Economic Zones investment in i4.0 technologies to meet the aims and SME clusters with cloud computing. Reform of the RS4 is required. They should include the of these sectors is called for, notably energy and following: investment incentives covering land, water supplies. Giving subsidies is not a long- skills training, taxation and R&D allowances; term solution. Transport logistics is the other hard encouragement of technology transfer, infrastructure that needs addressing. The key issues collaboration with local companies, ministries and to be addressed here are freight and passenger universities and automating IP protection; soft and capacity and the efficiency of transport hubs such hard infrastructure improvements to minimise the as ports and warehouses. The decision in January costs of doing business; an equitable framework 2019 to reduce customs clearance procedures for labour and foreign management relations under the Ministry of Commerce’s Camcontrol including an impartial arbitration system. and also reduce the number of agencies involved in border checkpoints is a step in the right 294