Notes from the Field

During the Economic Crisis, Cambodia Keen to Support Business

June 3, 2009

The recent release of two reports – one from the World Bank/IFC and the other from the IFC/Asia Foundation – compelled more than 200 Cambodians to gather on May 25th in a conference room overseeing the Tonle Sap river. They were business owners, public officials, and development organizations, all keen to discuss ways to make the life of business owners in Cambodia easier and more productive.

The lack of information on regulations, time-consuming procedures, unofficial charges, and the poor delivery of essential public services hamper business growth.   Making it easier, cheaper, and more transparent to start and operate a business could significantly help Cambodia compete in both the international and domestic markets, according to the World Bank/IFC Second Investment Climate Assessment (ICA) and the Provincial Business Environment Scorecard (PBES), published by IFC and The Asia Foundation.  At a time of unprecedented global financial and economic crisis, the issue is not anecdotal. Cambodia urgently needs to improve its business environment at the national and provincial level if it wants to mitigate the shock of the international crisis.

Speaking at the launch, H.E. Cham Prasidh, Senior Minister and Minister of Commerce, insisted on the urgent need to take concrete measures at both the national and local level to facilitate the development of all enterprises. He said, “As these two publications show, Cambodia has made great economic progress in just a few short years, but we still face important challenges. It is the responsibility of all Ministries to reduce procedures and improve the business environment to help businesses develop in Cambodia.”

At both the national level and sub-national level, improved governance is a priority

The Second ICA survey — which was conducted with 500 entrepreneurs in Phnom Penh, Siem Reap, Sihanoukville, Battambang, and Kampong Cham — shows that corruption was the top concern of entrepreneurs, as it was for the first ICA in 2003. The second highest concern was macro-economic uncertainty. Because of deteriorating conditions in the global economy, this ranked higher than in 2003. Entrepreneurs’ third-highest concern was anti-competitive practices; fourth was economic and regulatory uncertainty. Private companies, and especially small and medium enterprises, need better access to finance, information on regulations and procedures, export opportunities, reliable dispute resolution mechanisms, and access to efficient and transparent government services. Similar issues are raised by smaller enterprises at the local level. Informal fees, for instance, are also mentioned by 75 percent of the MSMEs surveyed in the PBES as a major obstacle to their development.

Some Cambodian provinces are more business-friendly than others, but all have progress to make

At the local level, Micro Small and Medium enterprises (MSMEs) face a myriad of constrains that vary in intensity from province to province. Although policies are designed and decided at the national level, how they are implemented at the local level is what matters for Cambodian enterprises, 96 percent of which are micro-enterprises with less than 10 employees. 90 percent of these micro-enterprises operate only within their own province.

The Provincial Business Environment Scorecard (PBES) measures this difference in business environments at the sub-national level by ranking provinces against each other, according to their quality of economic governance. The 2006 PBES, which was the first PBES study conducted in Cambodia, interviewed 500 company owners or managers in Cambodia’s ten most-economically active provinces. The 2009 PBES conducted in-depth interviews of 1,234 business owners from the formal and informal sector in all 24 of Cambodia’s provinces. Although completed by data and information collected from published sources or self-observation, the PBES is, in large part, the voice of local MSMEs.

A car garage owner in Phnom Penh said, “The process of registering a business is complicated and time-consuming for business people, unless we know all the required documents. Moreover, we have to visit the ministries many times to get the document signed depending on officials in charge’s availability.” He addressed one of the ten areas of economic governance investigated by the survey: time and costs of starting a business; property rights; transparency of regulations; the time required to comply with regulations; informal charges; participation of the private sector in policy making; crime prevention; the time and required procedures to pay taxes; how effectively local officials help the private sector; and dispute resolution.

According to these ten criteria, or sub-indexes, Kampong Cham is the top-ranking Province in 2009, as was the case in the 2006 PBES, while the capital city of Phnom Penh remains at the bottom. The 2009 PBES also demonstrates that rapid progress can be expected when concrete measures are taken by local authorities. This is proved by the example of Sihanoukville and Siem Reap, which both moved up from near the bottom in 2006 to the higher ranks on the 2009 PBES by making significant advances in four out of the ten areas. Nationwide, indicators showing the most improvement were made in the cost of starting a business and the time spent complying with government regulations and tax administration. The indicators which deteriorated on the 2009 PBES, in comparison with the 2006 PBES, are property rights, informal charges, transparency, and dispute resolution.

PBES as a tool to prioritize efforts and reforms

An important outcome of the May 25 conference is the strong commitment of the Government’s representatives to use the PBES as a tool to identify priorities for reform and to monitor progress over time.  In his concluding remarks, H.E. Phork Sovanirth, Secretary of State of the Ministry of Industry, Mine and Energy, urged the audience to use the information from the two reports as “they will be instrumental in designing reforms and program activities to improve the business and investment environment and enhance the effectiveness of dialogues between the pubic and the private sector at the provincial level as well as at the national level.”

Addressing the representatives of the line ministries working at the provincial level as well as the Province’s Governors, Senior Minister Cham Prasidh declared, “Using the PBES, provincial governors and the line ministries can set priorities for action. The 2009 PBES will serve as a base-line for your performance. There is a need to come back to measure the same provinces again in a few years to see whether there have been any improvement or regression and why.”

A tool for action and dialogue between the public and the private sector; this is exactly what these reports aimed to be, a starting point for reforms and improved business environments that will spur business activity, job creation, and economic growth for the benefit of Cambodia’s people.

Véronique Salze-Lozac’h is The Asia Foundation’s Regional Director for Economic Programs and is based in Cambodia. She can be reached at vsalze-lozach@asiafound.org. Last week, The Asia Foundation’s Cambodia office released the second Provincial Business Environment Scorecard (PBES) survey, which ranks all 24 provinces on the quality of their economic governance. Findings from the report have been cited in articles in Agence France-Press, Voice of America, and two articles in The Phnom Penh Post (one here, the other here).

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