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A few hurdles still block path to joining global value chains

A view of a container storage yard at a port terminal in Kandal province.
A view of a container storage yard at a port terminal in Kandal province. Heng Chivoan

A few hurdles still block path to joining global value chains

The government needs to urgently amend its industrial development policy to spur the inclusive growth of small- and medium-size enterprises (SMEs) and develop a national logistics platform to cut onerous shipping costs if Cambodia is to find a place in global value chains, panellists at a macroeconomic conference said yesterday.

Speaking at yesterday’s 2017 Outlook Conference, an event sponsored by ANZ Royal Bank and the Cambodia Development Resource Institute (CDRI), economists and members of the private sector agreed that Cambodia was making slow strides in capitalising on industrial fragmentation, but plenty more could be done.

“Cambodia does not need to have a whole manufacturing process, but rather choose which part of the value chain it wants to target,” said Khoon Goh, head of Asia research for ANZ Group. “It is all about task specialisation along a particular value chain.”

He added that while Cambodia was slowly shifting from labour-intensive garment manufacturing to medium and high-tech manufacturing, it was still overly reliant on the import of materials to produce these export products.

“Cambodia can make lateral steps and can use countries like Thailand and Vietnam as a model to aspire to by moving away from simple assembly operations,” he said.

Sear Rithy, chairman of WorldBridge Land, which is developing an industrial park and bonded warehouse zone just south of the capital, said the government should amend its industrial development policy to be more inclusive.

“The government does not have a strong SME policy to get smaller companies into the value chain,” he said. “For too long, development has always been focused on large investments and securing huge amounts of capital.”

He added this has created a disconnect between corporate interests and those of the average local business, excluding them from the value chain.

“SMEs are the drivers of the economy and Cambodia needs to follow Vietnam’s footprint for development that includes decentralising supply chains,” he said.

“If there were incentives to develop SME zones in places like Kampong Cham for pepper, or in Ratanakkiri for rubber, that would only have to be on a few hectares of land, we could create value by producing products at the source rather than paying costly shipping rates.”

Hiroshi Suzuki, chief economist of the Business Research Institute for Cambodia, said that despite some shortcomings, Cambodia was becoming a beacon of success in capturing investment from companies looking to diversify their value chain. He said Japanese companies in particular had relocated some of their manufacturing processes to the Kingdom.

“Cambodia is expected to be one of the best places for a manufacturing base to support the global value chain,” he said, adding that it was now up to the government and development partners to maintain and promote the country’s attractiveness.

“In order to enhance the merit of Cambodia, the logistics link with neighbouring countries is indispensable,” Suzuki said.

He cited the improvement of hard infrastructure, such as National Road 5 and the Sihanoukville Port, and soft infrastructure, such as “smooth and transparent customs procedures, efficient inland transportation, and the establishment of cold chains”, as vital to creating an efficient logistics network.

A brief released by CDRI that accompanied the event urged the Cambodian government to fast-track the establishment of a national task force to improve the country’s logistical performance, an initiative that would be spearheaded by the Ministry of Public Works and Transport to cut high transport costs.

The taskforce would strive to close the gap in coordination between the private and public sector, while prioritising the development of transport corridors such as roads, waterways and railways.

A 1 percent increase in stock of quality and efficient infrastructure directly contributes a 0.08 percent increase to GDP, the report noted.

Ruth Banomyong, an associate professor at Thammasat Business School in Thailand and a consultant hired by the World Bank to help Cambodia develop its National Logistics Council, said any initiative would have to start by addressing costly bureaucracy at the ground level.

“Without clear rules and regulations that are strictly followed, any potential development in supply chains or logistics will continue to operate in an environment that lacks transparency,” he said.

Without transparency, he said, it is impossible to fully understand the merits of a diversified value chain and where profits can be derived from.

Ruth urged the Cambodian government to weed out corrupt border and customs officials that delay shipments and add to costs.

“Cambodia needs to change the way it thinks about logistics,” he said. “It needs to stop informal payments at the border.”It was not just about paperless cross-border transactions, but about “people-less” transactions, he noted.

“Cross-border e-commerce is the future, but for this future to take off you need to limit the actual physical interactions that cause costs to rise,” he added.

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