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Promised reforms offer hope to small businesses

Promised reforms offer hope to small businesses

They are the tiny giants of Cambodia's economy. By government estimates, small and

medium enterprises (SMEs) account for up to 99 percent of all companies and almost

half the nation's employment.

The vast majority of these businesses are rice millers, employing an average of two

people in what should really be described as "micro" enterprises. Other

types of SMEs include metal goods producers, weavers and motorcycle repair shops.

The exact definition of an SME is rubbery, but in Cambodia the term usually refers

to manufacturing or agricultural businesses, rather than service-oriented industries

such as restaurants. One working definition says SMEs have between 10 and 100 employees

operating with between $50,000 and $500,000 worth of assets. Surprisingly, the hotspot

for manufacturing is not Phnom Penh, but Kampong Thom, Kampong Cham and Prey Veng,

in that order, according to a 2001 study by the Ministry of Mines, Industry and Energy.

Despite the central role these modest-sized businesses play - or could play - various

assessments have concluded that SMEs are hobbled by government bureaucracy, and by

banks' wariness to give loans in such an unregulated financial environment.

But change is afoot. In July, Prime Minister Hun Sen signed on to an ambitious reform

blueprint designed to cut the red tape faced by entrepreneurs, open up access to

finance and establish channels through which to filter complaints against ministerial


The SME Development Framework was drafted with the assistance of the Asian Development

Bank (ADB) and is due to be released publicly in the coming weeks. The stated vision

of this "game plan" is to "develop a conducive business environment,

which will lead to a competitive SME sector contributing to the creation of quality

employment and improve the range of goods available to the people of Cambodia."

The reforms will be steered by an SME subcommittee of 11 senior officials from various

ministries and driven forward by a permanent secretariat staffed with 10 Cambodians

and a foreign advisor, currently ADB consultant Charles Schneider.

The ADB is encouraging the implementation of the SME Development Framework by providing

a $20-million budget support loan to be released to the Ministry of Economy and Finance

(MoEF) in three stages, as a "kind of carrot to the government for reform,"

said Keo Rattanak, secretary of the SME subcommittee.

One of the first priorities, Rattanak said, is to review the Byzantine matrix of

licenses required of small business, leading to an elimination of any useless or

overlapping licenses and the streamlining of the process to obtain the necessary

ones. The Council of Ministers has already approved the plan for the license review,

and a hotline to deal with complaints from SMEs should be operational within a month,

Rattanak said.

"We need early success, so we might pick a few [licenses] first and use this

as a showcase to do the review," he said.

Elimination of licenses, however, also means elimination of official and unofficial

fees, and Rattanak admits that some ministries will be reluctant to let go of their

paperwork cash cows.

"This will be one of the most challenging of all the reform aspects because

it cuts across all ministries and won't be pleasant," Rattanak said, but added

that he was confident the commitment to the plan shown by the Council of Ministers

will see the process through.

"If we have any difficulty we will report directly to the Prime Minister,"

he said.

A 2004 ADB report on SME development, estimated that the necessary reforms - including

the scrapping of some licenses - would cost between $25 million and $30 million.

"The real struggle will come when it's time to make changes," Schneider


But a precedent in September last year gives hope to the architects of SME reform.

When Hun Sen announced that the costs for registering a business would drop from

$615 to $177 and the time taken be reduced from 30 days to just 10 days, the number

of registrations doubled the next month and has remained around that level since.

"It's the elasticity of registration," Schneider said. "If you lower

the price you'll get more registrations."

Schneider hopes the same trend of business confidence will occur if annual licenses,

certificates and inspections are streamlined.

The success of this revenue trade-off also depends on taxation reform and the ability

of the Ministry of Economy and Finance to improve tax collection, he said.

Another priority area for the secretariat is to set up a telephone hotline so SMEs

can appeal against administrative decisions - anonymously if necessary - and know

that the secretariat will feed these complaints to the SME subcommittee and track

the progress. If it becomes apparent that a particular ministry is making life hard

for SMEs, the secretariat can advocate change or the matter could even be raised

at forums such as the Government-Private Sector Forum, which has a manufacturing

and SME working group representing the industry.

"There are going to be bumps in the road and I think the ability of the secretariat

to maintain recourse mechanisms will be important," Schneider said.

But the hotline and the license review are just two of the more immediate components

to the SME reforms.

The simplification of accounting procedures is also high on the SME agenda. Although

the MoEF is currently training larger businesses to use an accounting template consistent

with international accounting standards, it's far too complex for many SMEs, the

smaller of which often keep simple logs of spending and receipts in schoolbooks on

the front counter.

So a basic accounting system has been developed for SMEs. The English-language version

has already been approved by the MoEF's National Accounting Council and the Khmer

version is expected to get the green light by the end of the year, Schneider said.

Access to finance remains a huge constraint to start-up businesses and those wanting

to expand. Local banks provide only 1 percent of working capital to companies and

even then only if the owner has land or a building to mortgage, according to the

Development Framework. Banks are wary because borrowers sometimes don't take their

debts seriously and the courts are weak when they try to repossess debtors' land

or property, the framework stated.

To foster some trust and growth, 16 local banks are working on a "credit information

system" (CIS) which will catalogue bounced checks, late payments and defaults

of borrowers. When the banks agree on a draft prakas currently being reviewed and

a code of conduct to protect the privacy of borrowers, they will be able to access

this online database and make more informed decisions about entrepreneurs.

"This will help the banks to identify the good customers for loans," said

Talnay Im, director-general of the National Bank of Cambodia.

Im said the CIS should be operational by January 2006.

The list of other SME reforms the government hopes to accomplish includes passing

the key commercial laws in the pipeline, deterring smugglers, strengthening laws

about the leasing of equipment, and improving access to domestic and international


The ADB is not alone in pushing the interests of SMEs in Cambodia. There are ongoing

activities funded by the Australian Agency for International Development, European

Commission, the German technical cooperation organization GTZ, the Japanese International

Cooperation Agency, Mekong Private Sector Development Facility, and the US Agency

for International Development.

While those involved admit that success hinges on political will, the ADB's $20 million

assistance program for the Development Framework represents an optimistic injection

of cash and expertise for the 'little guys' of Cambodia's economy.




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