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,
"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,"
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.