Logo of Phnom Penh Post newspaper Phnom Penh Post - Kingdom’s agro-processing potential




Kingdom’s agro-processing potential

Content image - Phnom Penh Post
Cambodia exports rice to the international market. But other, potentially even more profitable, opportunities exist. Cambodia could add value by processing its rice into other products like sake, vinegar, noodles, bread, or milk. AFP

Kingdom’s agro-processing potential

Agro-processing is the future of Cambodia’s agricultural industry. In recent months, Prime Minister Hun Sen has called on local and foreign investors to inject more funding into the sector, and researchers from institutions like the World Bank agree. Increasing Cambodia’s agro-processing capacity has the potential to enhance agricultural and socioeco4nomic development significantly.

But at the moment, Cambodia is wasting this potential.

Agro-processing, which links the agricultural and manufacturing sectors, takes raw and intermediate materials – including crops, livestock, fish and forest materials – and turns them into finished, marketable products.

For example, Cambodia exports rice to the international market. But other, potentially even more profitable, opportunities exist. Cambodia could add value by processing its rice into other products like sake, vinegar, noodles, bread, or milk.

The benefits of linking agriculture with manufacturing is clear. A processing plant located in a rural area, for example, could serve as an additional buyer for local farmers and potentially help to spur on agricultural productivity. Such a plant would add value and often quality to local domestic products. And, crucially, other economic activities associated with agro-processing, like packaging, retailing, marketing, and transporting goods, all generate jobs.

The experiences of neighbouring countries provide the best argument for the kind of growth the agro-processing industry could create in Cambodia. Thailand’s agro-processing industry makes use of 80 per cent of the country’s agricultural raw materials. In 2017, that sector was worth $102 billion or 23 per cent of GDP. Vietnam’s agro-processing sector was worth $44 billion or 15 per cent of the GDP in 2018. In Thailand, as many as 9,000 agro-processing companies employ more than 1.1 million people, and in Vietnam 9,428 processing companies employ more than 600,000 people.

Growth opportunities

In comparison, the agro-processing industry contributed only $589.83 million or 2.4 per cent of Cambodia’s GDP in 2018, according to the National Institute of Statistics.

Currently, much of Cambodia’s agricultural exports are raw products like cashew nuts, mangoes, rubber, and cassava. Rather than investing in a domestic processing industry these goods are sent to be processed in Vietnam and Thailand. Just 10 per cent of Cambodia’s agricultural materials are processed domestically – a figure that has remained relatively stagnant since 1998.

This figure shows there are obvious investment opportunities and room for gains in the agro-processing industry in Cambodia. And the Cambodian government is making some efforts to help this nascent sector along.

Under the Industrial Development Policy, which is set to guide decision-making from 2015-2025, the Kingdom plans to increase the export of processed agricultural products to 12 per cent by 2025. To achieve this, the government has set meaningful goals, including identifying growth opportunities for Cambodian agro-processing businesses, and identifying priority products for processing and export.

To attract foreign investment in Cambodian agro-processing, companies registered as Qualified Investment Project (QIP) can benefit from a tax exemption of 40 per cent and a tax holiday for three years as well as another priority period of three years. QIPs also benefit from Special Economic Zones – these zones have privileges such as an additional budget for infrastructure, public works, and civil servants who provide immediate assistance as required. Investors can also benefit from free trade agreements such as the Everything but Arms (EBA) scheme, the Generalised System of Preferrences (GSP), and the ASEAN Free Trade Area to export commodities.

The Kingdom is also working to reduce the cost of electricity, which constitutes a large constraint for processing businesses. In January, Cambodia’s Electricity Authority announced that there would be a reduction in electricity tariffs for consumers in six provinces that export to Vietnam in 2020. For agricultural SMEs operating in these provinces, the cost reduced to $0.1370 per kWh and $0.1580 per kWh for large enterprises.

Remaining constraints

But Cambodia is not yet ready to truly take advantage of agro-processing. According to a 2016 survey from Cambodian market research firm BDLINK, there are many constraints for this sector, such as irregular and insufficient supply of raw materials, a lack of skilled workers for necessary maintenance and operation of the processing machinery as well as unreliable transportation and poor road quality.

Historically, transportation cost has been another big constraint. In 2013, transportation of goods in Cambodia cost $10/100km/tonne. That’s compared with $7/100km/tonne in Vietnam, and $5/100km/tonne in Thailand, according to the World Bank.

In terms of logistical performance Cambodia falls short of its neighbours as well. In 2018, Cambodia received a score of 2.58 from the World Bank’s Logistics Performance Index, which takes into account factors like customs, infrastructure, international shipments, logistics quality and competence putting the country at a rank of 98 out of 160 countries. While Thailand received a score of 3.41 with rank 32 and Vietnam received a score of 3.71 with rank 39.

And the lack of information on market and market access, informal payments, intensive manual and administrative export procedures, and intense competition with imported products remain big challenges.

The Kingdom should help this sector by favouring taxation, technical and financial support to firms. Likewise, the public universities that provide agro-processing training and stakeholders should contribute to the improvement of research and development (R&D) with the enterprise to discover a new product, technical, and technological innovation.

In terms of taxation, the Cambodian government must make supporting investment to the agro-processing industry a policy priority.

Both Thailand and Vietnam have given heavy policy support to their respective agro-processing industries. The Thai government, for example, created Food Innopolis, a global food innovation hub focusing on research, development, and innovation for the food industry. The platform offers multiple types of tax exemptions, including on research and development equipment, exclusive licences to own land, permanent resident visa, and other benefits. Investors also can obtain additional funding from numerous government agencies.

Vietnam has made itself highly attractive for foreign and local investors in terms of food processing by offering preferential tax policies for investors. Vietnamese processed agricultural products are currently being exported to as many as 200 countries.

The Cambodian government must also step up its support to R&D for this sector. Thailand attributes much of its competitiveness in the food industry to its increased investment in R&D and technological innovation. Those innovations have facilitated an industry that maintains low physical costs and flexible manufacturing structures. But it is not easy to do so for Cambodia agro-processing SMEs that have limited cash flows; they cannot improve their workforce, capital and technical progress.

In terms of improving financing, two institutions could have a critical role to play: the Agricultural and Rural Development Bank (ARDB) as well as the forthcoming SME Bank. In 2018, the ARDB provided $159.11 million of total loans to local enterprises. And, the SME Bank will soon operate in the hope of stimulating agro-processing and other SMEs with an initial capital of $100 million.

Cambodia can be doing more with its agricultural production than it is right now. But to capitalise on the potential, it will take willingness on the part of the government to put these policy pieces in place to attract and support investment in this industry.

Nith Kosal is a young research fellow at Future Forum, an independent public policy think tank based in Phnom Penh. His research covers financial subsidy policy and agricultural price policy in Cambodia.

MOST VIEWED

  • All inbound flights set to face added scrutiny

    Ministry of Health spokesperson Or Vandine said on Monday that the ministry is monitoring all inbound flights, after it was announced that only those from Malaysia and Indonesia will be temporarily cancelled from August 1. Vandine said on Monday that the two countries were identified as

  • Flights from Indonesia, Malaysia cancelled

    A Ministry of Health official has warned of the possibility of Covid-19 spreading through community transmission after the total infected cases in the Kingdom rose to 225. Ministry spokeswoman Or Vandine told reporters on Saturday that the possibility of community transmission cannot be overlooked and that

  • Man in quarantine dies of ‘overdose’

    The Ministry of Health on Thursday said a Cambodian migrant worker who died while being isolated at a quarantine centre in Tbong Khmum province’s Kroch Chhmar district may have died from syncope or overdose of tablets. In a statement, the ministry said the 21-year-old

  • Ministry set to reopen 20 schools in August

    The Ministry of Education, Youth and Sport will allow 20 high-safety-standards schools to reopen next month despite new cases of Covid-19 in the country. Ministry spokesperson Ros Soveacha wrote in a Telegram message on Wednesday that the schools are in Phnom Penh, Siem Reap and Battambang.