PSD Strategies of the Private Sector In Cambodia

1. Introduction

Cambodia has an area of 181,035 square kilometers (km2) and borders Viet Nam, Lao People Democratic Republic (Lao PDR), and Thailand. The longest river in Asia, the Mekong River, runs through the country from north to south, breaking to the west to form the famous Tonle Sap Lake. The country is divided into 24 provinces and municipalities. Geographically, Cambodia is surrounded by mountains in the north and west along the border with Thailand and Lao PDR, and in the east with Viet Nam. In the south, Cambodia borders the Gulf of Thailand. The middle of the country is flat and mainly used for rice production. Phnom Penh is the capital city.

The signing of the Paris Peace Accord in 1991 ended the years of violence and civil war and allowed Cambodia to begin to rebuild through the development of a market economy. Privatization and liquidation of state-owned enterprises (SOE) occurred rapidly in the 1990s to the point that only a few now remain. The Royal Government of Cambodia (RGC) has also embarked on a series of macroeconomic and structural reforms, which have succeeded in stabilizing the economy and establishing the foundation of a market economy. These reforms included the restructuring of the financial sector, enactment of investment and tax laws, the establishment of a land titling regime and progress toward adopting improved accounting and auditing standards. While these reforms are far reaching, additional reforms such as the adoption of a commercial code to improve contract enforcement, strengthening of the judiciary and improved governance are necessary to create an effective enabling environment for the private sector. In particular, reforms of registration and licensing procedures would go a long way to relieve the pervasive informality of the private sector by bringing more enterprises into the formal sector where they would have better access to financing, markets and training.

In recent years Cambodia’s economy has become largely dependent on only two sectors, garment manufacturing and tourism. Garment manufacturing is the single largest export item in Cambodian economy – over 90% of all domestic exports – not to mention employment generated for Cambodians. It is estimated that more than a million rural Cambodians depend on the income sent home from garment workers in the capital. For this reason, Cambodia has a large trade surplus with the United States, much of it under quota. US imports from Cambodia in 2002 were more than $1 billion and US exports to Cambodia were $29 million. The import-partner of Cambodia such as Thailand 27.1%, Vietnam 19.2%, China 14.7%, Hong Kong 8.2%, Singapore 7%, Taiwan 5.6% were more than $6.424 billion (2008 est.) and export-partner as US 54.5%, Germany 7.7%, Canada 5.9%, UK 5.5%, Vietnam 4.5% were more than $4.616 billion (2008 est.). Many of the garment worker jobs may be lost after the Multi-fiber Agreement, and quotas, expire in 2005. Tourism is on the increase, which could bring in foreign exchange, expand investment, and generate jobs. The challenge is to increase investment, both domestic and foreign, that will absorb the more than 200,000 new labor force entrants each year, and raise incomes in rural areas.

The RGC with the support of the donor community has also made strides toward improving basic education while the number of vocational schools, mostly operated by the private sector, has increased significantly since the mid 1990s. Steps are still needed to improve the quality of education and assure that vocational training addresses the practical demands of the economy and results in a better qualified workforce. Strides have also been made in developing the physical infrastructure of the country including the development of the road network and improvements in the provision of electricity. The private sector identifies the poor condition of the road network as a major constraint to growth. At the same time, electricity prices in Cambodia are amongst the highest in the world and have a significant impact on the cost competitiveness of Cambodian businesses. Because of high energy prices many enterprises are forced to commit limited capital resources to purchase and maintain their own power generators. Continued support from the RGC and the donor community will be necessary to further improve education and training capabilities and develop the physical infrastructure necessary to make Cambodia a more efficient and cost effective place to do business.

The PSA outlines the role of the private sector in Cambodia and identifies major constraints facing the development of the private sector. The major constraints focus on the legal and regulatory environment, weaknesses in human capacity caused by insufficient education and training and the need to further develop the physical infrastructure of the country, including transportation, electricity and water. The PSA also provides a long-term vision and phased action plan for addressing the major constraints. The action plan provides a sequenced set of recommendations for the RGC over the next ten years focusing on policy, regulatory and institutional reforms, which are targeted at establishing a business environment conducive to private sector development.

2. Problem Statement

Private sector is as a key developing economic growth and poverty reduction in Cambodia because when its sector gets better, it creates jobs that use labor, the main asset of the poor, growth increases the tax base, enabling governments to provide basic social services, private sector is acknowledged to be better suited for sustaining rapid growth than government but its sector has several constrain as follow:

• There are limited human resources with technical and managerial skills and abundance of non-skilled labor in Cambodia.
• Insufficient investments
• The high incidence of smuggling from neighboring countries negatively impacts domestic manufacturers by creating unfair competition from goods entering the country free of tariffs and value-added tax (VAT).
• High operating costs due to poor transportation infrastructure, comparably expensive electricity and fuel costs and the dependency on foreign imports of equipment and raw materials make it difficult for local producers to compete with imported products.

3. Literature Review

Identifying the private sector as the key to sustainable, rapid growth, the PSD strategy aims to help expand and strengthen private sector participation in the development of the DMCs. The strategy is designed to provide a systematic and coherent framework within which ADB will seek to promote the private sector to support growth and reduce poverty. (Asian Development Bank 2000).

The importance of the private sector for economic growth and poverty reduction though not provable in the terms discussed above – is obvious to any student of economic progress over the last century. Numerous experiments have been tried with control by government, or by various forms of collective or cooperative ownership, of the means of production. All have failed to deliver in a sustained way as well as a market economy with a large and vibrant private sector. All countries with low levels of poverty in today’s world fit that description. Consequently, government support for an environment where economic growth is rapid and where the private sector is free to invest and innovate without heavy government control is most promising. (James W. Fox 2003).

The private sector encompasses all economic activities that do not involve production by the public sector and includes all for-profit firms regardless of size, activity (goods, services, or financial), or location (urban or rural), and institutions specifically established to serve the private sector such as industry associations. The boundary between private, for-profit institutions and private not-for-profit organizations is fluid and part of a continuum. (Shirley, 2003).

Private sector development (PSD) is critical for poverty reduction in two major ways. First, private markets are the engine of productivity growth and thus create more productive jobs and higher incomes. Second, complementary to government roles in regulation, funding and provision, private initiative can help provide basic services that empower the poor by improving infrastructure, health and education – the conditions for sustainable improvements of livelihoods. Reform processes including deregulation or privatization should also be used pro-actively to enhance environmental sustainability (world bank group 2002).

The importance of the private sector in development is not just related to MDG (related to halving the number of people in the world living on less than a dollar a day), but also in terms of the tax revenues that business contribute to developing country governments which can be used to finance public expenditure. It is also through the market mechanism that technology is transferred and growth is sustained ( Mike Foster 2009).

Private sector driven regional economic integration implies a higher level of private sector participation in development of the regional economy. It is recognized that private sector operations are increasing in scope, following the redefinition of the role of government to reduce its direct engagement in business operations. Privatization initiatives and public sector reforms bear testimony to the changing roles of government on the one hand and the enhanced role of the private sector on the other. The implication of these developments is that the private sector strategy presented here has envisaged the widening space for the private sector in economic activities. (East Africa Community, 2006)

Private sector development strategies can be powerful vehicles to initiate and drive comprehensive business environment reform agendas. This paper looks at two successful examples in Ghana and Namibia. In both countries the private sector development strategies has established a shared long-term vision, provided a coherent policy framework, and facilitated the prioritization and sequencing of policy instruments for private sector development. They also improved the intra-governmental coordination, clarified the division of labor between the public and the private sector, and promoted a structured and results-oriented public-private dialogue. (Marita Broemmelmeier and Tobias Gerster 2007).

Many modern and successful economies have relied on the private sector to achieve sustainable economic development. The private sector is driven by the profit motive and requires enabling policies conducive to enhancing opportunity for attractive returns to investment. The challenge facing countries that have adopted private sector-led growth has been that of putting in place a strategy and incentive framework, which can facilitate and promote the private sector in a direction that is consistent with the overall development strategy. In the context of the East Africa region, private sector development (PSD) must be able to accelerate growth, reduce poverty and improve the quality of life of the people of East Africa (East Africa Commune 2006).

Promote the Private Sector in Cambodia

The first draft of the PRSP was released at the third National Workshop of 26-27 August 2002 attended by over 200 people. The workshop had discussions from different NGOs and “this time from the private sector,” suggesting that the private sector did not participate in earlier discussions.

The private sector has a focal person liaising with GSCSD who assisted with dissemination meeting with the GSCSD, provided excellent material from their database on topics such as agro-industry.

The IMF country representative issued a discouraging projection about Cambodia’s economic growth for next year. But this kind of projection is not set in stone. It is only a projection based on the current situation. But we have an ability to write the future. With more effective action on the part of the international community and the Royal Government alike, we can achieve higher rates of growth. If it is permitted, the private sector can be the engine for growth, providing jobs for the people, raising standards or living, creating capital and wealth in Cambodia. We can implement the vision of the Prime Minister, as outlined in his “Rectangular Strategy.” But we need your help to achieve these ends (Bretton G. Sciaroni 2004).

The private sector is expected to be actively involved in the process of monitoring and evaluating the NPRS. Through such organizations as the Chamber of Commerce and Worker Federations/Trade Unions, the private sector is expected to participate actively in meetings, workshops and national poverty forums.

The importance of private sector development is well recognized and clearly enunciated in the Rectangular Strategy. But declaring that the private sector is the engine of growth is only a beginning. Investors today have a wide range of options. They are practical people who look at what they face on the ground, not what they hear at investment promotion conferences. If they do not like what they see, they will go elsewhere. It is essential to ensure that what they hear is what they get. We believe that in Cambodia the following are key to a positive investment climate: (1) Stability in the political, economic and policy regimes. (2) Open and fair competition in a market system with free access to information. (3) A legal and regulatory regime that is predictable, transparent, and consistently and fairly applied to all. (4) Lowest possible transaction costs of doing business, especially the elimination of corruption. (5) Adequate availability of finance, physical infrastructure and skilled labor. Only under these conditions will Cambodia get the long-term, broad-based and diversified private investment that is essential for sustainable growth (Shyam P. Bajpai, ADB).

PS in Cambodia is characterized by a narrow base dominated by the garment, tourism, and construction sectors. Garment constitutes 80% of Cambodia’s total export while agriculture is the largest sector in terms of employment.

Private sector is the major source of economic growth, employment and poverty reduction, accounting for 92% of the country’s total employment. To enhance private sector development, and diversify economy to ensure a broad based future economic development and employment, the Royal Government of Cambodia (RGC) faces the challenges of i) establishing an enabling environment for business, ii) diversifying production and export, and iii) ensuring delivery of necessary public services.

4. Aim, Significance of Research

The research studies will provide benefits to:

4.1. For Ministry of Economy and Finance and Ministry of Industry, mines, and energy and Ministry of Commerce

• Could address the policy and implementing on the developing strategy of the private sector in Cambodia.
• Recommend maybe made to Ministry for Economy and Finance and Ministry of Industry, mines, and energy and Ministry of Commerce for developing strategy and policy of the private sector.

4.2. For study and public

• To promote private sector-led economic growth in Cambodia.
• To help solve problems that obstruct private sector growth.
• To increase the contribution of the private sector to poverty reduction.

5. Research Objective and Key Question

5.1. Research Objective

The main objectives of the studies are:

• To study the policy and strategy of private sector in Cambodia.
• To study the strategies of government based on foreign investment.
• To show the developing strategies of the private sector for concept to approval and implementation.
• Find out the problem, weakness and opportunities prevail in the implementation.

5.2. Key Questions

• Why a private sector development (PSD) strategy for Cambodia?
• How does the developing strategy of the private sector promote economic growth in Cambodia?
• How does the government set up policy and strategy of the private sector?
• What does the government do for promote foreign investment in Cambodia?
• What is the role of development institutions in furthering and developing an appropriate role for the private sector?

6. Research Methodology

The method of data collection involves a rapid appraisal as well as a field survey.

Rapid appraisal consists of review of available documents, group and individual interviews and information interviews with key information. In order to get detail data and information a well designed research methodology is essential. The tentative research methodology will be as follows:

6.1. Research Philosophy

For the purpose of this study the Phenomenology approach will be appropriate since it is some sort of social study. Moreover, the success of this research is significantly based on in-depth understanding of phenomena of the work environment. The main advantage of this approach is that it’s allows more flexibility in research process.

The overall nature of the study will be the exploratory and descriptive since both the approach facilitate to clarify research understanding and assess the phenomena in the light of research objective.

6.2. Research Approach

According to the objective of the study, it requires in depth diagnosis, analysis, providing solution on the basis of data analyzed and so on. From this perspective the induction will be more meaningful since it is involved in discovering and uncovering the facts. This approach is also consistent with the Phenomenology philosophy. Moreover, it allows more flexibility to researcher in determining research emphasis as the research progresses.

6.3. Research Strategy

It is difficult to determine the research strategy well in advance because if depends on the situation, nature of data, data collection and analysis tools and methods etc. According to the nature of the research objective the case study will be more appropriate because this strategy helps to gain a rich understanding of the context form a particular organization point of view. In addition to this as this study is involved in solving problem thus at the same time action research strategy will be adopted too. The combination of multiple strategies not only allows researchers to collect and analyze data from different sources also helps to ensure reliability and validity.

6.4. The Field Survey

The field survey is conducted based on a questionnaire and data are collected to find the opinion of Ministry of Economic and Finance, Ministry of Industry, mines, and energy and Ministry of Commerce and people who live in other provinces such as Kampong Cham, Prey Veng, Svay Reang and Kampong Speu Province. For the questionnaire survey a sample of more than 100 persons.

6.5. Data Collection

For the purpose of this study primary and secondary data are equally important. Primary and secondary are to be collected by using various tools and techniques. The primary data will be collected through questionnaire, interview, observation, and survey. Primary data and secondary date are also very important for any type of research. Particularly where the primary data is insufficient and difficult to access. In this study both the written and no written documentary data will be used. In addition to this secondary data from multiple sources e.g. newspapers, professional, journals, local chambers, NGOs and Ministry for Economy and Finance, Ministry of Industry, mines, and energy and Ministry of Commerce.

6.6. Data Analysis

In analyzing the data and information mainly qualitative approach will be adopted since most of the time this research will be involve in dealing with qualitative data and information. The quantitative analysis will be adopted as well, where necessary.

7. Content of the Thesis’s reports (Tentative)

Chapter I. Introduction

1. Overview
2. Problem Statement
3. Aim, Significance of Research
4. Research objective and key questions
5. Research Methodology
6. Content of the reports (Tentative)
7. Literature Review
8. Project Monitoring

Chapter II. The Development situation and the contribution of the Private Sector to the economic environment

1. Overview

2. Private Sector Profile

2.1. Introduction

2.2. Agriculture

2.3. Industry

2.4. Service

2.5. Foreign invested

3. Private Sector Contribution to the Cambodian Economy

4. Private Sector Development role in Poverty Reduction in Cambodia

5. Methodology and Framework of Private Sector

Chapter III. The Significance of Private Sector Development in Cambodia

1. Enhancing Private Sector and Attracting Investment in Cambodia

1.1. Trade

1.2. Tourism

2. Working Creation and Improving Condition of the Job

3. Private Sector contributes education in Cambodia

Chapter IV. The Basic Developing Strategies of Private Sector in Cambodia

1. Strategic Position of Private Sector in Cambodia

1.1. Overview

1.2. Risks and Conditions

1.2.1. Strength

1.2.2. Weaknesses

1.2.3. Opportunities

1.2.4. Threats

1.3. Expected results on Private Sector in Cambodia

2. Strategic Goals

2.1. Improving business environment in Cambodia

2.2. Improving the investment climate and trade facilitation

2.3. Improving the Competitiveness of the factors

Chapter V. The Strategies route of the Development of Private Sector in Cambodia

1. The strategy of Improving the legal System of Private Sector

1.1. Formalization

1.2. Registration

1.3. Licensing and Inspection

1.4. Enforcement of Legal Framework

2. The Strategy of Improving the Market Access and Information of PS

2.1. Trade promotion and Information

2.2. Customers Reform

2.3. Export development

2.4. SME Sector

3. The Strategy of the Access to Finance

3.1. Contract enforcement

3.2. Credit information

3.3. Expansion of financial services

3.4. Financial management efficiency

Chapter VI. Priorities for Private Sector Development in Cambodia

1. Support SME Development

1.1. Strengthen formalization of business through registration and licensing reform

1.2. Establish legal, policy and institutional framework for SME development

2. Governance Reform to Improve Enforcement of Laws

3. Continue Support for Financial Sector Reforms

4. Develop RGC’s Capacity to Provide Assistance to the Private Sector

5. Continue Infrastructure Development

6. Strengthen Capacity Building

Conclusions and Recommendations