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close this bookPoverty Alleviation Trough Micro and Small Enterprise Development in Cambodia - ILO/UNDP Project CMB/97/021 - Final Report (ILO - UNDP, 2000, 126 p.)
close this folderPart B: Situation Review 1997 (“stand alone” report)
View the document(introduction...)
View the documentList of acronyms
View the document1. Introduction and background
View the document2. Macro-economic framework for micro and small enterprise development in Cambodia
View the document3. Government priorities and plans
View the document4. Legislative, regulatory and incentive framework
View the document5. Brief description of stakeholders in MSE development in Cambodia
View the document6. Main externally assisted programmes for MSE development
View the document7. Constraints and opportunities at the enterprise level
View the document8. Conclusions and issues to be elaborated further
View the documentANNEX 1: Documents
View the documentANNEX 2: List of key persons met

7. Constraints and opportunities at the enterprise level

a) Constraints

Cambodian micro and small enterprises face a number of constraints which also apply to medium and large enterprises, thus encompassing the entire private sector. The types of problems depend on the extent to which the enterprise is exposed to imported inputs and international markets, and to the extent to which the entrepreneur has internalized the range of constraints he/she is facing. The series of interviews revealed that after years of isolation and self-education in running an enterprise, the owners/managers of businesses do not appear to perceive many of the constraints (such as lack of knowledge in technology, lack of support institutions, etc.) as affecting them. In the following, the main findings of the mission, supported by a review of previous studies, are provided under the heading used for enterprise interviews8.

8 Results of the 21 enterprise interviews are attached in Annex 3.

Demand and marketing

Particularly in micro and small business, enterprises tend to choose the same line of business, thus, creating heavy competition in small markets. This suggests, firstly, that the abilities of MSEs to identify viable (and not viable) business opportunities are lacking. Secondly, there is no mechanism or institution providing guidance or information on sectors in which investment is recommended and in which the market is already saturated. Business plans required for credit programmes do address the issue, but based on very limited information and knowledge. When enterprises face competition, they sometimes turn to the government such as MIME/DIME for assistance in curtailing other producers, thus displaying an attitude toward the role of the government reminiscent of a planned economy and not in compliance with the principles of the market economy that the Royal Government pursues. Also some entrepreneurs revealed a lack of understanding of changing consumer patterns and tastes dominating the Cambodian market due to the recent massive inflow of beverages, cigarettes, processed foodstuffs and consumer goods from abroad.

Several enterprises reported problems with imitations and pirated labels and product/company images to the extent of copying the original producer’s address. They report the cases to MIME and the Ministry has in some cases succeeded in locating the pirate enterprise and destroyed the production facilities. The enforcement of legislation in most cases, however, appears to be difficult and the entrepreneurs are left to fend for themselves with the rivals who usually flood the market with a cheaper, inferior quality product thus gradually eroding the reputation developed by the original producer’s high quality product and established markets.

For larger projects, local capacity to prepare feasibility studies is extremely limited. Nearly all export-oriented businesses have partnerships with foreign enterprises and marketing is normally the responsibility of the foreign partner. There is no support service in the country to provide international market information to enterprises. The rapid liberalization of the foreign trade regime and imminent membership in ASEAN will pose a particularly important challenge to demand analysis, marketing capabilities and competitiveness of Cambodian products in terms of price and quality. Currently price competition is heavily dependent on the extent to which import duties are enforced on products from neighbouring countries and on the distance to the markets due to high informal road taxes. Due to the lack of capacities to enforce tariffs and the “porous” borders, enterprises in Cambodia seem to be already facing fierce competition from imports.

Raw material, technology and product development

Generally low levels of technology and knowledge in using the technology in the enterprises result in wastage of raw material and energy, and low quality of products. The availability of raw materials of sufficient quality was not quoted as a problem by enterprises which sell to local or regional markets. Dependence on firewood for energy (production of bricks, tiles, household utensils, rubber tyres, etc.) is, however, a major cost factor due to recent restriction on the use of firewood by MAFF and the high cost resulting from numerous middlemen and informal taxes levied between the source and the user. Electricity cannot so far be considered as an alternative to firewood due to extreme scarcity and high cost.

Entrepreneurs in Cambodia have generally learned their technologies from the trade and have very limited theoretical background. They have ideas and experience, but lack the ability to innovate or adapt and master new technologies. Due to the extreme scarcity of technical specialists in the country, there are very few institutions to which an entrepreneur can go for technical advice. Several entrepreneurs and ACLEDA branch offices named DIME/MIME as the institution to which they turn to with questions related to the acquisition of new machineries, generators or other technical issues.

Finance

There is an apparent need for loans for investment and working capitals. Although 31 commercial banks existed as of 1995, they had very limited branch networks outside the capital and a large portion of lending was concentrated in Phnom Penh. Their lending is mainly through the provision of overdrafts for wholesale and retail trade (32%), other services (20%) and export/import businesses (18%). Agriculture and manufacturing comprise only 13% of the total lending. The interest rate in the commercial banking sector is currently 18% p.a.

A number of “semi-formal” micro and small credit schemes have been operated with generally good results. At the end of 1995, it was estimated that the 30 large NGO credit operators were reaching about 3.5% of the total number of rural households. About 70% of the lending goes to women, with about 70% of the total lending being micro-loans for micro-enterprises. With the exception of ACLEDA which also provides larger loans, loan sizes vary from $35 to $60, usually for a term of four to six months. Effective annual interest rate is from 60% to 96%9. By the end of 1996, the NGO operators had the loan outstanding of about $6.6 million and the deposits of about $ 174,000.

9 Informal “money-lenders” charge on average 10 to 60% per month.

Although “semi-formal” NGO credit programmes are providing valuable loans and seem to be making sizable impact, supply of loan capital is still very limited compared to the potential demand. Since the commercial banks are not yet providing significant amounts of loans to manufacturing enterprises and certainly not outside Phnom Penh and the NGO credit programmes, with the exception of a part of ACLEDA credit programmes, are targeting micro enterprises, most of the small enterprises currently do not have access to reasonable loans necessary to compete and expand. For capital investment, long-term lending is necessary but such loans are generally not available.

For commercial loans, the difficulties in obtaining land ownership title documents for collaterals for Cambodians10 and the non-availability of assets to foreigners severely hampers the abilities of enterprises to generate enough working capital and investment financing through the commercial banking system.

10 The land title documents that are necessary for collateral for loans, irrespective of the location within the country, have to be obtained in Phnom Penh.

Labour

There is abundance of potential labour in Cambodia, but with very limited skills and at a cost which may at times be higher than in Vietnam. Private entrepreneurs generally did not cite difficulties related to maintaining the workers after training on the job. The normal salary ranges between 70,000 and 180,000 Riel per month11.

11 Meals and accommodations are generally provided “free of charge”.

There are some vocational, skill and management training institutions providing training of various duration to existing and potential entrepreneurs as well as workers. A relatively low percentage of the graduates find employment in the areas they have been trained in. Mechanisms and instruments for assessing the actual human resource development requirements and matching curricula to address those requirements have not yet been introduced in a systematic manner thus leaving to some wastage in the utilization of scarce resources in training programmes. The need for flexibility and responsiveness to the skill needs of the market is recognized in the new TVET policies and the challenge for the Government is to implement such policies12. Providers of skill training need to have capacity to put them into practice.

12 UNDP/ILO CMB/96/002 Project is assisting the Government in this direction.

Interesting to note in terms of skill formation is that some enterprises are offering apprenticeship as a means to earn extra income for themselves and for providing opportunities for workers/apprentices to learn new skills. The workers are willing to pay for apprenticeship; e.g. $100 for one-year arrangement in tailoring and up to $300 for TV and radio repairing.

Observations of MSEs confirmed the generally poor safety conditions in the workplace that are typical for the sector in most developing and transitional countries. Family-based enterprises, in particular, have genuine concerns about the safety and would be interested in improving the conditions. The obstacles are three-fold; finance, technology and awareness that safety improvements can be made in a fairly cost-effective manner. For example, changes in workshop layout could improve the productivity and the safety conditions for workers at the same time.

Management

As to management skills in general, there appears to be a lack of awareness among the entrepreneurs of their importance even for the immediate future. It is natural that the entrepreneurs are generally content with their management capacity having successfully managed their enterprises under such difficult conditions. However, increasing competition among themselves and from the neighbouring (more sophisticated) countries will necessitate them to improve their management capacity further.

The already mentioned abilities for business opportunity identification relate to marketing management; i.e. one of the marketing 4P’s, “products” suitable for market13. Lack of such abilities is particularly prevalent among micro enterprises. One of the two major problems identified by micro enterprises in one of the previous studies was competition (the other one being finance). Although due to opportunity costs they may not be able to attend full-fledged business training courses, even if offered, they may benefit greatly from getting to know basics of marketing management.

13 4P’s of marketing management are; products, prices, places and promotion.

Infrastructure

The overall condition of the road network poses a serious bottleneck for access to raw materials and markets. The relatively good physical infrastructure in the corridor from Kampong Som (Sihanoukville) to Phnom Penh provides a comparative advantage for that region, particularly for export-oriented businesses and imported products. On the other hand, proximity to raw materials and markets does provide a comparative advantage for small enterprises in the provinces due to the high cost of transport of products from elsewhere. A particularly significant factor, besides the physical condition of the transportation network, seems to be the existence of the informal road tax levied by a large number of checkpoints, raising the prices of raw materials, energy and finished products.

For most MSEs, problems related to communications (limited telephone network) and water supply were not cited as significant. Such factors are more likely to affect decisions related to joint ventures with foreign partners or direct foreign investment who know what is available in other countries and, thus, have higher expectations. There are currently no industrial zones or estates, but some are planned (first in Sihanoukville). Preparations are underway in MIME.

For energy, virtually all businesses using electricity to any significant extent rely entirely on their own generators due to the very poor state and high cost of public power supplies. For all enterprises needing the generation of heat in the processes, the traditional use of firewood is becoming increasingly difficult and rice husk as an alternative may soon face problems of availability. Energy is potentially one of the key constraints of the future competitiveness of a number of enterprises, particularly vis-a-vis products from neighbouring countries.

Business environment

Looking from the standpoint of the MSEs, one could assume that the government is taking the laissez faire approach to the private sector development. This is a clear view that emerged from the enterprise visits. Except for the tax authorities who make visits once a month (but rarely to micro enterprises) and the visits of health authorities to food processing enterprises, the government seems almost non-existent. Although a major effort has been made for the establishment of the legal and regulatory framework that would facilitate the private sector development and its subset, the micro and small enterprise development, the process is far from complete. Ironically, because of the inadequacy of existing framework and the lack of capacity to implement the existing laws and regulations, the current environment under which the MSEs are operating can be described as “enabling”.

However, the current situation is deceptive and is not even desirable for the long term health of the private sector. The fact that there are a large number of government officials who are more used to controlling enterprises rather than promoting them would suggest that, without conscious effort to preserve and/or promote an enabling environment for the private sector in general and MSEs in particular, the policies toward the private sector expressed in the First Socioeconomic Development Plan would not be fully implemented. For this purpose, capacity building of the officials is a necessity. Such capacity building needs are all the more important because there are enterprise owners who have asked the government to eliminate their competitors, which suggests that even the entrepreneurs still see the government as controlling rather than promoting them.

For the more modern and outward-oriented enterprises and particularly for foreign investment, the absence of a positive, supportive and facilitative policy, strategy and legislative framework constitute an obstacle, rather than an enabling factor, exacerbated by the security concerns depending on political developments in the country. Issues such as complicated import procedures for machinery, unclear responsibilities of various ministries and institutions, and enforcement of label protection laws against imitations were quoted as a part of such a necessary framework.

In the public sector which is responsible for implementing various policies, low motivation and initiative coupled with lack of understanding of enterprise management in a private sector environment were cited as constraints. A large number of people are on government payroll in various ministries but not actively contributing to the activities of their employers.

Other issues

Although we are seeing the beginning of sectoral organizations (e.g. garment manufacturers, but consisting of medium and large enterprises), so far there have been no initiatives to establish associations for micro and small enterprises. The only association which sees itself representing the private sector is the Phnom Penh Chamber of Commerce that includes medium and large manufacturing and service sector enterprises. Due to the history of the country, the climate for the promotion of such cooperation among enterprises is not conducive. In the long run, however, the emergence of such interest groups will be advantageous for the purposes of coordination and advocacy. Potentially, such groups could also act as intermediaries for support services for their members.

b) Opportunities

The opportunities for micro and small enterprise development in Cambodia are not entirely overshadowed by the constraints elaborated upon above. The rapid emergence of private sector activities in the trade and service sector after the liberalization of the economy clearly demonstrate the latent entrepreneurial talent available in the country. Investment in longer-term venture in agro-business and manufacturing has taken longer and the success so far has been mostly in the garment sector. However, as expressed in the Socioeconomic Development Plan, the country has good potential for resource-based industries (rubber, marine products, rice, sugar, soy beans, sustainable forest products) and handicrafts (for instance Muslim weavers exporting to Malaysia). In addition, the booming construction industry provides a market for building materials and potentially some intermediate products, the agricultural sector for agricultural inputs including farm tools and machineries, and the consumer market for a large number of beverages, foodstuffs and selected consumer goods.

The imminent membership in ASEAN will provide both opportunities and challenges to the Cambodian economy in ways and at a scale that cannot be covered by the present limited study. A special review on that issue will be needed in connection with the question of private sector development in general.