Kingdom’s agro-processing potential
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 decisionmaking 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.