Regulatory barriers and high logistics cost could hinder growth and competitiveness going forward

The idea that Southeast Asia could become a global manufacturing hub, complementing China or even succeeding the economic powerhouse one day, remains a fresh thought since its conceptualisation around five years ago.

Analysts have prophesied that the “factory of the world” role which China plays could be replaced, as the economy slowly pivots to being driven by domestic consumption, on the back of increasing wages, from export-oriented.

The opportunity for ASEAN to assume that role is high as it increasingly adopts Industry 4.0, ramping up manufacturing while leveraging on lower production cost and a younger demography.

Added to that are trade agreements including the Regional Comprehensive Economic Partnership that will likely capture more investment into the region.

Just before the pandemic, foreign direct investment (FDI) into the region was among the strongest in Asia Pacific in 2019 at $155 billion, according to UN Conference on Trade and Development data cited by UN Economic and Social Commission for Asia and the Pacific.

Within Southeast Asia, Cambodia, Vietnam and Indonesia enjoyed the highest level of inward foreign investment, thanks to relocations of multinational enterprises from China due to the US-China trade tension as well as investments by ASEAN members in manufacturing and services sector.

But this growth momentum hinges upon productivity and logistic competitiveness, as identified in the Masterplan on ASEAN Connectivity 2025.

Productivity improvement leans on capturing greater share of global trade, services and data flows via major trade deals, developing efficient and sustainable infrastructure solutions, and embracing disruptive technologies across different sectors.

As for logistics competitiveness, the masterplan stated that the region’s customs and logistics costs remain far higher than international benchmarks.

In fact, when compared to China, although ASEAN’s logistic networks were more competitive on speed, its logistics cost was more expensive.

Seemingly, high logistics costs have been a point of contention among industry players including freight forwarders in Cambodia for many years.

A July 28 report by the Organisation of Economic Cooperation and Development (OECD) highlighted this issue, saying that it stems from an alleged lack of competition and monopoly by state-owned entities.

The report is part of the Fostering Competition in ASEAN project funded by the ASEAN Economic Reform Programme under the UK government.

It is aimed at checking regulatory constraints in the logistics sector by identifying regulations that could hinder the efficient functioning of markets and creating a non-level playing field for businesses.

The report studied each member’s logistic sector under the ASEAN Competition Action Plan 2016-2025, which provides for an assessment to be conducted on the impact of non-tariff barriers on competition, followed by recommendations.

Efficient logistics can play a significant role in increasing a country’s economic development by facilitating international trade and improving its competitiveness.

“By developing an efficient logistics system, a country can enhance its connectivity to better serve its importers and exporters, and satisfy the needs of regionally integrated production facilities for reliable just-in-time delivery of inputs and outputs,” OECD said.

Potential barriers

In Cambodia, 28 legislations were analysed in five segments comprising freight transport by road, rail and water, freight forwarding, warehousing, small-package delivery services and value-added services where OECD found 51 potential barriers or restrictions, most of it in maritime freight transport and ports.

In 2019, the transportation and storage market was worth $2.1 billion, representing 7.8 per cent of gross domestic product, the report stated, adding that the logistics sector was dominated by road freight transport where the number of registered trucks more than doubled between 2008 and 2016.

Despite significant investment and improvements in recent years, it is reported that Cambodia’s transport infrastructure is still inadequate in terms of both quantity and quality, it wrote.

Citing World Bank data, OECD said logistics costs over sales in Cambodia were estimated at 20.5 per cent in 2018, higher than some ASEAN countries, such as Thailand and Vietnam, and the global average of 10 to 12 per cent.

However, the costs were comparatively lower than Indonesia and Philippines but informal logistics fees levied by government agencies were significant at 48 per cent of total logistics administration costs.

In terms of overall logistics performance, Cambodia ranked 98 out of 160 in the World Bank’s Global Logistics Performance Index that same year.

Based on an aggregate indicator by World Bank, the perception of Cambodia’s trade and transport-related infrastructure was lower than most ASEAN member states.

Thus, improving transport infrastructure would seem essential in order to reduce logistics costs which remained relatively high compared to other countries in the region.

Exclusive rights

Within the context of freight transportation, OECD placed an emphasis on water transport, given that it plays a major role in Cambodia’s local economy and exports.

Both the Phnom Penh Autonomous Port (PPAP) and Sihanoukville Autonomous Port (PAS) are state-owned and overseen by the Ministry of Public Works and Transport (MPWT) and the Ministry of Economy and Finance (MEF).

While there is no primary legislation for maritime, meaning sea and inland waterways, and ports, the sectors are governed by other legal instruments such as decrees, sub-decrees, regulations and guidelines. Laws that cover these sectors are being drafted, OECD said, however adding that “various organisations have noted that the lack of sector legislation is a challenge for the MPWT in being able to carry out its functions”.

The OECD team found 26 restrictive regulations for transport of freight by sea or inland waterway and made 17 recommendations concerning the provision of port services by third parties, regulation of port tariffs, vessel registration, permits and authorisations and operational restrictions.

Given that the port authorities are the provider of port services, OECD warned that “exclusive rights might lead to monopoly pricing and potentially the provision of lower quality services”.

“In addition, the current service provider was not awarded those rights following an open tender. Therefore, there was no competition for the market, in order to select the most suitable service provider, based on variables such as prices and quality of service,” it said.

The World Bank once described the high cost of port services in Cambodia when compared to Vietnam and Thailand, that “the provision of important maritime auxiliary services is currently monopolised by state-owned enterprises, leaving a large gap for competition to improve services’ quality and delivery”.

However, OECD opined that the monopoly of port services likely reflected a primary concern for the safety of port operations, including the protection of port infrastructure, prevention of environmental hazards, and controlling maritime traffic in the port area.

It recommended the consideration of advantages and disadvantages of the provision of port services by private entities.

“If a policy decision was made in favour of private involvement in the provision of port services, the authorities should create appropriate legal frameworks so that the provision of port services could be tendered based on fair, transparent and non-discriminatory terms to guarantee competition for the market,” it said.

Similarly, port tariff regulation, which is decided by a board of directors, with representation by various ministries, might limit the operators’ ability to set their prices and prevent them from competing on price.

“This can lead to inefficient outcomes as prices do not adjust to supply and demand and can alter the competitive structure of a given product or market,” OECD stressed.

It said some studies suggest that the current tariffs in Cambodian ports are excessive, citing a 2016 European Chamber of Commerce’s cost benchmarking exercise that found port dues and charges relating to comparable vessels were 3.7 times higher at PAS than Cai Mep port in Vietnam.

Special port handling rates

“It is true,” Cambodia Logistics Association president Sin Chanthy said, when asked if logistics costs, particularly port handling charges,were higher in Cambodia than its neighbours.

He has many times over the years highlighted the staggering costs in the logistics sector, and even more so in the face of pandemic as borders were shut, coupled by lockdowns which restricted transportation.

In light of that and the exorbitant rise in ocean freight since last year, he said rice exporters negotiated with the PAS authority and managed to secure a 50 per cent discount on the charges relating to lift-on/lift-off (Lo-Lo) cost.

“We expect cassava exporters would try to work out a similar deal with the port,” he told The Post via text, adding that in Sihanoukville port, the current Lo-Lo cost is nearly $96 for a 40-foot container while the cost for a 20-foot container is $63.70.

Interestingly, cassava, which is among Cambodia’s major exports where 1.5 million tonnes were exported between January and April this year, has never been shipped out of PAS as it makes no financial sense due to the final cost of shipment.

“Cassava is farmed in Battambang, Pursat and Banteay Meanchey provinces, which are more than 600 kilometres away from Sihanoukville. The cost for [road] transport is $30 per tonne. The costs including port charges, customs clearance and phytosanitary certificate would come up to $15 per tonne.

“The cost of free-on-board [FOB] at the port is $250 to $260 per tonne whereas the cost for cassava at the farm is between $215 and $220 per tonne,” he shared.

Thus, the costs incurred at the port and transportation there does not make sea freight feasible, Chanthy explained, summarily providing an idea of how logistics costs add up in Cambodia.

He hoped that the port would consider special rates for port handling charges and reduce the fees on port documentation.

Given that exports in the agriculture sector did not abate despite Covid-19, he suggested that the sector’s export policy be aligned with the private sector mechanism, that the ports have sufficient facilities such as warehousing, pumps and handling, and financial support with low interest rates.

According to OECD, the MPWT has set a port tariff framework for PAS while an inter-ministerial prakas by MPWT and MEF outlines PPAP’s fixed rental fees and fees for using the domestic port, passenger terminal and Phnom Penh Port Centre.

The risk here is, price regulation in the provision of port charges and port services may limit operators’ ability to set their prices and prevent them from competing on price, OECD said.

“This can lead to inefficient outcomes as prices do not adjust to supply and demand and can alter the competitive structure of a given product or market,” it cautioned, although contending that the government might have decided on fixed or maximum rates to protect port users from excessive prices.

Therefore, in the case of a natural monopoly or where competition is limited, price regulation would prevent operators from taking advantage of their position.

Nevertheless, OECD recommended that only maximum prices should be stipulated in any framework for setting port dues and charges. “Maximum prices should only be set when there is a lack of competition. Maximum prices should be regularly revised to ensure they are in line with market dynamics and provide the necessary incentives for innovation,” it said.

No monopoly, no subsidy

Meanwhile, Penn Sovicheat, undersecretary of state for the Ministry of Commerce, told The Post that the draft law on competition has been submitted to the National Assembly for discussion in the plenary session.

“Once the law is passed, we will discuss if there are issues … and will mitigate barriers to entry. We won’t stand for unfair competition. The law will encourage everyone to participate,” he said, expressing hope for its speedy approval and implementation.

However, Sovicheat, whose ministry oversees competition policies, pointed out that most of state-owned entities (SOEs) have been privatised over the years. This has enabled and ensured fair competition among the SOEs such as the rubber plantations and ports.

“The ports are public-listed and operate as a private company. They do not receive subsidies, fundings or preferential treatment from the government,” he explained.

Furthermore, there is no monopoly in Cambodia, he attested, while adding that licenses for small-package delivery companies were approved for both local and international companies.

Sovicheat was commenting on the small-package delivery market which OECD highlighted as lacking a level playing field given that state-owned Cambodia Post does not have a strong presence in the domestic market and is not competing closely with global integrators in this segment.

OECD urged that the competition law does not exclude Cambodia Post and other SOEs from the scope of the legislation, ensure same licensing requirements and fees to every state entity, as well as avoid tax exemptions for them.

As of February 2020, Cambodia had 13 SOEs including two joint ventures from 187 wholly-owned companies in 1989, following its transition to a market-driven economy from planned economy, OECD said.

“We abide by the World Trade Organization commitments. In 2017, the Trade Policy Review praised our efforts for identifying concrete strategic action areas on improving trade competitiveness,” he added.