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What ails Cambodia’s logistics sector?

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The Kandal Cold Storage facility, adjacent to the Phnom Penh Autonomous Port, will handle 25 per cent of the country’s total storage. YOUSOS APDOULRASHIM

What ails Cambodia’s logistics sector?

A World Bank report has laid bare weaknesses in Cambodia’s logistics sector which can weigh down its competitiveness, while offering solutions that could bring it up to speed in a fast-evolving global supply chain

Last month, the World Bank published a special focus, Post Pandemic Supply Chain Disruptions: Strategies to Reduce Logistics Costs, which acknowledged the current impacts from ocean freight rates and fuel prices on Cambodia’s logistics.

But it also underlined persistent setbacks and weaknesses that continue to plague Cambodia’s logistics sector.

The findings, particurlary on logistics costs being among the highest in the region, informal payments and varied yet expensive cross border fees, while they are not new to the industry, continue to weigh on Cambodia’s competitiveness.

With trade, and especially exports, being a crucial growth engine of the economy, smart logistics solutions and efficient supply chain management are preconditions for ensuring Cambodian economic competitiveness in the long term.

“By 2030, it is expected that Cambodian firms would move four times more goods through highways, ports, airports, and warehouses than currently.

“However, the country’s logistics costs per gross domestic product [GDP] is significantly higher than in comparable ASEAN countries and was estimated at 26.43 per cent of GDP in 2020,” it said.

The report offered strategies to reduce national logistics costs and address “weak links” in the supply chain in Cambodia. Supply chains, it said, form a complicated system where any disruption, at any possible level, can affect the entire distribution network.

“As is well known, supply chains can only be as strong as their weakest link, and this is especially important for Cambodia, where the transport and storage sector currently account for about eight per cent of the country’s GDP,” the report read.

Eight per cent gap

The World Bank called out the total cost of holding inventory or inventory carrying cost, stating that it was “particularly high” in Cambodia, with an estimated value equivalent to about 13 per cent of GDP in 2020, implying “high uncertainty” in the supply chain.

In Cambodia, firms experience “higher” expenses from keeping products at warehouses, distribution centre or storage facility, resulting in actual expenditures related to storage, labour, transportation, handling, insurance, tax, item replacement, shrinkage and depreciation.

It also has an impact on opportunity costs (potential benefits) which would have an additional impact on firm profitability. Inventory carrying costs are closely related to growth or slowdown of household consumption and to interest rates.

In 2020, as household consumption dropped nearly two per cent, levels of inventories held in the manufacturing sector rose to around 2.3 per cent, it said.

“The direct relationship between the inventory carrying cost and interest rate levels, with an average loan rate in 2020 of 9.88 per cent, was slightly higher than in 2019.

“While logistics administration costs are not available in the Cambodian national accounts, the related expenditures are imputed and estimated to be around 10 per cent of total logistics cost [2.53 trillion riel, or $619.9 million], which is equivalent to 2.4 per cent of GDP,” it said.

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Source: Cambodia Economic Update (World Bank, June 2022)

Comparisons based on a methodology used to calculate logistics costs per GDP showed a gap of almost eight per cent in terms of inventory carrying cost between Thailand and Cambodia.

“Thailand’s inventory carrying cost is estimated at 5.3 per cent compared to 13.07 per cent for Cambodia. Higher inventory cost in Cambodia seems to result from higher lending interest rates, higher inventory and limited inventory management capabilities,” the World Bank said.

Since 2015, logistics costs per GDP in Cambodia, estimated at 27.9 trillion riel in 2021 (about $6.7 billion), fell to around 26 per cent of GDP in 2020.

“As expected, the ratio of logistics costs to GDP in Cambodia increased between 2019 and 2020. Logistics expenditures increased while GDP growth slowed in the wake of the Covid-19 pandemic,” it said.

In 2020, the inventory carrying costs made up the “largest component of logistics costs”, beyond transportation and warehousing costs.

Inventory carrying costs accounted for 49.47 per cent of total logistics costs, followed by transportation costs, representing 41.44 per cent of the total logistics cost. Logistics administration costs remained unchanged at 9.09 per cent.

“This may be an effect of the pandemic on inventory levels, as sales of goods were slower and supply chains suffered from limited delivery capability during lockdowns,” the report read.

Partial truth

Accordingly, the World Bank justified the need to estimate logistics cost per GDP. It said national logistics efficiency can be evaluated in terms of “trade-offs between a country’s economic output”, reflected by its GDP, and national logistics cost (NLC), to show national competitiveness.

However, it contended, calculating NLC is a complex process, as country-level and firm-level logistics activities are complex and different.

“From the perspective of policymakers, governments may not be able to deal with such challenges related to national logistics performance if they do not have the ability to measure their respective domestic logistics performance and cost,” it added.

The World Bank said the ratio of logistics costs to GDP, identified as a key indicator in measuring a country’s capability in managing its logistics system, has been recognised by the Ministry of Economy and Finance (MEF) as an important indicator.

While some countries have published their data, the method might be different due to different data sources and calculation.

“Cambodia has never published NLC per GDP, but some data exist related to logistics costs over sales in certain sectors. The challenge is that these numbers are sector specific, so they do not reflect the overall situation within the country,” the report said.

Questions to the MEF by The Post were not answered by the time of writing.

Meanwhile, Ministry of Commerce spokesman Penn Sovicheat said the World Bank used a different methodology that takes lending and interest rates into account when calculating inventory carrying cost which Cambodia does not.

“We use production cost, freight costs, insurance, delivery cost and other ancillary costs to calculate inventory carrying cost, which is our usual method. The comparison of logistics costs to GDP is new to us,” he said via telephone.

That being said, he acknowledged that Cambodia’s cost was higher than its neighbours and it does impact on the country’s competitiveness but was not too agreeable with the 13.07 per cent parity.

He also questioned why the study did not include consultations with his ministry and the private sector including the Garment Manufacturers Association of Cambodia. On this basis, he felt that the report might only be displaying a “partial truth”.

‘Monopoly of services’

Transportation and warehousing costs, which are 3.25 per cent higher than in Thailand, make up 10 per cent of overall logistics costs. This is exacerbated by the diesel prices and the condition of the trucks.

“The trucks operating container drayage date back to the last century, as Cambodia has one of the oldest trucking fleets in Asia, and many of the trucks are imported second hand from South Korea, third hand from Vietnam or other countries where they are long past their useful and economic life.

“Poor maintenance is made worse by the facilitation culture, which enable soperators to get around inspections and roadworthiness checks by making ‘informal’ payments,” it said.

In addition, costs of crossing borders are high and varies at different borders. These include customs fees immigration, and other costs not related to transport costs and bilateral agreements yet to be implemented, according to the Interim Master Plan on Intermodal Transport Connectivity and Logistics System.

The World Bank said the lack of implementation of the Greater Mekong Subregion Cross-border Transport Agreement for the past five years, including bilateral agreements with Thailand and Vietnam, is “leaving Cambodia behind in taking on a significant share of the cross-border trade with its neighbours”.

Meanwhile, the port services and terminal handling costs continue to tower above Vietnam and Thailand, with previous reports noting the monopoly of “important maritime auxiliary services” by state-owned enterprises. This allegedly leaves a large gap for competition to improve the services’ quality and delivery.

According to OECD Investment Policy Review in 2018, the World Bank mentioned, a cost benchmarking conducted by EuroCham Cambodia members found that “port dues and charges relating to comparable vessels are 3.7 times higher at Sihanoukville than at Cai Mep, Vietnam”.

Grey channel

In the last six years, EuroCham has submitted three White Books on Trade and Investment Policy Recommendations on eight business segments including customs, logistics and special economic zones to the government in a bid to improve the ease of doing business.

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Source: Cambodia Economic Update (World Bank, June 2022)

In that time, it has found that the removal of state-owned CamControl and Kampuchea Shipping and Agency and Brokers as well as the 50 per cent reduction in container scanning fees showed that the government took the input of the private sector seriously.

"Unfortunately, international trade is evolving fast and rapid,” said Suy Bunthan, chairman of EuroCham Cambodia’s transportation and logistics committee, urging the government to seriously improve other areas.

Sharing his concerns on the sector with The Post, he noted that in relation to e-commerce for small and medium enterprises (SMEs), Cambodia should enhance its regulatory framework to enable SMEs to go global and increase collection from inbound e-commerce platforms.

“When government agencies, such as those under the MEF updates its cross-border procedures, there’s a need to balance between control and convenience.

“If the focus is too much on the control side, the procedures act as a stopper and discourage SMEs from exporting to international markets. But, if it is too complicated or inconvenient to pay import duty, the government loses the opportunity of collecting revenue or those packages will indirectly go through the grey channel,” said Bunthan.

In addition, he hoped that the government would add a category for low value dutiable consignments for items between $50 and $2,000 with simplified clearance procedures and have them released from customs within one to two hours. “It would push SMEs to go global.”

This falls in line with a point made by the World Bank where it noted that the lack of simplified clearance procedures for low-value shipments was not conducive to the promotion of cross-border e-commerce, and in particular restricts the participation of micro, SMEs.

Another setback is in relation to digitalisation and e-payment where the government needs to prioritise full automation for cross-border procedures, enable full single window and introduce digital solutions to eliminate paper-based procedures and physical interaction.

While Cambodia lacks an express clearance model, several initiatives and proposals, including from DHL and EuroCham on raising the de minimis threshold and introducing simplified clearance for low-value shipments have been submitted.

“The General Department of Customs and Excise [GDCE] is currently preparing draft procedures for express assignments [expected to be consulted with relevant stakeholders], which are yet to be implemented,” the World Bank said.

Questions to MEF were acknowledged by its spokesman Meas Soksensan, noting that it would take GDCE some time to respond.

Cambodia Logistics Association president Sin Chanthy failed to return with a comment while Ministry of Public Works and Transport spokesman Va Simsorya did not take questions.

‘Hidden costs’

Generally, EuroCham’s Bunthan said Cambodia’s logistics or transportation route, infrastructure and system are not comparable to Thailand or Vietnam.

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Source: Cambodia Economic Update (World Bank, June 2022)

In terms of transport service efficiency and the complexity of import or export procedures, both countries are several strides ahead of Cambodia in key components of logistics costs, such as transport and warehousing, inventory and administrative costs.

“Cambodia has the advantage of labour cost, a stable political situation, and especially a strong commitment by the government to attract more investment.

“Therefore, Cambodia can be a preferred choice for investors, mostly in the area of production and manufacturing, like garment where raw materials or parts are imported, produced or assembled and exported as finished products.

“Such a set-up needs the strong support of the logistics sector. So, it has to be competitive in terms of logistics performance and logistics cost,” he said.

Although the chamber acknowledged the MEF’s National Single Window to facilitate import-export activities, the “implementation and utilisation of the system are not there yet”.

Bunthan remarked that such complexities result in bottlenecks and have negative impact on logistics performance, which in the end would increase the logistics costs and deter investors from doing business.

“As a result, Cambodia may not benefit fully from free trade agreements and would not be able to help SMEs access international markets,” he said, adding that red tape involving cross-border procedures were onerous and costly.

Similarly, infrastructure poses challenges, in that Cambodia has only one deep seaport, bringing the issue of capacity and efficiency into question.

“Some logistics company choose not to use Cambodia’s sea port, instead they transport the cargo by road and utilise the sea port in Vietnam or Thailand. We acknowledge the government’s effort to push for more investment into sea ports, such as in Kampot.

“Road infrastructure has improved over the years [but] there’s a lot more to do to shorten the travel time from the manufacturing site to the port,” Bunthan said.

He added that despite cheaper labour cost and shorter distances, trucking fees were still higher than neighbouring countries.

Most of the time, the trucking service is outsourced to local trucking companies, which are able to deal with “local challenges” and “hidden costs” while travelling on the road.

Lead agency

Twelve short and medium-to-longer term recommendations were made by the World Bank in the special focus. The effectiveness and sustainability of the reform agenda to improve Cambodia’s trade competitiveness largely depends on the government’s “strong leadership” and positive outcomes.

The establishment of performance indicators to monitor and measure the progress in the work programme is critical to provide the basis for continuing support by the government and international development partners.

But, a lead “agency” in the government with clear mandate and terms of reference at the national and border or gateway level must be identified, the World Bank stressed.

In some areas of logistics, change was taking place, such as the adoption of logistics and supply chain segments in the Cambodia Industrial Development Plan 2015-2025, and the Interim Master Plan on Intermodal Transport Connectivity and Logistics System.

However, the momentum should be maintained and possibly increased and extended to cover all links of the supply chain to improve reliability and reduce logistics costs.

In other areas, Cambodia has plans to introduce major changes but has yet to implement them.

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Source: Cambodia Economic Update (World Bank, June 2022)

“There are also aspects where changes have yet to be agreed, let alone implemented. Efforts to increase Cambodia’s competitiveness, facilitate international trade, and enhance its connectivity to better serve consumers and meet the needs of regionally integrated facilities for reliable delivery of inputs and outputs require a systematic approach,” it said.

Future plan

Back in 2019, Cambodia climbed four points to hold the 106th spot out of 141 countries in World Economic Forum’s Global Competitiveness Index, indicating major improvement. However, it was still far behind Thailand, which ranked 40 and Vietnam at the 67th position.

Ministry of Commerce’s Sovicheat is aware of the fragility of Cambodia’s competitiveness in relation to its neighbours but asserted that the data by the GDCE showed that long haul exports, for instance to the US and EU, have been performing well. Export value rose over five per cent year-on-year to $19.3 billion in 2021.

“We have reached the highest trade volume [$48 billion in 2021], thanks to the export of garment, footwear and travel goods. Agriculture exports have also bounced back after the EU lifted the safeguards. The data is evidence that our performance has improved,” he said.

“Yes, our competitiveness is affected, which is also due to high freight costs due to the shortage of containers and the war but it is manageable because the cost is shared between the buyer and seller. It is a compromise and we make it work,” he said.

Sovicheat maintained that Cambodia’s position in the global supply chain is credible, as foreign investments have increased.

On the terminal handling costs, which the World Bank said is double the fee in Sihanoukville port than in Thailand and Vietnam, the spokesman said it has been reduced over the years. “Further reduction would incur losses for the port operator.”

He shared that Cambodia was trying to minimise logistics costs by advocating the use of information technology, such as the National Single Window service for the facilitation of import and export activities.

At the head of it, the government is making sure that the logistics sector performs well by adding more roads, highways, warehouses, a cold chain warehouse at the Phnom Penh Autonomous Port and strengthening export markets.

These are contained in thecomprehensive Logistics and Intermodal Master Plan for Cambodia (2022-2023), though it has yet to be finalised.

According to the World Bank, the master plan is built around the development of a hub-and-spoke system that services trade and domestic freight movement along the northwest, southeast, and southwest areas whileconnecting the coast, north and northeast segments. It will join up four hubs – Sihanoukville, Phnom Penh, Battambang and Siem Reap – with two cross-border links, Poipet and Bavet.

“We are preparing for the master plan where every ministry has to revise [policies] to plug the holes and address deficiencies to move the goods,” Sovicheat said.

EuroCham acknowledged that the government is working hard to address the concerns by the private sector, noting that change is not going to happen overnight, said Bunthan.

“But, we will need to keep the momentum going. After all, we want to operate in an environment where it is easy to do business and to do it transparently.

“We view the challenges as a structural issue where the government needs to utilise technology to support the reform initiatives and review the regulatory framework in order to align with global trend,” he remarked.

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