54413 The Provincial Business Environment Scorecard in Cambodia A Measure of Economic Governance and Regulatory Policy Summary Report April 2009 PBES 2009 | 1 PBES 2009 | 2 The Provincial Business Environment Scorecard 1 in Cambodia A Measure of Economic Governance and Regulatory Policy Summary Report April 2009 1 The Provincial Business Environment Scorecard (PBES) is a partnership between the International Finance Corporation and The Asia Foundation, with funding support from Danida, DFID and NZAID, through the Multi-Donor Livelihoods Facility. PBES 2009 | 3 PBES 2009 | 4 Table of Contents Abbreviations .................................................................................................................................................... vi List of Tables .................................................................................................................................................... vii List of Figures .................................................................................................................................................... vii Acknowledgments ............................................................................................................................................. viii 1. Introduction ............................................................................................................................................ 9 2. Provincial Business Environment Scorecard and Sub-Indices ..................................................... 11 2.1 Overall scoring strategy ................................................................................................................ 11 2.2 The sub-indices .............................................................................................................................. 11 2.3 Survey strategy ............................................................................................................................... 12 3. Profileof Cambodianfirms................................................................................................................ 3 1 3.1Cambodia'sfirmsaremicro-enterprises.....................................................................................13 3.2Increaseinsmallandmediumenterprises.................................................................................14 3.3Concentrationof firmsinthePhnomPenhregionisdecreasing...........................................14 3.4Firmstendtooperateonlywithintheirhomeprovince...........................................................15 3.5Mostfirmsareinservicesorcommerce.....................................................................................16 3.6Womenareactiveinbusiness......................................................................................................16 3.7 Firms are young.............................................................................................................................. 17 3.8 Business growth is likely to continue ......................................................................................... 17 4. The2009PBESRankings:ExplanationandAnalysis................................................................... 19 4.1Rankings......................................................................................................................................... 19 4.2Improvementinsomeprovinces'rankingsovertime.............................................................21 4.3Highranking,butfarfromperfect........................................................................................... 23 4.4Impactof governanceimprovements....................................................................................... 23 4.5Individualpolicies.........................................................................................................................24 5. Conclusion............................................................................................................................................31 AppendixA1-Methodology..........................................................................................................................33 AppendixA2-ConstructingthePBES.........................................................................................................37 AppendixA3-Relationshipbetweenthe2006and2009PBESresults...................................................39 PBES 2009 | 5 Abbreviations ADB: AsianDevelopmentBank DANIDA: DanishInternationalDevelopmentAgency DFID: UnitedKingdom'sDepartmentforInternationalDevelopment DIME: Departmentof Industry,Mines,andEnergy DOC: Departmentof Commerce DOT: Departmentof Tourism ICA: WorldBank'sInvestmentClimateAssessment IFC: InternationalFinanceCorporation MDLF: Multi-DonorLivelihoodsFacility MIME: Ministryof Industry,MinesandEnergy MOC: Ministryof Commerce MOT: Ministryof Tourism MSME: Micro,small,andmediumenterprises NZAID: NewZealand'sInternationalAid&DevelopmentAgency PBES: ProvincialBusinessEnvironmentScorecard VAT: Valueaddedtax WB: WorldBank vi PBES 2009 | 6 List of Tables Table1: ChangesinDistributionof EnterprisesbySize(2006and2009PBES)..................15 Table2: Comparisonof PhnomPenhtoBusinessEnvironmentsinOtherProvinces.......21 Table3: Impactof IndividualSub-indicesontheProbabilitythatBusinessOwnersWill ExpandtheirBusinesses..................................................................................................26 Table4: Levelsof CambodianBusinessFormalization............................................................. 28 TableA1: WhoAnsweredthe2009PBESSurvey?........................................................................35 TableA2: DetailedDescriptionsof Sub-IndicesandComponentIndicators........................... 41 List of Figures Figure1: Distributionof EnterprisesbySize.................................................................................14 Figure2: 2009PBESListing­GeographicalDistributionof Enterprises................................15 Figure3: 2009PBESListing­Distributionof EnterprisesbySector.......................................16 Figure4: 2009PBESListing­Distributionof EnterprisesbySexof Owner.........................16 Figure5: 2009PBESListing­Distributionof EnterprisesbyYearsof Operation..............17 Figure6: 1 Final2009PBESRanking.................................................................................................. 9 Figure7: Final2006PBESRanking.................................................................................................20 Figure8: PerformanceonIndividualSub-indices........................................................................24 Figure9: RelationshipBetweenGovernanceandBusinessExpansion......................................25 Figure10: RelationshipBetween2006and2009PBESRankings.................................................40 PBES 2009 | 7 vii Acknowledgments The2009ProvincialBusinessEnvironmentScorecardProjectisacollaborativeeffortbetweenthe InternationalFinanceCorporationandTheAsiaFoundation.Wearegratefultodonorsof IFCand TheAsiaFoundationfortheirfinancialsupport. Theprocessof conductingthe2009PBESsurvey,includingthelistingof businessestablishments, wouldnothavebeenpossiblewithoutsupportfromH.E.SarKheng,DeputyPrimeMinisterand Ministerof Interior;H.E.ChamPrasidh,SeniorMinisterandMinisterof Commerce;H.E.SuySem, Ministerof Industry,MinesandEnergy;andH.E.Dr.HangChuonNaron,SecretaryGeneralof the Ministryof EconomyandFinance.TheDeputyPrimeMinister,SeniorMinister,Ministers,andthe SecretaryGeneralissuedseparatelettersof endorsementfortheproject. Likeotherresearchendeavors,the2009PBESistheresultof thecollaborativeeffortsof many individuals.Theproject'stechnicaladvisorandauthorof thereportwasDr.EdmundMalesky,with supportfromKrislertSamphantharakandPaulSchuler.Overallsupervisionandadviceonthe2009 PBESwasprovidedbyCharlesSchneider,SoneathHorandVeroniqueSalze-Lozac'h.KhyToukand SambathSaktooktheleadindevelopingandmanagingtheproductionof the2009PBES.LangSok andSanTeacarriedoutspotchecksonthequalityof interviewsinthefieldtoensureaccuracy.Kent HelmersmanagedthefieldresearchandwasassistedbySininKithandVuthyBun.AnnBishopwas thetechnicaleditorandproof reader.KuntheaKeaundertookgraphicdesignandlayout.TonieTan providedvaluableadministrativesupport. viii PBES 2009 | 8 1. Introduction In Kratie Province, a window and door shop importantbecauseitwillhelpCambodia'smicro, owner states: "In my province, provincial small,andmediumenterprises(MSMEs),which officials do not support business activities. represent over 95 % of private enterprises, to They never visit or invite us to talk about our achievetheirpotentialincreatingjobsinrural businessenvironmentproblems."However, in areas where the majority of Cambodians live theneighboringprovinceof KampongCham, and poverty rates are highest. Creating jobs is the owner of a small brick factory feels that moreimportantthaneverwith230,000young his province's business climate has improved. peoplejoiningthelabormarketeveryyear.3 "Bribes have declined sharply. A reduction in administrativeprocedureshashelpedtoreduce The PBES, which covered 10 Cambodian corruption." economicallyimportantprovincesin2006,and all 24 provinces in 2009, relies largely on the As these stories indicate, entrepreneurs' perceptions of business owners to generate a experiences with local authorities can vary scorecardthatranksprovincesonmeasuresof dramaticallyfromoneCambodianprovinceto business environment quality. In this way, the another.Whilelawsandregulationsaredecided PBES helps public officials identify province- atthenationallevel,howtheyareunderstood specificareasforreform. and implemented depends very much on provincialauthorities.Differencesinthequality The PBES also gives business owners the of economic governance2fromoneprovinceto evidence they need to advocate effectively another contributes to uneven levels of growth for reforms and engage public officials in across Cambodia. productive discussions about how to achieve reforms. Numerous obstacles such as lack of In order to understand how provinces are information on regulations, time consuming supporting or preventing business growth, procedures, unofficial charges, and the poor InternationalFinanceCorporationandTheAsia deliveryof essentialpublicservicesallhamper Foundationhavecollaboratedindevelopingthe business growth. Provincial Business Environment Scorecard (PBES).The2009PBESranksall24provinces In addition to pointing out areas for reform, onthequalityof theireconomicgovernance. thePBESidentifiesprovincesengagingingood practices so that other provinces can learn The PBES provides reliable data to help from these examples. Also, 2006 PBES and businesses and local governments identify 2009 PBES provide a baseline against which which governance factors are most in need of policymakers and regulators can monitor the improvement. This evaluation is particularly results of reforms over time. 2 Economic governance refers to the nature and practice of economic management, regulation and development; or the institutional environment that governs economic activities. 3 Cambodia Economic Watch, Economic Institute of Cambodia (April 2005). PBES 2009 | 9 PBES 2009 | 10 2. Provincial Business Environment Scorecard and Sub-indices 2.1. Overall scoring strategy 1. Entry Costs: A measure of the time it takes for firms to register and receive all The PBES scores are generated through a the necessary licenses to start a business; the mixture of responses to survey questions and number of licenses required; and the official `hard' data collected from government sources costs of registering and obtaining all required andotherpublishedmaterials.Thesedataareall licenses/permits. groupedinto10broadsub-indices(categories), whichareassessedona1-10pointscale.Added 2. Property Rights: A measure of the together, these 10 sub-indices create a 100- formal rights businesses have to the land and point overall score for economic governance. buildings they occupy and their security of Technically, it is possible for a province to tenure once land is properly acquired and receive a perfect score of 100 if it earns top titled. scoresonall10indicators,however,perfection isverydifficulttoachieve.Indeed,allprovinces 3. Transparency: A measure of whether have low scores in some areas. firmshaveaccesstotheinformationtheyneed aboutgovernmentregulationsandprocedures, Before describing the sub-indices and the as well as the related legal documents necessary survey strategy, it is important to note that to run their businesses; whether regulatory the sub-index rankings are based on how information and legal documents are available provinces perform relative to other provinces toeveryonewhoasks;andwhethernewpolicies on particular survey questions and other data. and laws are communicated to firms and Therefore,thepointtotalsarenotcomparable enforcedinapredictablemanner. topointtotalsinothercountriesorsomeideal measureof governance.Rather,thesub-indices 4. Time cost of regulatory compliance: A shouldbeviewedasmeasuresof comparative measure of how much time firms spend on achievement of provinces in the Cambodian complying with government regulations, how context. For a more detailed explanation of longtheywaitforprocedurestobecompleted, the scoring strategy, see Appendix A2 of this aswellashowfrequentlyfirmsareinspectedby report. local government agencies. 2.2. The sub-indices 5. Informal Charges/Bribes: A measure of howoftenfirmspayinformalchargessuch Thefollowing10sub-indiceswereusedtograde as bribes and kickbacks to obtain government all24of Cambodia'sprovinces. contracts; the extent to which these informal PBES 2009 | 11 payments are obstacles to business operation, 2.3. Survey strategy andwhetherinformalpaymentsarepredictable andachievetheexpectedresults. Eachsub-indexisbasedprimarilyonresponses to survey questions answered by Cambodian 6. Participation: A measure of whether business owners in the 2009 PBES. To firmsareconsultedaboutproposedprovincial ensure that the results accurately reflect policies and whether business associations or conditionsthroughoutthecountry,sophisticated other interest groups advocate on behalf of survey and sampling techniques were used to business owners. ensurethatnoregionortypeof businesswasover orunder-represented,andthatsurveyquestions 7. Crime Prevention: A measure of how generatedmeaningfulresponses.Intotal,1,234 muchfirmspayincoststhatresultfromtheftas businessownersfromall24provincialcapitals wellasthecoststopreventcrimebypayingfor plusteneconomicallyimportantdistrictsacross securityservicesand/or`protectionmoney'. the nation were surveyed. 8. Tax Administration: A measure of both Among the randomly selected 1,234 administrativeproceduresrelatedtopayingtax interviewees, the PBES also interviewed andthecostof taxintheprovince. representativesfrom152firmsthatparticipated in the 2006 PBES survey. These previously 9. Proactivity of Provincial Leaders: A interviewed entrepreneurs were critically measure of the creativity and willingness of important in 2009 PBES because they provincial authorities to interpret national experiencedthebusinessenvironmentin2006 policiesandregulationsinfavorof localprivate andcoulddirectlycomparethiswithconditions firmsanddeveloptheirownprovincialinitiatives two years later. This provided the best topromoteprivatesectordevelopment. opportunity to compare changes in economic governance over time. 10. Dispute Resolution: A measure of firms'satisfactionwiththeoutcomesof formal For a more detailed description of how the andinformalmethodsof disputeresolutionin survey and sampling were conducted and theirprovince. how the panel respondents were selected, see AppendixA1. PBES 2009 | 12 3. Profile of Cambodian Firms To help understand the results of the PBES selecting the 1,234 entrepreneurs who were survey, it is useful to look at the listing of surveyedforthe2009PBES. businesses from which survey respondents weredrawn.Sinceexhaustiveandcomparable Before examining how the index was listsof businessesinCambodia's24provinces constructed, it is helpful to review some key had not been made, the PBES research team features of Cambodia's private sector. First, gathered basic information on MSMEs in the whileprivatesectordevelopmentattractsalot capitalcityof eachprovince,plusoneadditional of attention, very little statistical information district in Cambodia's 10 most economically- is currently available on Cambodia's private active provinces. Counting all businesses enterprises. What do Cambodian businesses operatingwithinthreekilometresof thecenter look like? By providing a valuable profile of of each provincial capital and in selected Cambodia's private sector, the listing and districtsaddeduptoatotalof 63,507firms.Of descriptiveinformationfromthesurveyprovide thesebusinesses,95.5%agreedtoprovidethe generalanswers.Second,amoreaccuratepicture informationrequestedbytheresearchteamso of the Cambodian business environment will thedatainthelistingareextremelyreliable. provide a framework for understanding the needsof specificbusinessenvironments.Third, Because we only counted businesses within and most important for this report, a picture provincial capitals and selected districts, we of the nation's firms provides more context cannot claim that our listing covers all businesses regardingwhorespondedtothesurveywhich in Cambodia. Since we only included 10 was used to generate the PBES scorecard. districts,inadditiontoprovincialcapitals,there is a slight urban bias to the findings. Also we 3.1 Cambodia's firms are micro- have likely missed some large manufacturing enterprises establishments(particularlyinfoodprocessing) that are located more than three kilometres The most striking finding from the listing of fromthecenterof town.Thatsaid,thelisting almost 64,000 businesses across Cambodia is of businesses created for the PBES is certainly the very small size of most firms. For 69% themostcomprehensivelistingof businessesto of businesses,theonlyemployeeistheowner, dateandsystematicdatacollectionprocedures 90.4% of enterprises in the listing have fewer mean that data is directly comparable across than four employees, and 96% have fewer Cambodianprovinces.Also,thelistingof more than10(Figure1).If onereferstothegeneral than 63,507 businesses in all 24 provinces, definitionof amicro-enterpriseasanenterprise served as an ideal sample frame for randomly with less than 10 employees,4 then 96% of Cambodianbusinessesaremicro-enterprises. 4 Definition used by the Ministry of Industry, Mines and Energy. PBES 2009 | 13 Figure 1: Distribution of Enterprises by Size (Number of Employees in Addition to the Owner) 2.2% 1.7% 5.7% 21.6% Number of Employees 0 1 to 4 5 to 9 68.8% 10 to 19 20 + While this report uses the terms `MSMEs', were some differences in the methods used in `firms', `enterprises' and `establishments' the2006and2009PBEStogeneratethelisting interchangeably, readers should keep in mind of businesses,6thedifferencewouldprobably that96%of firmsaremicro-enterprises.Table lead to an underestimate of the extent of 1 compares the 2006 and 2009 PBES listings business growth. It is clear that more and more in order to study changes in the business entrepreneurs are taking the risk of starting a communityovertime.Overall,thedistribution business, and moreover, the growth rate was of enterprisesbysizehaschangedonlyslightly highest for larger businesses. The number of since 2006. Businesses with fewer than four businesswithbetween10and20employeeshas employees still make up the vast majority of nearly doubled over the past two years, while enterprises(92%in2006and90.4%today). those with over 20 employees grew by almost 200%. Both of these trends, while still at an 3.2 Increase in small and medium early stage, should contribute to employment enterprises 5 growthandpovertyreductioninthelongrun. Overall, more businesses are opening in 3.3 Concentration of firms in the Cambodia.If welookjustatthefirmssurveyed Phnom Penh region is decreasing inthe10provincescoveredbythe2006listing (hereafter referred to as the `Original 10'), we As Figure 2 demonstrates, the listing shows see that the total number of businesses grew a strong concentration of enterprises in the by 27% in the past two years. Although there capitalcityandsurroundingprovinces.Phnom 5 For a more detailed analysis of changes in firms and how the numbers were re-weighted to reflect population differences between provinces, see Ap- pendix A1 and Table A1. 6 The 2006 PBES counted all businesses in the three largest districts and capital of a province, while the 2009 PBES only considered enterprises in the capital city and one additional district in each of Cambodia's 10 most economically active provinces. PBES 2009 | 14 Table 1: Changes in Distribution of Enterprises by Size (2006 and 2009 PBES) Firm Size 2009 Original 2009 Original 2009 Full Growth in 2006 2006 (%) 2009 Full (Employees) 10 Provinces 10 (%) Share Original 10 0 (Only Owner) 29,841 71.4% 35,778 67.3% 43,709 68.8% 19.9% 1 to 4 8,703 20.8% 11,755 22.1% 13,689 21.6% 35.1% 5 to 9 2,126 5.1% 3,270 6.2% 3,597 5.7% 53.8% 10 to 20 733 1.8% 1,304 2.5% 1,424 2.2% 77.9% 20 and over 372 0.9% 1,021 1.9% 1,088 1.7% 174.5% Total 41,775 100% 53,128 100% 63,507 100% 27.2% Employment Per Firm 2.01 2.32 2.08 15.4% The 2006 and 2009 comprehensive PBES listing varied slightly in sampling methodology. In 2006, the most populous three districts in each province were counted. In 2009, only the capital and one district in 10 economically-active provinces were counted. Figure 2: 2009 PBES Listing ­ Geographical Distribution of Enterprises 50 44.8 45 40 Percentage of Enterprises 35 30 25 20 15 9.7 10 7.0 5.3 3.5 3.3 3.2 5 2.6 2.6 2.5 2.4 2.3 1.7 1.7 1.3 1.1 0.9 0.9 0.9 0.6 0.6 0.5 0.3 0.3 0 Phnom Penh Battambang Kandal Siem Reap Banteay Meanchey Sihanoukville Rattanakiri Svay Rieng Kampong Cham Kampong Chhnang Kampong Speu Prey Veng Takeo Kampot Pursat Pailin Koh Kong Kampong Thom Oddar Meanchey Kratie Mondulkiri Preah Vihear Stung Treng Kep Penhaccountsfor45%of allenterprises.While 3.4 Firms tend to operate only within this is a substantial share, it is much smaller their home province than in 2006, where Phnom Penh accounted for60%of businesses.Inthecurrentlisting, Not only are businesses small, they are also Battambang comes far behind Phnom Penh quite `provincial'. Ninety percent of surveyed with10%of allenterpriseslisted,andPhnom businesses operate solely within their home Penh'sneighboringprovince,Kandal,has7%of province,andonly10%export.Businessesin businesses.Thehighpercentageof businesses PhnomPenharemoresophisticatedthanthose concentratedinPhnomPenhiscomparableto inotherpartsof Cambodia,with16%of firms thatinothercapitalcitiesindevelopingcountries engagedinexporting.7 in Southeast Asia and beyond. 7 As a result of Phnom Penh's disparity and its under-representation in the national sample, the nationally-weighted sample differs slightly from the PBES sample. See Table A1 for more details. PBES 2009 | 15 3.5 Most firms are in services or province,withPreyVeng,forexample,showing commerce alargepercentageof womenbusinessowners (almost75%). If we disaggregate by sector, both the listing and the PBES survey show that 93.5% of Figure 3: 2009 PBES Listing - enterprises are concentrated in services or Distribution of Enterprises by Sector commerce (48.2% and 45.3%, respectively), while manufacturing and construction account 1.0% foronly5.4%,andnaturalresourceexploitation accountforonlyabout1%.Figure3displays this data from the comprehensive business 45.3% listing. 48.2% 3.6 Women are active in business 5.4% The important role that women play in the privatesectorisshowninFigure4.Withwomen Services owning 62% of listed enterprises, their role Manufacturing/Construction in economic growth is substantial. However, Commerce Natural Resource Exploitation gender distribution varies tremendously by Figure 4: 2009 PBES Listing - Distribution of Enterprises by Sex of Owner 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Percentage of Enterprises 0 Prey Veng Takeo Sihanoukville Kampong Chhnang Koh Kong Battambang Banteay Meanchey Kampot Kampong Speu Pursat Kandal Phnom Penh Stung Treng Svay Rieng Oddar Meanchey Siem Reap Kampong Cham Kratie Kep Rattanakiri Mondulkiri Pailin Preah Vihear Kampong Thom Female Male PBES 2009 | 16 3.7 Firms are young 3.8 Business growth is likely to continue Finally,thelistingshowsthatthemajorityof the Drawing on data from the PBES survey, it enterpriseslistedareyoung.Forty-twopercent seems likely that rapid growth in the private of businesseshave operatedfor lessthan two sector will continue. Forty-nine percent of years, while another 22% have operated for businesses surveyed for the PBES intend to less than five years (Figure 5). This indicates increase their business activities over the next dramatic growth in entrepreneurial activity two years. However, these figures should be overthepastfewyears.Thisresulthascritical treated with some caution as the survey was implications for analysis of the survey results. conducted before the international financial Therapidgrowthof newstart-upsinthepast crisisbeganinlate2008. fewyearsmeansthatmanyfirmshaveonlyjust begun operations, and have not yet registered theirenterpriseandjoinedtheformalsector. Figure 5: 2009 PBES Listing ­ Distribution of Enterprises by Years of Operation 50 41.5 Percentage of Enterprises 10 15 20 25 30 35 40 45 21.8 20.7 15.7 5 0 Less than 2 3 to 5 6 to 10 Greater than 10 PBES 2009 | 17 PBES 2009 | 18 4. The 2009 PBES Rankings: Explanation and Analysis 8 The following sections show the PBES rankings rememberthattherankingsarerelative,based anddiscusstheminthecontextof Cambodian onbestpracticesinCambodia.Provincesare economicdevelopment. notbeingcomparedtosomeidealandpossibly unobtainable measures. 4.1 Rankings 4.1.1 Kampong Cham retains top position Figure6presentstheresultsof the2009PBES. Thisisthesumof provincialscoresoneachof Asin2006,KampongChamisthetop-ranked the10sub-indices.Because10possiblepoints province, though in 2009, the gap between areavailableforeachsub-index,thefinalranking theprovincesrankedfirstandsecondismuch isona100pointscale.Toachieveperfection,a smaller.Kampot,thefourth-rankedprovincein provincewouldneedtoberankedfirstinevery the2006index,hasmoveduptosecondplace. oneof thePBESindicators.Itisimportantto Now only two points separate Kampot from Figure 6: Final 2009 PBES Ranking Kampong Cham 65.30 Kampot 64.14 Koh Kong 64.10 Rattanakiri 63.81 Sihanoukville 63.80 Oddar Meanchey 63.33 Pursat 62.92 Kampong Chhnang 62.51 Prey Veng 61.67 Kampong Thom 60.81 Preah Vihear 60.61 Kep 60.35 Svay Rieng 60.21 Siem Reap 59.43 Pailin 59.25 Kampong Speu 58.68 Stung Treng 58.59 Mondulkiri 58.30 Kandal 57.54 Takeo 57.08 Banteay Meanchey 57.07 Battambang 56.60 Kratie 55.76 Phnom Penh 48.31 0 10 20 30 40 50 60 70 80 90 100 2009 Provincial Business Environment Score 8 For a detailed explanation of how the scores were compiled, see Appendix A2 and the Technical Reports (2006 & 2009). PBES 2009 | 19 Figure 7: Final 2006 PBES Ranking Sihanoukvilleandfivenewcomers(KohKong, Pursat,OddarMeanchey,Rattanakiri,andPrey Kampong Cham Kampong Cham 72.90 72.90 Veng)completethelistof provincesthatscored Svay Rieng Svay Rieng 64.14 64.14 above 60 points. Phnom Penh, the national Kampong Chhnang Kampong Chhnang 61.67 61.67 capitalandheartof theCambodianeconomy, rankslast.Amarginof oversixpointsseparates Kampot Kampot 61.18 61.18 Kandal Kandal 57.55 itfromtheotherlow-rankingprovinces. 57.55 Battambang Battambang 56.46 56.46 Banteay Meanchey Banteay Meanchey 56.35 56.35 Phnom Penh Phnom Penh 49.36 49.36 4.1.2 The case of Phnom Penh Siem Reap Siem Reap 48.95 48.95 Sihanoukville The extremely low score for Phnom Penh 47.82 Sihanoukville 47.82 00 10 10 20 20 30 30 40 40 50 50 60 60 70 70 2006 Provincial Business Environment Score 80 80 90 100 90 100 warrants special explanation. To some extent, Phnom Penh is handicapped by urbanization and population density, problems that do not Kampong Cham; in 2006, the gap between burdenitspeers.MunicipalofficialsinPhnom Kampong Cham and Svay Rieng, the second Penharestretchedtocapacityinordertoprovide rankedprovince,wasalmost9points. servicesforsuchanenormouspopulationand cater to the many and complex demands of Although consistently ranking first, Kampong the country's most diverse population. It is Chamstillhasaspectsof economicgovernance notsurprisingthatwaitingperiodsforbusiness that need to be improved. While provincial documentation and land titles take longer. There officials continue to earn high scores on aresimplynotenoughgovernmentofficialsand proactivity and dispute resolution, ratings resources to meet the demands. In addition concerned with entry procedures, land access, to a shortage of officials, urbanization poses transparency, and informal charges have distinct problems (crime, pollution, heavy use declined noticeably. of infrastructureandmaintenancecosts).These Testimonials about entry costs from with an application for a permit. It took Koh Kong Province, the highest ranked only one week to receive a Patent and one newcomer in the 2009 PBES. more week for a permit from the Provincial Department of Commerce. Manufacturing Enterprise Manager: I did not need to go to a government Restaurant Owner: A Patent took only office to apply for a permit for my business. one day to process after we collected and Government officials came to me, instead. submitted all required documents from It took one week to receive a Patent and village and commune chiefs. I had to three days for a license from the Provincial negotiate the application price as there is Department of Industry, Mines and Energy. no official price schedule. It would be good to have one-window service to take care of Electric Equipment Shop Owner: A business establishment paperwork. government official came to my business PBES 2009 | 20 Table 2: Comparison of Phnom Penh to Business Environments in Other Provinces Indicator Phnom Penh Other Percentage of enterprises denying the occurrence of bribery 45% 68% Percentage of enterprises denying commission payments on government contracts 13% 32% Percentage of enterprises paying protection payments to local police 30% 5% Percentage of enterprises negotiating tax payments with local officials 67% 57% issues pose challenges not found to the same Phnom Penh will remain the center of the extent in other regions. Thus, Phnom Penh's Cambodian economy for the foreseeable lowperformancecanbejustified,inpart,byits future. It will continue to have the largest share unique position as the centre for Cambodia's of businessactivity,aswellasattractthemost economic and social life. investment and the most talent. These successes result not from good governance, but from On the other hand, many of Phnom Penh's Phnom Penh's endowments which include: a sub-indexscorescannotbeexplainedonlybyits largeurbanmarketforgoodsandservices;the urbanstatus.IntervieweeresponsesinPhnom country'smosthighlyeducatedpopulation;far Penh indicate that civil servants stand out for betterinfrastructure;cheaperenergyprices;and theirlowlevelof servicequality.The2009PBES closeproximitytogovernmentandtherebyto data show that this is not matched elsewhere in opportunities for lucrative national contracts. Cambodia. As Table 2 shows, compared with Nevertheless,governanceinPhnomPenhwill other provinces, business owners in Phnom continue to constrain overall growth. Phnom Penharefarmorelikelyto:1)paysmallbribes Penhwillneverreachthefulleconomicpotential to local officials; 2) pay commissions in order thatitsendowmentsprovideunlesssomething towingovernmentcontracts;3)giveprotection is done to improve service quality and reduce payments to local police officers to avoid the risks of doing business. criminal activity; and 4) negotiate their tax paymentswithlocalofficials. 4.2 Improvement in some provinces' rankings over time It is little wonder that business owners in PhnomPenhappeartoblamethegovernment Since the 2006 PBES, a number of provinces for their troubles (only 32% rated officials' have taken important steps to improve their attitudesaspositive)andmanylackconfidence business environment. inpublicinstitutions(only18%believethatlocal institutions will protect their property rights). The largest improvers were Sihanoukville and Worse yet, poor governance has affected the Siem Reap. Both ranked near the bottom in attitudes of local entrepreneurs in the capital. the 2006 rankings, but have since moved up Whereas 60% of entrepreneurs elsewhere in tothetopandmiddletiersrespectively.Siem the country plan to expand operations over Reap demonstrates improvement in nearly 9 the next two years, just 45% of businesses in of 10categories.Sihanoukvillehastakenaless the capital have such plans. In fact, 3.6% of consistentpath,improvingradicallyonfivesub- PhnomPenhfirmsareplanningtoclosedown indices, despite slight declines and stagnation inthenexttwoyears,comparedtoonly1%of inothers.Ingeneral,Sihanoukville'sadvances firmsintherestof thecountry. outweigheditsset-backs.Bothprovincesshowed PBES 2009 | 21 Land Titles in Battambang A businesswoman described her meter. I asked them to buy my land if they experience applying for a land title. First, were sure about the price. I had to negotiate she went to the village and commune the tax price three times and pay fees for offices for an application and had to make all kinds of services, including paper, pen, a payment for the application and for stamp, and even for them to complete the each required signature. At the tax office, form. I wondered for what do they receive she had to negotiate the tax fee. At first, their government salaries? My last stop was tax officials wanted to collect taxes on 2.5 at the Department of Land Management, times the actual market price of her land. Urban Planning and Construction. My application for the land title will take two to "My land cost 10 USD per square meter on three months to process and cost $5,000 for the market, but [the government officials] a 30m x 80m plot." quoted the price at 25 USD per square themostdramaticadvancesinpreventingcrime, have easy-to-understand regulatory information facilitatingentrycosts,securingpropertyrights, readily available in the lobbies of government andenhancingtransparency. agencies. Itisusefultothinkabouttherapidgovernance Sihanoukville also excels in transparency of improvementsof SiemReapandSihanoukville businessinformation.Theresearchteam,which in contrast to decline in the nation's capital. visitedall24provinces,foundthatSihanoukville LikePhnomPenh,theselocalitiesbenefitfrom agencies were among a select group with propitious endowments. Siem Reap attracts regulatory information clearly posted, and tourists every year due to the unparalleled splendor of the Angkor Wat complex, while Sihanoukville receives investment because its Governance Improvements in Siem Reap Cambodia'sonlydeepwaterport,tourismhas strongpotentialandSihanoukvillehaspossible A guest house owner said he finds out about new laws and regulations that affect his oil reserves off its coast. Both locations could business from newspapers, media coverage, easilyrestontheirlaurels,attractinginvestment and respective government departments. every year while making minimal advances in "The provincial tax department comes four governanceandregulation.Yet,inthelasttwo times per year to give information on tax years, both locations have invested significant issues," he said. "The provincial department resources to create more efficient and of tourism provides information on tourist transparent regulations. Siem Reap especially trends, rules, and regulations." standsoutasoneof onlyafewprovincesthat PBES 2009 | 22 where maps of future infrastructure projects deservestudyand emulation. As an example, werereadilyaccessible,withouthavingtomake Kandal(ranked16thoverall)ranksamongthe specialrequestsorcontactstoobtainthem. topprovincesintermsof propertyrightsand thetimespentcomplyingwithregulations. By contrast, other provinces (Phnom Penh, Battambang and Banteay Meanchey) have 4.4 Impact of governance improvements slippedovertime.Thesedeclineswereprimarily aresultof lowerscoresonlandaccess,informal By improving governance in areas where charges,andtaxadministration. their scores are lowest, provincial officials help MSMEs to prosper. When regulation 4.3 High ranking, but far from perfect and arbitrary enforcement costs are reduced, entrepreneursaremorelikelytorisktheircapital In contrast to other countries, where sub- and energies on business expansion. A ten- national indices have been created9,Cambodian pointimprovementinPBESscores,roughlythe provinces are tightly clustered in their final differencebetweenKratieandKampongCham, scores. No single province stands out as resultsina9.9%increaseinthechancethatan having far better governance than its peers. entrepreneurwillexpandhis/herbusiness.This With very little reform effort, low ranking relationshipisillustratedmoresuccinctlybythe provincescouldquicklyclimbuptheladderin blue line in Figure 9. futuresurveys.Eventhetop-rankedprovinces of Kampong Cham and Kampot have much Table3showsthatfivesub-indicesareof primary room for improvement. This fact is vividly importanceforprovincestoconsiderimproving displayed in the star charts in Figure 8, where inordertoencourageentrepreneurstoexpand branchesrepresentperformanceoneachof the their businesses: informal charges, ease of individual sub-indices. An ideal province that regulation,entryprocedures,crimeprevention, scored a 10 on each sub-index is represented and tax administration. For instance, a single inthetopleft-handcornerof thefigure.After point improvement on the informal charges thisperfectscore,figuresforeachprovinceare sub-indexisassociatedwitha3.3%increasein displayed according to their final PBES score. Itisimportanttonotethatnoprovincecomes close to the ideal. Crime in Kampong Cham Furthermore,significantdeficienciesareevident, even in the provinces with the very highest A small-sized steel window and door rankings. For instance, informal charges and entrepreneur, said that armed robberies taxadministrationcontinuetoposeobstaclesto and burglaries often go unreported businessownersinKampongCham.Similarly, because of lack of faith in the authorities. Kampot officials have more work to do in "The victims didn't report crimes to the improvingtransparencyandproactivityinlocal authorities because they don't believe that decision making. By contrast, lower ranked the authorities can solve the cases and return what has been stolen... People, provinces have achieved success in isolated especially business owners, have tried to areas.Theirpoliciesforachievingthesescores protect their property by themselves..." 9 The Provincial Competitiveness Index (PCI) in Vietnam, the Economic Governance Index in Sri Lanka, and similar indexes in Indonesia or the Philip- pines. For more information see: http://www.youtube.com/watch?v=7UPgfRTtkm0 PBES 2009 | 23 the chance of business expansion. Time cost 4.5 Individual policies of regulatory compliance, entry procedures, crime prevention, and tax administration are Table A2 details the different sub-indices and associated with changes of similar size. The indicators that combine to give the overall score. other sub-indices are of lower priority with AfewhighlightsfromthePBESindicatorsare: regardtobusinessexpansion. 4.5.1 Improvements in the overall Policy decisions always involve trade-offs. business environment Devotingtime,energy,andfinancialresources to one policy goal, generally means that other Entry Costs: Entry costs appear to have objectives are left wanting. Knowing which improved generally across the country. In policychoiceswillprovidethebiggestspurto additiontotheprovincesthathaveimplementeda businessactivitycanbeacrucialfactorinhelping `One-window'officeforregistrationprocedures narrowthechoiceof initiativesthatprovincial since the last PBES, we can also see that the officialsshouldconsider.Table3shouldbea total number of documents required in order useful tool for provincial authorities to use in tobecomefullylegalhasdeclined(downfrom choosingamongtheseimportantpolicytrade- 5to4).Thetotalnumberof daysforbusiness offs. registration at the Provincial Department of Commerce has also declined (down from 20 Itis,however,importanttonotethatalthough to 16.75 days), and the time required to pay participation or transparency rank very low, the Patent Tax for very small operations is theymaybeinstrumentalinachievingprogress considerablylowertoo(downfrom15to12.25 inthehighimpactsub-indices. Figure 8: Performance on Individual Sub-indices Perfect Score Kampong Cham Kampot Koh Kong Rattanakiri Entry Costs Entry Procedures Property Rights Property Rights Transparency Transparency Sihanoukville Oddar Meanchey Pursat Kampong Chhnang Prey Veng Participation Participation Time Costs Regulation Ease of of Regulatory Compliance Informal Charges Informal Charges Crime Prevention Crime Prevention Kampong Thom Preah Vihear Kep Svay Rieng Siem Reap Proactivity Proactivity Taxes Taxes Dispute Resolution Dispute Resolution Krong Pailin Kampong Speu Stung Treng Mondulkiri Kandal Takeo Banteay Meanchey Battambang Kratie Phnom Penh PBES 2009 | 24 Figure 9: Relationship between Governance and Business Expansion .8 Estimated Probability .6 .4 .2 0 45 50 55 60 65 Provincial Business Environment Score 2009 95% CI Probability of Business Expansion 95% CI Probability of Business Decline days).Theoneexceptiontothisgeneraltrendis to 54% in 2009) and consequently fewer thetimerequiredtoobtainaone-yearoperating owners complain that paying bribes to lower license,whichhasactuallyincreasedsomewhat. taxes is a problem (80% down to 75%). Of Formal fees for business documentation have course,theseareonlymarginalimprovements. also increased, but their increase is far below Seventy-fivepercentof businessesstillconsider the rate of inflation recorded over the same that paying bribes to the tax authority is an period.10 obstacle to business operations. This is a very high proportion by international standards. In Time Costs of Regulatory Compliance: addition,morefirmscitedfrustrationwithtax Regulatory procedures show some sign of rates and tax administration. This shows that easing. While firms do report spending more there is much more work to be done to construct of their time on bureaucratic procedures, the afairandequitabletaxsystemthatappropriately median11numberof businessinspectionshas taxesfirmsforgovernmentservices,butisnot declined (from four to two times per year) so prohibitive thatithandicaps theirability to and waiting periods for new land for existing conduct business. It is notable that the number businesseshasbeencutinhalf from60to30 of firmsnotpayinganytaxesatallhasnearly days. doubledinthepasttwoyears.Inpart,thismay beareflectionof theyouthandinformalityof Tax Administration: Some improvement new operations, but it could also be, in part, in tax administration is also apparent. Fewer a reaction to a tax system that many business firms negotiate their final payment with local owners believe is unfair. This has negative authorities(64%onaveragein2006,compared consequences for national and provincial 10 Fees for business documentation include formal and informal fees that business owners have paid to obtain formal documents for starting up a business. 11 The median is the middle value in a list of numbers. PBES 2009 | 25 Table 3: Impact of Individual Sub-indices on the Probability that Business Owners will Expand their Businesses Marginal Probability of Business Expansion Index Potential Impact (Based on 1-Point Increase in Sub-Index) Informal Charges 3.5%* High Time Costs of Regulatory Compliance 3.3%* High Entry Procedures 3.1%* High Crime Prevention 2.7%* Medium Taxes 2.2%* Medium Proactivity 0.4% Low Property Rights 0.2% Low Participation 0.0% Very Low Transparency -1.0% Very Low Dispute Resolution -1.8 Very Low *Indicates that coefficient was significant at the 0.1 level or lower. governments because they are deprived of In 2009 PBES, a significant decline in important revenue they could use to improve registrationswasevident.Whilethenumberof infrastructureandpublicservices. businesses registered centrally had increased to 14.4%, the number of businesses completing 4.5.2 Declines in key areas registration procedures at the provincial level haddeclinedto13.3%intheoriginal10PBES The 2009 PBES also captures some provinces.Over40%of operationsnowhaveno deterioration in the business environment. businessdocumentationatall.Correspondingly, Someof theseindicatorsarecriticallyimportant only4.3%of operationsarepayingtaxesunder and should be given immediate attention by the real regime. local,provincial,andnationalofficials. The size of a business matters a great deal Formality: Moststrikingly,thereappearstobe with regard to formality. Fifty percent of a growing proportion of businesses operating respondents with more than $100,000 in total intheinformalsector,asTable4demonstrates. investment are registered at either the central In 2006, 3% of PBES respondents were orprovinciallevel,asopposedto25%of those formallyregisterednationallyattheMinistryof withlessthan$100,000ininvestedcapital.This Commerce and another 38% of businesses doesnotexplainthedeclineinthe2009PBES, were registered at Municipal or Provincial however,asTable1shows,thenumberof large Departments of Commerce. Most others enterpriseswasgreaterthaninthe2006PBES. eitherhadaone-yearoperatinglicensefromthe relevantlineministryorpaidasimplefeetothe Forthemostpart,thedeclineinformalityresults localtaxauthority(thePatentTax).Only16% from the youth of new businesses. Forty- of firmshadnodocumentationatall.Similarly, two percent of businesses were started since 11%of operationswereintherealtaxregime 2006.Thesenewbusinessesareanindicator andthereforepayingturnovertaxes. of recenteconomicgrowthinCambodia,and PBES 2009 | 26 may simply not have had time yet to fulfill all documentation or even know whether such of the formalities of becoming fully formal. Of documentation exists at all. Only 20% of businessesof anysizethathavebeenestablished businessesinthemedianprovinceknowwhata since2006,only17.3%arefullyformal(8.9%at provincialbudgetis.Intotal,73%of businesses thenationalleveland8.4%attheprovinciallevel). claim to be uninformed about changes in laws Infact,whenweconcentrateourattentiononly thatmateriallyaffecttheirbusinesses.Fifty-five onthepanelrespondents(meaningrespondents percent of businesses in the median province whoagreedtobesurveyedforboththe2006and believe some sort of relationship is necessary 2009PBES),wecanseethatexistingbusinesses with local authorities to get such documentation. have actually become more formal over time. Furthermore, 47% believe there is overt Twenty-six percent of panel respondents are favoritismtowardpolitically-connectedfirms. now registered at the central level. Ithasbeensaidbefore,butitbearsrepeating: Despite the fact that a business' age is the transparency is critical for small businesses. primary determinant of formality, careful The more information they have, the better attentionshouldbepaidtothisindicatorover they can forecast business prospects and risk. time to verify whether other factors may also be This allows them to make educated decisions playingaroleincontinuinginformality. about investment and expansion. Without such information, firms avoid expansion for Informal Charges: Informal charges also fear of experiencing unanticipated problems appeartohaveworsenedslightly.Inthe2009 due to changes in laws and other factors that PBES, only 52% of businesses denied paying impact the business climate. Access to clear bribestolocalofficials,downfrom56%inthe andreliableinformationaboutregulations,legal 2006PBES.Moreover,therehasbeenan8% feesandtaxesnotonlymakebusinessowners increaseinthenumberof businessesreporting more responsible, but also less vulnerable to thatcorruptionisanobstacletotheirbusiness arbitrarydecisions.Furthermore,transparency (now 42% in the median province). Most isamongtheeasiestpolicychoicestomake.It strikingly, 31% of businesses report that if is far easier to increase access to information theypayonebribe,additionalagenciesarealso than to change local institutions. Provincial likelytovisitthemandaskforbribes.In2006, officials who are seeking a short-term boost only17%of businessesinthemedianprovince in their province's PBES score would benefit reported this multiplier effect. While public from simply making information available in procurement has improved marginally, much the lobbies of the local agencies where business moreimprovementneedstotakeplace.Only owners go to seek information. 19%of firmsinthemedianprovincebelievethat thereissufficientandtransparentinformation Dispute Resolution: Disputeresolutionshows on public procurement contracts, while 62% significant decline as well. Most importantly, of businessesbelievethatpersonalconnections entrepreneursreportlessconfidenceinformal arenecessarytowinabid.Moreover,75%of institutions.Only22%of firmsinthemedian businesses believe that `kick backs' are regularly provincebelievethatthelegalsystemwillprotect requiredtowingovernmentcontracts. theirpropertyrights;downfrom34%in2006. Correspondingly, only 41% of respondents Transparency: Transparency of business were satisfied with resolution of their documentation has declined as well. Fewer contractualdisputesoverthepastyear,and65% firms have access to basic business of businesses were not successful in recovering PBES 2009 | 27 Table 4: Levels of Cambodian Business Formalization Levels Description Key Documents Required Representation in PBES Samples 2009 Full 2009 2006 Full Original 10 1 Fully Formal Registration at Ministry of Commerce 13.3% 14.4% 3.0% ­ National Three-year Operating License from relevant ministry Patent Tax registration at Central Tax Authority Value Added Tax (VAT) identification number from Ministry of Economics and Finance Paying profit tax under real tax regime. Labor permit certifying approval of company's internal rules for enter- prise with over 8 employees Environmental Certificate governing solid waste and water disposal from the Ministry of Environment Other licenses when applicable 2 Fully Formal License to Operate a Commercial Enterprise from Provincial/Municipal 13.9% 13.3% 38.0% ­ Provincial Department of Commerce* One-Year Operating License from Ministerial Department at Provincial Level Patent Tax registration at Provincial/Municipal Tax Authority Paying estimated tax if under $1500 annual profits Other licenses including Labor Permit and Environmental Certificate when applicable 3 Unregistered One-Year Operating License from Ministerial Department at Provincial 13.5% 12.4% 21.0% w/ Operating Level License Patent Tax registration at Provincial/Municipal Tax Authority Other licenses including Labor Permit and Environmental Certificate when applicable 4 Patent Tax Patent Tax registration at Provincial/Municipal Tax Authority 23.7% 19.6% 22.0% 5 Fully No formal documentation 35.7% 40.3% 16.0% Informal 2009 Full: PBES sample employing stratified random sampling to mirror the population in all 24 provinces. 2009 Original 10: Analysis limited to ten provinces studied in 2006. 2006 Full: PBES sample in 2006 that included only 10 provinces The 4 most common are the Factory Operating License for Industrial Enterprises from the Heavy Industries Section of MIME; the Handicraft Operating License from the Handicraft and Light Industries Section of MIME; the Service Sector Operating License from MOT; and the Agricultural, Forestry, and Fisheries Operating License from the Ministry of Agriculture, Forestry, and Fisheries. These include Construction Permits from the Ministry of Land Management, Urban Planning, and Construction; the Road Construction License from the Ministry of Public Works; Sanitation Permits; and Import/Export Licenses from the Customs Authority. The Patent tax is an annual registration (or license) fee levied on all businesses, industries and professions, though farmers are exempted. The tax is based on turnover from the previous year. New businesses must register with the tax authorities within 15 days after beginning economic activity (Law on Taxation, 1999). The first Patent tax is estimated in accordance with the performance of similar enterprises. Firms that do not wish to export may register with the provincial- municipal commerce division (under Prakas 78-MOC-2002). * Firms that do not wish to export and are not eligible to pay profit taxes under the "real regime," as they earn less than $1500 in annual profits (Article 12 of the Law on Commercial Enterprises and Registration). PBES 2009 | 28 payments owed to them by delinquent clients. crucial. Businesses will no longer be able to In2006,53%of businesseswereunsuccessful relyonsocialrelations,localleaders,andother in recovering monies owing to them. These informalmeasurestoenforcecontracts,asthey findingsareworrisome.Firstof all,thescaleof willbedoingagreaterproportionof business unpaidbillsisequaltoabout2.8%of totalsales, withfirmsoutsidetheirsocialnetworks.This sopoordisputeresolutioniscostingbusinesses lackof confidenceinformalmeansof dispute a great deal of money. Secondly, as more resolution raises the risk of doing business and businesses join the market and as Cambodia has the potential to limit business expansion furtherintegratesinternationally,formalmeans and growth. of dispute resolution will become even more PBES 2009 | 29 PBES 2009 | 30 5. Conclusion The PBES provides valuable information public-private partnerships to address weak on how local business owners perceive and links and build on better practices. Also, even understand their business environment, what more important than comparing their overall constrains them and how they feel about the rankings with other provinces, provinces have performanceof theirpublicsectorcounterparts a great opportunity to learn from each other on different aspects of economic governance. andsharebestpracticesandlessonslearnedby Italsohighlightsdifferencesamongprovinces studying how performance on each sub-index and shows that some provinces perform variesfromprovincetoprovince. betterthanothersinspecificareas.Itisthusa usefultoolforlocalofficials,theprivatesector, In terms of prioritization, provincial officials and other stakeholders to use in comparing may want to concentrate their learning and the performance of their province with the reformactivitiesonreducinginformalcharges, performance of other provinces. This tool crime, entry costs, regulatory enforcement can also help officials to identify the specific costs, and the burdens of tax administration. strengths and weaknesses of their local business These sub-indices are most highly correlated environment. As such, the PBES provides a with prospects for business expansion. Also, practical tool for provincial officials to use in mechanisms for gathering the opinions of developinganactionablepolicyagendaandin businesses and enabling them to participate consultingwiththeprivatesector. in shaping local policy generally appear to be of great importance in achieving governance Indepthanalysisof PBESresultswillhelplocal improvements. officials and businesses to develop strategic PBES 2009 | 31 PBES 2009 | 32 Appendix A1 - Methodology This section provides a simple summary of A1.2: Comprehensive Listing of Active the methodology used in the PBES. For more Operations detailed information, please use the 2006 and 2009TechnicalReports. Researchers travelled to each province to undertake a complete listing of businesses A1.1: Sampling and Selection within three kilometers of the center of the provincial capital, plus the selected districts. The 2009 PBES research sampling strategy Every business operation in a fixed location, consistedof threebroadsteps. formalandinformal,wasrecordedalongwith basicinformation:thelocationof thebusiness, First, a listing of all MSMEs was undertaken the activity, the gender of owner, the number by the PBES research team within three of employees,etc.Intotal,63,507firmswere kilometers of the center of each provincial listed across Cambodia's 24 provinces. The capital,plusonedistricteachinCambodia's10 listingexercisewasnecessaryduetothelackof mosteconomicallyactiveprovinces.Thelisting anupdatedandexhaustivedatasetonprovincial andfirm-levelinformationwasusedtodrawa MSMEs in Cambodia that was comparable stratifiedrandomsampleof businessesforface- acrossprovinces.Thedatafromthelistingcanbe to-face interviews. consideredextremelyreliableandrepresentative, asthetotalresponseratewas95.5%.Nosingle Second, these face-to-face interviews were provincehadaresponseratelowerthan90%. conducted with business owners in order to Moreover,themedianprovincialresponserate capturebusinesses'perceptionsonkeyaspects of 98.9%, with a standard deviation of 2.2%, of provincialeconomicgovernance. indicatesthatnon-responsebiasdidnotimpact anyprovincedisproportionately. Third,thefindingsfromfocusgroupdiscussions and published data related to economic A1.3: The Survey development were assembled to complement the perceptions of the interviewees who took The listing was then used to randomly select partinthesurvey.Thisthirdstepisreferredto a stratified provincial-level sample of 1,082 as `secondary data collection'. firmsacrossallprovinces,withthestratabased on the sector and the number of employees PBES 2009 | 33 per business. For the purposes of the study, werealsoaskedabatteryof questionsaboutthe analysis was focused on growth-oriented performanceof theirbusinessandplansforits businesses, as opposed to merely subsistence- future. oriented operations. So all enterprises where the owner was the only permanent employee In addition to the 1082 firms interviewed in wereexcludedbeforesampling.12 The median stage2,andusingthesamequestionnaire,152 provincial response rate for initial contact firms/establishments already covered by the withfirmswas60%.13Whenafirmrefused,a 2006 PBES, were re-interviewed. This panel replacement firm was randomly selected from groupwascrucialformeasuringtheevolution thelist,sothattargetquotasforeachprovince of business environments between the 2006 could be achieved. All provinces had at least and2009PBES,asperceivedbyindividualfirms 39targetrespondents,butsomemorepopulous inthe10provincescoveredbythe2006PBES. areas,suchasPhnomPenh(111),Battambang Thispanelgroupwascomprisedof businesses (65), and Siem Reap (66) had slightly larger randomlyselectedfromallthefirmssurveyed targetstoensurerepresentativeness.Following for the 2006 PBES. The panel is especially generalpracticesforcalculatingsamplingerror, useful,becausetheperceptionsof interviewees we can assume a 4% margin of error around are impervious to sampling error. Because aggregateresponses. panel interviewees experienced the business environmentin2006,theycandirectlycompare Inface-to-faceinterviews,businessownerswere this with current conditions. asked more than 60 questions regarding their perceptions of their business environment. Table A1 provides descriptive information on Covering all 10 sub-indices, the questions therespondentswhoansweredthesurvey.Four addresseda varietyof topics such as thetime samplesof businessesarecompared.Column businessownersspendonadministrativetasks; 1 assesses the entire PBES sample of 1,234 the type of licenses they must have and how businessesin2009withoutre-weighting.These easyorcomplextheythinktheproceduresare data provide an accurate reflection for each to obtain them; how much various business province,butcannotbeusedfornational-level procedures cost in terms of time and money; analysis. By stratifying at the provincial level, interviewees' comprehension of regulations the PBES data tend to under-estimate large and access to business documentation; the provincessuchasPhnomPenhandBattambang. willingnessandeffortsof provincialleadersto Toprovidenational-levelconclusionsbasedon help local businesses; the extent of informal thePBESsurvey,TableA1re-weightsanswers charges and protection payments; whether bytheproportionof Cambodia'stotalfirmsin businesseshavecommercialdisputesandhow eachprovince,sothatPhnomPenh'simportance theseareresolved;andwhethertheyhaveregular to the economy is accurately reflected in the exchanges with public officials. Interviewees data. These proportions are the same ones 12 The exception was Stung Treng, Oddar Mancheay and Preah Vihear, where the number of growth-oriented businesses was too small to support a sta- tistically reliable sample. In this case, some single-employee companies were sampled. To maintain comparability with the other provinces, replacement firms were randomly sampled based on descending floor area size, so that larger subsistence-based businesses had a higher probability of selection. 13 The response is not perfect, but is extremely high for business surveys in general, especially in developing countries. Given the sensitive nature of the instrument and the fact that many firms were answering such questions for the very first time, the response rate is very impressive. Please note, however, that response rates were significantly reduced in provinces affected by the Preah Vihear border conflict. Bateay Meanchey (33%), Battambang (43%), Order Meancheay (39%), and Preah Vihear (29%) all had below average responses. Robustness testing indicated that low response rates did not impact final PBES rankings. PBES 2009 | 34 Table A1: Who Answered the 2009 PBES Survey? Provincially Nationally Original 10 Panel Representative Representative Provinces2 Respondents3 Sample1 Sample4 Observations 1234 675 152 1234 Respondent's Position in Firm Owner and Primary Manager 88.2% 86.4% 92.8% 83.2% Owner without Management Responsibilities 1.30% 0.74% 1.3% 2.5% General Manager 6.16% 7.70% 2.6% 10.2% Employee 1.30% 2.37% 3.3% 2.53% Relative of Owner 4.16% 2.82% 1.6% Establishment Year Before 1991 6.2% 7.9% 7.9% 8.2% Between 1991 and 1996 13.7% 15.6% 23.7% 15.6% Between 1997 and 2002 23.6% 23.6% 30.3% 18.0% After 2002 56.5% 53.0% 38.2% 58.1% Size of Firm (Number of Employmees) 2 or less 62.2% 58.1% 54.6% 52.3% Between 3 and 5 24.1% 25.3% 27.0% 26.1% Between 6 and 10 8.8% 9.8% 12.5% 12.7% Between 11 and 30 4.4% 5.9% 5.9% 7.7% More than 30 0.6% 0.9% 0.0% 1.3% Percent Seasonal Hires 4.5% 4.9% 5.2% 3.8% Size of Firm (Investment Size) $10,000 or less 57.1% 54.8% 50.7% 55.8% Between $10,000 and $50,000 29.2% 30.4% 34.2% 30.9% Between $50,000 and $100,000 6.0% 5.9% 5.3% 5.2% More than $100,000 7.7% 8.9% 9.9% 8.1% Primary Sector of Operations Manufacturing 9.1% 8.6% 7.9% 9.0% Construction 0.2% 0.4% 0.0% 0.1% Service/Commerce 90.4% 90.5% 90.8% 90.7% Agriculture/Aquaculture 0.2% 0.4% 1.3% 0.1% Primary Sales Location In Home Province of Firm 89.4% 90.5% 98.0% 86.1% In Other Cambodian Provinces 0.7% 1.0% 1.3% 0.9% Exported Internationally 9.9% 8.4% 0.7% 13.1% Plans over Next Two Years Increase Size of Operations Considerably 18.9% 19.3% 19.1% 17.1% Increase Size of Operations 41.1% 38.2% 32.9% 32.8% Continue Operating at Present Size 36.2% 38.2% 41.5% 45.5% Reduce Size of Operations 1.9% 2.1% 3.3% 1.1% Reduce Size of Operations Considerably 0.5% 0.4% 0.7% 0.6% Plan to Close this Business 1.4% 1.8% 2.6% 2.9% 1 2009 PBES drew a random stratified sample, based on the total number of employees in 24 provinces. 2 Analysis limited to ten provinces studied in 2006. 3 The 2009 PBES panel surveyed 152 firms that participated in the 2006 PBES 4 Re-weighted PBES sample reflects the national proportion of firms within each province. PBES 2009 | 35 showninFigure2above.Descriptivestatistics A1.4: Case Studies by the national-level weighting can be viewed Inadditiontothestandardquestionnaireused in Column 4. For comparative purposes, for the survey, 85 firms/establishments were descriptivedataarealsoprovidedjustforfirms interviewedtodevelopcase-studiesandcollect inthetenprovincesoriginallysurveyedin2006 quotesthatareincludedasvignettesinthisand (Column 2) and for the 152 panel respondents otherpublications. (Column3). PBES 2009 | 36 Appendix A2 - Constructing the PBES A2.1. Choosing the Sub-indices and province to record whether they could easily Constructing the Score obtain the basic documentation necessary to register and run a business in the locality. Two Once survey data is collected, responses of forms of secondary data are employed. Data businessownersareaggregatedattheprovincial frompublishedandverifiablesourcesanddata level. Province-level indicators are selected to from self-observation, derived from sending a capture critical areas of economic governance researchteamtoeveryprovincetorecordbasic forprivatesectordevelopment. factsaboutregulatoryprocedures. Dealing with Perception Bias Standardizing Indicators As90%of businessesonlydobusinessinside TableA2belowprovidesafulllistingof allsub- theirhomeprovince,thereisastrongprobability indices and indicators included within them. of perception bias. It is difficult for business Descriptiveinformationforeachindictorisalso owners to rank their provincial leaders fairly provided,allowingover-timecomparisons.Each against other leaders when they have no idea indicatorwithinasub-indexisstandardizedto what the business environment is like in other a10-pointscale,with10representingthebest jurisdictions.Weaddressthisdilemmaintwo score recorded in Cambodia that year and 1, ways. First, the survey questions selected for theworst.Allotherprovincesranksomewhere inclusionintheindexareheavilytiltedtowards betweenthesetwoendpoints. moreconcrete(oftencountable)concepts,such as"Howmanyregulatoryinspectionsdidyour Constructing Sub-Indices firmexperienceinthepastmonth?"asopposed tomoreabstractapproachessuchas,"Rankthe Construction of sub-indices is based both on burden of inspections on a five-point scale." broadconceptsdiscussedinternationallyamong In some cases, however, abstract questions economists, and more narrow categories of are necessary to truly capture the business Cambodian-specific business obstacles. Using environmentconceptunderstudy.Recognizing these theoretical guides, particular indicators thatperceptionbiascanaffectrankingsinthese are selected to represent the concept covered cases,wemergesecondarydataintothesesub- by each sub-index. Sub-indices are calculated indices to correct for the bias. For instance, bytakingthesimpleaverageof theircomposite in the transparency sub-index we did not rely indicators. As a result, they are also on a 10- solelyoninterviewees'perceptionsof accessto pointscale.Whensecondarydataareincluded business information; instead, we sent a team inasub-index,aweightedaverageisemployed of researchers to provincial agencies in each toensurethatsecondarydataaccountfor40% PBES 2009 | 37 of the sub-index score. This is enough to localitycanbeidentifiedandanyotherprovince correctforperceptionbias,butnotenoughto canconceivablyattainaperfectscoreof 100in dominatetheopinionsof respondents. future iterations by emulating these Cambodian bestpractices. Assembling the Final PBES Second, the PBES is solely a measure of Afterthecreationof sub-indices,afinalPBES economic governance and regulatory policy. scorecanbeefficientlyassembledbysumming It does not assess initial conditions for up the sub-indices. Different weighting development (that is, the fundamental approaches are certainly possible. In 2006, underlying factors that contribute to economic the number of provinces was too small to growth in a province but that are virtually objectivelycreateweightsof interesttopolicy- impossible to address in the short term, such makers (number of firms, investment growth, aslocation,infrastructure,sizeof thedomestic andprofitability)bydeterminingtheimpactof market, and human resources). In doing so, individual sub-indices on key outcome variables the PBES is able to rank all provinces on an by using regression analysis. However, with equal basis without giving undue advantage moredatain2009,suchanoperationispossible. to well-endowed locations. Thus, the PBES Nevertheless,wemaintainthesameunweighted should not be confused with a measure of Total approach to facilitate over-time comparisons. Investment Environment that includes both Table 3, however, does provide the analysis economic governance and measures of initial of themostimportantsub-indices.Interested endowments(i.e.structuralconditions). userscansupplytheirownweightings,asthey seefit. Third, the indicators that comprise the PBES areactionableinthesensethattheyarespecific A2.2. Advantages of a Relative Approach items that provincial officials can target and monitorimprovementupon,andtheyareaction- Three features of the PBES approach are worthy because they represent policies that worth noting. First, the scores are generated privatefirmshaveidentifiedascriticaltotheir by comparing an individual province to the businesssuccessandthatpreviousresearchhas best and worst provinces on a particular showntobeinfluentialforfirmperformance. indicator. By normalizing the scores around best economic governance practices already The same 10 sub-indices used in 2006 PBES found in Cambodia and not against ideal are used to allow for over-years comparison. and possibly unattainable standards of good Theyweredesignedtohighlightprivatesector governance,thePBESencouragessub-national prioritiesaswellasfocusontheissuesthatcan governments to improve their performance. beinfluencedbylocalgovernment. For each indicator, a `star' or top-performing PBES 2009 | 38 Appendix A3 - Relationship between the 2006 and 2009 PBES results For a comparative ranking such as the PBES, Figure 10 is a scatter-plot illustrating the it is important to demonstrate that rankings relationshipbetweenthe2006and2009PBES do not change substantially from year to scoresandrankingsforthesame10provinces. year. This consistency has important policy The first thing to notice about this figure is and methodological implications. In terms of thatitisverylikelythatpastperformanceisan policy, the stability of the rankings indicates importantdeterminantof futuregovernance.14 that provincial reforms have long-lasting The graph shows that past performance is an effects.Theydonotdissipateattheendof the important determinant of future governance. calendar year; firms continue to benefit from Thelineshows,basedonthe2006PBESscores, them and recall their impact when questioned whatonewouldexpecttheprovince's2009PBES by interviewers. score to be. Methodologically, the strong correlation with Itisimportanttonotethat`stability'inthescores PBES rankings in 2006 indicates that ranking does not mean that the scores cannot change. provinces against each other works quite Overthepasttwoyears,anumberof provinces well. The PBES can consistently identify top climbedupthePBESladder.Theseprovinces performers, while also identifying what lower can be identified immediately in Figure 10, as rankingprovincesneedtodotoimprovetheir their actual 2009 PBES scores are above the scoresinfuture.Suchstabilityisconfirmation predictionline. that the approach offers a consistent and accurate measure of provincial economic governance over time. 14 The correlation coefficient, as a measure of the standardized covariance between 2006 and 2009 PBES, is 0.49 and is significant at the .05 level. PBES 2009 | 39 Figure 10: Relationship between 2006 and 2009 Rankings15 75 2009 Provincial Business Environment Score 70 65 KCham Sihan Kamp KChhn 60 SRieng SReap Kand BMean Batt 55 95% Confidence Interval 50 Predicted Values PPenh Observed Values 50 55 60 65 70 75 2006 Provincial Business Environment Score 15 The shaded region shows a 95% confidence interval around that line. A confidence interval means that were we to repeat the PBES exercise and re-sample a new set of firms, 95% of the time, the true correlation line between the 2006 and the 2009 scores would lie within that region. The relation- ship may not be exactly the same, but we can say for certain that past performance would continue to be a strong and positive determinant of future governance. PBES 2009 | 40 Table A2: Detailed Descriptions of Sub-Indices and Component Indicators 1. Entry Costs · Otheragenciesaskforadditionalpayment(%Yes) · %of firmsregisteredwiththeMinistryof CommerceorMunicipal · Firmsusuallyknowhowmuchadditionalpaymentisrequiredin Departmentof Commerce theirindustry(%agree) · Total number of registrations, licenses and permits firms need to · Regularitythatservicesaredeliveredasexpectedwhenafirmpays operate therequiredadditionalpayment(%regularlyoralways) · WaitingperiodforRegistrationCertificatefromProvincial/ · Bribesareusefulforbusiness(%Agree) MunicipalDepartmentof Commerce(mediandays) · OfficialfeeforRegistrationCertificatefromProvincial/Municipal 6. Participation Departmentof Commerce(median$) · %of firmsagreeingprovincialgovernmentsolicitsadvicefrom · WaitingperiodforOne-YearOperatingLicense(mediandays) affectedfirmsonnewlaws,rules,regulationsordecrees · OfficialfeeforOne-YearOperatingLicense(median$) · Therearebusinessassociationsorclubsintheprovince(%Yes) · WaitingperiodforPatentTaxregistrationfromLocalTaxAuthority · %of firmsinsamplethataremembersof associationsorclubsin (mediandays) theprovince · OfficialPatentTaxFeefromLocalTaxAuthority(median$) · Numberof businessassociationsper10,000firmsinprovince* · ProvincialRevenuefromPatentTax* · BusinessForumheldin2007* · ProvincialRevenuefromRegistrationcertificate* · Evidenceof visiblesuggestionboxesinDIMEorDOCorother modeof aggregatingbusinesscomplaintstoCommuneCouncilin 2. Property Rights DIMEorDOC*(Noevidencetothreedifferentchannels) · %of firmswithlanddocumentation · %of firmswithsolidtitletoland 7. Crime Prevention · %of firmsthatfeelexpropriationisarisk · %of firmsthatexperiencedlossesduetotheft,robbery,vandalism, · %of firmsthatdeemchangesinrentalcontractsarisk orarsoninlastyear(%No) · Effectivelandprices(adjustedfordifferencesinsupplyanddemand) · Monetaryvalueof firm'slossescausedbycrime(median$) (mean$)** · %of firmsthatbelievefirmsintheirsectormakeprotection paymentstothepolice 3. Transparency · %of firmsthatpayprotectionmoneytoothers · Transparencyof -andaccessto-localplanninganddecrees/ decisions(10documents/5-pointscale) 8. Tax Administration and Burden · Firm'sknowledgeof provincialbudget(%notfamiliar) · %of firmsthatbelievebribestopublicofficialstoavoidtaxesand · Relationshipwithaprovincialofficialisnecessarytoobtainaccessto regulationsareasignificantbusinessobstacle provincialdocuments(%alwaysorfrequently) · %of firmsthatdonotpaytaxes · %of firmsagreeingthatfavoritismtowardfirmswithpolitical · %of firmsthatbelievenegotiatingwithtaxauthorityispartof connections is an obstacle to business. business · Regularitythatrepresentativesfromtheprovincialgovernor'soffice · Taxadministrationisanobstacle(%) meetwithfirmstodiscusschangesinlawsorpolices(%seldomor · Taxratesasobstacle(%) Never) · Firmsareinformedaboutneweconomicandfinanceregulations 9 Proactivity of Provincial Authorities thataffecttheirbusiness(%uniformedorpoorlyinformed) · Provincialgovernmentofficials'attitudetowardprivatebusiness(% · Regularitythatafirmreceivesadvancenoticeaboutneworchanging positive) centralgovernmentlaws(%SeldomorNever) · Provincialdepartmentsof lineministriestendtointerpretinfirms' · RequesttoProvincial/MunicipalDepartmentof Commerce* favorwhencentralregulationlacksclarity(%agree) (5-pointscale) · Provincial government is good at working within central laws to · RequesttoProvincial/MunicipalDepartmentsof Industry,Mines createaprofitablebusinessenvironment(%agree) andEnergy*(5-pointscale) · Provincial government is creative and clever about solving new · Availabilityof infrastructuremaps*(#officeswithmapavailable) businessproblems(%agree) · Provincialgovernmentwillinglyriskspunishmentfromthecentral 4. Time Costs of Regulatory Compliance governmenttopassdecisionstoaidlocalbusinesses(%agree) · Managementtimeduringyearspentdealingwithrequirements · Therearenoinitiativesattheprovinciallevel(%) imposedbygovernmentregulations(%of firmslessthan16days) · Totalnumberof inspectionsperyear(median) 10 Dispute Resolution · Timeittookafirmtoreceiveitslandtitle(mediandays) · %of firmsthatareconfidentthatthelegalsystemwilluphold contractsandpropertyrightsindisputes 5. Informal Charges · Possibilityof goingtoanotherofficialtodisputeunjustdecision(% · Givinggiftstopublicofficialsissometimesrequiredtopass seldomornever) customs,obtainlicenses,receivepublicservices,ormeettax · Percentageof salesin2008forwhichfirmdidnotreceivepayment requirements(%No) intheagreedtime(median) · Corruptionisanobstacle(%of majororsevereobstacle) · Percentageof salesforwhichfirmneverpaidbycustomersin2008 · Informationregardingavailablepublicprocurementcontractsis (median) transparent(%AlwaysorFrequently) · Satisfactionwithdisputeresolutioninprovince(%satisfied) · Importanceof governmentconnectionsforwinningpublic · Successatrecoveringmoneyowedtoit(%successful) procurementcontracts(%EssentialorUseful) · %of firmsinprovincethatbelievethereisafairprocesstodispute · Firmsbelievefirmsintheirindustryoftenpaycommissionswhen changes in rent contracts doingbusinesswithgovernment(%of SeldomorNever) * component uses hard data; ** Derived from factor analysis; all other indicators derived from perception data PBES 2009 | 41 IFC, a member of the World Bank Group, creates The Asia Foundation is a non-profit, non-governmental opportunity for people to escape poverty and improve organization committed to the development of a their lives. We foster sustainable economic growth peaceful, prosperous, just, and open Asia-Pacific region. in developing countries by supporting private sector The Foundation supports programs in Asia that help development, mobilizing private capital, and providing improve governance, law, and civil society; women's advisory and risk mitigation services to businesses and empowerment; economic reform and development; governments. Our new investments totaled $16.2 billion and international relations. Drawing on more than 50 in fiscal 2008, a 34 percent increase over the previous years of experience in Asia, the Foundation collaborates year. with private and public partners to support leadership and institutional development, exchanges, and policy In Cambodia, IFC Advisory services are research. delivered in partnership with Australia, Canada, the European Union, Finland, Ireland, Japan, With offices throughout Asia, an office in Washington, New Zealand, the Netherlands, Norway, Sweden, D.C., and its headquarters in San Francisco, the and Switzerland. Our advisory strategy is derived Foundation addresses these issues on both a country from an ongoing analysis of local and regional and regional level. In 2008, the Foundation provided development needs, and consists of five focal areas more than $87 million in program support and distributed that a decade of "on the ground" experience has over one million books and educational materials valued shown will best improve the investment climate at $41 million throughout Asia. and enterprise development. The focal areas are: To implement the second edition of the Provincial · Improving the business enabling environment Business Environment Scorecard in Cambodia, The · Increasing access to financial services Asia Foundation has received financial support from the Multi Donor Livelihoods Facility (MDLF). Based in the · Improving environmental and social sustainability Royal Danish Embassy in Phnom Penh, MDLF channels · Increasing value added in specific supply chain US$65 million of funding support from Danida, the UK linkages Department for International Development (DFID) and New Zealand Aid (NZAID) to the Natural Resources · Increasing access to infrastructure Management and Livelihoods Programme (NRMLP). The NRMLP (2006 ­ 2010) has the aim of reducing For more information, visit www.ifc.org/mekong. poverty and improving natural resources management, with a particular focus on 14 provinces of Cambodia. For more information, visit The Asia Foundation's website at: www.asiafoundation.org. PBES 2009 | 42