36822 CAMBODIA No. 7 Doing Business in 2005: Comparing the Cambodian Business Environment with the World In its Rectangular Strategy, the government of Cambodia states that it "considers the private sector to be the engine of economic growth... [and that] a healthy private sector is the key to the promotion of economic development." Yet, for the private sector to be healthy, the country's"[business] environment has to be conducive to enhance private enterprises." The Rectangular Strategy shows that the government clearly recognizes the need to institute a number of economic and judicial reforms to improve the business environment so that Cambodia will be better able to compete in the global economy and attract private sector investment. 1 This issue of the Business Issues Bulletin (BIB) examines the health of the Cambodian business environ- ment by using a number of indicators of business environment performance and comparing Cambodia's perfor- mance with countries in the region and with international best performers. The comparisons made here have been drawn from the wealth of data collected, analyzed and published in Doing Business (2005) a report prepared by the World Bank Group that provides objective measures of the regulatory environment in 145 countries around the world. 2 These indicators assess the extent to which common types of business regulations enhance or constrain investment, productivity and growth. The Doing Business indicators cover six areas of regulation that are widely recognized to promote or hinder private sector growth, including starting a business, registering property, enforcing a contract, hiring and firing workers, getting credit, and bankruptcy. Since Cambodia does not have regulations concerning bankruptcy, and (standardized) comparable data with specific reference to Cambodia on the credit market is not available in the Doing Business data, this Bulletin does not cover these last two indicators of business environment health. Starting a Business: Entry Regulation When an entrepreneur draws up a business plan and goes into business, the first hurdles to overcome are the legal procedures required to incorporate and register the new firm. According to Doing Business (2005), which is based on data collected in 2004, it took a great deal of time to legally register a business in Cambodia. Up until August 2004, it took as many as 94 days to complete all the procedures required to set up a business and the cost was as much as US$1,500, which is nearly five times Cambodia's per capita income (see Figure 1). These figures include both official and unofficial costs and time spent to register a company, including bribes to cut through bureaucratic "red tape." The long time frame and high costs of legally registering a business made Cambodia one of the worst places in the region to set up a company (better only than Indonesia). The Business Issues Bulletin provides those interested in business issues with a The consequences of cumbersome and costly registration procedures are serious. short summary and analysis of a particular New investment is discouraged and the majority of businesses that are estab- topic affecting the business environment in lished remain in the informal economy where it is much more challenging for Cambodia. Also included are opinons on them to raise the financing they need to operate successfully and grow. Informal topic from a number of relevant stakeholders. businesses also contribute much less to government revenue. The Bulletin is published with support from Recognizing that burdensome business registration hurts the economy, the Cam- the Mekong Private Sector Development bodian government issued new regulations in August 2004. These reduced the Facility (MPDF), a multi-donor funded initiative managed by the International Finance Corporation (IFC), the private- 1 Rectangular Strategy for growth, employment, equity and efficiency of the Royal Govern- sector arm of the World Bank Group. ment of Cambodia, delivered by Samdech Hun Sen, the Prime Minister, in the first cabinet The statements and opinions presented meeting of the third legislature of the National Assembly, July 16, 2004. here are only meant to provide additional 2 Unless otherwise noted, the information provided in this Bulletin, including statistics, reference material and do not reflect the charts and graphs, conclusions and recommendations are drawn from the Doing Business official opinion of the Mekong Private 2005 Report, a joint publication of the World Bank and the International Finance Corporation. Sector Development Facility or of IFC. The full Doing Business 2005 report can be found at URL: http://rru.worldbank.org/ DoingBusiness/Main/About.aspx Figure 1 - Entry Regulation before reform Time to Start a Business (days) Cost to start a Business (% of income per capita) 180 151 500 480.1 150 400 120 94 90 Shortest Time - Global 300 56 Least Cost - Global 60 41 50 200 30 33 130.7 30 2 8 100 0 28.6 0.0 1.2 6.7 14.5 19.5 25.1 Australia e laysia China nes esia 0 ark e Singapor ina nes Ma Thailand Philippi Vietnam mbodia land esia Ca Indon Denm Ch laysia Singapor Thai lippi Vietnam mbodia Phi Ma Indon Ca official costs of registering a company from US$635 to US$177, tered. This can be a hindrance to private sector investment as and the official time required from 30 to 10.5 days. There is no securing rights to property through proper registration strength- information to date as to whether unofficial fees and delays have ens the incentive for owners to build on their property. Holding also declined, since the change in regulations is too recent. How- formal title to property also enables entrepreneurs to mortgage ever, since the new regulations have been widely disseminated, it their land and buildings, and thus raise the financing they need to is likely that unofficial costs and delays have gone down too. develop their businesses. Reducing registration time to only 10.5 days makes Cambodia a However, formalizing property rights through registration is of leader in Southeast Asia, trailing only Singapore, which has a reg- little value if this does not make it easy and inexpensive to for- istration time of 8 days (see Figure 2). However, the cost of mally transfer property rights. If the procedures for transferring registration in Cambodia remains high when compared with per property rights from seller to buyer are too slow and costly, the capita income (US$310 in 2005). Cambodia also compares unfa- transfer will occur informally ­ without proper updating of ti- vorably with other countries in the region (see Figure 2). Only in tling records in the property registry. This turns formally regis- Indonesia is registration more expensive. tered titles back into informal ones ­ which means that owners Figure 2 - Entry Regulation after reform in Cambodia in August 2004 Time to Start a Business (days) Cost to start a Business (% of income per capita) 140 130.7 160 151 120 140 120 100 100 80 80 56 57.1 60 60 33 41 50 40 30 40 28.6 20 2 8 10.5 14.5 19.5 25.1 0 20 0 1.2 6.7 straliaSingapore Camb odia a 0 laysi ailand ina Ch ia Au Ma Th Philippines Vietnam donesia ina In nmark Ch De Singapore Thailand ilippines Malays Vietnam mbodia Ph Ca Indonesia The current standardized cost of starting a business in Cambodia is based on the new official cost and the data on per capita income provided in the Doing Business database [(US$177/US$310) = 0.5709677] H.E. Sok Siphana, Secretary of State, Ministry of Commerce no longer have the benefit of formal property rights. It may be hard to further reduce the cost of registration. Putting the cost of doing business into perspective, $177 is relatively small. And, Compared to other countries in the region, Cambodia's perfor- because it is just a one time cost, companies can amortize the cost over mance with regard to formalizing property rights is about aver- age. Data from Doing Business indicate that in Malaysia, Singapore the life of the business. and China is it less expensive to register and transfer the rights to Nou Tepirith, Attorney At Law (Senior Partner), Bou Nou property (see Figure 3). The official cost is 4.1% of the property Ouk & Partners value in Cambodia, compared to 2.2% in Malaysia. However, the When companies start their businesses, relevant ministries also evaluate time it takes to legally register property in Cambodia is slow com- them. These include the Ministry of Environment, Ministry of pared to other countries in the region. Only in Vietnam and Tourism, and the Ministry of Energy, Mines and Industry. These Malaysia does the transfer of legal title to property take more time than in Cambodia. For example, for a business to purchase land ministries don't have clear procedures and a time table for assessing and the building(s) on it in peri-urban Phnom Penh, the law companies. For example, when the Ministry of Environment con- requires the completion of seven different procedures which take ducts an environmental assessment of a garment factory, they don't an average of 56 days to complete. In contrast, business owners do it when the factory prepares for construction ­ they do it when in Thailand can accomplish the same transaction in only two days construction is almost complete. This makes the investment climate with only two procedures. unpredictable and can adversely affect the costs paid by the investor. One thing stands out in the process of registering property in Cambodia: over half of the time spent on registration ­ at least RegisteringProperty 30 out of 56 days ­ is devoted to obtaining the Certificate of Title from the Municipal Land Office. If the time on this one proce- Land and buildings account for between half and three-quarters dure could be reduced, property registration could be completed of country wealth in most economies. In developing countries more quickly. The consequences of it taking so long to acquire such as Cambodia, however, very little property is legally regis- legal title to land, is that much of Cambodia's land is never prop- 2 Figure 3: Benchmarking-- Registering Property Time to Register Property (days) Cost to Register Property (% of property value) 143 150 20 125 16 LeastTime-Global Least Cost - Global 100 78 12 11.0 75 56 8 5.5 5.7 6.3 50 32 33 33 2.2 2.7 3.1 4.1 25 4 1 2 9 0.0 0 0 rway land e na a ina Chi laysi No Thai laysia Singapor Philippines Indonesia Ca mbodia Vietnam Ch Ma udiArabia Ma Singapore Cambodia Vietnam * Another country with the least rigid conditions globally is Sweden. Sa Philippines Thailand Indonesia erly registered.3 This greatly limits opportunities for business ing, as Figure 4 shows. The time and costs required to enforce a owners to use their land as collateral to raise financing. contract in Cambodia compare unfavorably with other countries in the region. Mr. Lan Sinara, Director of Marketing & Sales, Cambodia Real Estate As Figure 4 indicates, going to court to enforce a contract in Cam- The official cost of registering and transferring title is 4% of the bodia does not make economic sense for a company. It takes an total value of a property. This tax that has to be paid by purchas- average of 401 days to enforce a contract, and court and attorney ers of the property. The average actual cost of transferring the title fees cost 121.3% of the value of the debt. Thus for every $100 of of an apartment is US$1,300, around half of which is for infor- unpaid debt, a Cambodian business must pay $121.30 in court mal fees paid to officials dealing with property registration. The and legal fees to recover it. This compares unfavorably to $9 per average actual cost of transferring the title of a villa is US$2,000. $100 in Singapore, and $13.40 per $100 in Thailand. This makes Again, half of the fees are informal. resorting to the court system more expensive in Cambodia than in any other country in the region, except Indonesia. The actual time spent registering title to a property ranges from two weeks to a month and a half, with the average being a month. Almost all of this expense is fees to attorneys. While not manda- Fee schedules for property registration vary for different sizes of tory, the use of an attorney to collect unpaid debts is common and the high costs for court and attorney in Cambodia put smaller property, but these are not published. Only officials working in the businesses and the poor at a disadvantage because they cannot Cadastral Office have access to this information, which enables them afford high legal costs. As a consequence of the high cost to to pocket some money. recover a debt in Cambodia, business owners, and especially SME Mr. Hem Hour Narith, Managing Partner, BNG Advocates & owners, are reluctant to do business with anyone they do not Solicitors know well. This forces companies, particularly SMEs, to adopt Checking property title to verify ownership, a common procedure in conservative business practices. They deal only with customers property transactions worldwide, is very time consuming in Cambo- they trust and structure transactions with new business partners to ensure that credit will be repaid. Both approaches restrict the dia. This slows down property transactions. I think that property growth of SMEs and because SMEs comprise 99% of the firms title records should be available on the Internet so that they can be in Cambodia, and provide 45% of total employment, limiting verified quickly. The government should also develop guidelines on SME growth means hampering job creation and overall growth property tax payment and make these accessible to the public. of the economy.4 H.E. Sok Siphana, Secretary of State, Ministry of Commerce Enforcing Contracts: Court Efficiency Contracts are the foundation of commerce. It is the belief that the court will enforce contracts that drives businesses to explore opportu- When one party to a contract fails to live up to the terms of the nities throughout the world. If businesses have no confidence in the contract, the court is usually the default institution for resolving court system to resolve their commercial disputes, then no economic the problem, especially in developing countries where alternative dispute resolution mechanisms such as commercial arbitration policies of government will have much result. are not established or do not function well. But enforcing con- Our court system needs swift reform. Besides reforming the court, tracts through the court system can be costly and time-consum- alternative dispute resolution (ADR) mechanisms, such as commer- Figure 4: Comparing Contract Enforcement Time to Enforce a Contract (days) Cost to Enforce a Contract (% of debt value) 570 600 140 121.3 126.5 500 Shortest Time - Global 120 380 390 401 404 400 300 100 Least Cost - Global 300 241 80 50.7 200 60 30.1 100 27 69 40 13.4 20.2 25.5 0 20 4.2 9.0 Tunisia e MalaysiaPhilippine ThailandCambodia s 0 Singapor ina Ch VietnamIndonesia y rwa land laysia ina Ch No Singapore Thai Ma VietnamPhilippinesCa mbodia Indonesia 3 Chan, Sophal, Tep Saravy and Sarthi Archarya (2001). Land Tenure in 4Royal Government of Cambodia, SME Secretariat of the SME Sub- Cambodia, a Data Update. Working Paper 19, Cambodia Development Committee (2004), SME Development Framework, Phnom Penh, page 1. Resource Institute, Phnom Penh p. i. 3 cial arbitration, have to be introduced to expedite and lower the cost of temporary job holders, however, should be three to five times as of settling commercial disputes. It is important too that the private much as those of regular job holders. sector is actively involved in ADR because it's their business, so they know their issues very well. CONCLUSIONS Cambodia has made great strides in improving the business en- Hiring and Firing Workers vironment in some areas. As already discussed, the most notable improvement is "entry" regulations. In August 2004, Cambodia Providing jobs to new labor force entrants and maintaining em- cut the cost and time required to register a business, and also ployment for those who already have jobs is a contentious issue reduced capital requirements from US$5,000 to US$1,000. As a for many governments. Hence, governments work hard to pro- result, the number of new companies legally registering their mote the growth of businesses so that more jobs are created, businesses has grown significantly, averaging 122 registrations while at the same time establishing laws and institutions to pro- per month since September 2004, compared to only 61 per month tect the interests of workers. before that.5 The success of the company registration reform clearly shows that when there is political will, the government can Figure 5 compares Cambodian labor regulations with those of achieve impressive results. other countries in the region and beyond. As Figure 5 indicates, Cambodia's labor regulations are among the more rigid when it RECOMMENDATIONS comes to hiring workers. Hiring is only more difficult in Vietnam Improve court efficiency in enforcing contracts and Indonesia. However when it comes to firing workers, Cam- Among the most pressing challenges are the costs and delays bodia has the most liberal regulations. involved in contract enforcement. Cambodia needs to make it easier and faster to collect debts. To improve the efficiency of Although well-intended, some employment policies can have contract enforcement and the collecting of debts, Cambodia could adverse consequences for workers if they are too rigid. When look to the Philippines' abridged procedures that save time and employment regulations are not flexible enough, employers fail money because they do not require an attorney's expertise. to officially record the hiring of workers in order to save them- selves the trouble of following time-consuming and costly offi- Speed up property registration cial rules. This puts workers at a disadvantage because they do not For faster property registration, Cambodia could follow Thailand's receive legal protections such as regulated work hours, rights to lead in consolidating all procedures in one place ­ the registry ­ collective bargaining, etc. which would eliminate duplication by different agencies, unnec- Figure 5: Labor Regulations Rigidity of Employment Index Cost of Firing (weekly wages) 75 57 180 157 60 LeastRigid-Global 48 51 42 150 45 41 30 120 Least Cost - Global 98 30 90 90 90 74 15 0 0 3 60 39 47 0 30 0 4 0 ngKong,ChinaSingapore Malaysia ChinaPhilippines ailand Th mbodia Ca VietnamIndonesia and ore a d lan ina Zeal Thai Ch esia Ho w Singap mbodi Ca Malaysia Ne Philippines VietnamIndon Mr. Ken Loo, Secretary General, GMAC essary red tape, costs and delays. Much simpler and less expen- Although labor supply is abundant, procedures for hiring staff are sive procedures to register property will encourage many more cumbersome. An employer has to inform the Ministry of Labor every people to register their property. This could free up an enormous time a new employee is hired. In law, firing a worker is easy, but in practice amount of "dead capital" currently tied up in untitled property.6 it is not. According to the labor law, a company has to pay compen- If more businesses had legal title to their land and buildings, sation when no valid reasons [for firing the worker] are offered. more could borrow against these assets and thus get the financ- ing they need to operate their businesses effectively or expand. To ease the difficulty in hiring workers, the government could allow an employer to report new hires quarterly or bi-annually. With Revise rigid requirements for hiring and firing workers regard to firing, there is no need for additional provisions. Cambodia needs to strike a balance between creating jobs and protecting workers. Issues such as statutory limits on the num- Mr. Seng Phally, Executive Director, Cambodian Labor Orga- ber of overtime hours allowed, the size of the premium paid for nization (CLO) overtime, and restrictions on night work should be re-considered The finding in this study (both for hiring and firing workers) is in order to allow employers and employees to decide these issues relevant only to the formal labor market, particularly in the gar- collectively. If employers had more leeway to determine these ment sector. It's not true for the less productive and mostly non-wage issues with employees, they would likely be more willing to for- informal labor market, which comprises 70% - 80% of employment. mally employ workers and thus entitle them to more benefits. To address the issue of difficulty in hiring, the government should 5 allow more flexible hiring policies. That is, employers should be able Ministry of Commerce, as presented in the "Kick-off Workshop for the SME Development Program" jointly organized by the Ministry of Industry, to hire workers on irregular or temporary bases. The salary base Mines and Energy and the Asian Development Bank, May 11, 2005. 6 Soto, Hernando de (2001). The Mystery of Capital: Why capitalism triumphs in the West and fails everywhere else. Black Swan. London. Page 27. BUSINESS ISSUES © Copyright, MPDF 2005 Publisher: MPDF No. 70, Norodom Blvd., Phnom Penh BULLETIN Tel: (855)-23-210-922 Fax: (855)-23-215-157 Printed by: E-mail: shor@ifc.org, Website: www.mpdf.org Security Printing & Packaging Co., Ltd.