PBES 2009 | 1

The Provincial Business Environment Scorecard in Cambodia

A Measure of Economic Governance and Regulatory Policy

Summary Report

April 2009

PBES 2009 | 2

PBES 2009 | 3

The Provincial Business Environment Scorecard1 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 | 4

PBES 2009 | 5

Table of Contents

Abbreviations .................................................................................................................................................... viList of Tables .................................................................................................................................................... viiList 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................................................................................................................13 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..........................................................................................................................33AppendixA2-ConstructingthePBES.........................................................................................................37AppendixA3-Relationshipbetweenthe2006and2009PBESresults...................................................39

PBES 2009 | 6

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

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List of Tables

Table1: ChangesinDistributionof EnterprisesbySize(2006and2009PBES)..................15Table2: Comparisonof PhnomPenhtoBusinessEnvironmentsinOtherProvinces.......21Table3: Impactof IndividualSub-indicesontheProbabilitythatBusinessOwnersWill ExpandtheirBusinesses..................................................................................................26Table4: Levelsof CambodianBusinessFormalization............................................................. 28TableA1: WhoAnsweredthe2009PBESSurvey?........................................................................35TableA2: DetailedDescriptionsof Sub-IndicesandComponentIndicators........................... 41

List of Figures

Figure1: Distributionof EnterprisesbySize.................................................................................14Figure2: 2009PBESListing–GeographicalDistributionof Enterprises................................15Figure3: 2009PBESListing–Distributionof EnterprisesbySector.......................................16Figure4: 2009PBESListing–Distributionof EnterprisesbySexof Owner.........................16Figure5: 2009PBESListing–Distributionof EnterprisesbyYearsof Operation..............17Figure6: Final2009PBESRanking..................................................................................................19Figure7: Final2006PBESRanking.................................................................................................20Figure8: PerformanceonIndividualSub-indices........................................................................24Figure9: RelationshipBetweenGovernanceandBusinessExpansion......................................25Figure10: RelationshipBetween2006and2009PBESRankings.................................................40

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The2009ProvincialBusinessEnvironmentScorecardProjectisacollaborativeeffortbetweentheInternationalFinanceCorporationandTheAsiaFoundation.Wearegratefultodonorsof IFCandTheAsiaFoundationfortheirfinancialsupport.

Theprocessof conductingthe2009PBESsurvey,includingthelistingof businessestablishments,wouldnothavebeenpossiblewithoutsupportfromH.E.SarKheng,DeputyPrimeMinisterandMinisterof Interior;H.E.ChamPrasidh,SeniorMinisterandMinisterof Commerce;H.E.SuySem,Ministerof Industry,MinesandEnergy;andH.E.Dr.HangChuonNaron,SecretaryGeneralof theMinistryof EconomyandFinance.TheDeputyPrimeMinister,SeniorMinister,Ministers,andtheSecretaryGeneralissuedseparatelettersof endorsementfortheproject.

Likeotherresearchendeavors,the2009PBESistheresultof thecollaborativeeffortsof manyindividuals.Theproject’stechnicaladvisorandauthorof thereportwasDr.EdmundMalesky,withsupportfromKrislertSamphantharakandPaulSchuler.Overallsupervisionandadviceonthe2009PBESwasprovidedbyCharlesSchneider,SoneathHorandVeroniqueSalze-Lozac’h.KhyToukandSambathSaktooktheleadindevelopingandmanagingtheproductionof the2009PBES.LangSokandSanTeacarriedoutspotchecksonthequalityof interviewsinthefieldtoensureaccuracy.KentHelmersmanagedthefieldresearchandwasassistedbySininKithandVuthyBun.AnnBishopwasthetechnicaleditorandproof reader.KuntheaKeaundertookgraphicdesignandlayout.TonieTanprovidedvaluableadministrativesupport.

Acknowledgments

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InKratie Province, awindow and door shopowner states: “In my province, provincialofficials do not support business activities.They never visit or invite us to talk about our businessenvironmentproblems.”However, intheneighboringprovinceof KampongCham,the owner of a small brick factory feels that his province’s business climate has improved.“Bribes have declined sharply. A reduction inadministrativeprocedureshashelpedtoreducecorruption.”

As these stories indicate, entrepreneurs’experiences with local authorities can varydramaticallyfromoneCambodianprovincetoanother.Whilelawsandregulationsaredecidedat thenational level,howtheyareunderstoodand implemented depends very much onprovincialauthorities.Differencesinthequalityof economic governance2fromoneprovincetoanother contributes to uneven levels of growth across Cambodia.

In order to understand how provinces aresupporting or preventing business growth,InternationalFinanceCorporationandTheAsiaFoundationhavecollaboratedindevelopingtheProvincial Business Environment Scorecard (PBES).The2009PBESranksall24provincesonthequalityof theireconomicgovernance.

The PBES provides reliable data to helpbusinesses and local governments identify which governance factors are most in need of improvement. This evaluation is particularly

importantbecauseitwillhelpCambodia’smicro,small,andmediumenterprises(MSMEs),whichrepresentover95%of privateenterprises, toachievetheirpotential increatingjobsinruralareas where the majority of Cambodians liveandpoverty rates arehighest.Creating jobs ismoreimportantthaneverwith230,000youngpeoplejoiningthelabormarketeveryyear.3

The PBES, which covered 10 Cambodianeconomicallyimportantprovincesin2006,andall 24 provinces in 2009, relies largely on theperceptions of business owners to generate ascorecardthatranksprovincesonmeasuresof business environment quality. In thisway, thePBES helps public officials identify province-specificareasforreform.

The PBES also gives business owners the evidence they need to advocate effectively for reforms and engage public officials inproductive discussions about how to achievereforms. Numerous obstacles such as lack of information on regulations, time consumingprocedures, unofficial charges, and the poordeliveryof essentialpublicservicesallhamperbusiness growth.

In addition to pointing out areas for reform,thePBESidentifiesprovincesengagingingoodpractices so that other provinces can learnfrom these examples. Also, 2006 PBES and2009 PBES provide a baseline against whichpolicymakers and regulators can monitor theresults of reforms over time.

1. Introduction

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).

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2.1. Overall scoring strategy

The PBES scores are generated through a mixtureof responses to surveyquestionsand‘hard’ data collected from government sources andotherpublishedmaterials.Thesedataareallgroupedinto10broadsub-indices(categories),whichareassessedona1-10pointscale.Addedtogether, these 10 sub-indices create a 100-point overall score for economic governance.Technically, it is possible for a province toreceive a perfect score of 100 if it earns topscoresonall10indicators,however,perfectionisverydifficulttoachieve.Indeed,allprovinceshave low scores in some areas.

Before describing the sub-indices and the survey strategy, it is important to note thatthe sub-index rankings are based on howprovinces perform relative to other provincesonparticular surveyquestionsandotherdata.Therefore,thepointtotalsarenotcomparabletopointtotalsinothercountriesorsomeidealmeasureof governance.Rather,thesub-indicesshouldbeviewedasmeasuresof comparativeachievement of provinces in the Cambodiancontext. For a more detailed explanation of the scoring strategy, seeAppendixA2of thisreport.

2.2. The sub-indices

Thefollowing10sub-indiceswereusedtogradeall24of Cambodia’sprovinces.

1. Entry Costs: A measure of the time it takes for firms to register and receive allthe necessary licenses to start a business; thenumber of licenses required; and the officialcosts of registering andobtaining all requiredlicenses/permits.

2. Property Rights: A measure of the formal rights businesses have to the land and buildings they occupy and their security of tenure once land is properly acquired andtitled.

3. Transparency: A measure of whether firmshaveaccesstotheinformationtheyneedaboutgovernmentregulationsandprocedures,as well as the related legal documents necessary to run their businesses; whether regulatoryinformation and legal documents are available toeveryonewhoasks;andwhethernewpoliciesand laws are communicated to firms andenforcedinapredictablemanner.

4. Time cost of regulatory compliance: A measure of how much time firms spend oncomplying with government regulations, howlongtheywaitforprocedurestobecompleted,aswellashowfrequentlyfirmsareinspectedbylocal government agencies.

5. Informal Charges/Bribes: A measure of howoftenfirmspayinformalchargessuchas bribes and kickbacks to obtain government contracts; the extent to which these informal

2. Provincial Business Environment Scorecard and Sub-indices

PBES 2009 | 12

payments are obstacles to business operation,andwhetherinformalpaymentsarepredictableandachievetheexpectedresults.

6. Participation: A measure of whether firmsareconsultedaboutproposedprovincialpolicies and whether business associations orother interest groups advocate on behalf of business owners.

7. Crime Prevention: A measure of how muchfirmspayincoststhatresultfromtheftaswellasthecoststopreventcrimebypayingforsecurityservicesand/or‘protectionmoney’.

8. Tax Administration: A measure of both administrativeproceduresrelatedtopayingtaxandthecostof taxintheprovince.

9. Proactivity of Provincial Leaders: A measure of the creativity and willingness of provincial authorities to interpret nationalpoliciesandregulationsinfavorof localprivatefirmsanddeveloptheirownprovincialinitiativestopromoteprivatesectordevelopment.

10. Dispute Resolution: A measure of firms’satisfactionwiththeoutcomesof formalandinformalmethodsof disputeresolutionintheirprovince.

2.3. Survey strategy

Eachsub-indexisbasedprimarilyonresponsesto survey questions answered by Cambodianbusiness owners in the 2009 PBES. To ensure that the results accurately reflect conditionsthroughoutthecountry,sophisticatedsurvey and sampling techniques were used toensurethatnoregionortypeof businesswasoverorunder-represented,andthatsurveyquestionsgeneratedmeaningfulresponses.Intotal,1,234businessownersfromall24provincialcapitalsplusteneconomicallyimportantdistrictsacrossthe nation were surveyed.

Among the randomly selected 1,234 interviewees, the PBES also interviewedrepresentativesfrom152firmsthatparticipatedin the 2006 PBES survey. These previouslyinterviewed entrepreneurs were criticallyimportant in 2009 PBES because theyexperiencedthebusinessenvironmentin2006andcoulddirectlycomparethiswithconditionstwo years later. This provided the bestopportunity to compare changes in economicgovernance over time.

For a more detailed description of how thesurvey and sampling were conducted andhow the panel respondentswere selected, seeAppendixA1.

PBES 2009 | 13

To help understand the results of the PBESsurvey, it is useful to look at the listing of businesses from which survey respondents weredrawn.Sinceexhaustiveandcomparablelistsof businessesinCambodia’s24provinceshad not beenmade, the PBES research teamgatheredbasic informationonMSMEs in thecapitalcityof eachprovince,plusoneadditionaldistrict in Cambodia’s 10 most economically-active provinces. Counting all businessesoperatingwithinthreekilometresof thecenterof each provincial capital and in selecteddistrictsaddeduptoatotalof 63,507firms.Of thesebusinesses,95.5%agreedtoprovidetheinformationrequestedbytheresearchteamsothedatainthelistingareextremelyreliable.

Because we only counted businesses within provincial capitals and selected districts, wecannot claim that our listing covers all businesses in Cambodia. Since we only included 10districts,inadditiontoprovincialcapitals,thereis a slighturbanbias to thefindings.Alsowehave likely missed some large manufacturing establishments(particularlyinfoodprocessing)that are located more than three kilometres fromthecenterof town.Thatsaid,thelistingof businesses created for the PBES is certainly themostcomprehensivelistingof businessestodateandsystematicdatacollectionproceduresmean that data is directly comparable acrossCambodianprovinces.Also,thelistingof morethan 63,507 businesses in all 24 provinces,servedas an ideal sample frame for randomly

selecting the 1,234 entrepreneurs who weresurveyedforthe2009PBES.

Before examining how the index was constructed, it is helpful to review some keyfeatures of Cambodia’s private sector. First,whileprivatesectordevelopmentattractsa lotof attention, very little statistical informationis currently available on Cambodia’s privateenterprises. What do Cambodian businesseslook like? By providing a valuable profile of Cambodia’s private sector, the listing anddescriptiveinformationfromthesurveyprovidegeneralanswers.Second,amoreaccuratepictureof the Cambodian business environment will provide a framework for understanding theneedsof specificbusinessenvironments.Third,andmost important for this report, a pictureof the nation’s firms provides more contextregardingwhorespondedto thesurveywhichwas used to generate the PBES scorecard.

3.1 Cambodia’s firms are micro- enterprises

Themost striking finding from the listing of almost 64,000 businesses across Cambodia isthe very small size of most firms. For 69%of businesses,theonlyemployeeistheowner,90.4%of enterprises in the listinghave fewerthan four employees, and 96% have fewerthan10(Figure1).If onereferstothegeneraldefinitionof amicro-enterpriseasanenterprisewith less than 10 employees,4 then 96% of Cambodianbusinessesaremicro-enterprises.

4 Definition used by the Ministry of Industry, Mines and Energy.

3. Profile of Cambodian Firms

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68.8%

21.6%

5.7%

2.2%1.7%

01 to 45 to 910 to 1920 +

Number of Employees

Figure 1: Distribution of Enterprises by Size(Number of Employees in Addition to the Owner)

While this report uses the terms ‘MSMEs’,‘firms’, ‘enterprises’ and ‘establishments’interchangeably, readers should keep in mindthat96%of firmsaremicro-enterprises.Table1 compares the 2006 and 2009 PBES listingsin order to study changes in the business communityovertime.Overall,thedistributionof enterprisesbysizehaschangedonlyslightlysince 2006. Businesses with fewer than fouremployees still make up the vast majority of enterprises(92%in2006and90.4%today).

3.2 Increase in small and medium enterprises 5

Overall, more businesses are opening inCambodia.If welookjustatthefirmssurveyedinthe10provincescoveredbythe2006listing(hereafter referred to as the ‘Original 10’),wesee that the total number of businesses grew by27% in thepast twoyears.Although there

were some differences in the methods used in the2006and2009PBEStogeneratethelistingof businesses,6thedifferencewouldprobablylead to an underestimate of the extent of business growth. It is clear that more and more entrepreneurs are taking the riskof starting abusiness, and moreover, the growth rate washighest for larger businesses. The number of businesswithbetween10and20employeeshasnearly doubled over the past two years,whilethosewithover20employeesgrewbyalmost200%. Bothof these trends,while still at anearly stage, should contribute to employmentgrowthandpovertyreductioninthelongrun.

3.3 Concentration of firms in the Phnom Penh region is decreasing

As Figure 2 demonstrates, the listing showsa strong concentration of enterprises in thecapitalcityandsurroundingprovinces.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 | 15

Firm Size (Employees) 2006 2006 (%) 2009 Original

10 Provinces2009 Original

10 (%) 2009 Full 2009 Full Share

Growth in 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.

Table 1: Changes in Distribution of Enterprises by Size (2006 and 2009 PBES)

Penhaccountsfor45%of allenterprises.Whilethis is a substantial share, it is much smallerthan in 2006, where Phnom Penh accountedfor60%of businesses. In thecurrent listing,Battambang comes far behind Phnom Penh with10%of allenterpriseslisted,andPhnomPenh’sneighboringprovince,Kandal,has7%of businesses.Thehighpercentageof businessesconcentratedinPhnomPenhiscomparabletothatinothercapitalcitiesindevelopingcountriesin Southeast Asia and beyond.

3.4 Firms tend to operate only within their home province

Not only are businesses small, they are alsoquite ‘provincial’.Ninety percent of surveyedbusinesses operate solely within their homeprovince,andonly10%export.BusinessesinPhnomPenharemoresophisticatedthanthoseinotherpartsof Cambodia,with16%of firmsengagedinexporting.7

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.

44.8

9.7

7.05.3

3.5 3.3 3.2 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

05

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Figure 2: 2009 PBES Listing – Geographical Distribution of Enterprises

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PBES 2009 | 16

3.5 Most firms are in services or commerce

If we disaggregate by sector, both the listingand the PBES survey show that 93.5% of enterprises are concentrated in services orcommerce (48.2% and 45.3%, respectively),while manufacturing and construction account foronly5.4%,andnaturalresourceexploitationaccountforonlyabout1%. Figure3displaysthis data from the comprehensive businesslisting.

3.6 Women are active in business

The important role that women play in theprivatesectorisshowninFigure4.Withwomenowning 62% of listed enterprises, their rolein economic growth is substantial. However,gender distribution varies tremendously by

province,withPreyVeng,forexample,showinga largepercentageof womenbusinessowners(almost75%).

45.3%

5.4%

48.2%

1.0%

Figure 3: 2009 PBES Listing - Distribution of Enterprises by Sector

Services

Manufacturing/Construction

Commerce

Natural Resource Exploitation

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6065

7075

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Figure 4: 2009 PBES Listing - Distribution of Enterprises by Sex of Owner

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PBES 2009 | 17

3.7 Firms are young

Finally,thelistingshowsthatthemajorityof theenterpriseslistedareyoung.Forty-twopercentof businesseshaveoperatedfor less than twoyears, while another 22% have operated forless than five years (Figure 5). This indicatesdramatic growth in entrepreneurial activityoverthepastfewyears.Thisresulthascriticalimplications for analysisof the survey results.Therapidgrowthof newstart-upsinthepastfewyearsmeansthatmanyfirmshaveonlyjustbegunoperations, and have not yet registeredtheirenterpriseandjoinedtheformalsector.

05

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21.8 20.715.7

Less than 2 3 to 5 6 to 10 Greater than 10

Figure 5: 2009 PBES Listing – Distribution of Enterprises by Years of Operation

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3.8 Business growth is likely to continue

Drawing on data from the PBES survey, itseems likely that rapid growth in the privatesector will continue. Forty-nine percent of businesses surveyed for the PBES intend to increase their business activities over thenexttwo years. However, these figures should betreated with some caution as the survey was conducted before the international financialcrisisbeganinlate2008.

PBES 2009 | 18

PBES 2009 | 19

The following sections show the PBES rankings anddiscusstheminthecontextof Cambodianeconomicdevelopment.

4.1 Rankings

Figure6presentstheresultsof the2009PBES.Thisisthesumof provincialscoresoneachof the10sub-indices.Because10possiblepointsareavailableforeachsub-index,thefinalrankingisona100pointscale.Toachieveperfection,aprovincewouldneedtoberankedfirstineveryoneof thePBESindicators.Itisimportantto

rememberthattherankingsarerelative,basedonbestpractices inCambodia. Provincesarenotbeingcomparedtosomeidealandpossiblyunobtainable measures.

4.1.1 Kampong Cham retains top position

Asin2006,KampongChamisthetop-rankedprovince, though in 2009, the gap betweentheprovincesrankedfirstandsecondismuchsmaller.Kampot,thefourth-rankedprovinceinthe2006index,hasmoveduptosecondplace.Now only two points separate Kampot from

8 For a detailed explanation of how the scores were compiled, see Appendix A2 and the Technical Reports (2006 & 2009).

4. The 2009 PBES Rankings: Explanation and Analysis8

48.3155.7656.6057.0757.0857.5458.3058.5958.6859.2559.4360.2160.3560.6160.8161.6762.5162.9263.3363.8063.8164.1064.1465.30

0 10 20 30 40 50 60 70 80 90 100

Figure 6: Final 2009 PBES Ranking

2009 Provincial Business Environment Score

Kampong ChamKampot

Koh KongRattanakiri

SihanoukvilleOddar Meanchey

PursatKampong Chhnang

Prey VengKampong Thom

Preah VihearKep

Svay RiengSiem Reap

PailinKampong Speu

Stung TrengMondulkiri

KandalTakeo

Banteay MeancheyBattambang

KratiePhnom Penh

PBES 2009 | 20

Testimonials about entry costs from Koh Kong Province, the highest ranked newcomer in the 2009 PBES.

Manufacturing Enterprise Manager: I did not need to go to a government office to apply for a permit for my business. Government officials came to me, instead. It took one week to receive a Patent and three days for a license from the Provincial Department of Industry, Mines and Energy.

Electric Equipment Shop Owner: A government official came to my business

with an application for a permit. It took only one week to receive a Patent and one more week for a permit from the Provincial Department of Commerce.

Restaurant Owner: A Patent took only one day to process after we collected and submitted all required documents from village and commune chiefs. I had to negotiate the application price as there is no official price schedule. It would be good to have one-window service to take care of business establishment paperwork.

Kampong Cham; in 2006, the gap betweenKampong Cham and Svay Rieng, the secondrankedprovince,wasalmost9points.

Although consistently rankingfirst,KampongChamstillhasaspectsof economicgovernancethat need to be improved. While provincialofficials continue to earn high scores onproactivity and dispute resolution, ratingsconcernedwith entryprocedures, land access,transparency, and informal charges havedeclined noticeably.

Sihanoukvilleandfivenewcomers(KohKong,Pursat,OddarMeanchey,Rattanakiri,andPreyVeng)completethelistof provincesthatscoredabove 60 points. Phnom Penh, the nationalcapitalandheartof theCambodianeconomy,rankslast.Amarginof oversixpointsseparatesitfromtheotherlow-rankingprovinces. 4.1.2 The case of Phnom Penh

The extremely low score for Phnom Penhwarrants special explanation. To some extent,Phnom Penh is handicapped by urbanizationand population density, problems that do notburdenitspeers.MunicipalofficialsinPhnomPenharestretchedtocapacityinordertoprovideservicesforsuchanenormouspopulationandcater to the many and complex demands of the country’s most diverse population. It isnotsurprisingthatwaitingperiodsforbusinessdocumentation and land titles take longer. There aresimplynotenoughgovernmentofficialsandresources to meet the demands. In addition to a shortage of officials, urbanization posesdistinct problems (crime, pollution, heavy useof infrastructureandmaintenancecosts).These

47.82

48.95

49.36

56.35

56.46

57.55

61.18

61.67

64.14

72.90

0 10 20 30 40 50 60 70 80 90 100

Sihanoukville

Siem Reap

Phnom Penh

Banteay Meanchey

Battambang

Kandal

Kampot

Kampong Chhnang

Svay Rieng

Kampong Cham

47.82

48.95

49.36

56.35

56.46

57.55

61.18

61.67

64.14

72.90

0 10 20 30 40 50 60 70 80 90 100

Sihanoukville

Siem Reap

Phnom Penh

Banteay Meanchey

Battambang

Kandal

Kampot

Kampong Chhnang

Svay Rieng

Kampong Cham

Figure 7: Final 2006 PBES Ranking

2006 Provincial Business Environment Score

PBES 2009 | 21

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%

Table 2: Comparison of Phnom Penh to Business Environments in Other Provinces

issues pose challenges not found to the sameextent in other regions. Thus, Phnom Penh’slowperformancecanbejustified,inpart,byitsunique position as the centre for Cambodia’seconomic and social life.

On the other hand, many of Phnom Penh’ssub-indexscorescannotbeexplainedonlybyitsurbanstatus.IntervieweeresponsesinPhnomPenh indicate that civil servants stand out for theirlowlevelof servicequality.The2009PBESdata show that this is not matched elsewhere in Cambodia.AsTable 2 shows, comparedwithother provinces, business owners in PhnomPenharefarmorelikelyto:1)paysmallbribesto localofficials;2)paycommissions inordertowingovernmentcontracts;3)giveprotectionpayments to local police officers to avoidcriminal activity; and 4) negotiate their taxpaymentswithlocalofficials.

It is little wonder that business owners in PhnomPenhappeartoblamethegovernmentfor their troubles (only 32% rated officials’attitudesaspositive)andmanylackconfidenceinpublicinstitutions(only18%believethatlocalinstitutions will protect their property rights).Worse yet, poor governance has affected theattitudesof local entrepreneurs in the capital.Whereas 60% of entrepreneurs elsewhere inthe country plan to expand operations overthenext two years, just 45%of businesses inthe capital have suchplans. In fact, 3.6%of PhnomPenhfirmsareplanningtoclosedowninthenexttwoyears,comparedtoonly1%of firmsintherestof thecountry.

Phnom Penh will remain the center of the Cambodian economy for the foreseeable future. It will continue to have the largest share of businessactivity,aswellasattractthemostinvestment and the most talent. These successes result not from good governance, but fromPhnom Penh’s endowments which include: alargeurbanmarketforgoodsandservices;thecountry’smosthighlyeducatedpopulation;farbetterinfrastructure;cheaperenergyprices;andcloseproximitytogovernmentandtherebytoopportunities for lucrative national contracts.Nevertheless,governance inPhnomPenhwillcontinue to constrain overall growth. Phnom Penhwillneverreachthefulleconomicpotentialthatitsendowmentsprovideunlesssomethingisdone to improve servicequality and reducethe risks of doing business.

4.2 Improvement in some provinces’ rankings over time

Since the2006PBES, anumberof provinceshave taken important steps to improve theirbusiness environment.

The largest improverswere Sihanoukville andSiemReap. Both ranked near the bottom inthe 2006 rankings, but have since moved upto the topandmiddle tiersrespectively. SiemReap demonstrates improvement in nearly 9of 10categories.Sihanoukvillehastakenalessconsistentpath,improvingradicallyonfivesub-indices, despite slight declines and stagnationinothers.Ingeneral,Sihanoukville’sadvancesoutweigheditsset-backs.Bothprovincesshowed

PBES 2009 | 22

themostdramaticadvancesinpreventingcrime,facilitatingentrycosts,securingpropertyrights,andenhancingtransparency.

Itisusefultothinkabouttherapidgovernanceimprovementsof SiemReapandSihanoukvillein contrast to decline in the nation’s capital.LikePhnomPenh,theselocalitiesbenefitfrompropitious endowments. Siem Reap attractstourists every year due to the unparalleledsplendor of the Angkor Wat complex, whileSihanoukville receives investment because its Cambodia’sonlydeepwaterport, tourismhasstrongpotentialandSihanoukvillehaspossibleoil reserves off its coast. Both locations could easilyrestontheirlaurels,attractinginvestmentevery year while making minimal advances in governanceandregulation.Yet,inthelasttwoyears, both locations have invested significantresources to create more efficient andtransparent regulations. Siem Reap especiallystandsoutasoneof onlyafewprovincesthat

have easy-to-understand regulatory information readily available in the lobbies of government agencies.

Sihanoukville also excels in transparency of businessinformation.Theresearchteam,whichvisitedall24provinces,foundthatSihanoukvilleagencies were among a select group withregulatory information clearly posted, and

Governance Improvements in Siem Reap

A guest house owner said he finds out about new laws and regulations that affect his business from newspapers, media coverage, and respective government departments. “The provincial tax department comes four times per year to give information on tax issues,” he said. “The provincial department of tourism provides information on tourist trends, rules, and regulations.”

Land Titles in Battambang

A businesswoman described her experience applying for a land title. First, she went to the village and commune offices for an application and had to make a payment for the application and for each required signature. At the tax office, she had to negotiate the tax fee. At first, tax officials wanted to collect taxes on 2.5 times the actual market price of her land.

“My land cost 10 USD per square meter on the market, but [the government officials] quoted the price at 25 USD per square

meter. I asked them to buy my land if they were sure about the price. I had to negotiate the tax price three times and pay fees for all kinds of services, including paper, pen, stamp, and even for them to complete the form. I wondered for what do they receive their government salaries? My last stop was at the Department of Land Management, Urban Planning and Construction. My application for the land title will take two to three months to process and cost $5,000 for a 30m x 80m plot.”

PBES 2009 | 23

where maps of future infrastructure projectswerereadilyaccessible,withouthavingtomakespecialrequestsorcontactstoobtainthem.

By contrast, other provinces (Phnom Penh,Battambang and Banteay Meanchey) haveslippedovertime.Thesedeclineswereprimarilyaresultof lowerscoresonlandaccess,informalcharges,andtaxadministration.

4.3 High ranking, but far from perfect

In contrast to other countries, where sub-national indices have been created9,Cambodianprovinces are tightly clustered in their finalscores. No single province stands out ashaving far better governance than its peers.With very little reform effort, low rankingprovincescouldquicklyclimbuptheladderinfuturesurveys.Eventhetop-rankedprovincesof Kampong Cham and Kampot havemuchroom for improvement. This fact is vividlydisplayed in thestarcharts inFigure8,wherebranchesrepresentperformanceoneachof theindividual sub-indices. An idealprovince thatscored a 10 on each sub-index is representedinthetopleft-handcornerof thefigure.Afterthisperfectscore,figuresforeachprovincearedisplayedaccording to theirfinalPBESscore.Itisimportanttonotethatnoprovincecomesclose to the ideal.

Furthermore,significantdeficienciesareevident,even in the provinces with the very highestrankings. For instance, informal charges andtaxadministrationcontinuetoposeobstaclestobusinessownersinKampongCham.Similarly,Kampot officials have more work to do inimprovingtransparencyandproactivityinlocaldecision making. By contrast, lower rankedprovinces have achieved success in isolatedareas.Theirpoliciesforachievingthesescores

deservestudyandemulation. Asanexample,Kandal (ranked16thoverall)ranksamongthetopprovinces in termsof propertyrightsandthetimespentcomplyingwithregulations.

4.4 Impact of governance improvements

By improving governance in areas wheretheir scores are lowest, provincial officialshelp MSMEs to prosper. When regulationand arbitrary enforcement costs are reduced,entrepreneursaremorelikelytorisktheircapitaland energies on business expansion. A ten-pointimprovementinPBESscores,roughlythedifferencebetweenKratieandKampongCham,resultsina9.9%increaseinthechancethatanentrepreneurwillexpandhis/herbusiness.Thisrelationshipisillustratedmoresuccinctlybytheblue line in Figure 9.

Table3showsthatfivesub-indicesareof primaryimportanceforprovincestoconsiderimprovinginordertoencourageentrepreneurstoexpandtheir businesses: informal charges, ease of regulation,entryprocedures,crimeprevention,and tax administration. For instance, a singlepoint improvement on the informal chargessub-indexisassociatedwitha3.3%increasein

Crime in Kampong Cham

A small-sized steel window and door entrepreneur, said that armed robberies and burglaries often go unreported because of lack of faith in the authorities. “The victims didn’t report crimes to the authorities because they don’t believe that the authorities can solve the cases and return what has been stolen… People, especially business owners, have tried to 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 | 24

thechanceof businessexpansion. Timecostof regulatory compliance, entry procedures,crime prevention, and tax administration areassociated with changes of similar size. Theother sub-indices are of lower priority withregardtobusinessexpansion.

Policy decisions always involve trade-offs. Devoting time,energy,andfinancial resourcestoonepolicygoal,generallymeans thatotherobjectives are left wanting. Knowing whichpolicychoiceswillprovidethebiggestspurtobusinessactivitycanbeacrucialfactorinhelpingnarrowthechoiceof initiativesthatprovincialofficialsshouldconsider. Table3shouldbeauseful tool forprovincial authorities touse inchoosingamongthese importantpolicy trade-offs.

Itis,however,importanttonotethatalthoughparticipation or transparency rank very low,theymaybeinstrumentalinachievingprogressinthehighimpactsub-indices.

Entry Procedures Property Rights Transparency Participation Ease of Regulation Informal Charges Crime Prevention Proactivity Taxes Dispute Resolution

Figure 8: Performance on Individual Sub-indices

4.5 Individual policies

Table A2 details the different sub-indices and indicators that combine to give the overall score. AfewhighlightsfromthePBESindicatorsare:

4.5.1 Improvements in the overall business environment

Entry Costs: Entry costs appear to haveimproved generally across the country. Inadditiontotheprovincesthathaveimplementeda‘One-window’officeforregistrationproceduressince the last PBES,we can also see that thetotal number of documents required in ordertobecomefullylegalhasdeclined(downfrom5to4).Thetotalnumberof daysforbusinessregistration at the Provincial Department of Commerce has also declined (down from 20to 16.75 days), and the time required to paythe Patent Tax for very small operations isconsiderablylowertoo(downfrom15to12.25

Entry Costs

Property Rights

Transparency

Participation

Time Costs of Regulatory Compliance

Informal Charges

Crime Prevention

Proactivity

Taxes

Dispute Resolution

Perfect Score Kampong Cham Kampot Koh Kong Rattanakiri

Sihanoukville Oddar Meanchey Pursat Kampong Chhnang Prey Veng

Kampong Thom Preah Vihear K Svay Rieng Siem Reap

Krong Pailin Kampong Speu Stung Treng Mondulkiri Kandal

Takeo Banteay Meanchey Battambang Kratie Phnom Penh

ep

PBES 2009 | 25

days).Theoneexceptiontothisgeneraltrendisthetimerequiredtoobtainaone-yearoperatinglicense,whichhasactuallyincreasedsomewhat.Formal fees for business documentation have also increased, but their increase is far belowthe rate of inflation recorded over the sameperiod.10

Time Costs of Regulatory Compliance: Regulatory procedures show some sign of easing.While firms do report spendingmoreof their time on bureaucratic procedures, themedian11 numberof businessinspectionshasdeclined (from four to two times per year)andwaiting periods for new land for existingbusinesseshasbeencut inhalf from60to30days.

Tax Administration: Some improvementin tax administration is also apparent. Fewerfirms negotiate their final payment with localauthorities(64%onaveragein2006,compared

Figure 9: Relationship between Governance and Business Expansion

to 54% in 2009) and consequently fewerowners complain that paying bribes to lowertaxes is a problem (80% down to 75%). Of course,theseareonlymarginal improvements.Seventy-fivepercentof businessesstillconsiderthat paying bribes to the tax authority is anobstacle tobusinessoperations.This isaveryhighproportionby international standards. Inaddition,morefirmscitedfrustrationwithtaxratesand taxadministration. This shows thatthere is much more work to be done to construct afairandequitabletaxsystemthatappropriatelytaxesfirmsforgovernmentservices,butisnotsoprohibitive that ithandicaps theirability toconduct business. It is notable that the number of firmsnotpayinganytaxesatallhasnearlydoubledinthepasttwoyears.Inpart,thismaybeareflectionof theyouthandinformalityof new operations, but it could also be, in part,a reaction to a tax system thatmanybusinessowners believe is unfair. This has negative 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.

0.2

.4.6

.8Es

timat

ed P

roba

bilit

y

45 50 55 60 65Provincial Business Environment Score 2009

95% CI Probability of Business Expansion

95% CI Probability of Business Decline

PBES 2009 | 26

Index Marginal Probability of Business Expansion (Based on 1-Point Increase in Sub-Index) Potential Impact

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 important revenue they could use to improveinfrastructureandpublicservices.

4.5.2 Declines in key areas

The 2009 PBES also captures some deterioration in the business environment. Someof theseindicatorsarecriticallyimportantand should be given immediate attention by local,provincial,andnationalofficials.

Formality: Moststrikingly,thereappearstobea growingproportionof businessesoperatingintheinformalsector,asTable4demonstrates.In 2006, 3% of PBES respondents wereformallyregisterednationallyattheMinistryof Commerce and another 38% of businesseswere registered at Municipal or ProvincialDepartments of Commerce. Most otherseitherhadaone-yearoperatinglicensefromtherelevantlineministryorpaidasimplefeetothelocaltaxauthority(thePatentTax).Only16%of firmshadnodocumentationatall.Similarly,11%of operationswereintherealtaxregimeandthereforepayingturnovertaxes.

In 2009 PBES, a significant decline in registrationswasevident.Whilethenumberof businesses registered centrally had increased to 14.4%, the number of businesses completingregistration procedures at the provincial levelhaddeclinedto13.3%intheoriginal10PBESprovinces.Over40%of operationsnowhavenobusinessdocumentationatall.Correspondingly,only4.3%of operationsarepayingtaxesunderthe real regime.

The size of a business matters a great dealwith regard to formality. Fifty percent of respondentswithmore than$100,000 in totalinvestment are registered at either the central orprovinciallevel,asopposedto25%of thosewithlessthan$100,000ininvestedcapital.Thisdoesnotexplainthedeclineinthe2009PBES,however,asTable1shows,thenumberof largeenterpriseswasgreaterthaninthe2006PBES.

Forthemostpart,thedeclineinformalityresultsfrom the youth of new businesses. Forty-two percent of businesses were started since2006. Thesenewbusinessesarean indicatorof recenteconomicgrowth inCambodia,and

Table 3: Impact of Individual Sub-indices on the Probability that Business Owners will Expand their Businesses

PBES 2009 | 27

maysimplynothavehad timeyet to fulfill allof the formalities of becoming fully formal. Of businessesof anysizethathavebeenestablished since2006,only17.3%arefullyformal(8.9%atthenationalleveland8.4%attheprovinciallevel).Infact,whenweconcentrateourattentiononlyonthepanelrespondents(meaningrespondentswhoagreedtobesurveyedforboththe2006and2009PBES),wecanseethatexistingbusinesseshave actually become more formal over time. Twenty-six percent of panel respondents arenow registered at the central level. Despite the fact that a business’ age is theprimary determinant of formality, carefulattentionshouldbepaidtothis indicatorovertime to verify whether other factors may also be playingaroleincontinuinginformality.

Informal Charges: Informal charges also appeartohaveworsenedslightly. Inthe2009PBES, only 52%of businesses denied payingbribestolocalofficials,downfrom56%inthe2006PBES.Moreover,therehasbeenan8%increaseinthenumberof businessesreportingthatcorruptionisanobstacletotheirbusiness(now 42% in the median province). Moststrikingly, 31% of businesses report that if theypayonebribe,additionalagenciesarealsolikelytovisitthemandaskforbribes.In2006,only17%of businessesinthemedianprovincereported this multiplier effect. While publicprocurement has improved marginally, muchmore improvementneedstotakeplace. Only19%of firmsinthemedianprovincebelievethatthere issufficientandtransparent informationon public procurement contracts, while 62%of businessesbelievethatpersonalconnectionsarenecessarytowinabid.Moreover,75%of businesses believe that ‘kick backs’ are regularly requiredtowingovernmentcontracts.

Transparency: Transparency of businessdocumentation has declined as well. Fewer firms have access to basic business

documentation or even know whether such documentation exists at all. Only 20% of businessesinthemedianprovinceknowwhataprovincialbudgetis.Intotal,73%of businessesclaim to be uninformed about changes in laws thatmateriallyaffecttheirbusinesses.Fifty-fivepercentof businesses in themedianprovincebelieve some sort of relationship is necessarywith local authorities to get such documentation. Furthermore, 47% believe there is overtfavoritismtowardpolitically-connectedfirms.

Ithasbeensaidbefore,but itbearsrepeating:transparency is critical for small businesses.The more information they have, the betterthey can forecast business prospects and risk.This allows them to make educated decisions about investment and expansion. Withoutsuch information, firms avoid expansion forfear of experiencing unanticipated problemsdue to changes in laws and other factors that impact the business climate. Access to clearandreliableinformationaboutregulations,legalfeesandtaxesnotonlymakebusinessownersmore responsible, but also less vulnerable toarbitrarydecisions.Furthermore,transparencyisamongtheeasiestpolicychoicestomake.Itis far easier to increase access to information than to change local institutions. Provincial officials who are seeking a short-term boostin their province’s PBES score would benefitfrom simply making information available inthe lobbies of the local agencies where business owners go to seek information.

Dispute Resolution: Disputeresolutionshowssignificant decline as well. Most importantly,entrepreneursreportlessconfidenceinformalinstitutions.Only22%of firmsinthemedianprovincebelievethatthelegalsystemwillprotecttheirpropertyrights;downfrom34%in2006.Correspondingly, only 41% of respondentswere satisfied with resolution of theircontractualdisputesoverthepastyear,and65%of businesses were not successful in recovering

PBES 2009 | 28

Levels Description Key Documents Required Representation in PBES Samples

2009 Full 2009 Original 10

2006 Full

1 Fully Formal – National

Registration at Ministry of Commerce 13.3% 14.4% 3.0%

Three-year Operating License from relevant ministry†

Patent Tax registration at Central Tax AuthorityΨ

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 – Provincial

License to Operate a Commercial Enterprise from Provincial/Municipal Department of Commerce*

13.9% 13.3% 38.0%

One-Year Operating License from Ministerial Department at Provincial Level†

Patent Tax registration at Provincial/Municipal Tax AuthorityΨ

Paying estimated tax if under $1500 annual profits

Other licenses including Labor Permit and Environmental Certificate when applicable‡

3 Unregistered w/ Operating License

One-Year Operating License from Ministerial Department at Provincial Level†

13.5% 12.4% 21.0%

Patent Tax registration at Provincial/Municipal Tax AuthorityΨ

Other licenses including Labor Permit and Environmental Certificate when applicable‡

4 Patent Tax Patent Tax registration at Provincial/Municipal Tax AuthorityΨ 23.7% 19.6% 22.0%

5 Fully Informal

No formal documentation 35.7% 40.3% 16.0%

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. Ψ 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).

Table 4: Levels of Cambodian Business Formalization

PBES 2009 | 29

paymentsowed to thembydelinquentclients.In2006,53%of businesseswereunsuccessfulin recovering monies owing to them. These findingsareworrisome.Firstof all,thescaleof unpaidbillsisequaltoabout2.8%of totalsales,sopoordisputeresolutioniscostingbusinessesa great deal of money. Secondly, as morebusinesses join the market and as Cambodiafurtherintegratesinternationally,formalmeansof dispute resolution will become evenmore

crucial. Businesses will no longer be able to relyonsocialrelations,localleaders,andotherinformalmeasurestoenforcecontracts,astheywillbedoingagreaterproportionof businesswithfirmsoutsidetheirsocialnetworks. Thislackof confidenceinformalmeansof disputeresolution raises the risk of doing business and has the potential to limit business expansionand growth.

PBES 2009 | 30

PBES 2009 | 31

The PBES provides valuable informationon how local business owners perceive andunderstand their business environment, whatconstrains them and how they feel about the performanceof theirpublicsectorcounterpartsondifferentaspectsof economicgovernance.Italsohighlightsdifferencesamongprovincesand shows that some provinces performbetterthanothersinspecificareas.Itisthusausefultoolforlocalofficials,theprivatesector,and other stakeholders to use in comparingthe performance of their province with theperformance of other provinces. This toolcan also help officials to identify the specificstrengths and weaknesses of their local business environment. As such, the PBES provides apractical tool for provincial officials to use indevelopinganactionablepolicyagendaand inconsultingwiththeprivatesector.

Indepthanalysisof PBESresultswillhelplocalofficials and businesses to develop strategic

public-private partnerships to address weaklinks andbuildonbetterpractices.Also, evenmore important than comparing their overallrankingswithotherprovinces,provinceshavea great opportunity to learn from each otherandsharebestpracticesandlessonslearnedbystudyinghowperformanceon each sub-indexvariesfromprovincetoprovince.

In terms of prioritization, provincial officialsmay want to concentrate their learning and reformactivitiesonreducinginformalcharges,crime, entry costs, regulatory enforcementcosts, and the burdens of tax administration.These sub-indices are most highly correlated with prospects for business expansion. Also,mechanisms for gathering the opinions of businesses and enabling them to participatein shaping local policy generally appear to beof great importance in achieving governanceimprovements.

5. Conclusion

PBES 2009 | 32

PBES 2009 | 33

This section provides a simple summary of the methodology used in the PBES. For more detailed information, please use the 2006 and2009TechnicalReports.

A1.1: Sampling and Selection

The 2009 PBES research sampling strategyconsistedof threebroadsteps.

First, a listing of allMSMEswas undertakenby the PBES research team within three kilometers of the center of each provincialcapital,plusonedistricteachinCambodia’s10mosteconomicallyactiveprovinces.Thelistingandfirm-levelinformationwasusedtodrawastratifiedrandomsampleof businessesforface-to-face interviews.

Second, these face-to-face interviews wereconducted with business owners in order to capturebusinesses’perceptionsonkeyaspectsof provincialeconomicgovernance.

Third,thefindingsfromfocusgroupdiscussionsand published data related to economicdevelopment were assembled to complementtheperceptionsof the intervieweeswho tookpartinthesurvey.Thisthirdstepisreferredtoas ‘secondary data collection’.

A1.2: Comprehensive Listing of Active Operations

Researchers travelled to each province toundertake a complete listing of businesseswithin three kilometers of the center of the provincial capital, plus the selected districts.Every business operation in a fixed location,formaland informal,wasrecordedalongwithbasicinformation:thelocationof thebusiness,the activity, thegenderof owner, thenumberof employees,etc.Intotal,63,507firmswerelisted across Cambodia’s 24 provinces. Thelistingexercisewasnecessaryduetothelackof anupdatedandexhaustivedatasetonprovincialMSMEs in Cambodia that was comparableacrossprovinces.Thedatafromthelistingcanbeconsideredextremelyreliableandrepresentative,asthetotalresponseratewas95.5%.Nosingleprovincehadaresponserate lower than90%.Moreover,themedianprovincialresponserateof 98.9%,witha standarddeviationof 2.2%,indicatesthatnon-responsebiasdidnotimpactanyprovincedisproportionately.

A1.3: The Survey

The listing was then used to randomly select a stratified provincial-level sample of 1,082firmsacrossallprovinces,withthestratabasedon the sector and the number of employees

Appendix A1 - Methodology

PBES 2009 | 34

per business. For the purposes of the study,analysis was focused on growth-oriented businesses, as opposed tomerely subsistence-oriented operations. So all enterprises wherethe owner was the only permanent employeewereexcludedbeforesampling.12 The median provincial response rate for initial contactwithfirmswas60%.13Whenafirmrefused,areplacementfirmwas randomly selected fromthelist,sothattargetquotasforeachprovincecouldbe achieved. All provinceshad at least39targetrespondents,butsomemorepopulousareas,suchasPhnomPenh(111),Battambang(65), and Siem Reap (66) had slightly largertargetstoensurerepresentativeness.Followinggeneralpracticesforcalculatingsamplingerror,we can assume a 4%margin of error aroundaggregateresponses.

Inface-to-faceinterviews,businessownerswereaskedmore than 60 questions regarding theirperceptions of their business environment.Covering all 10 sub-indices, the questionsaddressedavarietyof topicssuchas the timebusinessownersspendonadministrativetasks;the type of licenses theymust have and howeasyorcomplextheythinktheproceduresareto obtain them; how much various businessprocedures cost in termsof timeandmoney;interviewees’ comprehension of regulationsand access to business documentation; thewillingnessandeffortsof provincialleaderstohelp local businesses; the extent of informalcharges and protection payments; whetherbusinesseshavecommercialdisputesandhowtheseareresolved;andwhethertheyhaveregularexchanges with public officials. Interviewees

werealsoaskedabatteryof questionsabouttheperformanceof theirbusinessandplansforitsfuture.

In addition to the 1082 firms interviewed instage2,andusingthesamequestionnaire,152firms/establishments already covered by the2006 PBES, were re-interviewed. This panelgroupwascrucialformeasuringtheevolutionof business environments between the 2006and2009PBES,asperceivedbyindividualfirmsinthe10provincescoveredbythe2006PBES.Thispanelgroupwascomprisedof businessesrandomlyselectedfromall thefirmssurveyedfor the 2006 PBES. The panel is especiallyuseful,becausetheperceptionsof intervieweesare impervious to sampling error. Becausepanel interviewees experienced the businessenvironmentin2006,theycandirectlycomparethis with current conditions.

TableA1provides descriptive informationontherespondentswhoansweredthesurvey.Foursamplesof businessesarecompared.Column1 assesses the entire PBES sample of 1,234businessesin2009withoutre-weighting.Thesedata provide an accurate reflection for eachprovince,butcannotbeusedfornational-levelanalysis. By stratifying at the provincial level,the PBES data tend to under-estimate large provincessuchasPhnomPenhandBattambang.Toprovidenational-levelconclusionsbasedonthePBESsurvey,TableA1re-weightsanswersbytheproportionof Cambodia’stotalfirmsineachprovince,sothatPhnomPenh’simportanceto the economy is accurately reflected in thedata. 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 | 35

Provincially Representative

Sample1

Original 10 Provinces2

Panel Respondents3

Nationally Representative

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.

Table A1: Who Answered the 2009 PBES Survey?

PBES 2009 | 36

showninFigure2above.Descriptivestatisticsby the national-level weighting can be viewed in Column 4. For comparative purposes,descriptivedataarealsoprovidedjustforfirmsinthetenprovincesoriginallysurveyedin2006(Column 2) and for the 152 panel respondents(Column3).

A1.4: Case Studies Inadditiontothestandardquestionnaireusedfor the survey, 85 firms/establishments wereinterviewedtodevelopcase-studiesandcollectquotesthatareincludedasvignettesinthisandotherpublications.

PBES 2009 | 37

A2.1. Choosing the Sub-indices and Constructing the Score

Once survey data is collected, responses of businessownersareaggregatedattheprovinciallevel. Province-level indicators are selected to capturecritical areasof economicgovernanceforprivatesectordevelopment.

Dealing with Perception Bias

As90%of businessesonlydobusiness insidetheirhomeprovince,thereisastrongprobabilityof perceptionbias. It isdifficult forbusinessowners to rank their provincial leaders fairlyagainst other leaders when they have no idea what the business environment is like in other jurisdictions. Weaddress thisdilemma in twoways. First, the survey questions selected forinclusionintheindexareheavilytiltedtowardsmoreconcrete(oftencountable)concepts,suchas“Howmanyregulatoryinspectionsdidyourfirmexperienceinthepastmonth?”asopposedtomoreabstractapproachessuchas,“Ranktheburden of inspections on a five-point scale.”In some cases, however, abstract questionsare necessary to truly capture the businessenvironmentconceptunderstudy.Recognizingthatperceptionbiascanaffectrankingsinthesecases,wemergesecondarydataintothesesub-indices to correct for the bias. For instance,in the transparency sub-indexwedidnot relysolelyoninterviewees’perceptionsof accesstobusiness information; instead,we sent a teamof researchers to provincial agencies in each

province to record whether they could easilyobtain the basic documentation necessary to register and run a business in the locality. Two formsof secondarydataareemployed. Datafrompublishedandverifiablesourcesanddatafromself-observation,derived fromsendingaresearchteamtoeveryprovincetorecordbasicfactsaboutregulatoryprocedures.

Standardizing Indicators

TableA2belowprovidesafulllistingof allsub-indices and indicators included within them. Descriptiveinformationforeachindictorisalsoprovided,allowingover-timecomparisons.Eachindicatorwithinasub-indexisstandardizedtoa10-pointscale,with10representingthebestscore recorded in Cambodia that year and 1,theworst.Allotherprovincesranksomewherebetweenthesetwoendpoints.

Constructing Sub-Indices

Construction of sub-indices is based both on broadconceptsdiscussedinternationallyamongeconomists, and more narrow categories of Cambodian-specificbusinessobstacles. Usingthese theoretical guides, particular indicatorsare selected to represent the concept coveredby each sub-index. Sub-indices are calculatedbytakingthesimpleaverageof theircompositeindicators. Asa result, theyarealsoona10-pointscale.Whensecondarydataareincludedinasub-index,aweightedaverageisemployedtoensurethatsecondarydataaccountfor40%

Appendix A2 - Constructing the PBES

PBES 2009 | 38

of the sub-index score. This is enough tocorrectforperceptionbias,butnotenoughtodominatetheopinionsof respondents.

Assembling the Final PBES

Afterthecreationof sub-indices,afinalPBESscorecanbeefficientlyassembledbysummingup the sub-indices. Different weightingapproaches are certainly possible. In 2006,the number of provinces was too small toobjectivelycreateweightsof interesttopolicy-makers (numberof firms, investmentgrowth,andprofitability)bydeterminingtheimpactof individual sub-indices on key outcome variables by using regression analysis. However, withmoredatain2009,suchanoperationispossible.Nevertheless,wemaintainthesameunweightedapproach to facilitate over-time comparisons.Table 3, however, does provide the analysisof themostimportantsub-indices.Interesteduserscansupplytheirownweightings,astheyseefit.

A2.2. Advantages of a Relative Approach

Three features of the PBES approach areworth noting. First, the scores are generatedby comparing an individual province to thebest and worst provinces on a particularindicator. By normalizing the scores aroundbest economic governance practices alreadyfound in Cambodia and not against ideal and possibly unattainable standards of goodgovernance,thePBESencouragessub-nationalgovernments to improve their performance.For each indicator, a ‘star’ or top-performing

localitycanbeidentifiedandanyotherprovincecanconceivablyattainaperfectscoreof 100infuture iterations by emulating these Cambodian bestpractices.

Second, the PBES is solely a measure of economic governance and regulatory policy.It does not assess initial conditions for development (that is, the fundamentalunderlying factors that contribute to economic growth in a province but that are virtuallyimpossible to address in the short term, suchaslocation,infrastructure,sizeof thedomesticmarket, and human resources). In doing so,the PBES is able to rank all provinces on anequal basis without giving undue advantageto well-endowed locations. Thus, the PBESshould not be confused with a measure of Total Investment Environment that includes both economic governance and measures of initial endowments(i.e.structuralconditions).

Third, the indicators that comprise thePBESareactionableinthesensethattheyarespecificitems that provincial officials can target andmonitorimprovementupon,andtheyareaction-worthy because they represent policies thatprivatefirmshaveidentifiedascriticaltotheirbusinesssuccessandthatpreviousresearchhasshowntobeinfluentialforfirmperformance.

The same 10 sub-indices used in 2006 PBESare used to allow for over-years comparison.Theyweredesignedtohighlightprivatesectorprioritiesaswellasfocusontheissuesthatcanbeinfluencedbylocalgovernment.

PBES 2009 | 39

For a comparative ranking such as thePBES,it is important to demonstrate that rankingsdo not change substantially from year to year. This consistency has important policyandmethodological implications. In terms of policy, the stability of the rankings indicatesthat provincial reforms have long-lastingeffects.Theydonotdissipateattheendof thecalendar year; firms continue to benefit fromthemand recall their impactwhenquestionedby interviewers.

Methodologically, the strong correlation withPBES rankings in 2006 indicates that rankingprovinces against each other works quitewell. The PBES can consistently identify topperformers, while also identifying what lowerrankingprovincesneedtodotoimprovetheirscoresinfuture.Suchstabilityisconfirmationthat the approach offers a consistent andaccurate measure of provincial economicgovernance over time.

Figure 10 is a scatter-plot illustrating therelationshipbetweenthe2006and2009PBESscoresandrankingsforthesame10provinces.The first thing to notice about this figure isthatitisverylikelythatpastperformanceisanimportantdeterminantof futuregovernance.14 Thegraph shows thatpastperformance is animportant determinant of future governance.Thelineshows,basedonthe2006PBESscores,whatonewouldexpecttheprovince’s2009PBESscore to be.

Itisimportanttonotethat‘stability’inthescoresdoes not mean that the scores cannot change. Overthepasttwoyears,anumberof provincesclimbedupthePBESladder.Theseprovincescanbe identified immediately inFigure10, astheir actual 2009 PBES scores are above thepredictionline.

Appendix A3 - Relationship between the 2006 and 2009 PBES results

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 | 40

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.

Figure 10: Relationship between 2006 and 2009 Rankings15

2006 Provincial Business Environment Score

BMeanBatt

KCham

KChhn

Kamp

Kand

PPenh

SReap

Sihan

SRieng

5055

6065

7075

2009

Pro

vinc

ial B

usin

ess

Env

ironm

ent S

core

50 55 60 65 70 75

95% Confidence Interval

Predicted Values

Observed Values

PBES 2009 | 41

1. Entry Costs%of firmsregisteredwiththeMinistryof CommerceorMunicipal•Departmentof CommerceTotal number of registrations, licenses and permits firms need to•operateWaitingperiodforRegistrationCertificatefromProvincial/•MunicipalDepartmentof Commerce(mediandays)OfficialfeeforRegistrationCertificatefromProvincial/Municipal•Departmentof Commerce(median$)WaitingperiodforOne-YearOperatingLicense(mediandays)•OfficialfeeforOne-YearOperatingLicense(median$)•WaitingperiodforPatentTaxregistrationfromLocalTaxAuthority•(mediandays)OfficialPatentTaxFeefromLocalTaxAuthority(median$)•ProvincialRevenuefromPatentTax*•ProvincialRevenuefromRegistrationcertificate*•

2. Property Rights%of firmswithlanddocumentation•%of firmswithsolidtitletoland•%of firmsthatfeelexpropriationisarisk•%of firmsthatdeemchangesinrentalcontractsarisk•Effectivelandprices(adjustedfordifferencesinsupplyanddemand)•(mean$)**

3. TransparencyTransparencyof -andaccessto-localplanninganddecrees/•decisions(10documents/5-pointscale)Firm’sknowledgeof provincialbudget(%notfamiliar)•Relationshipwithaprovincialofficialisnecessarytoobtainaccessto•provincialdocuments(%alwaysorfrequently)%of firmsagreeingthatfavoritismtowardfirmswithpolitical•connections is an obstacle to business.Regularitythatrepresentativesfromtheprovincialgovernor’soffice•meetwithfirmstodiscusschangesinlawsorpolices(%seldomorNever)Firmsareinformedaboutneweconomicandfinanceregulations•thataffecttheirbusiness(%uniformedorpoorlyinformed)Regularitythatafirmreceivesadvancenoticeaboutneworchanging•centralgovernmentlaws(%SeldomorNever)RequesttoProvincial/MunicipalDepartmentof Commerce*•(5-pointscale)RequesttoProvincial/MunicipalDepartmentsof Industry,Mines•andEnergy*(5-pointscale)Availabilityof infrastructuremaps*(#officeswithmapavailable)•

4. Time Costs of Regulatory ComplianceManagementtimeduringyearspentdealingwithrequirements•imposedbygovernmentregulations(%of firmslessthan16days)Totalnumberof inspectionsperyear(median)•Timeittookafirmtoreceiveitslandtitle(mediandays)•

5. Informal ChargesGivinggiftstopublicofficialsissometimesrequiredtopass•customs,obtainlicenses,receivepublicservices,ormeettaxrequirements(%No)Corruptionisanobstacle(%of majororsevereobstacle)•Informationregardingavailablepublicprocurementcontractsis•transparent(%AlwaysorFrequently)Importanceof governmentconnectionsforwinningpublic•procurementcontracts(%EssentialorUseful)Firmsbelievefirmsintheirindustryoftenpaycommissionswhen•doingbusinesswithgovernment(%of SeldomorNever)

Otheragenciesaskforadditionalpayment(%Yes)•Firmsusuallyknowhowmuchadditionalpaymentisrequiredin•theirindustry(%agree)Regularitythatservicesaredeliveredasexpectedwhenafirmpays•therequiredadditionalpayment(%regularlyoralways)Bribesareusefulforbusiness(%Agree)•

6. Participation%of firmsagreeingprovincialgovernmentsolicitsadvicefrom•affectedfirmsonnewlaws,rules,regulationsordecreesTherearebusinessassociationsorclubsintheprovince(%Yes)•%of firmsinsamplethataremembersof associationsorclubsin•theprovinceNumberof businessassociationsper10,000firmsinprovince*•BusinessForumheldin2007*•Evidenceof visiblesuggestionboxesinDIMEorDOCorother•modeof aggregatingbusinesscomplaintstoCommuneCouncilinDIMEorDOC*(Noevidencetothreedifferentchannels)

7. Crime Prevention%of firmsthatexperiencedlossesduetotheft,robbery,vandalism,•orarsoninlastyear(%No)Monetaryvalueof firm’slossescausedbycrime(median$)•%of firmsthatbelievefirmsintheirsectormakeprotection•paymentstothepolice%of firmsthatpayprotectionmoneytoothers•

8. Tax Administration and Burden

%of firmsthatbelievebribestopublicofficialstoavoidtaxesand•regulationsareasignificantbusinessobstacle%of firmsthatdonotpaytaxes•%of firmsthatbelievenegotiatingwithtaxauthorityispartof •businessTaxadministrationisanobstacle(%)•Taxratesasobstacle(%)•

9 Proactivity of Provincial AuthoritiesProvincialgovernmentofficials’attitudetowardprivatebusiness(%•positive)Provincialdepartmentsof lineministriestendtointerpretinfirms’•favorwhencentralregulationlacksclarity(%agree)Provincial government is good at working within central laws to •createaprofitablebusinessenvironment(%agree)Provincial government is creative and clever about solving new •businessproblems(%agree)Provincialgovernmentwillinglyriskspunishmentfromthecentral•governmenttopassdecisionstoaidlocalbusinesses(%agree)Therearenoinitiativesattheprovinciallevel(%)•

10 Dispute Resolution%of firmsthatareconfidentthatthelegalsystemwilluphold•contractsandpropertyrightsindisputesPossibilityof goingtoanotherofficialtodisputeunjustdecision(%•seldomornever)Percentageof salesin2008forwhichfirmdidnotreceivepayment•intheagreedtime(median)Percentageof salesforwhichfirmneverpaidbycustomersin2008•(median)Satisfactionwithdisputeresolutioninprovince(%satisfied)•Successatrecoveringmoneyowedtoit(%successful)•%of firmsinprovincethatbelievethereisafairprocesstodispute•changes in rent contracts

Table A2: Detailed Descriptions of Sub-Indices and Component Indicators

* component uses hard data; ** Derived from factor analysis; all other indicators derived from perception data

PBES 2009 | 42

The Asia Foundation is a non-profit, non-governmental organization committed to the development of a peaceful, prosperous, just, and open Asia-Pacific region. The Foundation supports programs in Asia that help improve governance, law, and civil society; women’s empowerment; economic reform and development; and international relations. Drawing on more than 50 years of experience in Asia, the Foundation collaborates with private and public partners to support leadership and institutional development, exchanges, and policy research.

With offices throughout Asia, an office in Washington, D.C., and its headquarters in San Francisco, the Foundation addresses these issues on both a country and regional level. In 2008, the Foundation provided more than $87 million in program support and distributed over one million books and educational materials valued at $41 million throughout Asia.

To implement the second edition of the Provincial Business Environment Scorecard in Cambodia, The Asia Foundation has received financial support from the Multi Donor Livelihoods Facility (MDLF). Based in the Royal Danish Embassy in Phnom Penh, MDLF channels US$65 million of funding support from Danida, the UK Department for International Development (DFID) and New Zealand Aid (NZAID) to the Natural Resources Management and Livelihoods Programme (NRMLP). The NRMLP (2006 – 2010) has the aim of reducing 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.

IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. Our new investments totaled $16.2 billion in fiscal 2008, a 34 percent increase over the previous year.

In Cambodia, IFC Advisory services are delivered in partnership with Australia, Canada,the European Union, Finland, Ireland, Japan, New Zealand, the Netherlands, Norway, Sweden, and Switzerland. Our advisory strategy is derived from an ongoing analysis of local and regional development needs, and consists of five focal areas that a decade of “on the ground” experience has shown will best improve the investment climate and enterprise development. The focal areas are:

Improving the business enabling environment•

Increasing access to financial services•

Improving environmental and social sustainability•

Increasing value added in specific supply chain • linkages

Increasing access to infrastructure•

For more information, visit www.ifc.org/mekong.