Over recent years, Cambodia has benefited greatly from rising production costs in China and the resultant realignments in the supply chain.

Consequently, it has emerged as a competitive alternative manufacturing base for light manufacturing relocation within Southeast Asia. Cambodia’s garment and footwear industry, which accounts for over 70% of the country’s exports, is the country’s main user/driver of logistics activities, and it has a significant effect on the volume of freight shipments to and from Cambodia.

Over the past five years, Cambodia’s trade growth has been remarkable, with exports and imports increasing by an average of 16% and 11% respectively per year.

Chart: Growth in Merchandise Trade Volume, 2012-2016

Chart: Growth in Merchandise Trade Volume, 2012-2016

Moving forwards, it is expected that Cambodia’s trade levels will increase further still. Partly this is due to the aforementioned ongoing adjustments in regional supply chains. Additionally, the ASEAN region is becoming increasingly competitive, due to the trade bloc’s continued drive towards regional integration.

Following the establishment of the ASEAN Economic Community (AEC) in 2015, many ASEAN countries have actively responded to the visionary AEC Blueprint 2025 and this should have particular benefits for less developed countries such as Cambodia.

Consequently, it is predicted that cross-border commerce, including intra-bloc trading activities, will continue to grow. By way of example, Cambodia and Thailand have pledged to boost bilateral trade from US$5.6 billion in 2016 to US$15 billion by 2020. Together the two countries have agreed on an increase in the quota of buses and trucks crossing the Cambodian-Thai border from 40 per day to 500 per day by 2018.

At present, however, there is a marked shortage of logistics facilities and services in Cambodia which could support rapid trade growth. Cambodia’s existing transport infrastructure urgently needs to be improved, but it is also imperative to build a comprehensive logistics network which can handle an increasing amount of freight.

There is also a particular need to attract logistics professionals and qualified personnel who can supply modern, sophisticated logistics services. In this respect, Hong Kong logistics companies, which can claim years of experience in reforming the logistics market on the Chinese mainland, could play a constructive role in supporting the trade development of Cambodia.

Infrastructure Improving, yet More Work Needs to be Done

Needless to say, the infrastructure of Cambodia was severely damaged during the war years. At a national level, Cambodia also lacks a concrete strategic action plan on logistics development. This also helps to explain why Cambodia has fallen behind when competing with certain neighbouring countries in terms of infrastructure and logistics capabilities.

In 2016, Cambodia ranked 73th among 160 economies in the World Bank’s Logistics Performance Index (LPI), lagging behind Thailand (45th), Indonesia (63th) and neighbouring Vietnam (64th).

Specifically in terms of the quality of its infrastructure, Cambodia has a great deal of catching up to do, as it was ranked 99th as compared to Thailand (46th), Vietnam (70th) and Indonesia (73rd).

Chart: Logistics Performance Index and Quality of Infrastructure 2016

Chart: Logistics Performance Index and Quality of Infrastructure 2016

In order to address this issue, the Cambodian government is committed to setting up a National Logistics Council (NLC) by 2018. The NLC will be responsible for formulating the country’s first-ever national logistics blueprint, as well as coordinating government ministries, agencies, institutions and industry players.

A significant amount of investment is required to upgrade Cambodia’s transport infrastructure. A report from the Economic Research Institute for ASEAN and East Asia (ERIA) estimated that total investments of up to US$16 billion are required within Cambodia’s infrastructure sector between 2013 and 2022. The ERIA projection is largely in line with the trend highlighted by the Council for Development of Cambodia, with total committed infrastructure investment amounting to about US$7 billion between 2012 and 2016, or some 40% of the published total. Notably, the committed investment in infrastructure hit a five-year high at US$3.1 billion in 2015, representing 67% of published investment within Cambodia during that year.

Table: Investment by Sector, 2012-2016 (US$ million)

Table: Investment by Sector, 2012-2016 (US$ million)

Additionally, Cambodia has received a substantial amount of foreign aid to fund its infrastructure development, which may not be reflected in the above investment statistics. For example, China has been a major donor to Cambodia, disbursing more than US$4 billion of aid in the form of grants and soft loans between 1992 and 2016. When Cambodian delegates attended the Belt and Road Summit held in Beijing in May 2017, it was announced that China will provide Cambodia with a new aid package worth nearly US$240 million, intended for infrastructure construction, alongside other areas. With more projects expected to be rolled out over the coming years, many business opportunities will arise for Hong Kong companies to participate in the construction and redevelopment of Cambodia’s roads, railways and ports.

Road Projects Drawing Investment

Road transport is the major logistics modality in Cambodia, accounting for more than 70% of freight traffic. Goods in larger quantities are mostly containerised and then transported in bigger trucks, a major share of which are then shipped out of the country as ocean freight. In contrast, local delivery of goods in smaller quantities, many of which are break-bulk items, is primarily handled by small trucks, vans or even motorcycles.

Cambodia’s road network extends over 54,000km. However, as of 2015, the percentage of the country’s total road length which was paved stood at around 10% – the lowest among all ASEAN countries, according to the ASEAN Secretariat.

Chart: Ratio of Paved Road to Total Road Length

Chart: Ratio of Paved Road to Total Road Length

The conditions of major national roads may have improved in recent years, but roads leading to the rural areas mostly remain unpaved, lacking any traffic lights or roadside assistance services. During the rainy season, roads in both urban and rural areas can be affected and some of them could deteriorate considerably.

Photo: Paved road within Phnom Penh’s city centre.
Paved road within Phnom Penh’s city centre.

Photo: Paved road within Phnom Penh’s city centre.
Paved road within Phnom Penh’s city centre.
Photo: Dilapidated roads just outside Phnom Penh’s city centre.
Dilapidated roads just outside Phnom Penh’s city centre.

Photo: Dilapidated roads just outside Phnom Penh’s city centre.
Dilapidated roads just outside Phnom Penh’s city centre.

In order to construct a modern road network system in Cambodia, the government is committed to building 850km of expressways by 2020, along with a long-term plan to establish a national expressway network of 2,230km by 2040. So far, significant progress has already been made. For example, the Cambodian government signed a Memorandum of Understanding (MoU) with China’s Henan Provincial Communication Planning, Survey, and the Design Institute Co. Ltd. in 2015 to construct a 190km-long, 25m-wide expressway linking Phnom Penh and Sihanoukville. Under the MoU, construction is expected to be completed by 2020 at a project total cost of about US$1.6 billion.

Apart from upgrading the inter-provincial traffic routes between the capital and other main cites in Cambodia, there are also plans to upgrade cross border roads links from Phnom Penh to Bangkok in Thailand and Ho Chi Minh City in Vietnam. A project to enhance the connectivity of the GMS road network, including the updating of road sections from Battambang to Siem Reap, is expected to commence in 2017.

Cambodian Railway Rehabilitation Plan

In terms of rail transport, the railway system in Cambodia consists of only two lines – the 264km Southern Line (SL) from Phnom Penh to Sihanoukville, and the 336km Northern Line (NL) from Phnom Penh to Poipet, near the Cambodian-Thai border. Both lines are reported to be in very poor condition, with trains operating at a speed of approximately 20km per hour.

In 2009, after many years of limited efforts and outright neglect, the Cambodian government finally resolved to launch a railway rehabilitation programme, though progress so far has been very slow. The SL freight train service was re-launched in 2012 but it took another four years before limited passenger service could be re-introduced in 2016. Meanwhile, rehabilitation works on the NL have also been delayed, with only parts of the line completed as of the end of 2016.

Over the years, Hong Kong rail-related companies have earned a reputation as being amongst the most successful railway operators and consultants in Asia. Hong Kong companies may not be able to contribute directly in the construction of Cambodia’s railroads, but there are certain opportunities available for them in offering consultancy and contracting services covering railway planning, system integration and project management.

Ambitious Port Expansion to Add New Container Terminal

Maritime transportation is a key element in enabling Cambodia’s growing participation within global trade. However, its port capacity is a very major constraint. At present, only two main ports in Cambodia are able to handle international shipment – a deep-seaport in Sihanoukville and a river port in Phnom Penh.

The Sihanoukville Autonomous Port (SAP) is the largest seaport in Cambodia and the main trade gateway for seaborne cargo entering or leaving the country. The SAP handles about 70% of all containerised trade by volume, with a throughput of more than 400,000 TEUs in 2016. Outbound merchandise consists mostly of garments and rice, with the main markets being Europe and the US. In contrast, inbound merchandise primarily comprises raw materials for garment factories, construction materials and machinery.

Chart: Container Throughput

Chart: Container Throughput
Photo: Trucks queuing outside the SAP.
Trucks queuing outside the SAP.

The SAP has a limited draft of 8.5m at its entrance, which restricts the size of vessels calling at the port to a maximum 1,000 TEU. At best it can accommodate feeder vessels, with freight destined for long-haul markets loaded onto mother vessels at transhipment hubs such as Singapore.

On the bright side, the SAP is now the subject of an ambitious development plan designed to improve its capacity for handling international shipments. The construction of a new container terminal is expected to be completed by 2022, at a total cost of US$300 million. The new terminal will extend over 350m in length with a draft of 14.5m, thereby enabling the SAP to handle larger container ships. According to SAP management, the new container berths and storage yards will add 1 million TEU to the overall container throughput capacity.

International Logistics Services in Demand

Located between Thailand and Vietnam, two of the main production hubs in the GMS region, Cambodia has enormous potential to play a more important role in regional supply chains and logistics networks. However, most of the local logistics companies based in Cambodia are relatively small in scale and there is a notable lack of professionals and management staff with the relevant international experience. This in turn limits the ability of local companies to offer higher value-added services such as track-and-trace and inventory management

Photo: Trucks driving down a street in Phnom Penh.
Trucks driving down a street in Phnom Penh.

As such, foreign logistics companies have a clear advantage when it comes to providing international logistics services targeting those manufacturers engaged in export-oriented industries. Nevertheless, they may find it more challenging to compete directly with their local counterparts, who are able to supply low-end services in serving the domestic market.

In the light of this situation, a number of international logistics players such as APL Logistics, DSV, Panalpina and Yusen Logistics have established operations in Cambodia to target export-oriented manufacturers. They intend to provide a range of services such as cross-dock, in-land transportation, warehousing and distribution management and customs clearance. More recently, in a show of confidence in this emerging market, Thai logistics player SCG Logistics also announced plans to expand its business into Cambodia.

When entering Cambodia’s logistics market, it is recommended that Hong Kong businesses make the most of their own advantages and seek win-win cooperation arrangements with local companies. By forming a business partnership or joint venture, Hong Kong companies can avail themselves of their local partners’ connections for business development, while the local operators can build up their capacity to handle international freight.

Warehousing Business Opportunit

Photo: Warehouse for rent along National Road No.4.
Warehouse for rent along National Road No.4.

Broadly speaking, warehouses in Cambodia can be divided into two categories: small-scale warehouses with a floor area less than 1,000 sq m, and those with a floor area over 1,000 sq m. Many of these small warehouses tend to be concentrated within Phnom Penh or on the outskirts of the city, in areas such as Chamkar Doung and Stung Meanchey. For the most part, the larger warehouses are found along National Roads No. 3 and No.4.

As the regional supply chains become more integrated, the demand for warehousing facilities in Cambodia will continue to increase. While some modern warehouses have been built in recent years, mostly by foreign-invested logistics companies, the majority of older facilities remain sub-standard, as there has been no benchmark or standard for either the warehouse facilities or the services that they offer. Indeed, service quality tends to vary with operators of warehouses of different sizes and in different locations. In this regard, Hong Kong companies could seize opportunities by entering the Cambodian market to help raise or even set the standards for warehousing in the country.

Customs Bonded Warehouse

In 2017, with the prospect of Cambodia becoming a logistics point for goods destined for Vietnam and Thailand, Kerry Worldbridge Logistics Ltd – a joint venture between the Hong Kong-based Kerry Logistics and local logistics and property development firm Worldbridge International (Cambodia) – launched its first Cambodian customs bonded warehouse.

Located in the Kandal province, 17km south of Phnom Penh, the bonded warehouse is part of the Kerry Worldbridge Special Economic Zone (KWB SEZ), which covers a total land area of 63 hectares. The plan is for the US$100 million project to be built in three phases, with Phase I dovetailed with the construction of a customs bonded warehouse zone on 17 hectares of land. According to KWB SEZ management, importers will be allowed to bring in goods duty-free for local assembly or transhipment. An arrangement such as this would benefit manufacturers and traders, as they would not be required to pay duties upfront when storing their products in the warehouse, thereby gaining greater flexibility in organising their activities and cash flow.

Informal Payments Still an Issue

On balance, positive developments in Cambodia’s infrastructure and trade sectors should provide greater impetus to the renovation of the country’s logistics industry. Institutionally, though, a critical issue overshadowing the logistics industry is the widespread practice of unstructured payments, with unofficial charges often collected at weighbridge stations, border gates and checkpoints on main roads. Cambodia’s media also report that traffic regulations are selectively enforced in order to extract informal fees, and facilitation fees are often paid to avoid inspection on truck axle-weight and length issues.

In 2016, Cambodia ranked 156th among 176 countries in the Transparency International’s Corruption Perceptions Index, far behind the country’s three CLMV neighbours, namely Vietnam, Laos and Myanmar, which ranked 113th, 123th and 136th respectively.

As part of the measures to digitise customs procedures in Cambodia and to eradicate unofficial payments, the ASYCUDA computerised system for customs clearing was introduced in 2015, but it may well take a good deal of time to weed out this level of corruption. Hong Kong companies in both the manufacturing and logistics sectors should therefore be mindful of those corruption practices when operating within Cambodia.

Ultimately, if not tackled effectively, issues including a lack of logistics professionals and the prevalence of informal payments within the logistics sector could seriously hamper Cambodia’s hopes of taking on much more substantial role within regional supply chains.

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