Use of Value Chain Analysis to support Investment Climate...

Value Chain Session Presentation Slide 1

Use of Value Chain Analysis to support Investment Climate Reform

Magdi M. AminSr. Private Sector Development Specialist

East Asia & Pacific

Private Sector Forum20 April 2004

World Bank Group


ICA Perspective

• Basic hypothesis – policy impediments exist that, if removed, will unleash competition which will raise productivity & investment, leading to growth.

• Unit of analysis is the firm. ICAs are useful in identifying impediments where firms interact with government: Entry process, regulation, policies that distort factor markets and policies that raise perception of risk.

• Challenge: unless extremely well-designed sample and detailed survey, difficult to convert ICA data to sector analysis or specific policy recommendations.

CompetitiveInvestment

Climate

Firm-levelProductivity

Higher-Value

employment

PovertyReduction

Low Entry &Exit Barriers

EfficientFactor markets

Infrastructure

MacroeconomicStability


Value Chain Perspective

• Basic hypothesis: transaction costs exist that, if removed, would enable firms to maximize use of resources within a network/ supply chain to deliver a product most efficiently, raising productivity of the entire chain.

• Unit of analysis is the network of suppliers and buyers that produce a given product. Value chain analysis can identify policy-induced costs, but also non-state transaction costs (e.g. logistics, manufacturing support).

• Challenge: since results are specific to products, they are less robust -may be difficult to generalize either to sectors or to the economy.

LocalProduction

DomesticTrade

InfrastructureProvision

LargeBuyers &

Processing

LOCALSUPPLIERS

TradeFacilitation

FOREIGNBUYERS


Changes in global manufacturing and services environment force us to look at value chains

• Inventory

• Vertical Integration

• Resource/Market-seeking FDI

• Physical infrastructure

• Marketing, selling to customers

• Quotas

• Information

• Virtual Integration

• Network-seeking FDI

• Integrated logistics

• Collaborating with network partners

• WTO–Coase Theorem: firm will grow to point at which cost of conducting additional

– transaction cost inside firm is equal to conducting it in open market


Case Study:

Cambodia Garment Sector


Cambodia’s main export at risk

• In 2005, sector will be exposed to direct competition• Outside of quotas, margins have already declined and will

decline further

Garment Sales to US: Higher volume outside quota...

0

100

200

300

400

500

2000 2001 2002 2003

Millio

n S

q M

ete

rs

Outside QuotaUnder Quota

... but prices outside quota declining

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

2000 2001 2002 2003

US

D p

er

Sq

Mete

r

OutsideQuotaInside Quota


InputImport

43%

Transport

1%

CuttingLayering

2%

Sewing Assembly

1%

Finishing

1%

PackingLoading

12%

Transport

1%

Export DocProcess

12%

ExportClearance

27%

Trucking

19%

Customs

15%

Lifting

14%

TerminalHandling6%

Document

2%

TruckingHigh fuel costsPhnom Penh: $0.42/litreBangkok: $0.32/litreSaigon: $0.30/litre

Customs ClearanceImport permit: 40%Document process: 40%Chief inspector signature: 8%Document check: 8%Customs stamp: 4%

TerminalHandling

17%

Documents

1%

CustomsInspection

14%

Misc.

4%

Export Document Process

CP application:26%CO application:28%Visa:45%

Packing/LoadingQuality certificate:48%CP inspection:40%CO inspection:12%

ContainerScanning9%

CamControl4%

Other*

32%

Including late charge

assessed by government inspectors

OverheadTime30%

Inspection

16%

Lifting

3%

Trucking

26%

Customs

15%

Late charge assessed by government inspectors

Administrative Interventions – Production/Export of 40 Ft Container of Denim Jeans


Wholesale Company

Prepare:InvoicePacking listDraft B/L

Contract customs clearance

agent

Customs Clearance AgentFacilitatecustoms

applicationprocess

Ministry of FinanceCustoms: Phnom Penh

Evaluate Assessed Price Confirmation & Customs Application : Issue

Application documentCertificate of originB/L

Sealed customs document

Freight Forwarding/Trucking

Ministry of FinanceCustoms:

Sihanoukville

Calculate import dutyCalculate penalty fee (7% of invoice value)VAT calculations

Deliver customs documents

Ministry of Finance

Mobile Customs/Economic Police

On-site inspection

fee

Customsinvoice

CashPayment

Shipmentrelease

Ministry of Commerce

Cam Control

Cam Control survey &

inspections

Ministry of Transport

Port Authority

LoLo charges

AZ Group

TC scanning

Ministry of Transport

Roads

Roadtoll fee

Sealed customs

document

Shipment delivery

Import and Customs Clearance Procedure


Competitiveness of the garmentindustry hinges on reducing high administrative costs

Sample Benchmark of Import Clearance Charges for Garments

Cambodia: $858Hong Kong: $555Malaysia: $309Sri Lanka: $484Madagascar: $367

55% - 178%more expensiveto import intoCambodia

Key Cost Factor for Import Clearance in Cambodia

Importers must process as many as 37 documents, 15 signatures and 13 stamps

High Administrative Costs threaten the sector


Cambodia Hong Kong Malaysia Sri Lanka Madagascar

Trucking $ 200 $ 210 $ 85 $ 71 $ 50

Customs $ 280 $ - $ - $ 68 $ 25

Lifting $ 21 $ - $ - $ 29 $ 50

Inspection (at factory) $ 100 $ - $ - $ - $ -

Overtime charges $ 230 $ - $ - $ 6 $ 247

Terminal handling charges $ 100 $ 30 $ 176 $ 285 $ 35

Documentation $ 15 $ 15 $ 13 $ - $ -

Customs inspection fee $ 150 $ - $ - $ 30 $ 10

Misc. charges $ 30 $ - $ - $ 16

TOTAL $ 1,126 $ 255 $ 274 $ 505 $ 417

Benchmarking Export Clearance Charges Between Cambodia and Selected Countries: 40 Ft Container


Planting

26.7%

Fertilizing

18%

MarketLevies

2.4%

HarvestDrying

7.9%

Milling

8.5%

PackageInterest

2.9%

Transport

4.5%

Port/ Customs Charges

19.7%

Shipping

10.3%

LandPrep37%

Seeding

11%

Transplant

52%

Labour

100%

Labour Productivity in Rice Farming

Kg/workerCambodia 43.49Thailand 62.35Cambodian farmers are 43% less productive than Thai farmers

Low on-farm labour skills

Pooraccess to farming equipment

Low irrigated farming

Labour

9%

Fertilizer

91%

Fertilizer Use/Yield Rate

Fert. Use Yield/ha (tons)

Cambodia $48/ha 1.85Thailand $15/ha 2.09

70% of fertilizer sold in Cambodia is diluted to 1/3 –1/2 of actual concentration

PortCharges

25%

CamControl

18.8%

CustomsClearance

38%

FumigationPhyto-

Sanitary0.3%

OtherCharges

17.9%

High fertilizer costs due to high import cost

Lack of competition in the fertilizer distribution sector

Value Chain for the Production of Neang Mali Rice


Inefficient trade facilitation impacts the farmer and contributes to informality

• Informal mills do not have access to credit or working capital• cannot buy paddy for milling – therefore raw paddy is sold to Thailand• Lost contribution to GDP - $69.7 million, loss of potential government

revenue - $4.8 million

0

50

100

150

200

250

300

350

400

450

500

Official exports of rice Unofficial exports ofpaddy

'000 tons


The ICA clearly revealed the importance of trade facilitation

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00

% of Firms Identifying Problem as "Moderate", "Major" or "Very Severe"

Business Licensing, Operating Permits

Macroeconomic Instability

Tax rates

Tax administration

Customs and Trade Regulations

Legal system/conflict resolution

Regulatory Policy Uncertainty

Anti-competitive or informal practices

Crime, theft and disorder

Corruption

Cambodia: Top 10 General Constraints to Private Enterprise Operation and Growth


And that specific regulatory issues, such as inspection were part of the problem

Number of Inspections

0

5

10

15

20

25

30

35

Cambo

dia

Pakis

tan

China

Bangla

desh

Ind

ia

Polan

d

Garment

Food Processing


And that Trade Facilitation processes were closely associated with unofficial costs

Bribe Costs Associated with Regulations

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

Registr

ation

Basic L

icens

e

Land

Acquis

ition

Constru

ction

Expo

rtIm

port

Inspe

ctions

(all)

Tax In

sp'ns

Labo

r/SS I

nsp.

Municip

al Polic

y

Fire/S

afety

Sanita

tion/Ep

i

Enviro

nmen

talMea

n a

nd

Med

ian

Co

sts

for

Fir

ms

Rep

ort

ing

Pay

men

ts

MeanMedian


As well as delays

0

2

4

6

8

10

12

14

16

18

20

Day

s

Pakistan Cambodia Bangladesh India China Poland

Longest Time in Last Year to Clear Customs

Mean DaysMedian Days

Garment--Mean


We portrayed the issues as a downward spiral

NO RULE OF LAW

CULTURE OFADMINISTRATIVE

CONTROL

PRIVATE SECTOR RESPONDSBY STAYING INFORMAL OR

PAYING BRIBES

PRIVATE SECTORSMALL, LOW PRODUCTIVITY

LOW TAX REVENUESWEAK PUBLIC INSTITUTIONS

LIMITEDACCESS TO CREDIT

& MARKETS


Government Reactions

• June 2003: Value Chain Presentation– “The value chain analysis is an alarm bell … we need an emergency

response. We need to take action on this analysis. The only way for us to be competitive beyond our borders is to be competitive within our borders. ”

H.E. Cham Prasidh, Minister of Commerce

• Feb 2003: ICA summary / slides sent to Prime Minister

• March 2004: PM signs Decision No 12: Establishment of Inter-ministerial Special Task Force for Investment Climate & Trade Facilitation with mandate to:

– Reduce cost– Eliminate duplicating procedures– Reduce time delays– Increase national budget

• March 25, 2004: First meeting of Task Force


Present State Future State

Documentation/PaymentCDC (exempt status)

CustomsCamControl

Agricultural (Phyto-Sanitary)Industry (garments)

Other

InspectionsCustoms

CamControlAgricultural

IndustryOther

Inbound Clearance CommitteePort of Sihanoukville

CustomsCamControlAgriculture

IndustryImmigration

Documentation/PaymentCDC (exempt status)

Customs

InspectionsCustoms

Special Unit (selective)

Inbound Clearance CommitteePort of Sihanoukville

CustomsImmigration

Special Unit (selective)

Cambodian Reform StrategyKey Initiatives


Cambodian Reform Strategy:Reduce Product Inspection Burden

Consolidate and combine multiple inspection mandates

• Implement inspection referral system – Customs leads, and refers to specialists within other agencies (CamControl, Agriculture, Health, Labor, etc.)

• Reposition CamControl to focus on knowledge and understanding of quality and safety, less on inspection. Requires further study.

• Introduce Risk Management techniques; restructure scanning incentives

• Continue to outsource PSI with eventual transition to Customs, supported by appropriate capacity building


Cambodian Reform Strategy:Single Window

Support Single Window Implementation

Single Window Managed by Customs

Flat Fee &SLA

ReengineerProcesses

AutomationPerformance

Incentives

Other AgencyInvolvement

All document & payment processing

Formalize %Unofficial Fees

Allocate RevAcross Depts.


Other measures

Performance Measurement

Port Streamlining

• Implement price reductions across main port provided services– Institute flat fee for service with corresponding SLAs

• Increase coordination between customs clearance and cargo arrival

• Increase efforts to improve alternative throughput options (Port of Phnom Penh, road thru HCMC) – increase competition

Customs Broker/Shipping Agent Industries

• Establish capacity building program for in-country providers– Licensing, Certification,Training

• Eliminate KAMSAB “Agent of Record” monopoly status


ImmediatelyActionable

Short- to Medium-Term

Longer-Term

Source: Team analysis

Strengthen Rule of Law

Institutional Learning –Business Associations

Accelerate Leasing

Leveraging Private value

chains

Reposition CamControl

Remove impediments to diversification

Governance of PPITrade Facilitation

RemovingImpediments

BuildingInstitutions

Voice &Accountability Capacity

ICA & Value Chain analysis helped form part of a platform for a sector-wide approach


Risks

• Use multiple datapoints before reaching conclusions– Value chain analysis can be influenced by participants

• Generalize carefully– Not all value chains will look the same in each country

• Be aware of tendency for state to want to intervene in private value chains


Conclusions:Combining Value Chain and ICA Raises Impact

• Value chain worked well as a analytical tool– Helped to identify non-state barriers in specific chains– Helped provide a holistic view of processes and institutions – the way the private

sector sees it

• Value chain as governance model– New Institutional Economics - Coase, Williamson, North– Many developing countries lack “rule of law” to enable impersonal exchange– Value chains deliver their own governance: quality, cost and delivery

requirements and incentives– A form of social capital

• ICA commanded a broader audience, eventually including the PM, a necessary prerequisite for cross-agency reform

• Combined ICA / Value Chain helped make the link between broad constraints such as corruption and specific processes

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