A Framework Model on the Necessity for Developing Good Logistics for Cambodian Industrialization and Economic Development

Nhean Tola, Chea Sophak, Tea Saorithy

January 25, 2018

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1. Background

Logistics development in Cambodia has become more important for industrial development policy implementation as the Cambodian economy continues to develop. Decades of conflict destroyed much of Cambodia's road and rail network, and since the end of the conflict the country has struggled to attract significant investment for its internal infrastructure, especially for official development assistance from development partners. Existing Cambodian international ports along the Mekong River in Phnom Penh and on the shoreline in Preah Sihanouk province are operated at almost full capacity and require expansion. River transport is still underdeveloped even though there is potential for internal connections in addition to land transport. Freight rail transport was recently inaugurated from Phnom Penh to the coastal port in Preah Sihanouk province, restoring half of old operation lines built in the 1960s. The government has prioritized the expansion of key national roads and the development of expressways, funded through foreign assistance, to serve the future logistical and economic needs of Cambodia. Against these backdrops, BMI, an international research institution focusing on emerging markets, found in its business survey that investors in Cambodia faced major operational challenges due to the country's constraints in the transport and utilities infrastructure. It added that as a result, businesses are faced with a crumbling road and rail network, causing substantial risks for delays to supply chains. It also suggested that compounding these risks are other issues such as poor water quality, the high cost of internet, the high cost of fuel and electricity due to a reliance on imports, along with frequent blackouts due to the ageing transmission and distribution grid. Arvis et al., (2014) also found that inefficient logistics raises the costs of trading and reduces the potential for global integration.

Moreover, in responding to the relevant initiatives of some key interested development partners (e.g. World Bank, JICA, ADB, and South Korea) and to the needs of the private sector in Cambodia, the Royal Government of Cambodia recently established the General Department of Logistics under the Ministry of Public Works and Transport to help provide the necessary human resource fill-up. However, based on the reform experiences so far in Cambodia, the conceptual deficit is much more pronounced and difficult to overcome than the human resource shortage. In other words, when the new institution starts to work on the development of the relevant logistical policy, practice, and review, the conceptual deficit needs to be addressed by formulating its own reform concept from a holistic view and better understanding of the development of Cambodia. Moreover, it is also necessary for the logistic reform process to keep the engineering concepts in an alignment with the economic development concept in Cambodia.

This paper aims to provide an explanatory conceptual framework in which both the salient facts and the list of the policy responses can be understood. More precisely, we want to answer the question of the necessity of the logistics development of Cambodia. All of us generally understand and accept that transportation cost is a cost factor in production and must be reduced. Moreover, the basic mathematical formulas, such as revenue and cost, presented here are not new to economics or business. However, something less obviously clear are the characteristics of transportation costs in production when these formulas are considered and solved, as well as when the subsequent findings are articulated in terms of the explanatory framework for the existing economic problems. The report will introduce the model based on the microeconomic point of view (the firms’ view) and its discussion, followed by conclusions on the conceptual implications for Cambodia. We hope the concept will be useful for all practitioners from all circles including the Royal Government of Cambodia, the development partners, and the private sector, who now jointly develop Cambodian logistics.