My team has just completed a study on tax exemption for agricultural machinery spare parts; for one development organization. It was an exciting project, where we had a great opportunity to work collaboratively with a number of agricultural machinery importing and distributing companies and carried out numerous consultations with the Department of Agricultural Engineering (DAeng) of the Ministry of Agriculture, Forestry and Fisheries (MAFF) and farmers.
The agricultural machineries and spare parts market involves a number of key stakeholders, as illustrated in the picture. The DAeng is the regulator of agricultural mechanization in Cambodia. The mandate is to prepare and develop legal, policy, and regulatory documents and guidelines for the promotion of agricultural mechanization in the country. Despite its role as regulator, according to our interviews with deputy director and his staffs, there is no strong regulation in place, as yet, to regulate or alter the free market structure and mechanism of agricultural machineries. The private businesses of any forms operating in this market, including importers and distributors and their branches, dealers and retailers, local manufacturers, local assembly plant, repair workshops, and custom hiring service providers are not required to register with, or receive any certificate, license, or permit from MAFF to import, distribute, sell and supply these machineries, spare parts and associated services in Cambodia.
The supply side starts with the importation and distribution of an appropriate technology by a number of importers and distributors. Cambodia does not have a large domestic manufacturing base for agricultural machineries and associated spare parts. The majority of these products are imported from a variety of countries, including Thailand, China, Japan, India, Belarus, and the U.S. KUBOTA is a dominant brand in the market; other brands include John Deere, YANMAR, Belarus, TALOS, Mahindra, Mitsubishi, Ford, etc. Established in 2013, Belarus-Mekong LLC became the first assembly plant of the four-wheel tractor in Cambodia.
Some businesses import fabricated spare parts from Vietnam and China. Some local blacksmiths also make the fabricated. These fabricated spare parts (for tractor and power tiller) are estimated to account for up to 70% in the spare parts market, depending on brands. These spare parts cost about ¼ or 1/5 of the genuine products.
Local manufacturing is of microscale and basic in technology. Most of them are still family-owned businesses with a few workers and operate seasonally for the local market at commune or district level. They usually produce and supply less sophisticated machineries and equipment including thresher, water pump, locally made truck for transportation, trailer, implements, and some spare parts. These local manufacturers are also sourcing necessary spare parts from importer/distributors. One can anticipate the spillover effect that could improve the quality of the locally made products if high-quality spare parts are made affordable and easily accessible to these local manufacturers. The DAeng also has its own workshop as part of their R&D, producing a small number of machineries and equipment based on its own design. It often refers clients to local manufacturers when the order is high and collects design revenue from the manufacturers.
The machineries and associated spare parts are then delivered to the buyers associated with the farming operation, including farmers, farmer association, custom hiring service provider, and machinery maintenance and repair artisans; through a variety of channels including provincial branches of importers and distributors, dealers, and retailers. High capital investment induces some farmers to go for custom hiring service providers instead of owning the machine. Custom hiring service provider often sees this as a good business opportunity. Some farmer associations possess the machines and also rent them out to member or non-member farmers for a fee.
The market has bumped up over the last 10 years or so. Demographic pressure, economic growth, and government policy to modernize and commercialize agricultural sector has contributed to an increasing number of agricultural machineries and equipment utilization in farming.
The Agricultural Sector Strategic Development Plan (ASDP) 2014-2018 aimed to increase the use of machinery in land preparation by 85% and in rice harvest by 30% in 2018. The Department of Agricultural Engineering (DAeng) data made available recently shows mechanical operation accounted for 88% of land preparation and 70% of harvesting in 2015, implying that the 2018 targets set in the ASDP 2014-2018 were already achieved in 2015. The new Strategic Development Plan of Agricultural Engineering for Cambodia 2016-2020 aims to materialize in 2020 the 68% of mechanization level in the overall farming operation, especially through the promotion of the use of tractors and power tillers by equipping them with implements suitable for planting, fertilizer application, and other post-harvest operations.
There is a widely agreed consensus that machinery in agriculture plays an important role to replace the labor shortage in the sector, especially when the economy continues to grow; and a strong advocacy for its role in enhancing overall farming efficiency through productivity improvement.
However, the adoption of agricultural machinery in farming is still constrained by high cost, including high initial capital investment on the machinery purchase as well as high maintenance and repair cost resulting from high price and limited availability of spare parts. While agricultural machineries have received tax preferential including duty tax exemption, making a boost to the industry which is already highly dependent on import, the spare parts imports still carry a tariff rate from 0% to 35%, depending on the item’s specification and the legibility for Form D; in addition to specific tax of 0%-25% and value-added tax of 10%. Our qualitative and quantitative assessment has found potential benefits for farmers if the tax on spare parts gets exempted, too.