Investing in ASEAN: Cambodia
“After emerging from its dark past,” says a report from Leopard Capital – which manages investment funds in ‘overlooked frontiers’ – “Cambodia has begun to solidify the remarkable progress it has achieved since adopting free-market economic policies in the 1990s”.
The report goes on to list the country’s 11 “durable fundamentals”:
- Political stability
- Advantageous location
- Favourable investment climate
- Largely “dollarised” economy
- Increasing trade integration
- Advantageous labour conditions
- Improving transport connectivity
- Lower costs in telecoms, internet & power
- Untapped natural resources & land
- Underpenetrated, growing domestic consumer market
- Unleveraged financial position
“The Kingdom of Cambodia, as it is officially named, was part of French Indochina until it gained its independence in 1953. The 1970s to early 1990s was a traumatic period in Cambodia’s history, beginning with the Khmer Rouge regime, followed by Vietnamese occupation and almost 13 years of civil war,” says PwC Thailand in its report South East Asia – Investment Opportunities, Tax & Other Incentives, adding that “1993 marked a turning point, with the first free elections, and since then Cambodia has moved to what is today a nominally free and functioning country”.
Doing Business in Cambodia …..
“The long-term development of the Cambodian economy continues to present a daunting challenge after decades of war,” says PwC. “The country suffers from an almost total lack of basic infrastructure in the countryside. The government has committed to increasing infrastructure development, including road expansion, road maintenance and bridge construction, in order to facilitate transportation in the country”.
The report adds that “the major economic challenge for Cambodia over the next decade will be fashioning an economic environment in which the private sector can create enough jobs to handle Cambodia’s demographic imbalance. More that 50% of the population is under the age of 25. The population lacks education and productive skills, especially in the poverty-ridden countryside”.
Understanding that the private sector will be a significant engine of economic growth, the government is making an effort to provide a favourable environment for it. Most notably, it is trying to reduce the cost of doing business by combating corruption and mobilizing resources resources in order to enhance the development of the socio-economic and physical infrastructure.
“Although more progress still needs to be achieved in legal and judicial reform and rule of law and transparency,” says a report from Crowe Horwath (KH) Limited, “foreign investors are increasingly convinced of the Royal Government’s commitment to the process of reform itself. The country’s commitment to a market-based economy is without question and is enshrined in the Constitution”.
Cambodia’s economy is driven largely by the garment and footwear, agriculture and tourism industries. The global financial crisis weakened demand for many Cambodian exports, but in 2010, driven by exports – particularly of garments to the United States and the European Union – the Cambodian economy achieved a strong recovery. Says KPMG, “US garment and footwear imports from Cambodia in 2011 climbed by 17.8% to $2.7 billion”.
At the top of Crowe Horwath’s list of key reasons to invest in Cambodia is Highly Competitive Investment Incentives. “The new investment law in Cambodia now offers one of the best business incentive packages in Southeast Asia,” their report says, “making it a very attractive country to invest in. Some highlights of the new law include 9% corporate/income tax, tax holidays of up to 8 years, 5 year loss carried forward, full import duty exemption and a host of other attractive investment incentives”.
Pwc adds that the investment law “governs all investment projects made by investors who are Cambodian citizens and/or foreigners within the Kingdom of Cambodia. Cambodia provides the same treatment to foreign and domestic investors alike, with the exception of land ownership. Moreover, the government provides investors with a guarantee neither to nationalize foreign-owned assets nor to establish price controls on goods produced and services rendered by investors. The Cambodian government also grants the right to freely repatriate capital, interest and dividends”.
The government of Cambodia actively encourages both domestic and foreign investments, particularly those activities that involve production and services for export, Qualified Investment Projects (QIPs), and industries that are established in a Special Economic Zone (SEZ).
The Cambodian Department of Customs and Excise explains that a SEZ is “a special area for the development of the economic sectors which brings together all industrial and other related activities and may include General Industrial Zones and/or Export Processing Zones. Each Special Economic Zone shall have a production area, which may have a Free Trade Area, Service Area, Residential Area and Tourist Area. For the purposes of enhancing the competitiveness and attracting investment in the Kingdom of Cambodia in the Special Economic Zone (SEZ), trade facilitation relating to customs procedure requires less control mechanisms than normal check points to facilitate transportation in and out of the area”.
“Companies currently located in the Phnom Penh SEZ are enjoying a wide range of support from government institutions based on-site,” says the government, adding that the “Phnom Penh SEZ offers reliable infrastructural facilities such as roads, generation and distribution of power, water supply, sanitation and sewage systems, telecommunication networks as well as a health clinic, dormitories, restaurants, banks, and office and residential units”.
Why Invest in Cambodia?
Crowe Horwath offers several more reasons to invest in Cambodia:
Fast-Track Investment Approval – “With the establishment of the Council for the Development of Cambodia (CDC), investors now deal with just one government body, a “One Stop Service” investment centre that provides the fastest investment application processing in the region – less than 45 days,” according to their report.
Special Promotion Zones – “Industrial Zones are being developed in the capital, Phnom Penh and the main deep-water port, Sihanoukville. Investment in these zones will qualify investors for additional incentives”.
Plentiful Supply of Labour & Natural Resources – “Cambodia has a population of 9 million people, of which 51% are in the ‘working age’ group. Labour costs are low compared with other Asian countries and its natural resources, especially oil and minerals, are being discovered”.
Southeast Asia’s Burgeoning Markets are on its Doorstep – “As part of the Greater Mekong Sub-regional Economic Group, Cambodia is ideally placed to take advantage of the area’s fast-developing consumer markets”.
Preferential Trading Status – “Cambodia qualifies for GATT, the Generalized System of Preferences (GSP) status which is granted by the European Union, Japan, Scandinavia, Canada and Australia.
Cambodia in ASEAN
In looking at economic opportunities in Cambodia, one always needs to view them in the context of Cambodia’s larger relationship with the region. In 1999, the country became a member of ASEAN with its population of some 550 million. In addition, as a Least Developed Country (LDC), Cambodia has preferential access to some of the world’s richest markets for a number of products.
Of course Cambodia is not without problems similar to those of many poor LDCs, from health care and limited infrastructure to low government salaries, but with respect to doing business, the country does offer a progressive welcome to investors and is at the top of the charts among world’s LDCs in market-friendliness.
In a story in The Cambodia Herald last month, as a delegation from the United States-ASEAN Business Council was visiting the country with representative from companies like General Electric, Apple, Oracle, Visa and Conoco-Phillips, the paper noted that, “thanks to its location in the heart of Southeast Asia and its young work force, Cambodia has the potential to be a destination of choice for international investment, but it needs to work hard to become more attractive to foreign investment. One way that Cambodia can do this is by investing in the education of young Cambodians. The more educated and flexible the workforce, the more likely it is that foreign businesses will look to bring high-quality jobs to Cambodia in fields like technology and finance”.
“Another way that Cambodia can become a destination of choice for foreign businesses,” they wrote, “is to continue reforms to address corruption, rule of law, and labor problems”.
Cambodia has come a long way in a very short time. It is important to remember that, not that long ago, Khmer Rouge remnants roamed the country and basic security was a real issue. Today, security is less of an issue and, while crime is rising as in any developing society, tourists freely travel to the major tourism destinations with little worry.
Meanwhile, says Nomad Capitalist Andrew Henderson, “Development is everywhere. Unless you’re hoping to get a 99-year lease on one of the islands off the coast of Sihanoukville (the government is ‘divesting’ all of them to developers) or a mining contract, the business approval process is pretty straightforward. Combine that with one of the lowest cost workforces in Asia and you’ve got an attractive climate that a lot of investors have yet to take advantage of”.