Cambodia has emerged as an attractive new destination for foreign investors seeking to diversify their production bases and access a fast-growing local market. Although infrastructure is still underdeveloped and the legal system is inefficient, Thai companies will find that Cambodia offers some unique advantages.
Cambodia is one of Asia’s most liberalised economies, with very few limitations on foreign businesses. Infrastructure is reasonably adequate, and conditions for exporters are favourable. Its land and natural resources are abundant, and wages are low (although rising). Exporters to Europe and the United States benefit from preferential tariff treatment under the Generalised System of Preferences (GSP). And foreign currency risk is moderate because the economy is largely “dollarised”.
The economy has grown fast during recent years, at more than 8% per year from 2004 to 2012, according to the World Bank. The ongoing construction boom in Phnom Penh will sustain growth and boost consumption for years to come. The economy is gradually transitioning from one purely based on agriculture and low-cost, light manufacturing toward one that gains strength and stability from higher domestic consumption.
Cambodia’s laws and government policies welcome foreign investors, giving them the same rights and treatments as local corporations. In order to better support foreign investment, the Ministry of Commerce (MoC) and the Council for the Development of Cambodia (CDC) have consolidated much of their governmental functions to provide one-stop service.
The MoC deals mostly with company registrations. But foreign investments that involve manufacturing or exports also require approval by the CDC, which is responsible for reviewing a project to consider whether it meets the criteria for a “Qualified Investment Project” (QIP).
If approved, a QIP is eligible for various investment incentives such as a low 20% corporate tax rate, three-year tax holiday, 40% depreciation rate for tangible assets, exemption of customs duties and repatriation of profits.
Unlike most of its neighbours, Cambodia allows 100% foreign ownership, except for land. As a member of Asean, Cambodia is a party to the Asean Comprehensive Investment Agreement (ACIA), which protects foreign investment rights and properties.
Over the past two decades, Cambodia has primarily attracted investment in labour-intensive manufacturing, such as garments and production of elementary parts for shipment to final-stage assembly plants in Thailand and Vietnam. Cambodia’s deep-sea port in Sihanoukville provides access to regional shipping routes.
Agriculture and tourism have also long been among Cambodia’s growth engines. The recent boom in property development and construction will sustain a fast pace of expansion for years to come and generate business opportunities in building materials and household goods. Consumption and the retail sector are gaining a bigger and bigger share of the nation’s economic pie.
As for the legal environment, Cambodia’s judicial structure has three main levels, starting at the municipal level, above which are appeals courts and the Supreme Court. But disputes no longer need to only be settled by court, because individuals and companies have the right to arbitration. This is a relatively new legal concept in Cambodia, however, and is currently facilitated by judges or, in special cases, by government ministries.
Note that arbitration is only binding when both disputing parties have previously signed a contract agreeing to accept a decision by arbitration. Investors should make sure that any contract includes a clause allowing for “international arbitration”, which Cambodian courts will recognise.
Nevertheless, Cambodia’s judicial process continues to be plagued by inefficiency and lack of expertise in commercial matters. Most cases end up being litigated in Phnom Penh’s municipal court, which is understaffed. Companies that operate in Cambodia need to be prepared to cope with the challenges of handling legal matters under these circumstances.
One important point is to spell out terms clearly in contracts, because under the existing legal framework the courts are obliged to recognise contractual agreements.
Cambodia offers opportunities in sectors such as manufacturing, agribusiness, tourism, logistics, retailing and property. But a foreign investor needs to consider whether the existing infrastructure system is adequate for a specific project. The only railroad line in operation runs between Phnom Penh and Sihanoukville. Air transport too is limited. Public utility costs rank among the highest in Asean, and it is open to question whether Cambodia has sufficient energy supplies and energy security to sustain its growth in the long term.
There are 23 Special Economic Zones in nine key provinces, with enhanced infrastructure and other advantages. But only five of the SEZs are operating, in the provinces of Kandal, Svay Rieng and Sihanoukville. Various international organisations have provided Cambodia with development aid, but a lack of policy coordination at the national level has resulted in the delay or abandonment of public projects in some sectors including mass transit and energy.
Development of infrastructure is a business opportunity in the long term, but first the government needs to establish long-term policy objectives and demonstrate strong commitment. Meanwhile, the readiness of public infrastructure remains one of the top constraints to doing business in Cambodia, according to 2013 World Economic Forum (WEF) country report, which also cited government corruption, bureaucratic inefficiency and a lack of skilled labour.
But despite these concerns, Cambodia is now, and will continue to be, one of the best places for Thai businesses to invest. As Cambodia moves ahead on its path of economic development and modernisation, Thai companies should consider the opportunities.
Manop Sangiambut is Executive Vice-president for International Banking Business with Siam Commercial Bank. EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th