Assignment

Investment in Cambodia

T

he government has solved many problems related to the business and investment climate in Cambodia such as the reimbursement of value-added tax for exported goods, extension of tax holidays for garment factories, requirements for bank licensing, and the extension of accommodation tax exemption for the tourism industry. However, the main challenge the country will face over the next 10 years is the reduction of corruption and the strengthening of good governance at central and provincial levels.

A country on the verge of a breakthrough

This is a country that has risen from the abyss and transformed itself into a peaceful nation with improved social order, stability, cooperation and development. Building on this, the Royal Government has an ambitious vision to transform Cambodia into a fast-growing regional economy based on agriculture and agro-industries, manufacturing, tourism-related industries, and human resource development. Over the next 10-20 years, we expect to realise our vision by mobilising resources from all sources, both domestically and abroad, to invest in human resource development, institutions and infrastructure – including roads, bridges, seaports, airports, railroads, power, clean water supply, irrigation, and technology and increase access to international markets by integrating the Cambodian economy into the regional and world economy; rehabilitate and develop roads, airports, ports and other infrastructure including water supply, electricity distribution and telecommunication networks; and strengthen the legal framework, institutional capacity, investment and business facilitation.

The emergence of Cambodia in recent years as a high growth economy seemed to take all by surprise. The double digit growth enjoyed by Cambodia in much of this decade has warranted a great deal of commentary, and even the delayed impact of the international financial crisis has not dampened the interest of many companies in this exotic investment destination. In the past two years, many blue chip enterprises have discovered this small country in South East Asia, with such luminaries as Dupont, Cargill, General Electric, Mitsubishi, Microsoft, Intel, Crown Cork, Abbott and others setting up offices in Cambodia. And despite the international economic downturn, international corporations continue to come to Cambodia to take a look.

What explains this seemingly sudden interest in the kingdom? After the foundation of the new Cambodia a decade and one-half ago, why is there international attention now? The sudden burst of interest is due to the establishment of a track record which did not exist after the 1993 UNTAC election. In fact, there are multiple track records which have attracted the attention of worldwide business. Consider the following track records, all of which contribute to the interest expressed by any number of multinational corporations:

Diplomatic track record: Cambodia has methodically reintegrated into the region and the world. It has joined a number of international organisations and adopted a number of international conventions to join the community of nations. Among the more important diplomatic events that have occurred include:

- Asean (30 April 1999): Cambodia joined the preeminent regional organisation – the Association of South East Asian Nations – as the organisation moved beyond its Cold War origins and became an entity that was truly representative of the region.

- WTO (13 October 2004): Although Cambodia was the 148th member of the World Trade Organisation, it was only the 2nd LDC (less developed country) to be granted membership. And it was done so without having all of the WTO-compliant laws in place, but the commitment was made by Cambodia to enact the necessary laws and regulations to make it compliant.
- WIPO (July 1995): Although Cambodia joined the World Intellectual Property Organisation shortly after the creation of the new government, the necessary laws were not enacted until 2002-2003.

These memberships are indicative of the modern drive by the Royal Government of Cambodia to take the diplomatic actions necessary for it to become reintegrated into the world.

Political Track Record: Since the internationally orchestrated national election in 1993, Cambodia has had a series of elections, each judged by independent observers as being more fair and well-run than the previous election. There have been four such national elections, with the most recent being in July 2008. In addition, other local elections have been held. Furthermore, most of the senior officials in the Royal Government have held the same or similar positions in mandate after mandate, again lending to the political stability of the government.

Legal and Regulatory Track Record: Even before accession to WTO, the Royal Government set about to enact the necessary laws and regulations that are the building blocks of a modern economy. Previously, Cambodia either did not have the necessary laws or they were out of date. Now the legal structure that supports commercial activities is being modernised. Even before accession to WTO, there were important commercial laws being enacted. These included:

- Law on Investment (1994)

- Labour Law (1997)

- Banking Law (1999)

- Property Law (2001)

However, the drive to accede to WTO and to become WTO-compliant provided the Royal Government with a checklist of important commercial laws and regulations to enact. And these have been enacted on a regular basis:

- Trademarks, copyrights, and patent laws (2001-2003)

- Law on Commercial Enterprises (2005)

- Law on Negotiable Instruments (2005)

- Law on Commercial Arbitration (2006)

- Law on Government Bonds (2006)

- Law on Secured Transactions (2007)

- Law on Insolvency (2007)

These are only some of the laws that have been enacted in recent years that will contribute to economic growth. What any potential investor can see in this list and other regulations enacted in recent years is the commitment of the government to getting all of the laws in place that are necessary to build a modern economy. While Cambodia does not have all of the laws and regulations enacted, it clearly is working toward that end, and this gives investors confidence in the policies of the Cambodian government.

Thus, track records exist: economic growth is measurable and impressive over the years. Cambodia is joining the legitimate regional and international organisations that will integrate it into the world economy. Political stability can be seen through the electoral process and tenure in the senior positions of the government. And there is a legislative track record over the years.

But these are not the only reasons that explain why Cambodia remains an attractive investment destination. There are other, less tangible reasons why investors continue to go to Cambodia to investigate the business environment.

First, after the tragic recent history of Cambodia, opportunity abounds. There is much that can be done in Cambodia that is either not being done or is not being done well.

Second, since the Prime Minister, Samdech Hun Sen, initiated the Government-Private Sector Forum in 1999 (and a system of sectoral working groups in 2000), there are mechanisms for dialogue and problem-solving between the Royal Government and the business community. This system of consultation is indicative of the open and pro-business approach of the Royal Government. The senior officials want the economy to grow, and realise that the private sector must be considered a partner in this endeavour.

For all of these reasons – both tangible and intangible – Cambodia remains an attractive newcomer to an already robust Asian economic system. It will continue to command our attention for some time to come.

Invest in Cambodia

Agriculture

Banking

Mineral

Oil & Gas

Power

Property

Telecoms

Tourism

Agriculture
An estimated 85 per cent of 14 million Cambodians live in rural areas and depend upon agricultural cultivation as their primary means of subsistence or livelihood. Intervention to improve agricultural performance will greatly benefit a large number of people who are among those most affected by poverty.
The Cambodian agriculture & agro-industry sector has developed significantly in recent years and has great potential for investment, employment creation and as a source for economic growth. For instance, rice production has increased by more than 50 per cent since 2005. However, the sector is starting from a low base and suffers from fragmented and weak supply chains, low productivity and underdeveloped infrastructure. Support structures that will enable increased yield, quality and access to markets are also deficient.

The agriculture sector in Cambodia remains underdeveloped due to a lack of investment and reliance on old cultivation techniques and low quality seeds.

In response to the aforementioned constraints, as a Co-Chair of the Agriculture & Agro-industry Working Group, I would like to report the concerns of the private sector regarding the following issues:
Priority Agricultural Products

Most farmers are not informed about the demand for agricultural products in the world or domestic markets. They usually plant the same crops year after year. Now that there is a food crisis, they can obtain better prices for their crops if they plant the right ones, with good quality seeds, in accordance with international standards.

Unfortunately, recently we have seen that prices of agricultural products have decreased unimaginably in the international market. For example, one ton of top-grade rubber used to fetch over $3,000, but now the price is only $1,500; the palm oil price has decreased from $1,200 per ton to only $400 now; the price for tapioca flour has dropped from $530 per ton to only $220. The private sector understands that the Ministry of Commerce has selected 19 priority products for export, but farmers are unaware of this strategy.

The private sector thinks that the Minister of Agriculture, Forestry and Fisheries (MAFF) should encourage the use of land for the development of agriculture and disseminate information on opportunities for farmers in partnership with the Ministry of Commerce. In addition, the private sector suggests that MAFF provide guidance to farmers on which crops to plant, market demand and commodity prices. Then MAFF should source the right seeds and grains to provide to farmers and train them on techniques to obtain better yields.

Contract Farming

Small producers and farmers clearly face the danger of market failure and production problems. This is because these farmers cannot supply the market with sufficient products at an appropriate price. There is no guaranteed price for their products, in particular after harvest, which is a major challenge that small farmers and producers must overcome in the long run. In order to deal with this problem, contract farming can serve as a means to develop the market and to bring about technology transfer, which would benefit both producers and supporting companies.

The private sector thinks that MAFF should encourage contract farming between buying companies and farmers in order to ensure appropriate prices for products and technical assistance. In addition, the private sector would like to request that the Royal Government establish a framework and strengthen enforcement of contracts between farmers and large buying companies in order to ensure nationwide effectiveness.

The aforementioned issues were discussed by the Agriculture and Agro-Industry Working Group on 17 November 2007 under the chairmanship of His Excellency Chan Sarun, Minister of Agriculture and myself. Through discussions, the private sector clearly understands that the private sector’s idea has already been implemented by the Royal Government and the Ministry of Agriculture. I, as a Co-Chair of the Agriculture and Agri-Industry Working Group, together with USAID and the International Finance Corporation, in collaboration with His Excellency Chan Sarun, Minister of Agriculture, Forestry and Fisheries, have worked together to successfully solve the problem of importing pigs, which affected pig raising by domestic farmers.

These issues are important for private sector development in the Kingdom of Cambodia, for now and in the future.

Banking in Cambodia

Timeline
1975: The Khmer Rouge took control of Cambodia. Money is abolished and all banks are closed.

1979: After the Khmer Rouge is forced out, the new government establishes the National Bank of Cambodia (NBC) as the central bank and the Foreign Trade Bank as a wholly-owned subsidiary of the NBC to provide commercial banking services. Cambodia’s new currency, the Riel, is introduced in 1980.

1992–1998: The first privately owned commercial banks and foreign bank branches/subsidiaries start to reappear initially with the requirement that the minimum capital should be $5 million and the NBC should have a 15 per cent stake. By 1998 there were 32 licenced commercial banks most of which were small local institutions with some foreign private investors.

1998–2001: Major reforms to the banking system introduced under new Governor H.E. Chea Chanto. New banking law classifies financial institutions into three categories: i) Full Commercial Banks with a minimum paid-up capital of $13 million, ii) Specialised Banks – minimum paid-up capital of $2.5 million, and licenced/registered Microfinance Institutions (MFIs). Banks are allowed two years to conform. The number of Commercial Banks halves to 16. The requirement for 15 per cent participation by the NBC is abolished.

2002–Present: Reform process continues: the banking system initially suffers from over-liquidity and lack of quality borrowers. New banks arrive with foreign investors particularly from Australia, Korea and Japan.

The Foreign Trade Bank is privatised. The number of licenced Commercial Banks grows to 24. In the face of inflationary pressures and a sharp increase in credit in 2008 the NBC introduces measures to reduce liquidity and raises the minimum capital requirement for Commercial Banks to $37.5 million (unless they have an ‘A’ rated, or above, ‘influential’ (see note 1) foreign bank as a shareholder). All banks must conform by no later than the end of 2010.

It can thus be argued that the modern banking system in Cambodia is only 30 years old since the Khmer Rouge set the clock to zero and abolished money in the mid-70s. When viewed from this perspective it is a remarkable achievement to have come so far so quickly and in spite of misgivings expressed in two influential reports issued recently by the World Bank and the IMF, there are positive elements as well. Firstly, the NBC earns high marks for its prudent policies and regulations. Secondly, more and more banks are beginning to appreciate the benefits of transparency even to the extent of obtaining international credit ratings.

Thirdly, the government’s steadfast adherence to the market, freedom from exchange controls and unrestricted capital movements make it one of the most ‘business friendly’ environments in the region.

This having been said the score is ‘Good – but could do better’. A good regulatory environment is only good if it is consistently applied and effectively enforced. The problem for Cambodia is a chronic lack of skilled resources in the supervisory area which results in some hesitancy in prosecution, and reality falling short of intentions. Some progress is being made but there is still a way to go.

Transparency has improved considerably over the last decade but is still very mixed. Generally those banks which adhere to international standards in disclosure have done better in capturing market share than those who cling to traditional secrecy: an increasingly educated public are now demanding more information and placing their trust with those that provide it. One particular area of concern in an economic down-turn is the health of the loan portfolio and reassurance that provisioning is adequate yet there are still a few banks who insist that they have zero NPLs! (see note 2)
For a potential investor coming to Cambodia for the first time the banking system can be somewhat bewildering as the number of new financial institutions has proliferated. Unfortunately very few are internationally known or have strong banking backgrounds. The NBC’s reaction to this has been to raise the licencing requirements both in terms of capital adequacy and professional qualifications and this may cause some of the smaller ones to close (as happened in 2000 – 2001), amalgamate (although this seldom occurs in Cambodia perhaps due to the family-owned structure of many of them) or sell. Of the 24 commercial banks now operating the ‘top-4’ hold 70 per cent of total deposits and 73 per cent of loans in the banking system. Only one bank, Acleda, can claim to a true nationwide branch network in every province and town – most banks concentrate their offices in the five major cities.

It is now easy to transfer money throughout the country and ATMs and PoS terminals are springing up everywhere. Products and services are ‘plain vanilla’ compared to those offered in more advanced centres and there is still no money market although some of the bigger banks have set up informal arrangements with each other. The US$ is the most widely used currency particularly in the bigger cities but it is possible to have accounts in Euro, Aus$, Thai Baht, and almost any other major currency you wish as well as the Cambodian Riel (see note 3). There are no restrictions on foreign exchange. In this still very cash oriented society cash management and payrolls are important services, particularly for manufacturers, wholesalers and distributors and a few banks have made this a speciality.

Mineral resources

While Cambodia’s mineral resources remain largely unexplored, several important minerals have been discovered, which include bauxite, copper, zinc, gold, iron ore, nickel, granite, gemstones and tungsten. Minerals currently extracted include gemstones and gold - mostly mined by small-scale operators - marble, granite, sand, limestone and salt.

International mining firms see Cambodia as a new frontier that has yet to be explored. Unlike many other parts of the world, there has been little geological exploration of Cambodia since France ended its almost century-long colonisation in 1953. For this reason, and the fact that Cambodia is the only country in South East Asia that allows 100 per cent foreign ownership, overseas mining companies have been keen to invest.

The Ministry of Industry, Mines and Energy implements the country’s mineral law and policy. Under the wing of the ministry, the Department of Geology and Mines, and Department of Energy, coordinate the development of the mineral sector. The Cambodian Development Council (CDC) is the government agency that grants exploration licences to investors. If exploration is successful, investors are required to present a master project plan to the CDC before they can be granted a licence.

Mineral production in Cambodia has increased over recent years, so too has the number of mineral exploration licences granted to both foreign and local companies. However, as commodity prices plummet amidst the global financial crisis the sector could suffer as small and medium-sized investors struggle for cash.

BHP Billiton – the world’s largest mining company – is exploring for bauxite in Mondulkiri province on a 97,373-hectare concession. In 2006, BHP Billiton and Mitsubishi Corporation signed a mineral exploration agreement with the Royal Government. The agreement allows for bauxite exploration and evaluation of the potential for an alumina refinery. BHP says its exploration projects in Cambodia will continue in 2009 and that they are speculative with uncertain outcomes. The government meanwhile is optimistic these projects could lead to an eventual investment of billions of US dollars.

Australian company Southern Gold signed a Memorandum of Understanding (MOU) in 2006 for a prospective land position in the eastern provinces of Cambodia. During 2007/2008 Southern Gold increased its security of tenure with four MOU tenements being converted to Exploration Licences, bringing the total of granted licences to seven, covering an area of 1,600 sq km. The company has begun a three-year gold and base metals drilling programme in cooperation with the state-owned Japan Oil, Gas and Metals National Corp (JOGMEC), a Japanese body tasked with securing stable supplies of natural resources. The $4.5 million project is at two locations, Kratie and Snuol – north-east of Phnom Penh.

OZ Minerals of Australia (formerly Oxiana), in a joint-venture with a local company, is undertaking gold exploration at the Okvau-Oput area in north-east Cambodia and claims to have identified a promising trend of gold mineralisation. The company is also exploring other gold areas, including Phnom Chi, 100km west of Okvau, along with an area prospective for copper.

Kenertec Resources – a Korean company – obtained the rights in 2007 to explore and develop eight mining zones covering an area of 1,520 sq km in northern Cambodia, consisting of two copper/zinc mines, three iron/manganese mines, and three jewel mines. The company says it has detected a significant amount of minerals through on-site surveys including high quality copper, zinc, iron and manganese. Kenertec estimates the zones hold about 100 million tons of copper and zinc and about 1 billion tons of iron and manganese. They plan to continue exploration for another 2 to 6 years.

Four Chinese steelmakers have established a joint venture to explore and develop iron ore mines in Cambodia. Wuhan Steel, China’s fifth biggest steel mill, is leading the project with a 50 per cent stake, with Shanghai-based Baosteel Group taking 20 per cent, Anshan Iron & Steel Group and Beijing’s Shougang Iron & Steel Group each hold 15 per cent in the venture. The project is to explore and develop mines in Cambodia’s Preah Vihear province following exploration of the area by Cambodian companies and China’s National Machinery and Equipment Group that found the region may have 2.5 billion tons of iron ore reserves.

Local companies LYP Group, Udomseima, Dany Trading and Regapo have been granted concessions to mine sand in Koh Kong province, southern Cambodia. The sand is being exported to Singapore. Dredging is carried out by the Hong Kong-based Winton Enterprises in the Koh Kong estuaries where the sand is loaded onto barges before being transferred to larger ships for transport to Singapore. The government has imposed a strict limit on the size of the extraction zone and the amount of sand that can be extracted. It is estimated that between 40,000 and 60,000 tons of sand per month is being removed.

Singapore imports around 3.8 million tons of sand each year for land reclamation and construction projects. Following an Indonesian government ban on sand exports in January 2007, as a result of serious environmental degradation, Singapore has sought new supply sources. While sand-mining operations in Koh Kong province’s extensive salt water estuaries remain small-scale they are expected to have little impact on the local environment.

Cambodia devotes a surprisingly large share of its territory to conservation. According to a 1992 review by the UN’s World Conservation Monitoring Centre, Cambodia’s set-aside level of 26.3 per cent was far higher than the land reserved for conservation in Thailand (16.3 per cent), the US (11 per cent), Indonesia (10 per cent) or Australia (5.3 per cent).

The country’s environmentally protected areas, such as Koh Kong’s Peam Krasop Wildlife Sanctuary (a 25,897-hectare protection zone established in 1993) cover more than a quarter of its landmass. These areas also contain minerals, creating the potential for environmental damage. But minerals that can help lift Cambodia out of poverty should not be beyond reach simply because they lie buried within a protected area. Cambodia’s 47,845 sq km of land devoted to protecting the environment is hardly sacred. In the rest of the world, many protected areas are routinely open to mining. For example, authorities permit mining in about 78 per cent of South Australia’s 332 protected areas, according to the state’s regional government.

In Cambodia, however, it all boils down to control. In considering exploitation, the Royal Government obtains binding guarantees that companies will respect the environment and not harm indigenous rights. Ensuring that companies respect these agreements is of paramount importance.

The Royal Government is committed to the protection and preservation of Cambodia’s environment and its natural resources, while meeting the needs of sustainable development. It is also committed to alleviating poverty, and ensuring that the benefits mineral resources eventually bring to the country are distributed throughout all levels of society.

Petroleum resources

The Royal Government of Cambodia has been actively seeking to promote and facilitate the development of the country's petroleum resources with the objective of enhancing economic growth and providing opportunities for employment and participation in petroleum operations for Cambodian nationals and companies. The development and production of petroleum resources could be expected to generate significant revenue for Cambodia and allow the country to continue to develop its infrastructure to form the basis of future economic growth.

In recent years, significant exploration activity has been undertaken in Cambodia’s petroleum sector, with the most substantial operations being undertaken by ChevronTexaco in Block A, offshore Cambodia. However, currently Cambodia has no oil and gas production or any oil and gas project that is at the development stage.

Current petroleum regulatory regime

The Cambodian National Petroleum Authority (the CNPA) was formed in 1998 as the key governmental agency to oversee upstream and downstream petroleum activities in Cambodia. The principal law that applies to the upstream oil and gas industry in Cambodia is the Petroleum Regulations 1991, as amended in 1998 and 1999.

The Petroleum Regulations prescribe a process for the award of concessions in the form of petroleum agreements which is entered into by the CNPA and a relevant petroleum company and its partners. A Petroleum Agreement must be signed in substantially the form of the model agreement scheduled to the Petroleum Regulations, subject to any additions or deletions as may be approved by the Government.

Under the Petroleum Regulations 1991, some key points of note in respect of the terms of such concessions are:

- exploration periods are granted for a period of 4 years, and may be extended twice for a period of two years each time. The CNPA may further extend the duration of the exploration period for such time as may be reasonably necessary to complete certain matters (e.g. drilling, logging, testing or plugging of any well, completion of appraisal and evaluation of any discoveries);

- the Contractor must relinquish prescribed percentages of the allocated Contract Area at the end of each phase of the exploration period - at least 30 per cent of the original Contract Area by the end of the initial exploration period, a further 25 per cent of the original Contract Area by the end of first extension of the exploration period and any remaining areas of the original Contract Area, in each case excluding areas falling under a production area;

- the production period expires 30 years after the effective date of the production sharing agreement, although the CNPA may extend the production period by up to 5 years if commercial production from the relevant field after the expiry of the 30 year period is possible;

- royalty payable to the Government will be at least 12.5 per cent of the value of petroleum sold;
the Contractor will be entitled to cost recovery in accordance with the terms of its Petroleum Agreement; and

- the balance of petroleum produced within a Contract Area (after retention of Royalty by the Government and recovery of Petroleum Costs by the Contractor) will be allocated to the Government and the Contractor in accordance with the provisions of the Petroleum Agreement.

The Petroleum Regulations also contain other provisions that would commonly be expected in an international-standard regulatory regime for upstream petroleum operations, including in relation to approval of work programmes and budgets, obligations in relation to the conduct of petroleum operations and reporting to the Government.

The proposed new petroleum regulatory regime

The Royal Government of Cambodia and the CNPA are actively working to further develop and enhance the regulatory framework for the exploration and exploitation of petroleum, having regard to the current stage of development of Cambodia’s petroleum industry and other regulatory developments that have occurred since the initial introduction of the Petroleum Regulations in 1991. The centrepiece of the new regulatory framework is expected to be a Petroleum Law, supported by appropriate implementing regulations.

Given that a number of Petroleum Agreements have been entered into under the Petroleum Regulations (offshore and onshore), one of the key issues for existing petroleum contractors will of course be the extent to which the Petroleum Law provides for the 'grandfathering' of the terms of the existing production sharing contracts.

Petroleum investment in Cambodia

In 2002, the CNPA entered into a production sharing agreement with ChevronTexaco in Block A, with ChevronTexaco announcing in January 2005 that it had discovered oil in four exploration wells and gas in one well in Block A (although to date no commercial discovery has been declared). Concessions to other Blocks (have been granted to other petroleum companies including the Singapore Petroleum Company, PTT Exploration and Production Public Company Limited, Medco International Petroleum and Chinese National Offshore Oil Corporation.

The area of overlapping maritime claims by Cambodia and Thailand in the Gulf of Thailand (the OCA) is generally considered to be highly prospective for petroleum resources. The approximately 27,000 sq km area of the OCA is estimated to contain up to 11 trillion cubic feet of natural gas and underdetermined quantities of condensate and oil.

On 18 June 2001, Cambodia and Thailand signed a Memorandum of Understanding regarding the OCA to lay the foundation for ongoing cooperation in relation to joint development of the petroleum resources located in the OCA. The MOU recorded the intention of the countries to divide the OCA in to two zones and to attempt, through accelerated negotiation, to simultaneously agree upon:

- a treaty for the joint development of the hydrocarbon resources located within the Areas II, III and IV of the OCA (the Joint Development Area); and

- a defined maritime border for the northern Area I of the OCA (the Area to be Delimited).

Discussions in relation to development of the treaty regime for the Joint Development Area and delimitation of the Area to be Delimited, have continued regularly since the signing of the MOU and are ongoing.

The Royal Government of Cambodia is also endeavouring to promote domestic refining of any commercial quantities of oil that may be discovered in Cambodia, and has publicly stated its desire for the development of an oil refinery in Sihanoukville once oil production commences.

Power plans

The government is seeking investors for its proposed national electricity grid and is hoping to have the main backbone of the system in place by 2015.

The proposed national grid – part of the 2013-18 Cambodia Power Development System plan – will be controlled by the state-run Electricite du Cambodge (EdC), but Special Purpose Transmission Licences will be available to private companies to operate sections of the grid to supply individual consumers as well as rural areas off the main grid.

Phnom Penh, which accounts for 85 per cent of Cambodia’s electricity consumption, will be at the heart of the proposed grid. Substations will be built in the capital, Kampong Speu, Takeo, Kampot and Sihanoukville by 2011. The grid will be connected to western Cambodia by 2012 to supply electricity to Siem Reap, Battambang and Banteay Meanchey.

Electricity consumption nationwide has increased 12 per cent per year and consumption in Phnom Penh has risen 20 per cent annually.

Electricity costs in Cambodia are among the highest in the world, and only about 15 percent of the country’s 14 million people are connected to the power grid. The high cost is due to the country’s almost total reliance on fuel imports due to an absence of indigenous resources.

Electricity currently costs from 18 US cents per kilowatt-hour in Cambodia compared to around 5.4 cents per kilowatt in Vietnam so the provision of an affordable and reliable electricity supply is critical for the future of business in Cambodia.

Unreliable electricity supplies and high energy costs remain a major concern for businesses in Phnom Penh, where power outages are increasingly frequent in certain areas of the city.

The estimated current capacity for power production for the city is 190 megawatts, but demand runs at around 230 megawatts. The supplier solves this problem by cutting off the electricity supply to some areas on the outskirts of the city for one or two hours a day, which naturally causes problems for consumers.

In 2009 however, the city’s shortage of electricity could ease when the municipality begins purchasing 200 megawatts of extra power from Vietnam. The electricity will be imported via a new power line running from Vietnam through Svay Rieng and Kandal provinces to Phnom Penh.

Additional energy is expected to be available in 2010 with the completion of Khamchay dam, while a second dam in Sihanoukville is expected to further boost supplies in 2011.

The government also aims to strengthen fuel supply agreements with key trading partners to improve energy security and plans to build a coal-run power plant near Sihanoukville port to help supply the national grid.

Building hydroelectricity and coal power plants is the immediate priority of the Royal Government and 14 potential sites have been identified for hydropower plants with contracts already granted to Chinese companies to construct some of them.

Reality check

Cambodia’s real estate sector enjoyed unprecedented growth from 2006 to mid-2008. During this period the sector created new-found wealth for hundreds and construction jobs for thousands. But in a market fuelled by speculators, prices became overinflated; people became intoxicated on property and are now suffering headaches.

Speculators who a year ago were buying up real estate in the hope of selling it on to developers for a profit, have been left high and dry as prices have fallen.

Property values have fallen by 25-30 per cent in Cambodia and investment in the sector has virtually ground to a halt. Construction investment has fallen 40 per cent; some major projects have been put on hold or cancelled, and the fortunes of many high-flyers have been lost, along with numerous property-related jobs.

Numerous developers in Cambodia buy land and advertise their proposed grandiose projects, yet have no capital. In order to fund construction they collect deposits from customers.

The Royal Government is now working on new laws to protect buyers. This will ensure that developers adhere to stricter codes of conduct, such as:

- Depositing 2 per cent of their project budget in the central bank.

- Purchasing licences with fees based on the type and size of the development.

- Holding a non-accessible housing account at a commercial bank for buyers’ down payments.

The government has been studying and working on these rules with developers to find a unanimous solution that accommodates the needs of both parties.

The doom and gloom brigade say the fall in the property market will have broader implications for Cambodia’s economy. They say that as a result of speculators losing their money, many businesses will face ruin, that there will be less disposable income and sales of consumer goods will subside. People who borrowed money to buy units that have not even been built yet will not be able to repay the banks. Suppliers won’t get paid and everyone will lose.

The optimists say that property prices needed a reality check and that a turnaround could come as soon as next year. In addition, the large developers have not gone broke and there won’t be too many job losses in Cambodia because the supply chain comes from abroad, i.e. almost all construction materials are imported.

Meanwhile, the cost of construction materials has fallen substantially and, as many of these projects haven’t even been constructed yet, what better time is there to build?

Optimists also do not agree that many people are in debt to the banks because few people borrow money to buy properties in Cambodia – most pay cash. Individuals are more likely to have used their savings to pay deposits.

Neav Chantana, Deputy Governor of the National Bank of Cambodia (NBC) – the central bank – told a recent banking conference in Phnom Penh that real estate lending of $161 million amounted to 7 per cent of total banks’ lending. A further 7 per cent of lending was to individuals purchasing property for their own use and another 8 per cent went to the construction sector.

She said that Non Performing Loans (NPLs) stood at less than 5 per cent, “Which means the financial system is strong and performing very well,” she added. However, this could be misleading as not all banks in Cambodia report their true exposure to NPLs.

In mid-2008, NBC restricted access to loans by doubling banks’ foreign currency reserve requirement to 16 per cent from 8 per cent. It also capped the amount of real estate loans banks could make at 15 per cent of their portfolios. In February 2009, NBC repealed those restrictions in response to the rapid decline in the property market. According to the Ministry of Land Management, Urban Planning and Construction, investment in the construction sector fell to $2.8 billion for the first 11 months of 2008 – down from $3.2 billion in 2007. At its peak, the sector employed in excess of 45,000 people nationwide and it is estimated that around 30 per cent have lost their jobs as a result of the downturn. Despite falling demand, most major developers insist their projects remain on track and claim to have secured funding. The government says that most major construction projects in Cambodia are progressing, but slowly.

Mobile Operators

Mobile operators are keen to invest in Cambodia because they see a lot of potential for growth. With a mobile penetration rate of just 25 per cent, there are still many Cambodians who do not have phones and this provides a unique opportunity.

According to the government, the number of mobile phone users in Cambodia increased by nearly 15 per cent in 2008 reaching 3 million users by year’s end. The government expects to collect around $30 million in revenue in 2009 as a result of expanding domestic demand for mobile phone services. Collected revenue in 2008 was $28 million.

The Ministry of Posts & Telecommunications (MPTC) has granted 11 network licences to date (March 2009), eight of which have commenced operations with three more preparing to enter the market. Those already operating are: Hello GSM (TMIC), Mfone (Camshin), QB (Cadcomms), Star-Cell (Applifone), Excel, CamGSM, Metfone (Viettel), and Smart Mobile (Latelz).

Luxembourg-based Millicom International via its CamGSM unit is Cambodia’s largest mobile phone operator with 55 per cent of the market. Thailand’s Shinawatra operates Camshin which is in second position with a market share of 18 per cent. Telekom Malaysia International Cambodia (TMIC) is close behind with a 15 per cent share.

TMIC launched its new brand identity ‘Hello’ in November 2007. The company has seen the number of its subscribers almost double during the past 12 months and is now Cambodia’s third largest operator.

To meet the needs of its growing number of subscribers, Hello has announced the launch of the new prefix number 081. Customers using the new prefix will still receive the same benefits as existing customers using the provider’s 015 and 016.

In February 2009, the company launched an unlimited international roaming package. This is Cambodia’s first unlimited roaming package and will cut the cost of going online through a mobile when travelling outside Cambodia. The Daily Unlimited Data Roaming Plan is aimed at the small segment of business and government travellers who travel throughout the region and wish to use the internet overseas.

TMIC is investing $150 million in Cambodia to upgrade network capacity and add 500 new Base Transceiver Stations (BTS) for coverage in rural and provincial sites.

New operators

Smart Mobile became service provider number eight in March 2009. Smart Mobile has a Russian parent company, Latelz, which is 100 per cent owned by Timeturns Holdings – a Cyprus based company created by shareholders for managing and operating GSM/UMTS operators around the world. With Cambodia’s telecommunications sector growing so quickly, Smart Mobile is confident it can capture a significant share of the market and is investing heavily in infrastructure. “Smart Mobile is very excited to offer its services to mobile users in Cambodia,’ said the company’s CEO, Mr. Thomas Hundt. ‘We intend to be highly competitive with our pricing, service packages and promotions, and will also bring a fresh modern approach to customer service - one that focuses on living what we call the Smart life.

“Smart Mobile has designed a new high-tech, community-minded Smart Store in the heart of Phnom Penh that is open to anyone,” adds Mr. Rattana Um, Smart Mobile’s Corporate Counsel and Spokesperson. “It’s the Smart Mobile goal to make quality mobile technology accessible to customers across Cambodia and make the Smart life available to everybody.” At the cutting edge Smart Store on Monivong Blvd, Phnom Penh, consumers will be able to learn about Cambodia’s newest mobile service provider and its offering, to subscribe to Smart Mobile, to add services out of Smart Mobile’s service portfolio and to receive support. Inside are free internet and gaming kiosks and a large video screen set up for multi-media presentations- including seminars on ‘Smart living’ or game contests. There is also a stage designed to feature local artists, and a T&C coffee shop where customers can relax and take it all in. Gracing one wall of the store is a tribute to local Cambodian art and design and a ‘green’ booth is set up to focus on local organisations that are pitching in to help the environment and the community.

A ninth company may join the ranks in 2009. Sotelco, the Cambodian subsidiary of Russia’s VimpelCom has signed a contract to build a GSM network in Cambodia with China’s Huawei Technologies. As part of this new framework agreement, Huawei will deploy a nationwide GSM mobile phone network for Sotelco over the next five years. “Companies of VimpelCom Group are always committed to delivering their customers the broadest choice of superior mobile products and services, the best coverage and unparalleled customer service,” said Gael Campan, General Manager of Sotelco. “Sotelco selected Huawei for this key rollout project because of its expertise and proven track record in delivering quality mobile phone networks. Huawei’s technological expertise will help us deliver an excellent mobile experience to our customers.” VimpelCom has pledged around $200 million to be spent on its Cambodian network in the first three to four years following its commercial launch.

Viettel – Vietnam’s Ministry of Defence-run telecoms unit – officially launched its Metfone service in Cambodia in February 2009. The company immediately gained more than 500,000 subscribers in the Kingdom by distributing free SIM cards, and is launching a major drive to tap Cambodia’s rural market and bring schools online. At the opening ceremony, Viettel’s General Director, Hoang Anh Xuan presented H.E. Im Sethy, Cambodia’s Minister of Education, Youth and Sports, with $5 million to help the country to install free broadband internet transmission lines in 1,000 of the country’s schools. The project will be implemented over the next five years. Viettel says it has installed 1,000 transmitter stations countrywide and 5,000 km of fibre optic cable, covering all 24 Cambodian provinces and cities. The company plans to install additional transmitter stations and cable in order to extend its coverage to Cambodia’s islands.

Applifone, known under the brand name Star-Cell, is a private GSM mobile operator in Cambodia. The company was established in 2006 and commercially launched in 2007. In order to increase its coverage to all 24 provinces, Star-Cell recently teamed up with Ericsson to introduce solar-powered base stations to Cambodia. The satellite transmission feature provides affordable mobile-network coverage in remote areas where other transmission solutions are unavailable. Denis Ryabtsev, Chief Marketing Officer at Star-Cell, says: “Ericsson’s solar-powered site with satellite transmission will make a significant difference. It enables us to expand cost-effectively into rural areas, connect people for the first time, and offer affordable services that improve quality of life.” Since its commercial launch, Star-Cell has extended its services to most areas of Cambodia.

Funding to Boost Telephone Services in Rural Cambodia

Poor families in four of the poorer provinces of northern and north-western Cambodia – Banteay Meanchey, Otdar Meanchey, Preah Vihear, and Pursat – will benefit from a $2.6 million grant to increase access to telecommunications services signed by the World Bank, acting as administrator for the Global Partnership on Output-Based Aid (GPOBA), and the Royal Government of Cambodia.

Up to 52,000 poor households or 260,000 Cambodians are expected to benefit from the scheme, through improved telecommunications network coverage and the installation of public access points where people will be able to make and receive telephone calls on a regular and reliable basis.

“Ensuring access to telecom services to all people in Cambodia and bridging the digital divide is one of the priorities of this government,” said H.E. Chin Bunsean, Secretary of State of the Ministry of Post and Telecommunications of Cambodia which will oversee implementation of the project. “It’s time that the people in rural areas are able to benefit from the same services, at the same quality and prices that the people in the cities have been enjoying for so many years.”

Despite improvements in telecommunications services and an increase in the number of telecommunications companies, rural access is still a challenge in Cambodia. The National Institute of Statistics estimates that only one in six rural households owns a phone, compared to over 30 per cent of urban households. Rural and remote communes tend to be less commercially attractive to service providers because of higher operating costs and lower average revenues per user.

The GPOBA grant will provide a one-time capital subsidy for the provision of telephone services in locations that would otherwise be considered commercially unviable. Potential service providers will be selected competitively through an open bidding process. They will be free to use any technology, but must provide full network access and service at a quality and price similar to the rest of the network in Cambodia. The winning service provider will be the qualified bidder who offers the required services in the target areas for the lowest subsidy, and will sign a performance - or ‘output’-based contract with the government. In line with the output-based approach, most of the GPOBA subsidy will be paid only after the services have been delivered and verified by an independent agent.

“By making telephone services available to poor households in remote rural villages, the GPOBA project will help to improve access to markets and economic opportunities in some of Cambodia’s poorest provinces,” said Mr. Qimiao Fan, World Bank Country Manager for Cambodia.

The GPOBA project will draw on funds from the Australian Agency for International Development (AusAID) and the Swedish International Development Cooperation Agency (Sida).

Sustainable tourism

After more than a decade of spectacular growth, how can the tourism industry in Cambodia respond to the more demanding market conditions now faced by holiday destinations worldwide? In common with all periods of adversity, the current situation also presents opportunities for those willing and able to respond to the challenges ahead.

Tourism has played an important role in the development of Cambodia. It has brought employment, improvements in infrastructure, training and general education and living standards for many people, and raised the international profile of Cambodia. Its growth has helped diversify economic activity, and broaden the base of foreign earnings, currently dominated by the garment industry.

But the tourism industry itself needs to diversify and mature. More needs to be done to both promote, and to support Cambodia as a holistic destination in its own right. In recent years the question taxing most industry players was how to increase the yield from each tourist: how to encourage them to stay longer; how to add more value? With visitor numbers expected to fall, this has assumed a greater priority, and is now joined by the question of how to keep up the numbers.

Undoubtedly and quite rightly, any future Cambodian tourism experience is going to involve the Angkor temples. This World Heritage Site has driven tourism development and it has been relatively easy and inexpensive to improve the infrastructure around a small area of Siem Reap to produce world class, 5-star experiences - a modern airport, easy transfers the short distance to town, a wide range of accommodation types, an impressive range of restaurants, and other tourism related businesses.

The problem is that it has been all too easy to develop the tourism industry around Angkor. A typical itinerary combines a few days in Siem Reap plus a visit to Phnom Penh with the whole trip maybe lasting less than a week, and often as an add on to a longer regional tour. This makes Cambodia vulnerable as demonstrated by the knock on effect of problems at Bangkok airport at the end of 2008, which seriously affected arrivals. Another result of these whistle stop tours of Angkor/Siem Reap – Phnom Penh is that many visitors take away a narrow and distorted view of the country, one in which a stroll down “Pub Street” in Siem Reap is often seen as a glimpse of the “real” Cambodia.

The first priority in promoting Cambodia as a destination in its own right is to develop more extensive trips that take advantage of ongoing improvements in roads and infrastructure. A number of 10 to 15 day tours covering much more of the country are in place already and these are proving highly popular. Visitor satisfaction is high, with a general feeling that for a small, compact country, Cambodia has much to offer, as alluded to by the Ministry of Tourism’s slogan, ‘Kingdom of Wonder’. In addition to the world class cultural experience of the temples, and the unique phenomenon of Tonle Sap, there are pristine rainforests, exotic wildlife, remote wildernesses, the mighty Mekong, unrivalled beaches and islands, a wide range of seaside resorts, very varied topography and land use, (not evident to the traveller between Siem Reap and Phnom Penh). Also of significance and interest is the all pervading, historical, cultural, social and political impact of the recent past.

The second opportunity for growth is to develop new Cambodian tourist attractions in an environmentally sustainable way. This includes the mainstream activities in addition to eco-tourism itself. Tours to include Cambodia’s lesser visited provincial centres can be developed easily, and the infrastructure is largely in place. Expansion of tourism into the virgin rainforests of the Cardamoms, or the north-east provinces of Rattanakiri and Mondulkiri, or development of the islands, could soon destroy the very attractions themselves. Fortunately, ecotourism demands a premium that people will pay, and this can fund the development of environmentally sensitive resorts. Once built, the operating costs of low impact facilities are lower than other establishments, and the higher prices help boost long term profitability. Low impact eco tours also help to preserve the uniqueness of Cambodia.

A third component should be the development and promotion of the wider responsible tourism practices. Along with the benefits that tourism undoubtedly brings, the largely unplanned and rapid development of Siem Reap and the coast around Sihanoukville has resulted in many environmental and social issues. These not only affect the local communities but negatively impact tourists’ experiences and so reduce long term profitability. Adopting practices that benefit the poor and disadvantaged in communities around the tourism centres, not only benefits the communities but is a smart marketing and promotional tool with the potential to increase business, extend the length of stay, open up new markets, and encourage repeat business. In comparison with the longer established tourism industry in neighbouring Thailand where people return again and again, few people come back to Cambodia. In the past it has been time consuming and labour intensive to establish and sustain links with local communities, but new initiatives being introduced in Siem Reap are making it easier for businesses to improve their CSR performance. The real challenge is to engage the Asian tour operators in the above processes and develop more sustainable mass tourism activities.

Cambodia is still a welcoming place to do business. The government encourages investment by allowing 100 per cent foreign ownership of businesses, it is easy to arrange long leases on properties, and there are new developments which will open up the possibility of obtaining leasehold title to property, though non-Cambodian nationals cannot own land. Those with the government’s ear should be championing policies that seize the current opportunities for change, and move Cambodian tourism onto a broader and more sustainable footing.