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Sunday, August 23, 2009

Foreign Direct Investment in Cambodia

Because of the questions posted by a reader of my previous entry, I decided to give a more comprehensive reply that might interest more people. Mind you, I am not an economist but I do have a degree in business administration, which always includes the fundamentals of macroeconomics. So, I am not totally unknowledgeable in this field.

Cambodia’s largest problem is its narrow economic base and its size with a small population. The four sectors, garments, tourism, construction/real estate, and agriculture, do not offer foreign investors enough opportunities to invest in. In all developed countries, the small and medium sized businesses comprise about two thirds of a country’s economy, both in terms of employment and production/service. The public sector contributes anywhere from 33% (USA) to 55% (France) to the GDP in industrialized countries.

The Cambodian government with a budget of about $1.88 billion does not have enough money to spend huge amounts of money on infrastructure projects in order to achieve a sizable share of the GDP. Foreign governments, first among them the Chinese, extend loans or give foreign aid to Cambodia for most of the infrastructure projects; others extend foreign aid. In the case of the Chinese most of the money, however, is plowed back into Chinese companies who are awarded the projects as a condition of the loan. The one thing missing is the West’s direct involvement in Cambodia’s development. They do give foreign aid, often tied to certain projects, but rarely do you see Western companies carrying out road projects, new bridges, etc. One of the largest donors is Japan, which also fortunately are directly involved in major investments, e. g. the Stung Hao special economic zone.

Tourism attracted a good share of foreign investment in hotels, especially in Siem Reap, but as part of the whole picture, it doesn’t make a dent in the overall volume. Other big projects you read about, like Koh Puos or Koh Rong, are still in its infant stages or are still looking for investors, in other words, the private sector is somewhat hesitant to come in. Club Med or other well-known Western companies may have shown interest but no firm commitment has been made. In my view, it is Westerners that need to be attracted as they spend big money on their vacations. For instance, they don’t go to their own ethnic restaurants, like the other Asian people. And they all usually buy day tours, spend on souvenirs, etc.

Now construction/real estate is a different matter. The South Koreans just poured in millions of dollars into real estate projects. They leased huge tracts of land from the government or bought it through dummy companies and fronting people. But they will take it all back in the form of cash for sold properties, or in less desirable ways by way of abandoning their projects, and making off with the deposits. Again noticeable here is the lack of Western companies in real estate. Why? I believe they all saw the true nature of the Cambodian marketplace and just couldn’t see how to turn a profit in the current environment. One of the latest government’s instruments to lure foreigners to invest in Cambodia is the decree to allow foreigners to own condominiums above ground level. If they think that this will kick-start the economy, they had better think again. Why would a foreigner want to buy a condo in Phnom Penh? Most of them come here to work for certain period of time, only to return once their contract is up. They rent but don’t buy. How many are there to come to Cambodia to settle here? A few, but those are mostly people who dropped out from Western culture and civilization. They usually don’t have the means to buy a condo. I just can’t see the masses of foreigners coming in gobbling up all those empty condos.

The government also made huge concessions to Vietnamese companies in agriculture. Although this helps along the way in Cambodia’s development, it doesn’t benefit the country and its people in the long term, apart from providing low-paying jobs for farm workers. The Vietnamese just ship their products back to Vietnam from where they export them as Vietnamese goods. You also have Thai, Malaysian, a few Indonesian companies investing in agriculture, but again in the grand scheme of things, they don’t account for much.

Because of its low labor costs, Cambodia would be ideal for mid-size companies in the light machinery sector. The insurmountable roadblock here seems to be the low level of skills and education. The only sector utilizing this factor are garment manufacturers. Workers are quickly and easily trained on the job. But again, only other Asian countries have utilized this. There may be a couple of factories that have Western investors and are run by Western managers, but if I recall correctly, it is only two out of about 300 in Cambodia. You will find garments made in Cambodia in most Western stores, like Walmart, JC Penny in the U. S., or C&A in Europe, but they are only buyers and not investors. Some of these have directly invested in China though. So why not here?

Honda’s assembly plant is the sole exception in the machinery/automobile sector. In the consumables sector we read that the Crown brewery has attracted an investment from a Western fund. Hopefully, that Hyundai plant will become reality and not just be an unrealized pipedream. In my experience, the automobile sector is right up many a Khmer’s alley. There are countless auto repair shops everywhere in Cambodia. And they can deliver quality work, if properly trained, as the examples of the Toyota and Mercedes dealerships demonstrate.

This brings us to the question of investors’ confidence in the Cambodian economy and its political stability. A quick look back shows that what you first got in 1990, right after the country dropped its Communist name and opened its borders, were the adventurers and hazadeurs. They wanted to make a quick killing by smuggling, illegal logging, and other disreputable activities. A few even did, but most went away empty-handed. In other words, that period saw no investment, and nobody had any confidence in Cambodia as a country or as a viable economy.

In the pre- and the immediate post-1993 era, big bucks came in by way of UNCTAC, but Cambodia was still the Wild East. It depended almost 100% on foreign aid. The election itself did not raise the prevailing uncertainty what with one party threatening secession. From 1993 to 1997, the power struggle between the CPP and Funcinpec kept regular investors away. It took from 1998 until 2003 for Cambodia to consolidate and establish some stability, and promptly the turning point came at around that time. More garment factories opened their doors and the real estate craze began. Tourism boomed, and the governing party thought they had successfully navigated the first step on a quick path to a threshold country. Dreamlike growth rates just cemented that belief.

But was it really the serious investors with confidence in the system or was it just another form of hazardous gambler that caused that incredible boom? Probably a mixture of both. The government repeatedly pronounced Cambodia a very stable country thanks to the firm leadership of its prime minister and would not tire in stating that this is the reason why Cambodia is so attractive to foreign investors. I am just wondering why this doesn’t extend to Western investors.

The opposition will no doubt make you believe corruption and human rights violations are the two single factors preventing serious Western companies from investing in Cambodia. I doubt that very much. Western countries do good business with Vietnam, China, Arab countries, etc., and never had a problem with this way of doing business. They usually have no qualms about playing along with certain corrupt practices. You have human beings, you have corruption, it’s part of human nature. And hey, we don’t need to look down on any of those countries. Corruption is widespread and very common in the West as well. It only assumes forms that are more refined. Human rights violations? If you are familiar with the West and have lived or still live there, you know that this can’t be true. A very cynical view, yes, but true nonetheless. For the most part, it is lip service on the part of Western politicians.

So, generally, increased foreign investment is a direct result of increased confidence and will lead to a faster recovery from the downturn; we all know that. But how to go about it? Well, I don’t presume to advise the Cambodian government. But Hun Sen’s visit to France was a step in the right direction. This government must do more to enhance its stature with the EU and the U.S. and Canada. China may a willing partner without attaching any strings to its commitments, but this is a two-edged sword. Cambodia must achieve credibility with the richest nations, and those are in the majority still found in Europe; a well-mounted P. R. campaign to the EU and the Scandinavian countries like Norway and Denmark would greatly help in accomplishing that. I also don’t see a lot of activity directed towards the U. S. And it is also the smaller countries that can make a difference. And where are the French, British, and Germans in Cambodia in terms of investment? Unfortunately, this is not what I see from the government. Besides Sarkozy Hun Sen has not been received by another top foreign leader in the West. Perhaps a multi-pronged campaign will overcome that lack of confidence?

3 comments:

Charles said...

KJE,
Thanks for a well written and well researched article. As a self employed businessman (for 35+ years) interested in promoting tourism & investment in Cambodia, I really enjoyed your article which was forwarded to me by one of your subscribers. Sincerely, Charles Evans, soon to be based in Siem Reap

Anonymous said...

Thank you for the insight. Your blogs are well written. I am Khmer oversea living in the US and have made significant investment in real estate in Cambodia. Since 2003 to 2005, land prices had doubled their value. I bought four parcels in 2003 and hold on to those land as a long term investment. These parcels are land with access from the main road. I have dual citizenship and thus, I can hold on to those parcels in my own name without paying any Land taxes. Due to economic conditions, do you think the government will model property taxation the same way as in the US?

As always, I enjoy your insight on the prospect for Cambodia's real estate.

Keep up the good work.

Thanks

KJE said...

I believe eventually the Cambodian government has only one way to go: to implement a fair and just taxation system, and this would include some kind of property tax. After all, it is the government's responsibility to build roads, sewers, power lines, etc., which people use. This can't be for free.

The problem now is that most people don't make enough money for a payroll tax, usually the largest source of tax revenue for a government. Businesses do have to file tax returns and pay income tax. But my strong suspicion is that many a wealthy businessman knows how to avoid paying too much, similar to the West.

The current property tax is levied in the form of a sales tax. Whenever a plot of land is sold the title will not be transferred until the seller has paid the 9% tax.

I would be interested to know how much you paid for your land in 2003 and where it is located, so I can make a comparison. You can email me at the address of this blog me if you don't want to publish this here.

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