It Was to Be Expected

Election campaigns are never clean. The American advocacy groups and political action committees are masters of bending the truth, lying outright, throwing mud at the opponent, and trying to bury him/her along the way. These committees are especially formed for election campaigns in the U. S. Many Western countries have adopted the same methods, including Britain, Germany, and to some extent France (as far as I know).

The committees dig up dirt wherever they can to use it against the respective opponent. No party is immune from this. Some of it is really beyond the pale. Back in the 2004 campaign one such group maintained that the Democratic candidate then, John Kerry (the current Secretary of State), had not commanded a gun boat heroically in the Vietnam War when there was clear evidence to the contrary. They accused of him of lying about his war record. Or more recently, many will remember the birth certificate affair that has been hounding Barack Obama to this day. Some fools still claim he is not a U. S. born citizen. These are just two of the more egregious examples of campaigning in the U.S.

Of course, no one can expect that election campaigns would be better or cleaner in countries like Cambodia, which is practically run like a personal property of and by the party in power. With the overwhelming majority this party holds in the Assembly it is virtually a one-party state. Funcinpec with its one seat in the Assembly and a coalition partner with the ruling CPP looks more like a freeloader than an active and decisive political force. They might even disappear from the scene after this election, not that anyone would miss them.

Then we have the newly formed CNRP – Cambodian National Rescue Party. What I think of them I wrote in a previous post. Not that it would matter greatly in the current constellation, but nevertheless some CPP lawmaker thought up a fine way of getting rid of them in the Assembly altogether. He maintained that since the deputies who were elected as members of the Sam Rainsy Party and Human Rights Party and had now switched over to this new CNRP they have no right to keep their seats in the assembly as the CNRP did not take part in the previous election and hence cannot be represented in the Assembly. Strictly speaking, this might be true, at least for the members that were elected by proportionate vote. The ones that were elected directly can switch parties whenever they like, I think; they can become an independent member, although probably without the right to speak, but still with the right to vote. The idea gained steam and was promptly adopted. So all SRP and HRP members all of sudden found themselves without seat and salary, much to their chagrin. In a way it is a complete farce, not worthy of a democracy. I don’t think they did themselves a favor, but then we Westerners think differently. Needless to say, this was heavily criticized in the West, prompting the government to rebuke the U. S. State Department for meddling in its internal affairs.

Apart from that little ‘ruse’ to thwart the opposition’s work, the CPP singled out Kem Sokha to weaken his already fragile position even more. After many years a woman came forward to claim she lived with Kem Sokha and they had adopted two children. After a while he stopped paying her support. This cast a real bad light on Kem Sokha but this is surely no rarity in Cambodia where mistresses are practically the norm with middle-aged men with the means to afford one. Most certainly, this affair coming to light at this point in time was just a coincidence, right? This rather common story was played up in the CPP-oriented media in order to stoke outrage in people for such ‘amoral behavior’.

The prime minister weighed in by calling on Kem Sokha to solve the matter swiftly. He then went on to explain that he once helped a high-ranking opposition member from going to jail who had tried to pay for sex with a 15-year old virgin. He did not mention who it was so the public was left to infer and speculate.

Together with that Tuol Sleng fiasco the leading candidate did not cut such a great figure. Again, the prime minister publicly called on him to apologize or the masses would come out and demonstrate against him. He didn’t, and promptly there was a sizable demonstration at the Tuol Sleng site.

This all goes under the motto ‘Throw enough mud and some of it will stick’. In other countries the candidates themselves refrain from hurling insults at their opponents. Those action committees will do the job for them. But here the prime minister, not one to stay above the fray to begin with when it comes to choosing words, stooped to get involved personally by ridiculing Kem Sokha. That’s not very statesman-like, now is it? Isn’t that a role he apparently likes to play so much?

Of course, Kem Sokha is an amateur in the political arena; his populist pronouncements like the promise of a $25 pension for all retired people sounds so ridiculous that only the most naïve people would believe this. Unfortunately, the majority of the people fall into that category.

But the CPP must somehow intrinsically fear that this new party despite its many weaknesses and shortcomings might gain broader support among the population to break their two-thirds majority that they resort to these kinds of tactics. Or perhaps, they think it is all good fun and a sport for them?

To Lend or Not To Lend Money

Many Cambodians perceive foreigners as having money -  money to spend and money to lend. This manifests itself in the facts that the tourist gets his money taken by inflated tuk-tuk prices, at the Russian Market, also known as Tuol Tumpung Market, or elsewhere. Some expatriates get fleeced by bar-girls, or drink it away. In general, I would think it is a huge misconception.

However, if you have lived here for while and acquired either friends or possibly even a family (family being the greater family with once and twice removed folks as well) you will sooner or later be approached for a loan. So, you guessed it, I was the target for several  supplications to help out with people’s finances.

The first instance happened when I still lived stateside. One day my wife got a call from her uncle. That was some big expense for them, being poor folks, so it must be urgent. Of course, it was. They were in danger of losing their modest house. The bank threatened to take it away from them if they didn’t come up with the balance of their ‘home loan’ within a few days. It was some micro-finance  establishment. The balance was all of $2,500. If you don’t have any money this is a lot. They had obviously failed to make their monthly payments for some time. Who could turn these poor people away? So I agreed to lend them the money. They promised to pay it back as soon as their son who lived in Canada would be in a position to send them more every month.

Once we had relocated to Cambodia permanently they came to live with us for a while. As it happens many a time, we had a falling out and they moved back into their little house in Siem Reap. I drew a up a loan agreement, but being the ever-generous person, I did not include a term for the loan. It is interest-free to boot. Needless to say after that falling out, we never heard back from them and I guess I can kiss my money good-by. I also learned that they had used the original loan from the bank to extend micro-loans themselves but grossly miscalculated the risks and promptly lost those funds to ‘non-performing’ loans.

Another time, also still in the U. S., we got a call from a niece once removed. They asked for $5,000 which they needed to buy a car. They had $5,000 of their own. They wanted to use the car as a taxi. At that time you could hire just about any car with driver for $10 to $20 a day. On one of my visits I found out that they had bought the car already and gotten that $5,000 from a private person. They paid $200 a month in interest, which would translate into 100% interest. I could understand that they wanted to change that. As these people were not really in an emergency I advised them to go to a bank, e. g. ACLEDA, which makes car loans up to 40% of the value of the car. My friend even knew the loan officer and opened the door for them. When we asked them later what had happened they said they hadn’t dared to go to the bank. Also, since I had thought the business was a little shaky, I later learned that it was really going bad and they wanted to sell that car again. I would never have seen that money again.

The uncle’s son (divorced) in Canada was next to hit me up. He had been to Cambodia the year before and met a traditional Khmer dancer and wanted to get married. The problem was his business in Canada wasn’t going that great. He had made a big mistake with his divorce as the distribution of property left the wife with two houses, he got the business. The wife sold the houses at a good price and moved to Cambodia where she built a number of condos and rented them successfully. He, however, saw his sweat shop in Canada competing with imports from Cambodia, which sort of pulled the rug out from under him. In the end he didn’t have the funds to travel to Cambodia and hold that expensive wedding ceremony. He asked for $5,000 (this seems to be amount people think they can get easily). Remembering his uncle and his promise based on his son’s income I politely declined mentioning other capital intensive business. The wedding was a great success but he lost money – from what I heard from his father about $5,000. He had borrowed $10,000 from other people. They are still waiting for their money. The irony in this story was that once he got back to Canada he seemed to forget about his new wife because he didn’t contact her for months. He promised to send for her but needed money for the attorneys to prepare all the papers, etc. In the end, the wife lost patience and divorced him. The whole thing was done Cambodian style with no official paperwork, just the wedding ceremony. Am I glad I didn’t loan that $5,000.

Next up was one of my wife’s nephews. She has quite a lot of nephews and nieces. He had borrowed $300 before for a new car engine, which he indeed paid back more or less promptly. Now he also  had wedding plans; never mind that he was still in college and made a living as a part-time tuk-tuk driver. He did own a car, a tuk-tuk , and a bicycle, all of which he rented. The timing was essential as he had a competitor whose parents had also been in touch with the bride’s parents.  To me it looked more like a wedding out of hurt pride than of love. Anyway, he needed  $3,000 to pay for the preparations of the ceremony. Of course, he hoped that he would get that money back from the table money people give at weddings. As additional collateral he offered the next harvest of cassava, which he said was a dead-sure thing moneywise. Prices were at a very good level and he stood to make about $10,000 from that harvest.

I have a thing about Khmer reliability when it comes to paying money back. I suggested he wait with his wedding until he has finished his studies and found a job. But as anyone can imagine, that fell on deaf ears. I said I am not going to pay for his wedding this way. He needed to find another solution, e. g. sell his car. This is what he did in the end. It didn’t get him the needed $3,000 but only $2,500. The party was also a great success; unfortunately, he too lost money. At least his father-in-law was of some means, so not to worry.

Another time, I was to shell out $10,000 for some small hotel that someone we know wanted to build in Kratie. He had bought the land and now needed to run everything through the authorities. That’s what he needed the money for. He has a gentleman from the U. S. who is backing him in this. He will fund the whole thing; the catch, though, is that this gentleman still needs to sell his house in the U. S. The proceeds were to go into this project. The Khmer guy promised to pay me back after one month – the time it would take to sell the house. He sure doesn’t know the U. S. housing market. Needless to say, I again politely declined.

Of course, it is quite common that employees ask for an advance if there is some unforeseen circumstance. I usually reject those too; because his family will go hungry the next month. If it is one thing the average people here (and probably elsewhere too) don’t have the slightest clue of, it is that they don’t know how to manage money. Many people in the West, especially in the U.S., overspend, max out their credit cards, or take out second mortgages to fund extravagant purchases, but at least there is a developed consumer oriented financial industry, which is virtually non-existent here. So people better not spend the money they don’t have. It usually doesn’t end well.

With Candidates Like These …

…you can’t hope to win more seats in the upcoming election, let alone dream of winning it. The latest flap, whether manipulated or true, came when the CPP played snippets of a recorded speech Kem Sokha made. He claimed that the Vietnamese fabricated all or part of the story of the Tuol Sleng prison; at least according to those snippets. (If I remember correctly, the Americans tried to do the same after the Vietnamese had invaded, sorry, liberated Cambodia.)

No matter what he said, even if it were in another context and how long ago it was, it’s bad news. Politicians must be aware that their opponents will seize on each and every opportunity to paint the bleakest picture of them. Election campaigns are just like the Internet; it brings out the worst in people. Kem Sokha really does come across as a political amateur, too.

The top candidate of that new party is, of course, Sam Rainsy, never mind that he cannot stand for office, that he is abroad, is not allowed to return and is not on the official election roll. Whether this is based on a wrongful conviction in a ‘kangaroo’ court, or has legal merit, is not for this blogger to decide. In the end the reality remains that he cannot win an Assembly seat. That spot could have been allocated to another candidate, given the slim chances of increasing their number of seats, which is highly doubtful by any stretch of imagination.

Then there is that merger of SRP and Human Rights Party. Not too long ago these two parties were at loggerheads over policy, name of party, etc., but in the end they thought their combined efforts could turn the tide. How they arrived at that conclusion will remain their secret in light of their present weak position. Bundling their efforts appears futile and will most certainly not result in gaining more seats; mind you, the SRP currently holds 24 and the HRP just 3 seats out of 124 total. They have no support in the media as most of them lean towards the CPP out of self-interest. Obviously, they have no large campaign coffers either. So how can they ever hope to break the CPP’s two-thirds majority?

The choice of the new name for the party is somewhat odd too, at least to some observers – the National Rescue Party. If ever there was an ineptly chosen party name, this is it. The dictionary defines it like this: Rescue comprises responsive operations that usually involve the saving of life, or prevention of injury during an incident or dangerous situation.

The party stalwarts may have thought of rescuing Cambodia from the pernicious grasp of the ruling party. I am not so sure whether the name really resonates very much with the people. After all, life for most of them has improved, whether or not the government’s critics like it. Yes, there are still way too many conflict situations regarding land grabbing, evictions by unconscionable ELC holders, etc. Even the U. N. rapporteur stated that the overall situation has improved, albeit in small steps, and a lot still needs to be done. And lo and behold, the power outages have decreased considerably and come election time, the EDC promises those will be a thing of the past. (In the rural town where I have a house that was afflicted with daily 9 to 15 hour outages, they have disappeard since the Khmer New Year.)

So ‘rescue’ really does seem like an inept word. Perhaps Cambodian Party for Social Justice, or a similar less catastrophe-laden name would have been a better choice. Although Prince Thomico of the royal household joined that party, another prominent member of the SRP, Mu Sochua, remains surprisingly quiet. Maybe she is not too happy with all the recent events, and possibly with Kem Sokha being the vice-president.

So what it all boils down is that this election will be no different from the last one: The CPP will maintain, if not increase, their hold on power, the opposition will promptly cry foul, claiming that the election was not free and fair, whether true, half-true, or untrue, and Hun Sen will enter his 29^th (is it?) year in power. 

Trying to Invest in a Guesthouse/Small Hotel in Cambodia

Let’s make it clear: we are talking about a smaller investment, say around $250,000, not something in the multi-million dollar range. There are many big projects in the pipeline but we still have to see any of them become reality; whether this is Koh Rong where the Royal Group has been trying to drum up investment capital, or whether it is the many Chinese investors that have a lease on land and haven’t done anything with it, or whether it is the Sokha Group that has owned a huge part of the eastern end of Ochheuteal Beach for years but hasn’t shown any sign of using this prime piece of land for another 5-star hotel. Perhaps the one on Sokha Beach is not as successful as hoped for. There is also a French group holding a lease for Koh Russei, or the Monarch  company (Russian?) that leased Koh Tang. Neither has shown any sign of actually doing something with their lease. Of course, Monarch is a burnt child with their failed Hawaii Bach project.

Now why do I want to invest in a hotel, of all things? I have a long history with this country, if you can call more than 20 years history.  Somewhere else I had written about how it all started. But this is not what I want to go into again here. After many years of going back and forth between the U. S. and Cambodia, I finally relocated for good here.  The reasons were manifold. Originally, I wanted to relocate to a country in Europe, Italy or Spain. The U.S., my home for 20 years, had become too conservative and was moving ever more to the right, not to mention the hypocrisy in public life – not good for a died-in-the-wool liberal. It needed to be to a warm climate, too. Although I am married to a Khmer wife, Cambodia was a second choice. I liked the country well enough but there were too many things I wasn’t ready to adjust to. I also wanted to remain in a Western cultural environment. But what finally decided our move was that all my funds were in U. S. dollars, and I would have had to write off nearly 30% due to the rate of exchange. So, my wife being Cambodian, the economy here being dollar-based, there really was no practical alternative. Plus you are pretty much left alone in Cambodia if you don’t pay too much attention to the things some organizations are wont to criticize.

I had invested some money in a small working rubber plantation, which didn’t do too well in the beginning. But I didn’t need the income as I still earned money from my other business in the U. S. The bottom fell out from the plantation business during and in the aftermath of the financial crisis but recovered more than nicely a couple of years later. Although now it is not as profitable due to the drop in rubber prices, it still pays well enough to live comfortably.

Part of my professional life was spent in the tourism/hospitality industry, both as an employee and later as a self-employed businessman (before I turned to import/export as the travel industry underwent a drastic change with the introduction of the Internet). Being the owner of a rubber plantation is not one of the most challenging jobs you can imagine. So I have been looking for something else to do. The closest thing for me was to go back into the tourism/hospitality business. Trading was out of the question as I really did not want to compete with the native businesses and their tiny margins. Tourism is still a growth sector and if done right there is money to be made. I can point to many examples. But equally numerous are the businesses that simply don’t know what it takes to attract foreigners to their property. As mentioned elsewhere, customer service is an unknown term for most Cambodian businesses.

So I set out on buying or leasing a guesthouse/boutique hotel. At one point I even wanted to start from scratch but the numbers wouldn’t work out. Anyway here is my experience with both local people and expats. My search has been confined to Phnom Penh and Sihanoukville, although I did venture into Siem Reap at one time.

As a hotel contracting manager for a very large tour operator I checked out many resorts all over Asia and know my way around. I am a professional and know what factors determine a 3-star, 4-star, or 5-star hotel, and I know marketing. My aim was to go into the 3-star category, which constitutes the broadest base of the industry.

First project:

Build a 3-star 50 room resort at Otres Beach (near O); investment volume $7 million. The one hectare of land needed would have been $1.1 million alone. Since I didn’t have that kind of money myself, I looked for investors – unsuccessfully; end of story. The land we looked at was later leased by the Queenco Casino Group, although they haven’t put in a resort yet. They are probably waiting for the airport to accommodate direct flights from abroad. That’s been a long time coming, with the usual promises, promises, promises.

Second project:

The same thing on beach land north of Stung Hao (about 20 km north of Sihanoukville); the seven owners of the land couldn’t agree among each other  on the price. So this deal fell through. I later heard that Ke Kim Yang had bought the land. It is still sitting there undisturbed. I sometimes go by boat to that beach to swim.

Third project:

Again the same thing, but this time in Chrouy Svay; pristine beaches, clear and clean water; the catch: no hard title, no access roads, no electricity, no water, no nothing; this would also have been so isolated that it would have had to be a Club-Med type resort; too much hassle; no thank you.

Fourth project:

Ream National Park – at that time the government had just set aside a small area for tourism development. We checked it out and got all the nods from the officials when practically overnight we learned that a Chinese group had leased the entire southern part. Well so much, so good; just another concept down the drain. Never mind that the Chinese have done squat there in the 4, 5 years since. At least there is a small tent resort, which appears to be doing well enough, although this is far from being a money-making enterprise.

Since my more high-flying concepts obviously couldn’t be realized I left these plans alone for a while. The time wasn’t ripe for them either – we are talking 2008 – 2011. In the meantime, I built a house, bought some additional land for speculation (still dormant), bought a new car (sort of expensive, given the Cambodian import tariffs), bought a powerboat for fishing and other fun (also expensive as it was custom-made), so my investment funds had somewhat dwindled. I had also been busy for more than a year as a consultant for a large investor who was seeking an economic land concession (which failed).

When that ended I again became intrigued by the hotel business. My friend who is a very successful co-owner of now two boutique hotels in Phnom Penh reinforced my thoughts by offering to be a partner.

Foray into Siem Reap:

A nice guesthouse with 26 rooms in a good location; it made decent money; the Khmer owner wanted to go into the luxury sector so he wanted to sell the guesthouse. He was one of the few people I met who actually kept good books and knew exactly where he stood. We settled on a price ($70,000 based on an annual net profit of $40,000 – with a manager’s salary accounted for). He now needed to get the landlord to transfer the lease. But this turned out to be the deal-breaker: the landlord wanted to increase the rent so much it would have made the business unattractive – an all too familiar story in Cambodia.

Boutique Hotel in Colonial Vila Phnom Penh:

10 rooms, remodeled a year ago, total investment over $100,000 (for new electrical wiring and plumbing, among others), location a little off the main tourist spots, catered mostly to NGOs. Asking  price: $40,000. Now this made us scratch our heads. His explanation: his partner is in Thailand, she can’t come back as she has children there, so needs to sell quickly. He wants to get out too. So far so good. But when we asked for some accounting background he said maybe we could do this unofficially without any supporting documents  in order to speed it up. Too fishy for me.

Boutique Hotel Phnom Penh:

10 rooms, good location, good room rates, occupancy rate over 85%; profitable, how much exactly we didn’t get to find out as the asking price was $300,000; the owner said he had invested $200,000 to remodel it. But he had no long track record, as he had only owned it for a year. For me: too much for such a small hotel.

There was a sister hotel close-by; same story, same price. Thanks, but no thanks.

Riverside property:

8 suites with balcony and view of the river; nice but at $250,000 also too expensive. How are you ever going to earn the money back.

To his credit: he only wanted to sell if the right offer came along; makes sense.

Upscale Boutique Hotel in Neo-Colonial Style Villa, Phnom Penh:

8 Rooms incl. 1 junior suite; with restaurant, room to add two or three rooms; Boeung Koeng Kang area; no profit so far; the operator had it for 8 months only, had invested about $50,000, but had a high-level government job waiting for him. We were very much interested in this property as it had a lot of potential. We made an offer, but now he decided that he needed to be on the lease and we would sublease it. That didn’t sit well with us; too many potential complications later on. Sorry, no can do.

Low-end guesthouse near Sokha Beach:

Located practically at the back of the Sokha Beach Hotel Bungalows, across the little lake; 10 rooms, vacant at that time, up for rent at $1000 a month; the previous owner had room rates of $10 to $20. The condition of the rooms was more or less desolate, in other words, a lot needed to be done to upgrade this property. In the end we didn’t like the location. One could also buy it for $1.2 million.

Far end of Otres Beach project:

We wanted to build 10 upscale bungalows with swimming pool and beachside restaurant on a lot 30 x 55 m. We crunched figures upwards and downwards, turned them left and right, but in the end we didn’t see how we could come out with a decent profit for an investment of approx. $250,000. The 10 units were simply not enough, and we did not want build 2-story bungalows for marketing and financial considerations.

Guesthouse Serendipity Road

This was a 16-room property offered at $165,000, including a well-running restaurant, or so he says. Room rates are in the $20 range; occupancy not known; the price includes the security deposit; rent is decent; but a lot needs to be done with this property. Some of the rooms were really a mess; the kitchen looked unsanitary;  in the West the restaurant would be closed. How he can make money is beyond us, and how he can ask this kind of money likewise. Last I heard he sold it for $90,000 (still too expensive); so he was desperate.

Guesthouse  on Tola Street

Now this is one of the best mid-range places at Ochheuteal; everything is nicely laid out with 38 rooms,  a swimming pool, and a restaurant;  the rent is so low that I don’t want to mention it here. The owners rented the land and built the entire resort. They said they aren’t selling but if the offer is in the high 6 figures they might contemplate it. We had a nice chat, that was it; very good place, no doubt about it.

Guesthouse on Beach Road

This is also one of the most successful places at Ochheuteal. Like the one above the operator rented the land eight years ago and built everything from scratch. The rent is equally ridiculously low so I am sure he got his initial investment back even at moderate occupancy rates. The place is very popular and got good reviews. The operator isn’t sure whether he wants to sell it either; sometimes he is fed up with working 24/7, other times everything works so well that he doesn’t really want to let go of it. The lease has enough time on it; but at $400,000 it’s not exactly a steal; not within our range.

Guesthouse Mid-town

This one intrigued me a lot. The owner offered a guesthouse with 8 rooms, a restaurant, and a fishing charter boat for $60,000. According to his estimate the boat alone is worth $40,000, though I would put it in the $25,000 to $30,000 range. The guesthouse is shabby, one cannot say otherwise, unfortunately. The restaurant/bar does not do a lot business as there is no barkeeper who can attract guests. It mainly serves as the booking office for the boat tours. The fishing charter business, however, would have made it worthwhile. The boat seats 18. I could have put in a ‘fishing guide’ to accompany the guests. The Khmer skipper has been running the boat for 8 years. He knows the spots and how to handle a boat. The problem was that I didn’t want to and can’t run the guesthouse/restaurant myself. So I was looking for someone to manage it for me; I would sublease it for just the rent of $700. But the numbers no matter how long we crunched them just wouldn’t show a decent income for the manager, let alone a return, even a small one, for me.

Guesthouse  II on Tola Street

This is a new building; the catch is that the landlord wants to rent only half of it because he lives in the other half. He counts eight rooms, whereas we could use only seven, the eighth one was too small. In general, the building is designed as a residence and not as a guesthouse. There is enough room for a swimming pool and a small restaurant. Three of the rooms have their own kitchenette. The rent at $2,000 is a little too much. A little difficult the way it is designed, so a no go for us; we would have liked the location and the space. Our offer to rent the whole building was declined.

Guesthouse Chong Ochheuteal

This is one of the ugliest guesthouses I have seen in Cambodia. The big plus is its location right on the beach, that is, there is the road in front and then the beach. It has thirteen rooms all facing the ocean with beautiful views of sunsets; enough room for a swimming pool and expansion of the beach bar into a restaurant.

The rent at $1500 is very decent; transforming this guesthouse, especially the façade, into a more upscale small hotel would be worth it. This would be well within our budget.

But here comes the catch: there is an environmental problem of worrisome proportions. The nearby small river flows directly into the ocean, which wouldn’t be so bad if it didn’t carry waste water from the not too distant water treatment plant of Sihanoukville. At times there is a stench wafting over from some place (the local people don’t really know from where) that will drive away any guests staying there.  Obviously the chemicals used in the treatment plant also flow into the ocean. Guests have complained of itching. Too bad.  Another disappointment.

Guesthouse II on Serendipity

This is another dreamer. He is asking a cool $100,000 for his 27-room low-end guesthouse. He rents part of the premises to a diving outfit, offsetting the $1300 rent. He makes about $1000 to $1200 per month as his income; in other words, no real profit. When asked how he arrived at his asking price he just said he thinks it’s a fair price considering. Considering what?

Guesthouse  near  Ochheuteal

We are looking at 27-rooms, all air-conditioned,  all completely renovated; the owner invested about $60,000 into 8 new rooms (included in the 27), redoing the restaurant and the reception. Asking price: $165,000 including the security deposit. Room rates around $20, occupancy around 55%. Although the price is negotiable and the place is well-regarded by guests, we didn’t believe that even a much lower price could be recovered in a decent amount of time. A disturbing factor was that the owner has owned the place just one year. He wants to open a place on one of the islands. Why, if this one runs well and considering all the logistical problems for the islands?

So altogether, there has not been one place that fit our bill. Each one of the properties we looked at had one or more negatives. We are looking for a place to rent in a good location, preferably with a hard or at least uncontested title near the beach, which we can remodel, transforming it into a near 3-star property. Ideally, it would have 12 rooms with enough space to add 10 more or 25-30 rooms ready to use. This size hotel is much easier to fill than a 50 or 80 room hotel. If there is no swimming pool, we would put one in, same for a small restaurant. Together with offering sports activities, boat tours in our power boat, free transfers, etc., such a property will attract the appropriate clientele. The room rates will be according to the standard offered. There is enough low-end accommodation in the $10 to $25 range; we don’t believe there is a need for more. Plus you can’t really make any money at those rates.

People, whether Khmer or expat, who mostly invest in a guesthouse/small hotel/restaurant/bar usually say the profit is what they take out. Strictly speaking, that is wrong, of course. They pay themselves a salary, which is part of the expenses; they also need to amortize their investment they in most cases need to make (with or without interest) over the duration of the lease, and what is left over after that is their profit, or the return on investment. Many hope they can get their money back by selling the lease, but then the buyer faces the same situation.

In this context I usually use the term owner’s benefits, which includes salary, car expenses, entertainment expenses, health insurance; but these are all part of the expenses and do not constitute profit. The above naturally applies to leased properties only as foreigners are not allowed to own land. The accounting would be somewhat different in that case.  If you are married to a Khmer spouse, you can buy the land in her/his name, but the capital required makes this unfeasible for most. Frankly, I would not invest $2.0 million in land and a hotel in Cambodia. There are better ways to earn very good money with this kind of capital without the headaches that accompany the management of a larger hotel.

Sihanoukville is on the verge of transitioning from backpacker central to a flashpacker and middle-class tourist destination. It still lacks mid and upper range properties. Although there is a handful around, it is not nearly enough to arouse serious interest from larger tour operators in Europe, Australia, the U.S., Korea, Taiwan, etc. This transition will also help shed Sihanoukville that noxious reputation of being a haven for sex tourists, pedophiles, and other low-life that frequent such places as Victory Hill - the sooner the better. Cambodia could do without the riff-raff. Meanwhile, we keep on looking.

Economic Land Concessions

A few months back the PM signed a moratorium on the granting of economic land concessions. Nevertheless, a few concessions seem to have been granted after that moratorium. And recently after receiving another complaint from local people having problems with the concession holders, the PM stated the companies must abide by the stipulations of the concession agreement or lose the concession without compensation. This put the economic land concessions (ELC) back into the limelight.

Here is my experience with ELCs and how they work. These concessions transfer the authority for the exploitation of certain tracts of land from the government to an investor/investment companies. They may be for mining or agricultural purposes. The most notorious of them have in the past been concessions for the cultivation of rubber trees. There was practically a rush to start rubber plantations as investors saw an unprecedented rise of prices on the world market starting in 2008. Although there were dips in those prices the general outlook was positive as basically all natural resources disproportionately gained in value during the past five years or so. The underlying reasons for this may be a perceived or actual scarcity, increased consumption, and, in my mind, most of all, speculation.

Last year I had become involved in obtaining an economic land concession for a rubber plantation in Cambodia. A investor with interests in the automotive industry hired me as a consultant based on my long-term experience in Cambodia and the rubber business in particular. In the face of rising raw material prices this investor was looking to procure the raw material at its origin as part of a vertical integration into their business.

Originally, they were looking for a working plantation of about 3,000 to 4,000 ha, possibly broken down into separate smaller plantations. After looking at a number of them we shelved that idea as the state of these plantations was anything but up to par in terms of international standards. We then decided to try to obtain one of those ELCs and set out in locating suitable land.

One must bear in mind that only the Ministry of Agriculture can approve such an ELC and a certain procedure needs to be followed.

1.  An investor cannot apply from abroad. They must have a registered company/corporation in Cambodia, a tax number, and a working bank account at a local bank. This company then puts in the application.
   
   
2.  After locating a desirable tract of land the investor must apply at the Ministry of Agriculture (MoA). Comprehensive information about the investor and their financial qualification must be disclosed.
   
   
3. The MoA maintains a computer data base listing the soil properties, land coverage, etc. of the entire country.
   
   
4. They then review details of  the land in their database and decide whether it can be made available for a concession. This will initially comprise the questions of forest coverage and possible overlapping with other ELCs, either applied for or already granted. Officially, land covered by dense or semi-dense forest will not be approved for such a concession, which as we will see later can be a very important catch in the whole process.
   
   
5. If available, the official bureaucratic machinery is set in motion.
   
   
6. A commission consisting of representatives of the MoA, the Ministry of Environment (MoE), the Ministry of Commerce (MoC), the Council for Development of Cambodia (CDC), and the provincial government will be assembled to study the feasibility based on their own data and the investor’s application which includes financials, a business plan, and any necessary supporting documentation.
   
   The Ministry of Environment is tasked with conducting an ‘Environmental Impact Assessment (EIA)”. This is a comprehensive study covering every aspect pertaining the tract of land, e. g. soil, rain fall, waterways, elevations, structure of population, settlements, etc.
   
   The local government is to look into socio-economic aspects, e. g. local settlements, existence of community forests, impact on the local population on and nearby the planned concession.
   
   Compiling this EIA will take about three months. The EIA will designate the usable area, that is less waterways, religious sites, settlements, community property, etc.
   
   
7. Once the application is approved by the committee, the MoA submits the application to the Prime Minister’s office. The PM will then sign an authorization for the MoA to enter into a concession agreement with the investor.
   
   
8. It is now the investor’s job to draw up a master plan that is basically a business plan for the next 5 years taking into account any issues that might arise from conflicts with the local population.
   
   
9. The agreement will allow the investor to clear the land after the master plan has been submitted and approved, the land in questions has been transferred from public land of state to private land of state. A special permit is issued for clearing. The investor can sell the lumber from the clearing of the land.
   
   
10. The CDC will grant the investor’s company special tax status, e. g. tax exemption or reduction for the first 9 years, tax exemption for equipment to be brought in, etc. The company will then be listed in the investment register with the CDC.
    
    
11. The whole process will take about 6 to 9 months; it can sometimes be expedited if an influential person aids the investor in the process.

This all sounds pretty straightforward but there are many pitfalls that might occur on your way, which will make the process take longer and most likely more expensive. Plus one mustn’t forget that one is dealing with a lumbering bureaucracy. After all, the price of the concession for 1 ha at that time was around $350 to $400; before the moratorium it had risen to $480/ha. (I am publishing these prices here as they have been widely reported in the media, otherwise I would have kept them confidential.) Needless to say this price includes some hefty commissions for several parties involved in the process.

So if you do the math, 10,000 ha will cost you anywhere from $3.5M to $4.8M. One can offset part of this with the sale of the lumber, but it won’t come anywhere near the initial capital outlay. Overall economics for a rubber plantation aren’t that great initially either. Clearing, planting, and maintenance the first year will be about $2,000/ha or $20M for 10,000 ha. Maintenance until the first yield after 6 years will run to another $30M ($500/ha p. a.).  So round about $50M will have been spent by the time some revenue is gained from that investment. We are not exactly talking small potatoes here. A long-term view of 15 years, though, will make it a profitable enterprise and the investment will have been recovered, barring any unforeseen events. Concessions are granted for 70 years with an option to extend.

Registering a company and getting a tax number is a pretty simple deal. It includes a lot of forms but it can be done in a week or two. Now comes the more difficult part - how to find suitable land. There is a score of middlemen in the city that once they hear you are looking will just scramble to come to your aid. As mentioned in another post, most of those middlemen are worthless as they pass on second- or third-hand information. Sometimes they don’t even know the location of it, let alone the properties of the soil, the forest coverage, and so on. We contacted severable reliable (mostly military) men and subsequently checked out about 20 or so locations, traveling the length and breadth of Cambodia. Finally someone pointed us to a location where a number of rubber plantations were already in operation, including a sizable state-run plantation. At least, that showed us that the area was right for it. In quick order we had soil samples taken and analyzed by the MoA – they have the only lab in the country that can do this. All the other labs only analyze for construction purposes. The samples were a mixed bag, not exactly what I had hoped for in terms of fertile red soil (like my own plantation) but it was usable.

Foreign companies, notably from Malaysia, Indonesia, the U. S., China, etc. use a local company to process the application with the MoA. There are two or three of those in Phnom Penh that specialize in this and have a reputation for reliability and trustworthiness. Most importantly, these companies are owned by very wealthy people so there are no chances of them absconding with your funds.

The investor concludes a contract with that company, in which the company guarantees to obtain the ELC, or will refund the funds put into escrow with them, less a certain administrative fee. Originally, we decided to go down that road ourselves.

We were put in touch with a company run by an overseas Khmer who had some good connections into the higher echelons of government. It turned out these connections were located at the Council of Ministers – but not a minister himself. This seemed kind of promising.

The usual agreement calls for a 20% down payment; this is for processing all documents until the stage the commission to study the project is formed. Let’s assume we are applying for 10,000 ha and the price for one hectare is $300, we are talking about $600,000.

The next installment, if you will, is for 60%,  $1,800,000. This will cover the MoA’s request for approval form the Royal Government, e. g. the PM, and the subsequent official recognition of the ELC by PM’s cabinet.

Another 10% $($300,000) is due for the official demarcation of the ELC, the preparation of the master plan, the EIA, and the permit to clear the land.

The final 10% ($300,000) is to be made before the transfer from public to private state land, an investment agreement is entered into between the investment company and the MoC, MoE, and finally the registration with the CDC.

The payments may not be in sequence according the outlined procedure above but the end result is the same. It should be noted that in all cases where one of the reputable companies has been used the concession had always been granted; in other words no money disappeared. There are instances, however, where crooked middlemen guarantee the investor a fast track against some upfront payment of say $100,000, only to disappear with the loot. I know of at least one such instance. I was also warned of people who use the same tract of land and offer it to a number of investors, rake in substantial down payments, again only to disappear. The scam used usually entails a map of the area with the designated land that needs to be signed by the local authorities first – these are four provincial agencies including the governor’s office. The middleman promises to get those local signatures required for the official application, for a hefty fee, of course. He does indeed get those signatures because the involved officials will anything for a fee, knowing it is not a legal instrument to begin with. They just signed a map.

To their dismay the investors will find out when they present this to the MoA, that it doesn’t mean a thing with them. The only authority to approve any land for an ELC rests with the MoA. Many of those maps have been submitted to the MoA, which only files it under ‘Incomplete Application’. These scams almost always go unreported as the mostly Asian investors hate to lose face to have fallen for it.

The company we were going to use promised us such a fast track, but did not request an extra upfront payment but would adhere to the established agreement for this. So we started our negotiations for the agreement and quickly came to terms with them. They required us to write letters to the PM, the First Deputy PM, a number of ministers. Only one day later they said everything looks fine and we can go ahead. We hadn’t even signed the agreement yet. My investor flew in to meet with the Minister of Agriculture. The company had promised to set up a meeting with him. This was for us sort of a bona fide gesture that our project had been put on its way through the right channels.

Lo and behold, the Minister was not available but a member of the PM’s cabinet would be ready to welcome us. We were somewhat amazed that the meeting was not to take place at his office but at the Intercontinental Hotel. The meeting went sort of well but we were even more amazed when we learned later that the member we met was our contact’s (the Council of Ministers member) husband. That in itself is not unusual, as oftentimes several family members work in the government. But funnily enough, he was not even attached to the MoA, nor was he involved with concessions in the slightest. This surely raised some suspicion in our minds. We finally knew these people were really only blowing hot air when the facilitator called me one day not long afterwards and told me we could go ahead and start clearing the land. They had gotten the oral permission from the PM himself (like he would concern himself with such matters despite his propensity to micromanage).

We started stalling the negotiations for the agreement trying to find out more about the facilitating company. In the meantime we had also submitted, as advised, one of those maps to the local provincial authorities. The go-to man there asked for $100,000 but we rejected that outright. We finally settled on some small tea money. This again impressed upon us that not everything was kosher with all these people. After two months our go-to man came back with the signed map, but one signature was missing, and the governor had not signed it. In its place some illegible signature without stamp was added.

It was now time to call the whole thing off. We were not going to spend several hundred thousands of dollars only to lose them. Another very disturbing thing was that the owner of the facilitating company was a U. S. citizen. He could just take the down payment of $600K and disappear to and in the U. S. Tracking him down there would be nigh impossible. Adding to such suspicions was that this man, though nice and courteous in his demeanor, was not wealthy by any standard. In our minds, the temptation could be just too much for such a man. This is not to say that he would have done it, but we thought that it was quite possible for it to happen. We are not accusing this man of any crime or that he is a crook. Only circumspection prompted us to pursue another avenue.

We then went to the MoA directly, where we were told about those flimsy maps, got the necessary application form ($20) and started the application process ouselves. But a tentative land search revealed that this was densely forested land, and luckily though, did not overlap with an existing ELC. But it would most probably be rejected for environmental concerns. The Asia Development Bank and the World Bank had recently put great pressure on the government to abide by its commitment to preserve the environment. Well, that was very disheartening news, although I can imagine certain circles to be gleeful about this. I had visited that land myself several times and knew it was pretty densely forested but what I had seen was mostly undergrowth and not too tall, that is to say, old trees. Thankfully, we hadn’t spent any great amount of money, except that little tea money in the province.

We were also told we could try to obtain an exemption from the Minister himself. Sometimes this worked. We used an old acquaintance also at the CoC level but higher placed than our previous contact who is friends with most of the ministers to check for us. At that point we learned that several companies had already applied for that same land and had been rejected. Even a company run by one of the MoA highest officials, which had wanted that land, was turned down. So for us, that was the end of story for that tract of land. We wouldn’t waste any more time on that.

We now tackled the problem the opposite way. We simply asked the MoA to designate a tract of land available for an ELC for us. They gave us two locations, which I promptly visited. Once I got to the first one I was surprised to see tractors and heavy equipment clearing land where my GPS showed this would actually be the designated land for us. We called our contact at the MoA who said the coordinates may have gotten mixed up. On we went to the next location not too far away. At least here we saw no activity yet, except for Chinese people clearing adjoining land clearly delineated for them on our map.

In the meantime we had spent about 5 months on the project without any tangible results. My investor was getting impatient but agreed to hold out for this next tract and see what would happen. The rest is quickly recounted as the Prime Minister announced a moratorium on all new ELCs. Since we had not started the official application process we would not fall under those exemptions that were widely reported in the press and criticized by NGOs. End of story.

At the same time, however, rubber prices had fallen from a high of $5600/mt for SMR10 (or CSK10 in Cambodia) on the Malaysian Rubber Exchange in 2011 to $3,440/mt in January 2012 and $2,860/mt in June 2012. Investing about $50M in a new rubber plantation with fluctuations like this did not seem to be such a great idea after all. My investor, and I concurred, decided to shelve the plan at least until 2013 if not forever. Let’s see what the future in that sector holds. I personally believe that the tire industry can well live with the current price levels and leave the raw materials to the people who have been in the business for a while.

The moral of the story, though, is one can’t be too cautious in selecting one’s business partners, even if they appear to be highly placed, e. g. Under State Secretaries and up. Additionally, there are just too many of them that have the title but no authority whatsoever. According to some sources for every ELC granted in the past there are one or two that fell for a scam and made some people good money for nothing.