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As reported by the Phnom Penhh Post, The United Kingdom Trade and Investment Office (UKTI) has announced it will establish a permanent presence in Cambodia. This seems to be a natural progression as trade between the UK and Cambodia has grown significantly over the past few years, and the UK was the single largest investor in Cambodia in 2011. While the UK’s superlative investment of $2.2 billion last year may have been seen an anomaly, the establishment of this office may portend otherwise. UKTI, through offering expertise and contacts, aims to aid UK companies doing business internationally.
Cambodia has been positioning itself for stories like this through reforming and integrating its laws (Legal and Judicial Reform) and participating in international organizations: WTO, ASEAN, etc. The Council for the Development for Cambodia (CDC) and the Ministry of Commerce (MOC) regulate investment in Cambodia. An overview of the CDC approval process can be found here. A more detailed account of doing business in Cambodia from banking to mining can be found here. Clear processes and quick decisions from the government can be welcome indicators for a company considering taking on a big risk in another country.
Special Economic Zones (SEZs) continue to be something to watch in this area. China’s Shenzen has demonstrated the power of a legal island of commerce. Cambodia has approved 21 SEZs, though not all have seen activity. Tax incentives, a streamlined regulatory process and factory integration can be big draws for a foreign company. More on SEZs here.
The Royal Government has just announced a temporary freeze on new economic land concessions. Economic land concessions have become hugely controversial in recent years, with incidences of forced evictions, land grabs and illegal logging in forest reserves. Prime Minister Hun Sen yesterday issued an order temporarily suspending new concessions, and calling for revocation of concessions found to be in breach of the law. According to Radio Free Asia’s report, the decree reads in part:
The government has issued this order to all ministries, institutions, and authorities, at all levels to implement: Temporarily suspend the leasing of land concessions… All ministries, institutions, and authorities must implement the government’s policy regarding land concessions, and they must ensure that land concessions don’t affect communal land or the daily life of the community… Authorities must ensure that land concessions will benefit the country and the people. Those companies that have already received licenses from the government, but have failed to honor their contracts by cutting down the forest instead of developing their concessions, encroached on the land of the people, operated businesses other than for the license granted, abused villagers, or abused communal land will have their contracts revoked.
The World Bank just released its annual Investing Across Borders report, and the section on Cambodia makes for interesting reading. Overall, I’d say Cambodia comes out looking pretty good – an extremely open economy, decent access to land, albeit a slow process for opening a company.
The authors looked to four areas affecting foreign investment:
- Restrictions on foreigner ownership across sectors: Cambodia scores a perfect 100 on every sector except electricity transmission and ports.
- Ease and speed of setting up a foreign-owned business: 45 out of 100 on their index, versus a regional average of 57.
- Acquisition of industrial land: No ownership rights for foreigners, but lease rights are very strong. Also, land can be leased much quicker than the regional or global average
- Arbitration of commercial disputes: The report gives decent scores for the arbitration law, but it’s waiting for the National Arbitration Center to launch before it’s actually implemented.
One measure that could have been included is of rule of law, or effectiveness of the court system. That’s often the top concern of investors I’ve met with, as they’re skittish about putting money in a place which is perceived by many to have weak legal investment protection. I guess the arbitration measure is meant to capture this, but arbitration is only one means to resolving a dispute.
Further, Cambodia currently has NO commercial arbitration at all (see the post below). The report seems to score Cambodia based on the text of the as-yet unimplemented Law on Commercial Arbitration. A fictitious exercise if you ask me.
Camko City - Future Home of the Cambodian Stock Exchange
The last three years have seen a surge of anticipation for a fully functioning stock exchange in Cambodia. Expected to be established in CamKo City, hopefully by the end of the year, the Cambodian Stock Exchange (CSX) will be a joint-venture between the Korean Exchange and Cambodia’s Ministry of Economy and Finance (MEF).
Proponents of the exchange point out the potential benefits of raising much needed capital and thereby facilitating growth in local companies. A less publicized benefit of a well functioning stock exchange in Cambodia may be that it will encourage a more rational allocation of resources, given the current propensity of Cambodian investors to park their money in land for long periods of time.
Until March 1st, the Stock Exchange Commission of Cambodia (SECC) accepted license applications from firms seeking to participate in the future stock exchange. According to press reports, twenty-two national and international firms applied. A qualifying firm must comply with rigorous standards. The legislation states that along with having a sound corporate structure, firms seeking a securities license must have a minimum capital between USD 96,000 to 9.52 million. Prospective firms must also pay a license fee ranging from roughly USD 100,000 to 10 million. The minimum capital requirements and license fees vary depending on the type of securities license sought.
The SECC is currently reviewing its twenty-two license applications and is expected to reveal very soon which firms qualified for and will receive licenses. With only three state owned companies announced to list on the stock market—Sihanouk Autonomous Port, Phnom Penh Water Supply Authority, and Telecom Cambodia—experts believe that the SECC should grant licenses to fewer than half of the applicant firms, or risk oversaturation of the fledgling stock market.
Although the SECC’s receipt of so many securities license applications was a relative success in the journey to open the CSX, numerous obstructions in the path still exist. Such obstacles include the unfinished CSX premises, of which construction has yet to commence and disagreement over which currency to use. Some argue that the CSX should be used as a vehicle for promoting the local Riel while their opponents point out the value of sticking to the more stable US Dollar.
Another considerable obstacle is the lack of private companies interested in listing or able to list on the CSX. Although one private company, Cambodia Air Traffic Services, has publicly expressed interest in listing, many companies distrust the proposition of going public through the CSX. It is probable that many companies are adopting a wait and see approach while other companies simply cannot meet the revenue and transparency/accounting standards necessary to list. Further, the three state-owned companies that have already announced their intention to list have yet to court investors and the SECC has yet to issue the legislation necessary to transform the companies into public entities.
Despite the fact that there is still a lack of necessary legislation to enable the CSX in some areas, the advent of the stock exchange has already prompted the creation of other key legislation. For instance, 2009 saw a much needed fillip to Cambodian corporate governance legislation with a strengthening of standards of internal auditing for public enterprises and the creation of an Internal Auditing Department through the Ministry of National Defense. Most recently, the SECC released a Prakas stipulating corporate governance requirements for companies to list on the CSX.
Even with these legislative in-roads, and the SECC’s success in receiving abundant securities license applications, experts still predict that the CSX will not open until the second quarter of 2011 or even until 2015.
Whatever the case with the eventual start date, it is better to have the commencement of the exchange delayed until it is truly ready to ensure some measure of investor confidence rather than open early because of some arbitrary deadline.
Update: Government minister says the exchange won’t open until next year, at the earliest. Story here.
The Post reports on the latest government statistics, showing a 49% increase in company registrations this quarter compared to a year ago:
A total 663 businesses registered this quarter, compared with 445 in the same period of 2009. Of those, 373 were local companies, an increase of 44 percent over 2009’s first quarter, but a smaller jump than the 56 percent increase in foreign companies.
Two factors are behind the numbers: 1) entrepreneurs and foreign investors setting up new businesses, and 2) existing but previously unregistered businesses finally registering. Without more data, it’s impossible to tell the relative effect of each. Both are good signs though, as it shows a rebound in the economy, as well as progress towards the rule of law. For more on registering a business, see our publication.
Over the past several years, Cambodia has established procedures and granted permission for a number of Special Economic Zones to operate in the Kingdom. The idea is to offer a “one-stop-shop” for setting up a business, particularly manufacturing factories. Infrastructure, labor, and government administration are all grouped in a single place, making it easier to get up and running. Of the 21 approved, 8 are up and running – mostly along the border with Thailand and Vietnam.
An article in today’s Post on the subject caught my attention, particularly the following quote from Hidetoshi Nishimura, executive director of the Economic Research Institute for ASEAN and East Asia:
“The important thing [for Cambodia] is to get foreign money to foster its domestic industry. SEZ development in Cambodia is a potential way to produce exports for China,”
SEZs were pioneered by China in the early 1980s, and proved an enormously successful experiment in capitalism that lead to the economic giant we see today. It’s interesting to see that China is now exporting the SEZ model to its neighbors, so they can export goods back to China.
For more on Cambodian Special Economic Zones and other investment incentives, see our publication here.
