Cambodia Under the Spotlight: The road ahead offer many opportunities.
A strong economic outlook is driving renewed interest and new investments to Cambodia.
SWith stiff regulatory environments, unstable internal political situations and a general drying up of opportunities in some of the largest Southeast Asian countries, investors are slowly starting to venture out into frontier markets in search of new ones, and it seems it may be time to shine for often overlooked nations like Cambodia.
“There are a couple of things that make Cambodia relatively attractive to investors,” says Mr Morten Kvammen, the Principal Entrepreneur at Lotus Capital, a financial advisory and business development firm in the Greater Mekong Region. “One of the main reasons is that most of the wealth is concentrated in the capital, Phnom Penh. There was a report published by the Economist Intelligence Unit last year, with a review of all Asian cities, showing that the average household income here is almost as high as Bangkok, with just over US$10,000 per annum. And it’s not just that the wealth is in the hands of a few wealthy individuals either, around 50% of households are above that threshold.”
In terms of access, the country is sandwiched between Thailand and Vietnam, making it a strategically viable extension market for those with activities in either of those larger markets.
“Phnom Penh’s 200,000 households that qualify as middle income makes it an easy to penetrate market geographically, and the economy as a whole has been developing quite rapidly, with GDP annual growth rate at over 10% per annum up until 2009, but it’s still churning at a rate of 7% today.”
Interestingly, the same report by the Economist expects middle income households to reach half a million by 2030, with income levels surpassing Bangkok.
What makes Cambodia unique in comparison to Thailand and Vietnam is that it’s a dollar-based economy – banks operate in USD and most goods can be bought and sold in it – which circumvents any issues with local currency hedging and large exposures.
Corporate taxes hover around 20% and for ventures requiring USD 2 million and more in investment, there is an option to apply for approval as a qualified investment project from the Council for the Development of Cambodia, for the exemption on import duties and import VAT on capital equipment that is required for setting up operations, and in most cases companies can also apply for exemption on profit tax for a period of 3-7 years.
Foreigners can also own 100% of companies in Cambodia and there is no protectionism or restrictions like banking and finance, and telecoms, which further sets it apart from countries like Thailand.
The only restriction is on land ownership whereby a person can own 49% of a company that owns a piece of land, although in reality it’s fully legal to
have a long-time lease for 50 or 99 years, which, according to Kvammen, is the equivalent of full ownership.
Cambodia is still a fairly basic economy, so most of opportunities are centred around traditional sectors, such as garment manufacturing, tourism, and general trade, especially anything to do with the local consumer market, which has expanded tremendously in recent years. Mr Kvammen notes that they are witnessing a professionalisation of the entire goods distribution and the move away from non-branded, cheap quality knockoffs to higher quality goods, so branded retailing and franchise development is definitely having its heyday.
“It’s also worth mentioning that there’s a lot less competition here, whereas Thailand has a very well developed local business community. Usually larger companies tend to skip over Cambodia much the same way as they skip over Laos, in favour of Myanmar, which has a huge market opportunity, but is not yet ready for primetime.”
Setting up a local entity can be done in as little as a week, but realistically it’s a 2-4-week process if it’s done by the book and in a transparent way, and even the aforementioned approval for qualified investment projects that is supposed to take 28 days, may take anywhere from 3-6 months if no shortcuts are taken, but Kvammen assures there are enough qualified legal advisors that can help navigate bureaucracy and avoid hot waters later on.
Scandinavian presence in Cambodia is still nacent, but there is a well-established Norwegian car distributor with a nationwide service network of repair shops and the owner also has a protective clothing manufacturing company, but most entrepreneurs are focusing on hospitality and food & beverage sectors.
Apart from frontier entrepreneurs, big business is also starting to take notice of the country’s various opportunities.
In February, a US delegation comprising 14 companies, including General Electric, 3M and Coca-Cola embarked on a two-day visit with local government officials to gauge the challenges and opportunities the country affords.
Mr Michael Michalak, regional managing director of the US-ASEAN Business Council, said in a statement to the media that the companies, representing sectors ranging from agriculture to automotive, “generally came away optimistic”, although another representative for the delegation considered Cambodia’s suitability for investment as a “mixed bag”, contrasting heavy spending on infrastructure and a growing focus on IT with slow integration with Asean, corruption and high energy prices.
Mr Kvammen points out that while infrastructure has defintely been an issue in the past – with electricity being exorbitantly expensive and blackouts a common occurrence – the government has stepped up their game considerably over the past 4-5 years in developing large amounts of locally generated power along with much improved power distribution.
Road infrastructure, too, has been getting better, increasing the speed at which goods can be moved around the country.
Corruption, unfortunately, is still part of everyday life, and most businesses are subject to requests for “facilitations payments”, in other words small kickbacks to government officials to actually do their jobs, e.g. filing the processing the paperwork for setting up a company or doing monthly tax filings.
“While the sums are insignificant, they would of course be a hindrance for people that have zero tolerance for corruption. To avoid this, you need to set your standards right up front and it is possible to do business here without engaging in corrupt practices, it just means that things take a bit longer.”
The establishment of the AntiCorruption Unit a few years back has been seen as a step in the right direction and a lot of multinationals use it to report various shady practices. Mr Kvammen’s advice is to push back to the initial facilitation payment requests, which may slow things down a bit eventually, but that they should continue smoother from that point onwards.
Cambodia’s pro-business government seems to be at least aware of the issues with electricity prices and corruption. Some ministries are reportedly even working on digitising their services, a move that should increase transparency and further reduce opportunities for graft. The Education Ministry plans to add more secondary schools ready to develop a highly skilled workforce of the future, should also not be overlooked.
For investors with some patience and the ability to look at the bigger picture, may indeed finally provide Cambodia its moment in the sun.
Above left: Map of Cambodia and neighbouring countries. Above: Skyline of Phnom Penh including Central Market.