Business rode a roller coaster up and down the year
Foreign investment, MFN, logging, dams and electricity – ’96 was a year of good,
bad and maybe for business and economics.
T HE year 1996 was mixed for Cambo-dia’s economy. First, the good news in-cluded that
the economy grew 6.4 percent, more foreign investment came into the Kingdom, and
the split of the Khmer Rouge (KR) held out the promise of new investment territories
and the potential of expanding tax revenues.
But there are question marks, and many of them. The budget is under pressure, primarily
because taxes from logging concessions are not being directed to the Treasury. Due
to concerns of bureaucratic red tape and political instability, investment – both
local and foreign – is merely trickling in. Lastly, the government appears to be
sending mixed signals to investors regarding its commitment to economic reform and
diminished market intervention.
The big question for the next year is whether the government would have the political
will to contain these stress points or will they widen into dangerous fissures?
Reporter Robert Lang offers a summary – by no means inclusive – of the key business
and economic news and developments that made headlines this year.
Logging, Gems and the Khmer Rouge
The most dramatic event of 1996, the defection of Khmer Rouge potentate Ieng Sary
and thousands of KR soldiers, opened up a wealth of business opportunities, as well
as political ones.
In theory at least, the fertile areas of Pailin, Phnom Malai and elsewhere along
Cambodia’s northwestern border with Thailand came into the Royal Government possession.
The extent the government, and the Cambodian people, will benefit from these natural
treasures, however, remains to be seen.
The area surrounding Pailin is rich with rubies and other gems, while Malai and other
areas have long been key logging areas. Years under the KR and Thai businessmen have
seen the depletion of these resources, but the area remains plentiful – at least
for gems – according to observers. As a new gem-rush from Phnom Penh begins, cynical
observers could be forgiven for thinking that most of the profits will go straight
into individuals’ pockets, and precious little into the national Budget.
One need only look at Cambodia’s record on logging, which took a battering in 1996.
In April, Cambodia’s Prime Ministers and Thailand’s then-Defense Minister (now Prime
Minister) General Chavalit Yongchai-yudh signed an agreement in principal granting
over a million cubic meters of timber concessions to 18 Thai companies.
Government officials claimed that the timber was cut before the April 1995 logging
and export ban. However, critics – most notably the London-based Global Witness –
doubted the claim and argued that cash from the concessions was divided between Thai
and Cambodian government officials, the military, KR, and logging companies.
The Ministry of Agriculture developed a forest management plan to present to a Cambodian
aid conference in Tokyo in July, promising to follow the guidelines of the World
Bank, UNDP and the FAO, which had produced their own less-than-positive verdict on
Cambodia’s logging policy.
By the year’s end, the government’s continued failure to direct taxes from logging
concessions to the Treasury began to prompt a sterner response. The IMF canceled
a US$20-million loan in November, saying it wanted the government’s promises about
logging to be translated into actions.
Economic reforms and the market economy: a question of commitment
The IMF was also piqued with the government for not reducing its number of civil
servants. An IMF/World Bank rule calls for the number of a country’s civil servants
to be pegged at between 0.5-0.75 percent of the total population, which pressures
the government to shed 50,000-70,000 jobs from its current level of more than 163,000.
It appears unlikely, however, that the Prime Ministers are prepared to lose any of
these jobs due to concern with the social problems of potential mass layoffs.
The National Bank of Cambodia issued the first bank licenses since May 1994, in apparent
contravention of an IMF recommendation that it limit or reduce the number of banks.
This brings the total number of banks in the Kingdom to at least 33. Some observers
are concerned with the qualifications of bank executives, the plethora of illicit
banking activities, and the supervisory capabilities of the central bank.
In January, the Cambodian Development Research Institute held a conference on the
World Bank-IMF “Structural Adjustment Program.” Second Prime Minister Hun
Sen called on economic policies to focus on rural development and on strengthening
the economic capacity of women.
Other participants expressed worries that economic reforms were not working in several
areas. They cited increasing food prices; unsustainable levels of external debt;
the government’s lack of ability to increase its revenues; proportionally low spending
on agriculture, health, and education; and the slow rate of incoming foreign investment.
Meanwhile, the prospect of a level playing field for investors in Cambodia came in
for questioning several times during the year.
In June, construction companies, assisted by potential government regulations, were
reportedly planning to set up a Federation of Construction companies that would function
as a cartel and eliminate competition in the industry. Supporters of the Federation
argued that it would ensure consistent quality in the industry.
In August, the Prime Ministers scrapped a competitive bidding system in the government
medical supplies industry by awarding a private company, Doung Chivv Import-Export
Tourism and Transport, a three-year monopoly on imports. The deal was in violation
of Ministry of Finance regulations.
In January, Hun Sen criticized Finance Minister Keat Chhon for not allaying importers’
concerns about difficulties in doing business in Cambodia. The Second Prime Minister
attacked the Swiss firm Societe Generale de Surveillance (SGS), whose approval is
required to move imports out of ports. Several large importers had complained about
SGS, while critics said that the Swiss firm came under criticism for reducing corruption
In May, the Council for Development of Cambodia (CDC) came under fire by First Prime
Minister Ranariddh for inefficiency and corruption. Criticis said CDC had become
a “full-stop investment shop” – not a one-stop shop as intended.
CDC became engulfed in politics as the CPP was seen as unhappy with the predominant
role of Funcinpec in it. Observers suggested that government ministries were jealous
of CDC’s power of investment approval.
The 1996 Budget and foreign aid
Planned expenditures in the $580.9 million 1996 budget were 15 percent higher
than the previous year. Of that, 27.5 percent was earmarked to defense and security,
a slight drop from the 1995 Budget.
The Ministry of Health received 8 percent of the budget, or $48 million, up from
$24.6 million in 1995. The Ministry of Education received 11 percent, or $68.4 million,
up from $49.6 million.
In addition to the shortfall of revenues from logging concessions, the budget came
under further pressure as the government leased huge tracts of land – five percent
of the entire area of the Kingdom – to the military, some of which was later leased
to a Korean religious sect.
On the aid front, Cambodia went into the Consultative Group conference in July in
Tokyo seeking funding for a proposed $1.6 billion of development priorities. It came
away with a total $501 million in pledges – after the Japan government chipped in
enough to take it over the $500 million mark – in what all agreed was a good result.
In Tokyo, donors stressed political stability, centralizing state revenues, and increasing
spending on health, education, and rural development, especially agriculture. Donors
also raised issues of transparency of the military and logging budgets.
On the flip side, it was noted that at least a quarter of the $501 million in pledges
would never make its way into the Cambodian economy – instead going to foreign consultants,
or spent within the country of origin.
Dams and rivers: economic boon or enormous waste?
The dam debate took off in 1996, with proponents and opponents equally sure that
they were right.
At least 17 hydropower dams are planned on a dozen Cambodian rivers, proposals strongly
supported by Japan, the World Bank and the Asian Development Bank. Much needed revenues
from electricity sold to Thailand, Vietnam and China would boost the national economy,
they said. Critics, however, questioned the environmental and social consequences,
and doubted whether dams made economic sense for the Kingdom.
Meanwhile, the Tonle Sap river had donors, consultants and experts lining up to determine
its future. Fifteen different studies were underway or planned for the river, leaving
some observers muttering about duplication and confusion.
To some experts, the Tonle Sap lake is over-fished, silting up and eroding because
of rapid deforestation. Others think it is going through natural change. The scientific
data is poor. The four million Khmers who are estimated to depend on the river and
its great lake for their livelihoods have an integral interest in future plans.
Cambodia entering the World Economy
In September, US President Clinton signed long-awaited legislation giving the
Kingdom Most Favored Nation status (MFN), to the delight of Cambodian officials who
squabbled over who could take the credit.
Cambodia has applied for Generalized System of Preferences (GSP) with the US which
would eliminate tariffs on many imports to America. Many observers believe that the
US will grant GSP to Cambodia within several months. The Kingdom already has GSP
with the European Union.
US companies began to apply to Overseas Private Investment Corp (OPIC) for political
risk insurance. An OPIC fact-finding tour to Cambodia saw no major snags for providing
American investments in Cambodia with insurance.
In December, Cambodia became a member of the International Finance Corp (IFC), a
member of the World Bank Group and the largest multilateral source of equity and
loan financing for private sector projects in developing countries.
Also in December, the Association of South East Asian Nations (ASEAN) presented Cambodia
with some potentially unsettling news. Its fate remains tied with that of Burma’s,
an international hot potato, but whether or not Cambodia would face a delay in joining
ASEAN remained unclear.
In April, Hungary held a trade fair in the Kingdom, while in June – spurred by the
establishing of diplomatic ties between Cambodia and South Korea – a large South
Korean delegation visited Phnom Penh to investigate investment potential.
In July, Keidanren, Japan’s most powerful business organization, sent a 56-member
delegation to Cambodia. In August, the Singapore Trade Development Board visited
the Kingdom, while in October, a large Hong Kong delegation came to Phnom Penh.
Cambodian officials expect the garment sector, propelled by foreign investment and
particularly MFN and the prospect of GSP with the US, to take off soon. Garment exports
are predicted to comprise 50-60 percent of total exports in coming years. Critics
argue the garment boon may not help the economy as a whole, and certainly not the
industry workers who are largely paid subsistence wages. At year’s end, workers at
Cambodia Garments Ltd formed a union – the first – and went on strike. They returned
to work almost a week later with a pay raise, apology for past mistreatment, and
How some companies fared
Several foreign investments appeared to become mired in political quagmires during
In March, Ariston – potentially one of the Kingdom’s biggest foreign investors –
delayed a $2 million installment to the government. The Malaysian company insisted
that the government follow the arrangement struck in January and pass the Casino
Law which would give Ariston a gaming monopoly. In May, although the law had not
yet passed, Ariston commenced upgrading work on the Kang Keng airport in Sihanoukville.
In June, Ariston officials complained of government inefficiencies, extortion demands,
kidnap-pings, and tough standards of living. Meanwhile, Ranariddh, whose Party is
widely considered to have played a leading role in negotiating the Ariston deal,
said he supported the closure of the Naga floating casino, owned by Ariston, if necessary.
Hun Sen, meanwhile, reportedly flew to Malaysia to offer personal assurances that
Ariston would be looked after.
In September, a Malaysian firm, YTL, and the government agency, Aspara, began negotiations
to resolve a long-standing dispute over a Siem Reap development plan.
On the more positive side, in July, Thailand’s largest conglomerate, Charoen Pokphand
(CP Group), began operations in Cambodia. By December 1998, CP plans to have invested
$15 million in the Kingdom.
In November, Cambodia Brewery Ltd opened a brewery that will produce Tiger Beer in
cans and kegs as well as canned Anchor Beer and ABC Stout. The company invested $46
million in the brewery.
The cigarette market also remains hotly contested in Cambodia. In 1996, the British
American Tobacco (BAT) company entered the fray, establishing a joint venture with
Cambodian Tobacco Company with a $25 million investment plan.
The government granted Royal Millicom Co Ltd a license to operate a cellular phone
network, the Kingdom’s fourth mobile phone network, while the Ministry of Post and
Telecommunications sold its 30 percent interest in Cambodia Samart Communication,
allowing it to be fully taken over by Thailand’s Samart Corp.
Caltex opened its first petrol station in Cambodia in June. The US-owned company
has committed an initial investment of $20 million.
Beacon Hill Associates and Houston-based Mosbacher Power Group signed a joint venture
agreement to build and operate a 60MW combined cycle power plant in Phnom Penh.
In October, Royal Air Cambodge (RAC) reported losses of $7 million for its first
12 months. Company executives claim that unprofitable domestic routes kept it in
the red, while a steady stream of criticism from some quarters continued. A month
later, RAC had its inaugural flight to Guangzhou – the Kingdom’s first direct flight
route to China.