GARMENT SECTOR WORRIES TARNISH GOVERNMENT-PRIVATE

UNCLAS SECTION 01 OF 03 PHNOM PENH 001169

SIPDIS

SIPDIS

STATE FOR EAP/MLS, EB/TPP/ABT--THOMAS LERSTEN, DRL/IL--MARK
MITTELHAUSER, DRL/PHD
STATE PLEASE PASS TO USTR--BARBARA WEISEL AND DAVID BISBEE
GENEVA FOR RMA
LABOR FOR ILAB--JIM SHEA, JONA LAI
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA

E.O. 12958: N/A
TAGS: ECON ELAB KTEX EAIR PHUM CB
SUBJECT: GARMENT SECTOR WORRIES TARNISH GOVERNMENT-PRIVATE
SECTOR LOVE FEST



1. SUMMARY. Business leaders and government officials
touted recent accomplishments in promoting economic
development during the Private Sector Forum, held June 21.
Despite predictions of 2.5% economic growth in 2005,
Cambodia's GDP actually grew by 13.4%, thanks to a bumper
rice crop and stronger than expected growth in the garment
sector, tourism, and construction. Participants detailed
plans to renovate and reopen the Sihanoukville airport,
described the expanded banking system, and enumerated other
areas of progress. Garment manufacturers' concerns about
increasing numbers of labor disputes and the lack of progress
on negotiating nightshift wages were a strong but solitary
negative note in an otherwise mutually congratulatory event.
END SUMMARY.


2. The biannual Private Sector Forum is a plenary cabinet
meeting open to the business community and broadcast live on
all Cambodian television stations. Private sector and
government co-chairs of seven working groups gave
presentations on progress made on issues affecting the
business environment and seized the opportunity of the Prime
Minister's undivided attention to ask him to make decisions
on a variety of issues, from the establishment of new
government bodies to the granting of a concession for an
acacia plantation.

Recapping an Extraordinary Economic Year
--------------


3. Finance Minister Keat Chhon and Prime Minister Hun Sen
opened the forum by describing Cambodia's remarkable economic
performance in 2005. Early forecasts for 2005 economic
growth hovered near 2.5%, due largely to fears that the end
of textile quotas would have a severe impact on Cambodia's
garment sector. In contrast to these dire predictions, the
garment industry grew by 12.6% in 2005. Other sectors also
did quite well, including 17.3% growth in agriculture (thanks
to terrific weather and a record rice harvest, as well as an
increase of 11.8% in the fish catch),19.2% growth in
construction, and 16% growth in tourism. Due to these
impressive growth rates, GDP increased by 13.4% in 2005.


4. Keat Chhon noted that Cambodia's economic growth has been
slowly accelerating since the formation of the post-UNTAC
government. Annual growth averaged 6.3% from 1994 to 1998,
8.7% from 1999 to 2003, and 11.7% for 2004 and 2005. Prime
Minister Hun Sen noted that the government expects much more
moderate economic growth in 2006--currently projected at 5%.
The Prime Minister also requested donor and private sector
support in two key economic development projects: training
Cambodian workers and providing raw materials for special
economic zones, and promoting agricultural exports.

Cambodian Tourist Facilities: If You Build It, They Will Come
-------------- --------------


5. Lay Prahos, Minister of Tourism, described ambitious
plans to expand the lure of Sihanoukville's beaches by
repairing the city's airport. Many tourists in Cambodia
spend just a few days in the country touring the Angkor Wat
ruins at Siem Reap as part of a longer trip to Thailand or
other countries. The tourism sector believes that a flight
from Siem Reap to Sihanoukville--which would likely take
about an hour--would lure far more Angkor Wat tourists to the
beach than the current 9 hour drive. The Minister expects
that the Sihanoukville airport renovation project,whose
contract was recently withdrawn from Ariston Company and
given to Societe Concessionaire des Airports, will be
completed by January 2007. Within ten years, he hopes that
the runway will be extended to 4,000 meters so that large
planes can land, eliminating the need for Cambodia-bound
travelers to transit via neighboring countries. The Tourism
Minister also mentioned his ambition for a 4,000 meter-long
runway in Phnom Penh and small airports in Ratankiri and
Stung Treng.


6. The Prime Minister exhorted provincial governors to
promote tourism in their provinces, noting that Cambodia's
tourism potential is not limited to Phnom Penh,
Sihanoukville, and Siem Reap. He noted that domestic tourism
is an important first step--if Cambodians travel to ruins and

PHNOM PENH 00001169 002 OF 003


other tourist attractions safely, then foreign tourists will
follow. He also called for Cambodia to replace its
reputation as a sex tourism destination and instead to become
known as an eco- and cultural tourism destination only.

Banking Services Expanding
--------------


7. Charles Vann, private sector co-chair of the finance and
banking working group, noted that the banking system in
Cambodia had both improved and expanded in recent years. The
National Bank of Cambodia's relicensing process increased
confidence in the banking system, foreign deposits rose, and
the loan to deposit ratio increased. Moreover, banks have
expanded their reach, both by opening more branches outside
of major cities and by the introduction of ATMs. Meanwhile,
the interest rate for microfinance lending has dropped from
50% per year five years ago to 25% per year today. Chea
Chanto, Governor of the National Bank of Cambodia, noted that
Cambodian micro-finance institutions won three out of five
prizes for financial transparency in a recent worldwide
competition sponsored by a World Bank-affiliated group, the
Consultative Group to Assist the Poor.

Garment Sector Worried about Labor Problems
--------------


8. Van Sou Ieng, Chairman of the Garment Manufacturers
Association of Cambodia (GMAC),noted that in 2005, garment
exports topped USD 2.2 billion and accounted for 15% of
Cambodia's GDP while the garment industry employed 280,000
workers and indirectly supported 1.5 million people. He
credited this growth mainly to the reimposition of US and EU
safeguards against China, and reported that in the first five
months of 2006 garment exports have risen 15% over the same
period last year.


9. However, Van Sou Ieng also warned that unions are scaring
off buyers due to excessive strikes, 95% of which are
illegal. He noted that buyers fear that labor unrest will
damage their reputations for social responsibility and lead
to late shipments. Many buyers are delaying confirming their
garment sector orders until after July 3, when the Free Trade
Union and Cambodian Independent Teachers' Association have
threatened to hold a general strike. Van Sou Ieng complained
that garment factories face intense scrutiny under the law
and factory monitoring programs, while many unions lead
illegal strikes without penalty. Moreover, some unions
prevent willing employees from working during strikes through
threats, blockaded factory gates, and burning tires near
factory entrances. Finally, overly liberal labor laws allow
small numbers of workers to form unions and then protect the
three most senior leaders of each factory-level union,
creating a proliferation of unions and essentially
undismissable union leaders.


10. The GMAC chairman also lamented that no progress had
been made on resolving the issue of nightshift wages, an
issue which has been outstanding for more than two years.
The Labor Law currently states that any employee working
between 10 p.m. and 5 a.m. must be paid 200% the normal wage.
Commerce Minister Cham Prasidh asserted that this was meant
to apply to overtime work during those hours, but due to
vague wording also applied to nightshift workers. Nightshift
wages in other southeast Asian countries range from 110% to
130% of normal wages, and Van Sou Ieng and Cham Prasidh
appealed to the Prime Minister to set nightshift wages at
130%. They claimed that this move would encourage factories
to start a third shift, thereby creating 150,000 jobs.
(Comment: This claim, based on every existing factory
expanding from two to three fully-staffed shifts per day,
seems exaggerated. End comment.)


11. The Prime Minister acknowledged the garment sector
complaints, but said that he couldn't take unilateral action
to set a nightshift wage or resolve labor complaints. He
appealed to both sides to compromise, and appealed to workers
to "pay attention to your cooking pot," or economic
interests. If garment factories close, workers won't get USD
45 (the current monthly minimum wage),they will get nothing,
he noted. At the same time, he remarked that upholding labor

PHNOM PENH 00001169 003 OF 003


standards was inherently important: "Labor standards are not
about getting exports to the US, they are about upholding
human rights." The Prime Minister also said that the same
labor standards that apply to industry at large need to apply
to Cambodia's special economic zones.

Hun Sen Takes Aim at His Favorite Targets
--------------


12. In addition to his comments about economic matters, Hun
Sen also used the opportunity of a captive cabinet,
diplomatic corps, business sector, and television audience to
take aim at some of his favorite targets of late: the World
Bank and United Nations Special Representative for Human
Rights Yash Ghai. The Prime Minister described Yash Ghai as
"ignorant" and decried his willingness to criticize
Cambodia's human rights record while spending little time in
country. Moreover, he said it made little sense for the
international community to criticize Cambodia for its poor
human rights record but then ask for Cambodia's assistance in
persuading Burma to respect the human rights of its people.


13. Hun Sen accused the World Bank of demanding repayment of
allegedly misappropriated World Bank loans without providing
sufficient evidence. Even Saddam Hussein and Slobodan
Milosevic had a chance to see evidence and defend themselves,
he noted. He pledged that the government would protect
witnesses who came forward, asked companies to pay their
taxes on time so the government would have the money to repay
the World Bank, and told the country to prepare for a future
without foreign aid.


14. COMMENT: Given 2005's unexpectedly impressive economic
growth, this year's Private Sector Forum was largely a chance
for government and business leaders to publicly congratulate
themselves for a job well-done. Garment manufacturers'
worries about labor troubles and the business limitations of
high nightshift wages were the sole serious concern in an
otherwise upbeat meeting. Hun Sen was at his charismatic
best, benevolently agreeing to common sense proposals while
taking the high road and refusing to take unilateral action
on labor disputes, all while using humor to attempt to defuse
recent criticism from the World Bank and UN Special
Representative for Human Rights Yash Ghai. END COMMENT.
MUSSOMELI