INVESTOR INTEREST IN CAMBODIA SURGES DESPITE CHALLENGES

UNCLAS SECTION 01 OF 03 PHNOM PENH 001575 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/MLS, EB/TPP/ABT, EEB/TPP/MTA, EEB/TPP/BTA STATE PLEASE PASS TO USTR--BISBEE AND WEISEL STATE PLEASS PASS TO US TRADE AND DEVELOPMENT AGENCY--WINKATES BANGKOK FOR USAID--KISSINGER, FCS--BACHER, FAS--MEYER HANOI FOR FAS--WADE AND RALPH, FCS--NAY HO CHI MINH CITY FOR FCS--MARCHAK AND LE COMMERCE FOR ITA/OTEXA--D'ANDREA, ITA/MAC--MIKALIS AGRICULTURE FOR FAS/OCRA--RIKER TREASURY FOR INTERNATIONAL AFFAIRS--CHUN AND WALSH E.O. 12958: N/A TAGS: EINV ETRD KCOR EAGR EAID CB CH SUBJECT: INVESTOR INTEREST IN CAMBODIA SURGES DESPITE CHALLENGES REF: PHNOM PENH 1506 PHNOM PENH 00001575 001.2 OF 003 ¶1. (U) Summary: A dramatic surge in investor interest in Cambodia was evident during a recent investment conference held in Phnom Penh. Presenters emphasized a realistic view of Cambodia--a country with tremendous business opportunities, but where operating challenges such as corruption, poor infrastructure, and human capacity limitations must be overcome. Government officials pledged to promote economic diversification and use expected oil revenue wisely, though Prime Minister Hun Sen downplayed Cambodia's corruption problems. End summary. Surge in Investor Interest -------------- ¶2. (U) Foreign investor interest in Cambodia has surged in recent years, with foreign direct investment increasing 12-fold between 2004 and 2006 to USD 4.3 billion. Attendance at this year's investment conference was nearly double that of the last conference, held two years ago, with international businesspeople from a wide variety of industries accounting for roughly two-thirds of registrants. Brett Sciaroni, Amcit president of the International Business Club, noted that this investor enthusiasm flies in the face of Cambodia's dismal rankings on global indices of transparency and ease of doing business. Four key factors explain Cambodia's investment boom, Sciaroni said: sound macroeconomic policies which have created economic growth; legal and regulatory reform; political stability; and the government's extremely responsive approach to working with investors. (Comment: FDI appears to have slowed down considerably during the first six months of 2007, though when asked about this trend, the head of the Council for the Development of Cambodia, the government's investment-approving body, explained that it was largely about the timing of the approval of several large projects that would span years. Talking to Econoff after a different event, he laughed off others' concerns, saying, "Let them worry, I'm too busy approving new investments." End Comment.) Prime Minister: China's Rise is Opportunity, Not Threat -------------- -------------- ¶3. (U) Senior government officials at the conference described regional and global economic integration as a high priority, saying they hope to take advantage of neighboring countries' infrastructure and markets. They described an ambitious vision of an integrated road, telecommunications, and power network spanning Cambodia, Vietnam, Thailand, Laos, Burma, and southern China by 2012, and an equally ambitious regional trade network which would ultimately extend to nearly all of South and East Asia by 2017. ¶4. (U) Prime Minister Hun Sen was the first of several speakers to identify China's rise as an opportunity, saying that when people asked him if he was concerned by China's growth, he responded that he'd "rather have a million Chinese tourists than a millions Chinese migrants." Larry Strange, Director of the Cambodia Development Resource Institute (CDRI),observed that Cambodia is well-placed to benefit from Chinese growth and should become part of a greater China production and marketing network for agribusiness and tourism. Furthering this idea, Commerce Minister Cham Prasidh noted that China has already extended duty-free, quota-free access to many Cambodian agricultural and textile products. Both countries are looking to increase trade through the ASEAN-China Framework Agreement on Comprehensive Economic Cooperation. Economic Diversification Critical to Continued Growth -------------- -------------- ¶5. (U) Government speakers repeatedly emphasized their desire to diversify the economy away from its current dependence on tourism and garments, and outlined opportunities in agriculture, mining, energy, finance, manufacturing, labor-intensive industry, and infrastructure development. Cambodia is one of only 27 countries worldwide to have maintained an average growth rate of more than 6% for nine years or more, the World Bank's Stephane Guimbert said. Guimbert cautioned that maintaining such a high level of growth would be very difficult, and said that the key was diversifying exports. Several speakers highlighted Cambodia's special economic PHNOM PENH 00001575 002.2 OF 003 zones (SEZs),predominantly situated near the Thai and Vietnamese borders, as sites for manufacturing and export expansion. The SEZs boast relatively low labor costs; easier export-processing through one-stop service for all government permits; and close connections to the better infrastructure of Vietnam and Thailand. CDRI Director Strange noted that increased investment in the financial, telecommunications, and organic agriculture sectors is a promising sign that the Cambodian economy is beginning to develop a broader base. ¶6. (U) Several speakers highlighted agriculture, which employs more than 75 percent of the population, as a key sector for development. Strange said there was a consensus that agriculture is the engine of growth in Cambodia. Prime Minister Hun Sen said the government would allocate more resources towards developing the agriculture sector and would make large economic land concessions to investors interested in developing agricultural projects. Deputy Prime Minister Sok An suggested that he would like to use future revenues from oil to improve the agriculture sector, as well as building human and physical capacity. (NOTE: World Bank analysts are not as convinced Cambodia is ready for plantation-sized agribusiness, rather they argue that medium-sized freeholding plots tilled by many farmers all supplying large downstream food processing plants may be a better economic model for Cambodia. END NOTE.) ¶7. (U) Hun Sen and Sok An both expressed hope that Mondulkiri province, in the east, and Preah Vihear province, in the north, could become significant mining sites for bauxite and iron ore, potentially leading to billions of dollars in investment. Hun Sen referred specifically to negotiations with Australia's BHP Billiton to develop bauxite. On the issue of petroleum production, however, both leaders struck a more cautionary note, highlighting that no company has announced that oil or gas have been discovered in commercially extractable quantities. The senior officials expressed hope that, in the future, the domestic oil supply could help reduce the price of electricity, which currently is a major impediment to competitiveness for local industry. Hun Sen also promised to use petroleum earnings to reduce poverty; promote economic growth; and improve infrastructure, education, and health. Prime Minister Downplays Corruption Problems -------------- ¶8. (U) The Prime Minister downplayed concerns about corruption suggesting that the rise of Western businesses interested in working in Cambodia was proof that corruption was not a deterrent for businesses. In an apparent misunderstanding of a USAID-funded report, the Prime Minister mocked US-funded consultants for suggesting USD 15,000 per month salaries as a way to reduce corruption in the Customs Department. (Note: The report actually notes that some Customs officials reported paying up to USD 15,000 in bribes to obtain their positions. It also recommends increasing salaries, but does not suggest a particular amount. End Note.) ¶9. (U) The Ambassador responded to the corruption issue indirectly in his speech at an Embassy-hosted reception for conference participants. The Ambassador lauded the Cambodian government and people for dramatically changing the economic atmosphere via legal and customs reforms and a liberal investment regime. He then remarked that Cambodia must develop its work force, improve infrastructure, and, most critically, combat corruption if the country is to compete successfully with its neighbors. Emboffs also confirmed with the Ministers of Finance and Commerce the correct interpretation of the consultants' report. Private Sector Worries: Corruption, Poor Human Resources, and High Electricity Costs -------------- -------------- ¶10. (U) Private sector participants raised concerns about government transparency, weak human resources, and the high price of electricity during sectoral breakout sessions. Participants in several sectors felt obtaining action from the government is difficult without establishing personalized networks, creating an enabling environment for corruption. Lack of qualified workers also hampers business development across sectors. Participants also PHNOM PENH 00001575 003.2 OF 003 worried about competitiveness when electricity costs significantly more in Cambodia than in neighboring countries and demand for electricity is increasing by 50% per year. ¶11. (U) In response, Commerce Minister Cham Prasidh explained that Cambodia is starting from a very low base, following the elimination of capitalists and intellectuals by the Khmer Rouge during the 1970s. Today, the population is very young and is acquiring skills to contribute to the workforce. He invited investors to train the youth while Cambodia is an LDC, thereby developing a workforce at a relatively low price. The minister expressed hope that cross-border electricity supply from Thailand and Vietnam could ameliorate the electricity problem in the near-term, and investment in a variety of power sources could limit energy-dependency in the medium to long-term. He also encouraged interested participants to take their concerns to the Government-Private Sector Forum created to improve the business environment across sectors. COMMENT -------------- ¶12. (SBU) Cambodia's economic leaders clearly understand that rather than resting on its laurels, the Cambodian government needs to encourage economic diversification and work to promote increased investment if it is to maintain the country's remarkable levels of economic growth. Hun Sen's defensive comments about corruption were unfortunate and show the government's sensitivity about international pressure to manage resources wisely. Some private sector participants were sympathetic to the government's position, with one quipping, "Advice (about the oil revenue) is the one thing this country isn't short of." By the end of the conference, the two most striking factors were the government's laudable overall commitment to improve the investment climate and the enthusiasm among would-be investors. MUSSOMELI