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Rethinking investment laws

An employee of newcomer Tata walks in front of a Farmtrac tractor at the company’s showroom in Phnom Penh
An employee of newcomer Tata walks in front of a Farmtrac tractor at the company’s showroom in Phnom Penh late last year. Pha Lina

Rethinking investment laws

Cambodia’s 11-year-old investment law may be the most liberal in the region, according to the World Bank, but in practice, day-to-day business operations are far from simple, economists and business operators say.

Mey Kalyan, senior adviser to the Supreme National Economic Council, said that despite a generation of economic growth resulting from Cambodia’s lenient laws governing foreign direct investment (FDI), unclear registration and tariff schemes remain hurdles for daily business operations and the laws are out of date.

“From a historical perspective, Cambodia started its economic development from an empty hand. So the only way to activate its economy was to adopt a liberal system,” Kalyan said.

“We need to review our FDI laws in order to reflect the new reality and the economic direction that we want to go because our laws were formulated a long time ago.”

He added that despite Cambodia’s easily accessed economy, daily business operations such as acquiring certificates and permits, registration and informal payments remain hurdles for foreign business.

The call for a rethink on FDI laws comes after the World Bank on Monday released its East Asia and Pacific Economic Update. The report ranked Cambodia as the most liberal nation in the region for foreign investment, with Singapore coming in second. Thailand, the Philippines and Malaysia meanwhile, rank as the most restrictive nations for FDI, according to the Bank’s report.

“Regional experience indicates that where countries have relaxed foreign ownership restrictions, FDI has increased . . . In Cambodia and Vietnam, foreign investment reforms led to significant growth in FDI,” the report says.

Established in 1994, Cambodia’s investment laws were loosened in 2003 to allow 100 per cent foreign ownership of any business, relaxing of certain import duties and allowing renewable land leases of up to 99 years.

According to World Bank figures FDI has increased dramatically from less than $200 million in 2003 to $1.41 billion in 2012. There was a decline last year to $1.2 billion that the bank attributed to uncertainty brought on by post- election turmoil, but the bank estimates FDI to be on the rise again over the next three years reaching $1.52 billion in 2016.

On average, the Asean region allows 72 per cent of a business entity to be foreign owned, according to the World Bank report, making it the least liberal of nearly all regions across the globe for allowable foreign ownership.

Associate principal at China Market Research, James Roy, said Cambodia’s foreign investment laws are crucial to keeping the country competitive with Thailand and Vietnam. However, it is important that FDI is used to generate domestic benefits.

“Allowing 100 per cent foreign ownership, along with protections against nationalisation, helps lower the perceived risk for companies to invest in Cambodia,” he said.

“There are dangers especially if most of the gains of economic growth are retained by foreign-owned companies and do not translate to Cambodians themselves and improve their lives.”

In November last year, Sok Chenda, secretary-general of the Council for the Development of Cambodia, announced that there would be changes to the Kingdom’s investment laws.

Chenda said at the time Cambodia’s investment climate needed to be cleaned up and adjusted to suit the new economic environment and to remain competitive with countries like Myanmar.

A specific date for a law revision has yet to be announced.

But attractive investment laws are just one part of the draw for FDI. More is needed to improve the regulatory environment for starting up a businesses and enabling cross-border trade if Cambodia is to improve on it’s current ranking of 137 out of 189 economies on the World Banks ease of doing business index.

Despite 12 months of market research on Cambodia, India-based Tata International Ltd, incurred delays and struggled to find enough qualified staff when they began operations in farm machinery sales in November.

“The cost of doing business on a daily basis was quite a bit higher than what we initially assumed,” Jitendra Manghinani, country manager of Tata South East Asia (Cambodia), said. “That all said, we have seen growth much better than our expectations,”

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