CAMBODIA'S construction industry is on the verge of a takeoff but certain factors
- the industry's poor quality, anarchic tender processes, financial improprieties
and arbitrary taxes and duties - could slow its growth.
One problem is that there is too much competition, according to some company officials.
Of Cambodia's 2500 registered companies, 1,200 are construction firms.
When construction projects are put out to tender, "everyone answers the tenders",
says Thierry Loustau-Khao, Directeur Général of L.B.L. International.
Bidding wars - sometimes over who offers the highest bribe to have their tender accepted
- frequently break out, say other construction officials.
Bids vary by as much as 200 percent - compared to 10-30 percent in many other countries.
For instance, recent bids for a Phnom Penh electric substation ranged from $5 million
to $25 million.
The lowest bidder, at least until now, usually wins, but that doesn't mean it earns
profits, argue construction firm officials. "New firms just want the business
and they don't carry out surveys in advance," says Ken Hann, Vice Managing Director
of M.M.C, adding that some bids don't cover the cost of doing the work.
The quality of the job can suffer as companies cut corners to skimp on money. "It
is quite common that the low bidder uses lower quality cement or fewer steel beams
than specified in their contract," says one company general manager.
The downside for customers who accept low bids is often high maintenance costs once
the building is completed. One executive cites the Hong Kong Center, the Landmark
Hotel and the Royal Phnom Penh Hotel as buildings which required maintenance work
almost as soon as they were built.
Several expatriate firms complain of difficulty in breaking into Cambodia's construction
market, particularly given the extent of bribery.
"The typical Cambodian firm automatically gives 2.5 percent of the contract
price to the official who is making the decision about which company to hire,"
says one official. "Sometimes a bidding war breaks out to see who can give the
But the biggest obstacle to profits is the high cost of construction in Cambodia.
Low labor costs are more than offset by the expense of importing materials, transportation,
and supervising unskilled workers.
"It is 10-20 percent more expensive to build in Phnom Penh than in Bangkok,"
said Philippe Sire, Branch Manager of Dumez-GTM Cambodge, "and Siem Reap is
10-20 percent more expensive than Phnom Penh."
Arbitrary taxes and custom duties add to the costs. "Customs on identical goods
differ according to the mood of the customs official," complains one manager.
"Add to that the time spent trying to clear it through customs and the cost
of paperwork, and it suddenly becomes very expensive to import materials into Cambodia."
All in all, "the construction industry is in anarchy," notes Khaou Phallaboth,
a comment echoed by others.
Despite the difficulties, executives are still optimistic about the future, mainly
because Cambodia desperately needs infrastructure. "The country has no roads,
no bridges. It must build basic infrastructure in order for it to grow," said
K. Kenzaki, General Manager of Maeda, the largest Japanese construction firm in Cambodia.
Indeed, development plans abound. Managers proudly point to a host of projects, such
as the $120 million international airport, the $90 million international school,
two $15 million Hyatt Hotels, bridges, industrial and housing estates, and power
The construction industry will grow 10-15 times over the next decade, predicts Khaou
Phallaboth, Executive Director of the Khaou Chuly Group. Philippe Sire, of Dumez-GTM,
reckons the number of tourists and businessmen coming to Cambodia will leap 10 times
over this period.
Some companies believe customers' demands are slowly changing, which will help boost
the industry. "Many customers realize that over the long-term, because of high
maintenance costs, it costs more to construct a cheap building than one of higher
quality," said Roy Barram of Roymar Services. He says more and more investors
are demanding more sophisticated buildings, with higher-quality wiring, air-conditioning
and safety provisions.
With most firms confident of industrial growth - and higher profits - in the future,
what could derail this rosy picture? Several companies cite political instability
as the chief threat to their coffers. "Just yesterday I had an international
company cancel a huge project because they are worried about civil war," says
Beyond political risk, which must be factored into the cost of doing business in
Cambodia, the construction industry is threatened by the high cost and erratic supply
of materials. Roy Barram of Roymar Services sees the cost of materials, spurred by
increasing demand for quality, skyrocketing.
The erratic supply of materials could also threaten future prosperity. Many larger
firms are trying to ensure a guaranteed supply of materials by constructing in-house
plants or forming partnerships with other firms. Many plan to build their own casting,
steel, cement, pipe, or pile factories. While they won't achieve economies of scale,
they seek to reduce, not eliminate, their vulnerability to the erratic supply of
Some local firms are bolstering their balance sheets by seeking international firms
with deeper pockets and world-renowned credibility. Seng Enterprise, for example,
is forming partnerships with the Korean giants Goldstar and Hyundai in order to compete
for turnkey projects. Khaou Chuly MKK Construction has formed a joint venture with
In order to reduce their dependence on expensive expatriate supervisors, firms are
training Cambodian workers. M.M.C. trains some of its employees in its Malaysian
office. Maeda's offices are filled with eager workers learning computer software.
Meanwhile, many companies hope that government regulation will end irregularities
and boost the credibility of the Cambodian construction industry worldwide.
Twelve to 15 firms have met to plan to form a Federation of Construction Companies
to work with government ministries to establish standards of quality.
For instance, "if the ratio of sand to cement in sewage pipes is not regulated,"
says Khaou Phallaboth, "they will deteriorate in several years. Also, because
bricks are not sufficiently heated, some international companies refuse to use Cambodian-made
By offering a federation "seal of approval", the firms hope customers will
be prepared to pay the extra cost to ensure higher quality.
"The federation will ensure that companies will guarantee completion of the
project and that they have insurance," says Thierry Loustau-Khao.
Executives also hope the federation will help stamp out some of the excesses of the
tender process, making it more transparent and honest.
Many issues are unresolved, most notably enforcement. While the federation's advocates
want tougher standards, they know that sharpening the teeth of ministries may bring
about an unwanted degree of regulation in the minutiae of construction affairs.
While expressing optimism about the industry's prospects, companies are aggressively
maneuvering to compete better in the fat years to come.
Those without the wherewithal to band together to promote higher standards, to invest
in modern equipment, train staff, attract strong partners and ensure material supplies,
may find the boom years pass them by.