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SEZ policy hinges on infrastructure

Jayant Menon, lead economist for the Regional Cooperation and Integration Division of the Asian Development Bank, talks to the Post last week in Phnom Penh.
Jayant Menon, lead economist for the Regional Cooperation and Integration Division of the Asian Development Bank, talks to the Post last week in Phnom Penh. Heng Chivoan

SEZ policy hinges on infrastructure

A recent study by the Asian Development Bank (ADB) found that Cambodia’s special economic zones (SEZs) had attracted significant levels of foreign investment and created nearly 70,000 jobs that would not have existed otherwise. The Post’s Cam McGrath sat down with Jayant Menon, lead economist for ADB’s Office for Regional Economic Integration, to discuss the role and impact of the country’s SEZ program.

How successful have Cambodia’s special economic zones (SEZs) been in attracting FDI to the country?

Cambodia is a late-comer to the whole SEZ scene, but the Phnom Penh Special Economic Zone (PPSEZ) in particular has been very successful in my view because it’s attracted investments that would not otherwise have come to Cambodia. So in that sense, there’s additionality. It’s not replacing investments that might have gone to some other part of Cambodia anyway.

What are the primary advantages of operating in SEZs?

The Cambodian approach is one where SEZs are pretty much delegated to the private sector. They’re run by the manager of the SEZ and provide a sort of enclave whereby they have access to reliable and relatively cost-effective electricity, although at a much higher price than Thailand and Vietnam.

They sort of provide a one-stop shop service, which helps in terms of simplifying the paperwork and procedures when it comes to setting up a business. They also provide a relatively safe and secure geographically-bounded area that is attractive to firms and limits union militancy. While it doesn’t take it away completely, the perception, at least in PPSEZ, is that it reduces that risk.

How have the Thailand + 1 and China +1 policies pushed firms toward Cambodia?

The initial driving force for many Japanese firms to look at Cambodia was a result of these policies: Thailand +1 after the Thai floods disrupted the production chain in 2011, and China + 1 for other reasons, including rising wages. Wages in China are now much higher than those of Thailand and reaching Malaysia levels. Chinese firms are moving out of China because of rising wages at home.

That wasn’t enough by itself; it had to be a confluence of push and pull factors. So Cambodia offered a number of pull factors, like a highly-open investment regime with attractive incentives, competitively priced low-cost trainable labour and facilities provided inside the SEZ.

Do you expect we will see light labour-intensive industries in SEZs transform into heavier or more technical industries?

It can and will happen in Cambodia if the domestic conditions are right. Right now one of the big barriers to producing parts of products, apart from just sticking them together, is the very high cost of electricity. And producing these components is highly electricity intensive. Unless the cost of electricity and its reliability comes to a point where it is competitive with Thailand, that will continue to be a barrier to shifting out of labour intensive activities.

The other is as we move up the value chain the skill set of the labour force required also changes. Right now all they need is trainable labour – labour that has basic numeracy, literacy and cognitive skills. But if you’re going to move up the value chain you’re going to need a better-skilled labour force. Not just trainable, but a slightly trained labour force that has got vocational and technical skills, and even engineering skills that can be used to make it profitable.

There are over 30 SEZs registered in Cambodia, yet only nine are operational. Why are so many inactive?

I think SEZs are successful when they are established in areas where there is good access to infrastructure and facilities. If you try to create an SEZ in a remote area expecting that infrastructure and facilities will develop to serve the SEZ then you’ve got it around the wrong way – and I think this is what we’ve been seeing in some cases. The SEZ needs to be created in areas that have infrastructure and facilities for it to become viable and attract firms.

ADB is funding the development of several economic corridors that traverse Cambodia. Where do SEZs fit in?

The regional supply chain survives on moving parts or components in and out of countries cheaply and efficiently, because they have to be processed and value-added in many countries before the final product is completed. So unless you’ve got good connectivity, which is what these corridors provide, it’s not going to be viable.

This is activity that survives on minimising cost, otherwise investors wouldn’t bother with this complicated process of doing things in many countries. And if you can’t move the parts quickly and efficiently through countries the basic motivation is lost.

This interview has been edited for length and clarity

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