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Tax breaks without roadways a meaningless gesture: CDC

Workers construct a section of the road on the southern outskirts of Phnom Penh late last year.
Workers construct a section of the road on the southern outskirts of Phnom Penh late last year. Heng Chivoan

Tax breaks without roadways a meaningless gesture: CDC

Regardless of how attractive Cambodia’s incentive policies are, tax holidays and custom tariff reductions designed to lure investment will not be enough to overcome infrastructure shortfalls, like poor roads and high power costs, officials at an investment seminar in Phnom Penh said yesterday.

The event, organised jointly by the Council for the Development of Cambodia (CDC), World Bank Group and European Union, pitched Cambodia’s incentive policy against those provided by its immediate neighbours – Thailand, Laos, Vietnam and Myanmar.

Sok Chenda Sophea, secretary general of the CDC, said incentives are not a “panacea” for attracting investment into the Kingdom, instead creating an enabling business environment was equally necessary.

“You can give whatever incentive. If you ask a company to go in a remote area but it’s not accessible – no one will go,” Chenda said.

He said addressing physical infrastructure needs along with administrative streamlining, will remove any impediments to doing business in Cambodia.

According to Chenda, addressing the skills gap in Cambodia will require more skill-seeking foreign direct investment, where companies are encouraged to bring in investments linked to a particular skill to fill that void.

“Our aim is not to be a low-cost country, but to climb the ladder with more value addition,” he said. “Value addition will come only with skilled labor force.”

Sebastian James, senior economist at the World Bank and its financing arm the International Finance Corporation (IFC), said investments in the garment sector are very “mobile” and incentive-sensitive, making having the right policy critical.

“Cambodia’s investment climate is not that great. Tax incentives are not very effective if the fundamental conditions for making profits are not there,” James said.

He added that these “fundamental conditions” include cost of importing raw material and exporting goods, the cost of electricity and customs administrative issues, all of which need to be fixed before looking for added investments.

“These need to be addressed before you give the tax incentive. Because even addressing these factors might be as good as giving an incentive,” he said.

Putting Cambodia’s current incentive policy into perspective, Christine Bowers, project manager for investment policy in Cambodia at IFC, estimates that tax and customs incentives cost the country around $950 million last year, or 5.9 per cent of its GDP.

This incentive cost – when compared to Cambodia’s total tax revenue of 13.8 per cent of the GDP – was large and inhibits future incentive policies, she said.

“It becomes a challenge for policy makers to figure out where to find the space to make to add incentives.

“It becomes very expensive and there is not a lot of room to move.”

Given the incentive policies provided by its neighbours, who are positioning themselves in a global supply chain, Cambodia will find it difficult to find a strong competitive edge, which is one way of attracting investment, according to Christopher Lim, deputy director of the Business Environment division at the Singapore Economic Development Board.

“Unfortunately, Cambodia is not in the position to change this global demand,” Lim said.

“Competition is everywhere – in Laos, Vietnam, Myanmar and Thailand. Even Africa.”

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