Foreign investment, MFN, logging, dams and electricity - '96 was a year of good,

bad and maybe for business and economics.

T HE year 1996 was mixed for Cambo-dia's economy. First, the good news in-cluded that

the economy grew 6.4 percent, more foreign investment came into the Kingdom, and

the split of the Khmer Rouge (KR) held out the promise of new investment territories

and the potential of expanding tax revenues.

But there are question marks, and many of them. The budget is under pressure, primarily

because taxes from logging concessions are not being directed to the Treasury. Due

to concerns of bureaucratic red tape and political instability, investment - both

local and foreign - is merely trickling in. Lastly, the government appears to be

sending mixed signals to investors regarding its commitment to economic reform and

diminished market intervention.

The big question for the next year is whether the government would have the political

will to contain these stress points or will they widen into dangerous fissures?

Reporter Robert Lang offers a summary - by no means inclusive - of the key business

and economic news and developments that made headlines this year.

Logging, Gems and the Khmer Rouge

The most dramatic event of 1996, the defection of Khmer Rouge potentate Ieng Sary

and thousands of KR soldiers, opened up a wealth of business opportunities, as well

as political ones.

In theory at least, the fertile areas of Pailin, Phnom Malai and elsewhere along

Cambodia's northwestern border with Thailand came into the Royal Government possession.

The extent the government, and the Cambodian people, will benefit from these natural

treasures, however, remains to be seen.

The area surrounding Pailin is rich with rubies and other gems, while Malai and other

areas have long been key logging areas. Years under the KR and Thai businessmen have

seen the depletion of these resources, but the area remains plentiful - at least

for gems - according to observers. As a new gem-rush from Phnom Penh begins, cynical

observers could be forgiven for thinking that most of the profits will go straight

into individuals' pockets, and precious little into the national Budget.

One need only look at Cambodia's record on logging, which took a battering in 1996.

In April, Cambodia's Prime Ministers and Thailand's then-Defense Minister (now Prime

Minister) General Chavalit Yongchai-yudh signed an agreement in principal granting

over a million cubic meters of timber concessions to 18 Thai companies.

Government officials claimed that the timber was cut before the April 1995 logging

and export ban. However, critics - most notably the London-based Global Witness -

doubted the claim and argued that cash from the concessions was divided between Thai

and Cambodian government officials, the military, KR, and logging companies.

The Ministry of Agriculture developed a forest management plan to present to a Cambodian

aid conference in Tokyo in July, promising to follow the guidelines of the World

Bank, UNDP and the FAO, which had produced their own less-than-positive verdict on

Cambodia's logging policy.

By the year's end, the government's continued failure to direct taxes from logging

concessions to the Treasury began to prompt a sterner response. The IMF canceled

a US$20-million loan in November, saying it wanted the government's promises about

logging to be translated into actions.

Economic reforms and the market economy: a question of commitment

The IMF was also piqued with the government for not reducing its number of civil

servants. An IMF/World Bank rule calls for the number of a country's civil servants

to be pegged at between 0.5-0.75 percent of the total population, which pressures

the government to shed 50,000-70,000 jobs from its current level of more than 163,000.

It appears unlikely, however, that the Prime Ministers are prepared to lose any of

these jobs due to concern with the social problems of potential mass layoffs.

The National Bank of Cambodia issued the first bank licenses since May 1994, in apparent

contravention of an IMF recommendation that it limit or reduce the number of banks.

This brings the total number of banks in the Kingdom to at least 33. Some observers

are concerned with the qualifications of bank executives, the plethora of illicit

banking activities, and the supervisory capabilities of the central bank.

In January, the Cambodian Development Research Institute held a conference on the

World Bank-IMF "Structural Adjustment Program." Second Prime Minister Hun

Sen called on economic policies to focus on rural development and on strengthening

the economic capacity of women.

Other participants expressed worries that economic reforms were not working in several

areas. They cited increasing food prices; unsustainable levels of external debt;

the government's lack of ability to increase its revenues; proportionally low spending

on agriculture, health, and education; and the slow rate of incoming foreign investment.

Meanwhile, the prospect of a level playing field for investors in Cambodia came in

for questioning several times during the year.

In June, construction companies, assisted by potential government regulations, were

reportedly planning to set up a Federation of Construction companies that would function

as a cartel and eliminate competition in the industry. Supporters of the Federation

argued that it would ensure consistent quality in the industry.

In August, the Prime Ministers scrapped a competitive bidding system in the government

medical supplies industry by awarding a private company, Doung Chivv Import-Export

Tourism and Transport, a three-year monopoly on imports. The deal was in violation

of Ministry of Finance regulations.

In January, Hun Sen criticized Finance Minister Keat Chhon for not allaying importers'

concerns about difficulties in doing business in Cambodia. The Second Prime Minister

attacked the Swiss firm Societe Generale de Surveillance (SGS), whose approval is

required to move imports out of ports. Several large importers had complained about

SGS, while critics said that the Swiss firm came under criticism for reducing corruption

opportunities.

In May, the Council for Development of Cambodia (CDC) came under fire by First Prime

Minister Ranariddh for inefficiency and corruption. Criticis said CDC had become

a "full-stop investment shop" - not a one-stop shop as intended.

CDC became engulfed in politics as the CPP was seen as unhappy with the predominant

role of Funcinpec in it. Observers suggested that government ministries were jealous

of CDC's power of investment approval.

The 1996 Budget and foreign aid

Planned expenditures in the $580.9 million 1996 budget were 15 percent higher

than the previous year. Of that, 27.5 percent was earmarked to defense and security,

a slight drop from the 1995 Budget.

The Ministry of Health received 8 percent of the budget, or $48 million, up from

$24.6 million in 1995. The Ministry of Education received 11 percent, or $68.4 million,

up from $49.6 million.

In addition to the shortfall of revenues from logging concessions, the budget came

under further pressure as the government leased huge tracts of land - five percent

of the entire area of the Kingdom - to the military, some of which was later leased

to a Korean religious sect.

On the aid front, Cambodia went into the Consultative Group conference in July in

Tokyo seeking funding for a proposed $1.6 billion of development priorities. It came

away with a total $501 million in pledges - after the Japan government chipped in

enough to take it over the $500 million mark - in what all agreed was a good result.

In Tokyo, donors stressed political stability, centralizing state revenues, and increasing

spending on health, education, and rural development, especially agriculture. Donors

also raised issues of transparency of the military and logging budgets.

On the flip side, it was noted that at least a quarter of the $501 million in pledges

would never make its way into the Cambodian economy - instead going to foreign consultants,

or spent within the country of origin.

Dams and rivers: economic boon or enormous waste?

The dam debate took off in 1996, with proponents and opponents equally sure that

they were right.

At least 17 hydropower dams are planned on a dozen Cambodian rivers, proposals strongly

supported by Japan, the World Bank and the Asian Development Bank. Much needed revenues

from electricity sold to Thailand, Vietnam and China would boost the national economy,

they said. Critics, however, questioned the environmental and social consequences,

and doubted whether dams made economic sense for the Kingdom.

Meanwhile, the Tonle Sap river had donors, consultants and experts lining up to determine

its future. Fifteen different studies were underway or planned for the river, leaving

some observers muttering about duplication and confusion.

To some experts, the Tonle Sap lake is over-fished, silting up and eroding because

of rapid deforestation. Others think it is going through natural change. The scientific

data is poor. The four million Khmers who are estimated to depend on the river and

its great lake for their livelihoods have an integral interest in future plans.

Cambodia entering the World Economy

In September, US President Clinton signed long-awaited legislation giving the

Kingdom Most Favored Nation status (MFN), to the delight of Cambodian officials who

squabbled over who could take the credit.

Cambodia has applied for Generalized System of Preferences (GSP) with the US which

would eliminate tariffs on many imports to America. Many observers believe that the

US will grant GSP to Cambodia within several months. The Kingdom already has GSP

with the European Union.

US companies began to apply to Overseas Private Investment Corp (OPIC) for political

risk insurance. An OPIC fact-finding tour to Cambodia saw no major snags for providing

American investments in Cambodia with insurance.

In December, Cambodia became a member of the International Finance Corp (IFC), a

member of the World Bank Group and the largest multilateral source of equity and

loan financing for private sector projects in developing countries.

Also in December, the Association of South East Asian Nations (ASEAN) presented Cambodia

with some potentially unsettling news. Its fate remains tied with that of Burma's,

an international hot potato, but whether or not Cambodia would face a delay in joining

ASEAN remained unclear.

In April, Hungary held a trade fair in the Kingdom, while in June - spurred by the

establishing of diplomatic ties between Cambodia and South Korea - a large South

Korean delegation visited Phnom Penh to investigate investment potential.

In July, Keidanren, Japan's most powerful business organization, sent a 56-member

delegation to Cambodia. In August, the Singapore Trade Development Board visited

the Kingdom, while in October, a large Hong Kong delegation came to Phnom Penh.

Cambodian officials expect the garment sector, propelled by foreign investment and

particularly MFN and the prospect of GSP with the US, to take off soon. Garment exports

are predicted to comprise 50-60 percent of total exports in coming years. Critics

argue the garment boon may not help the economy as a whole, and certainly not the

industry workers who are largely paid subsistence wages. At year's end, workers at

Cambodia Garments Ltd formed a union - the first - and went on strike. They returned

to work almost a week later with a pay raise, apology for past mistreatment, and

concessions.

How some companies fared

Several foreign investments appeared to become mired in political quagmires during

the year.

In March, Ariston - potentially one of the Kingdom's biggest foreign investors -

delayed a $2 million installment to the government. The Malaysian company insisted

that the government follow the arrangement struck in January and pass the Casino

Law which would give Ariston a gaming monopoly. In May, although the law had not

yet passed, Ariston commenced upgrading work on the Kang Keng airport in Sihanoukville.

In June, Ariston officials complained of government inefficiencies, extortion demands,

kidnap-pings, and tough standards of living. Meanwhile, Ranariddh, whose Party is

widely considered to have played a leading role in negotiating the Ariston deal,

said he supported the closure of the Naga floating casino, owned by Ariston, if necessary.

Hun Sen, meanwhile, reportedly flew to Malaysia to offer personal assurances that

Ariston would be looked after.

In September, a Malaysian firm, YTL, and the government agency, Aspara, began negotiations

to resolve a long-standing dispute over a Siem Reap development plan.

On the more positive side, in July, Thailand's largest conglomerate, Charoen Pokphand

(CP Group), began operations in Cambodia. By December 1998, CP plans to have invested

$15 million in the Kingdom.

In November, Cambodia Brewery Ltd opened a brewery that will produce Tiger Beer in

cans and kegs as well as canned Anchor Beer and ABC Stout. The company invested $46

million in the brewery.

The cigarette market also remains hotly contested in Cambodia. In 1996, the British

American Tobacco (BAT) company entered the fray, establishing a joint venture with

Cambodian Tobacco Company with a $25 million investment plan.

The government granted Royal Millicom Co Ltd a license to operate a cellular phone

network, the Kingdom's fourth mobile phone network, while the Ministry of Post and

Telecommunications sold its 30 percent interest in Cambodia Samart Communication,

allowing it to be fully taken over by Thailand's Samart Corp.

Caltex opened its first petrol station in Cambodia in June. The US-owned company

has committed an initial investment of $20 million.

Beacon Hill Associates and Houston-based Mosbacher Power Group signed a joint venture

agreement to build and operate a 60MW combined cycle power plant in Phnom Penh.

In October, Royal Air Cambodge (RAC) reported losses of $7 million for its first

12 months. Company executives claim that unprofitable domestic routes kept it in

the red, while a steady stream of criticism from some quarters continued. A month

later, RAC had its inaugural flight to Guangzhou - the Kingdom's first direct flight

route to China.