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Heavy competition in the building game

Heavy competition in the building game

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

highest bribe."

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

stations.

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

one manager.

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

materials.

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

Maeda.

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

bricks."

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.

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