After three consecutive years of what the World Bank has classified as "investment

stagnation," last year the Cambodian government introduced Special Economic

Zones (SEZs) as an incentive for Foreign Direct Investment (FDI).

In December 2005, the Prime Minister signed a subdecree on establishment of SEZs.

Since the implementation of the sub-decree, 10 SEZ projects have been approved and

one is already operational.

The Taiwanese-owned "Manhattan Special Economic Zone" is in Svay Rieng,

on the Cambodia-Vietnam border. It started functioning in early 2006 and now employs

some 394 local workers (of which 40 percent are female) with an average wage of $45

per month. Two companies operate there, producing screws and bicycles.

"The private sector can be an engine of growth," said Sok Chenda Sophea,

secretary-general of the government's Council for the Development of Cambodia and

an adviser to Prime Minister Hun Sen. "The government is pragmatic; they use

the private sector to develop what they can't."

SEZs are free trade areas. The government is offering incentives for private sector

entities to begin manufacturing in SEZs, such as duty exemption for exports and imports

of raw materials for the industries in the zone. Tax on profit is exempted for up

to a maximum of nine years for the zone developer.

Such packages of incentives are offered to investors as part of the government's

plan to balance the fact that Cambodia has certain competitive disadvantages in manufacturing

terms, such as the high cost of electricity and transport, Sophea said.

Establishing SEZs along the country's borders with Thailand and Vietnam also helps

overcome these disadvantages, Sophea said.

"Firstly, this bypasses the high costs of energy and transport [as you can use

Thai or Vietnamese infrastructure]," he said. "Secondly, Cambodia is a

Least Developed Country [LDC] but Vietnam and Thailand are becoming, year after year,

richer."

There are disadvantages to increasing prosperity. Both Vietnam and Thailand have

ceased to benefit from preferential trade agreements and are now subject to both

European Union (EU) and US anti-dumping measures.

The government's SEZ policy has capitalized on Cambodia's status as an LCD: Cambodia

still benefits from duty-free and quota-free preferential access to EU markets.

"Every day I pray that the EU and the USA put more anti-dumping measures on

our neighbors," Sophea said. "It is not nice to steal work from Vietnam

and Thailand [but] it is strategic thinking."

Another key element of the SEZ policy is reducing Cambodia's administrative burden,

he said.

"In the SEZs we have put a 'one-stop shop'," Sophea said. "All import

and export documents are processed on the spot. This is very important. We want to

help investors to reduce their costs, reduce the time it takes. Overall [we want

to] become more competitive."

By using SEZs the government has been able to rapidly put in place trade reforms

which help achieve this improved competitiveness and attract investors, said Huot

Chea, World Bank economist.

"SEZs provide for streamlined and efficient trade facilitation reforms that

make it faster and cheaper for companies to do business," he said. "These

are important advantages for companies. While these reforms are also being implemented

on a nation-wide scale, this will take some time to implement fully. In the SEZs,

some of the bureaucratic hurdles can be removed more quickly."

In the Manhattan SEZ a "one-stop shop" is up and running for all paperwork,

risk-based and joint customs-CamControl inspection, tax exemption, and work permits

for expatriates in the zone.

"There is a definite benefit for investors to set up in the zone," Sophea

said. "The streamlined administration procedures [mean] everything will be much

more simple."

There are five governmental representative agencies stationed in the Manhattan zone

with 14 officials from Customs and Excise Department, CamControl, the Ministry of

Commerce, the Council for the Development of Cambodia, and the Ministry of Labor

and Vocational Training.

"The import and export paper process has been extremely speedy compared to current

procedures outside the zone," said a July 2006 World Bank assessment of the

Manhattan SEZ. "The zone is reportedly running well without any disturbance

from local/provincial authority and the developer is basically satisfied with all

the special one stop service arrangements."

There is one other major advantage of situating SEZs on Cambodia's borders: it is

a means of bringing much-needed jobs to the provinces, Sophea said.

"The government also wants to address the gap between Phnom Penh and the rural

areas," he said. "We try to combat it. For example, in Svay Rieng [the

Manhattan] SEZ gives thousands of workers jobs in garment factories - the workers

are happy to have jobs that are near where they are born, near their families. With

SEZs we are able to provide employment in their home province. If you can't do this

then you will have too much rural migration to the capital."

The World Bank's Chea agreed that locating SEZs in the provinces has already proved

advantageous in terms of furthering more equitable economic growth, and said the

benefits would be even more significant in the future.

"The [Manhattan] SEZ that is currently operational in Svay Rieng is creating

valuable employment in a poor province," he said. "As more investment flows

into it in the future, it will have an even bigger impact on growth and poverty reduction

in the province."

As more SEZs become operational, they will contribute to the government's aim of

encouraging investment and diversifying the economy, Chea said.

"The SEZs offer a better investment climate and better infrastructure than the

overall Cambodian economy," he said. "Hopefully, these advantages will

help in reducing the cost of doing business in Cambodia and in attracting a diverse

range of industries."

But SEZs cannot, and should not, be a substitute for overall economy-wide reforms,

he said.

"Sometimes it is easier to initiate reforms that are limited geographically

to pilot and test their impacts and to learn lessons from them," he said. "We

see SEZs as these 'pilots.' We hope that the success of the SEZs will encourage the

Government of Cambodia to accelerate the pace of economy-wide reforms to improve

the climate for private sector development that will create more investments and

jobs in Cambodia."