The new investment law has been praised by investors and businesses alike because of its robust incentives, but experts say more has to be done

Not too long ago, critics pointed out that Cambodia needed to be more discerning of its foreign direct investment (FDI), following the surge in real estate and construction investments that flooded the market.

Although much of the investments – infrastructure, manufacturing and tourism – kept the economy buoyed for over a decade, the contention lay in the type of investments that flowed into some sectors, allegedly tainting the country’s image.

The obvious ones being the intense real estate investments by foreign parties in Sihanoukville where over $1 billion worth of projects were approved between 2018 and 2019, causing a spike in land prices and haphazard development.

While the ban on online gambling in 2020 reduced the development pace, the ensuing coronavirus pandemic effectively put a pause on that. Over time, the resulting effect saw several real estate projects abandoned mid-construction as investments in the sector declined.

To be sure, overall investments also took a beating in the two-year period.

Data by the Council for the Development of Cambodia (CDC), revealed by National Bank of Cambodia (NBC), showed that 107 investment projects were approved last year compared to 154 in 2020. Total value also shrank 74 per cent year-on-year to $1.7 billion in 2021, or about 80 per cent less than 2019.

Of the total, 88 applications comprised investments in the industries sector, with the remaining bulk made up of five energy projects valued slightly over half a billion dollars.

But the gloom is slowing dissipating. In the first two months of this year, 37 investment projects totalling $2.4 billion were approved by CDC. A majority of that sum was backed by Kampot Logistics and Port Co Ltd’s $1.3 billion multi-purpose port.

Given the removal of the pre-flight polymerase chain reaction and on-arrival rapid tests, and the reinstatemnet of visa on arrivals more investments are likely to find its way into Cambodia. With a new investment law, the governnment is given the opportunity to recalibrate its old process of approving investments, including domestic applications for new projects or expansion. The question is, would it?

‘Greatly beneficial’

Around October last year, the government implemented the Law on Investment (LoI), replacing an older one that was gazetted in 1994. The 2021 law was enacted to spur industrial diversification that will help Cambodia withstand global crises and raise competitiveness. Since late last year, the new law has been actively introduced to business chambers and trade guilds within and outside the country.

“Definitely we are strongly promoting it. It is new, [so] we have to let people know its content,” Sok Chenda Sophea, CDC secretary-general said briefly in a text message. “Cambodia is implementing a post-Covid 19 recovery strategy, in which the LoI is one of the components.”

Indeed, the law has a handful of positive tweaks, which would help investors under the current economic landscape, given the expansion of qualified investment projects (QIPs), which would be eligible for investment incentives.

“The expanded investment sectors reflect businesses that are important for future growth, such as high-tech industries, research and development, digital businesses and green energy,” said Jay Cohen, partner and director of regional law firm Tilleke and Gibbins (Cambodia) Ltd.

The incentive buildout also includes small and medium enterprises (SMEs), which essentially makes the law “very inclusive”.

CDC data shows a sharp decline in approved investments in 2021 from 2019. NBC Economic and monetary statistics (Dec 2021)

As part of the package of investment incentives, Cohen said, investors are entitled to offsets of 150 per cent of the cost incurred for costs directly related to the welfare of Cambodian workers, such as canteens, nurseries and improved transportation. As such, the law encourages businesses to spend money to improve the welfare of Cambodian workers.

Clint O’Connell, partner and deputy managing director of DFDL Mekong (Cambodia) Co Ltd, a regional tax, legal and investment firm, found that the scope and timing of the new law would be “greatly beneficial” to Cambodia.

By timing, he meant, the growth of Cambodia’s economy post-Covid and the new law when coupled with the implementation of the recent free trade agreements and the “comprehensive tax treaty network” that is being built, all of which would ensure that Cambodia is in a “prime position” to lure foreign investors.

The new law takes into account the objectives under Cambodia’s industrial policy framework including “connecting to regional and global value chains, integrating into regional production networks and marching towards developing a modern technology and knowledge-based industry”.

“Ironically, one of the material changes with respect to the current incentives that has had the most impact, occurred outside of the new LoI where the annual Law on Financial Management 2020 introduced a change to the tax regulations allowing QIP investors to distribute profits, in certain circumstances, without a claw back of corporate tax, which was one of the main problem areas in the old investment law,” O’Connell commented.

Given the new law’s characteristics, the belief is that Cambodia would be able to meet the needs of a changing global business landscape, as well as emerging trends such as the rise in digitalisation and adoption of technology.

In fact, investment growth in financial technology and e-commerce sectors has been strong in Cambodia in recent years.

“One just needs to look at Cambodia’s 2020 E-commerce National Strategy and Digital Economy and Society Policy Framework 2021–2035 to see the importance that e-commerce investments will have in growing Cambodia’s economy in the future.

“To a certain degree Covid-19 escalated the importance of e-commerce to the lives of individuals and businesses in Cambodia and it is no coincidence that digital and high-tech sectors are included in the new LoI,” O’Connell said.

One piece of the puzzle

Yet, observers have noted that the law is only focussed on providing incentives when it should first build a proper ecosystem consisting of skilled labour, an established supply chain, internet connectivity, stable electricity supply and costs, and technical and financial assistance that would automatically attract investors.

CDC’s Sok Chenda who acknowledged the questions, did not return with answers.

“I think this assessment is incorrect and misplaces the role of what an investment law should be doing,” O’Connell opined, when asked.

He said there is “a lot of work” being done under a number of other regulations that are helping to build up a good ecosystem within Cambodia for businesses.

“Look at the recently introduced Competition and Consumer Laws as examples of this. The LoI is just one piece of the puzzle but should not in itself be seen as a panacea to fix all of the issues facing foreign investors in Cambodia,” he asserted.

Similarly, Cohen, who related his personal views, said “critics of the law are asking to do too much”. The law provides a good framework for bringing in businesses that would be broadly beneficial to Cambodia.

“As for business ecosystems, it will take time for them to develop organically and the government already has some initiatives in this regards, such as establishing special economic zones [SEZs] and SME clusters.

“[In terms of] skilled workers, the law contains offsets, including offsets for human resource development through vocational training,” he said.

Outdated SEZs

One such SME cluster is the one built by WorldBridge Industrial Developments Co Ltd in Takhmao, Kandal province, known as the i4.0 SME Cluster. For starters, it will house 10 local SMEs involved in seven sectors such as agriculture, waste recycling, affordable housing and healthcare, that were selected and screened by Platform Impact Co Ltd, a Phnom Penh-based firm, which develops and empowers impact-driven enterprises.

David Van, Platform Impact public-private partnership director, said consumer trends have changed where ethical and responsible manufacturing has become important.

He noted that workers must be respected, factories powered by clean energy, and supply chains ought to meet environment, social and governance (ESG) standards and UN sustainable development goals.

“Hence, the conventional SEZ especially in Cambodia where the government does not provide anything but facilitate documentation and basic road infrastructure, is becoming outdated,” he said.

The new format of SME clusters embracing Industry 4.0 and inclusive business operating modes is becoming “the norm and the way forward”.

To lure FDI, Van stressed, Cambodia would need to “adapt rapidly and provide new format of clustering production facilities”.

“The WorldBridge SME Cluster is a pioneer in that concept. It is fully encouraged and supported by the government as an example of how conventional SEZs need to change their modus operandi, in that they need to re-invent their business model,” he told The Post last August.

‘Nuts and bolts’

This circles back to the view that following the pandemic, Cambodia might be more keen to focus on impactful and ESG-driven projects, although many existing investments and businesses are already voluntarily complying to global standards.

“In general, investors and businesses operating in Cambodia are becoming more ESG-driven. In particular, foreign businesses entering the Cambodian market may be guided by ESG standards applicable to their home jurisdiction.

“For example, in the garment industry, foreign brands often want to encourage factories to obtain electricity from renewable sources so that the brand can meet its own ESG goals,” said Cohen of Tilleke and Gibbins, which handles commercial transactions, mergers and acquisitions and dispute resolutions.

Asked if the government can keep out “unsavoury investments” that might seem good in the beginning but detrimental in future, O’Connell explained that the sub-decree to the old law contained a negative list of prohibited activities which would not qualify for QIP status or incentives.

“Therefore, it is of course possible for the government to drive this to a certain degree when they enact the sub-decree for the new law,” he said.

Article 24 stipulates the expanded list of QIPs in the new law. cDC

His firm, which operates in South and Southeast Asia, has been seeing a broad range of projects coming through compared to previous years.

In fact, O’Connell said “a number of investors” are waiting for the implementation of the sub-decree to gain a “better feel as to how the nuts and bolts of the new law” would apply to them.

In the meantime, approval for a QIP would have to first “satisfy the investments thresholds set out in the negative list”, Cohen said, noting that the negative list has yet to be amended to reflect the encouraged sectors in the new law.

That being said, the law “does not impose other qualitative requirements” on the investments, which is consistent with a relatively open and free market economy, Cohen added.

No magic bullet

Since the arrival of the new law, webinars and seminars have been conducted by the public and private sector for businesses which welcomed the legislation after a long wait. Many were happy to note the changes including the tax exemption period and a staggered tax declaration period once the tax holiday ends.

“The new law has taken a decade to be drafted through an extensive and careful process to ensure Cambodia would catch the ball and run with rapidly evolving new technology and global trends,” Van of Platform Impact said.

However, he was quick to note that even if neighbouring countries provided “more attractive incentives”, the key factors triggering FDI remained in “infrastructure, productivity and production cost-effectiveness”, which Cambodia has been “struggling to address” since the last decade.

While substantial improvements have been noticed on the “hard part”, such as buildings and infrastructure, it has not been the case for the “soft part”. “For example, soft skills and TVET [technical and vocational education and training] which are crucial for a workforce if the country is to meet the demands from FDI,” he said.

Still, O’Connell said the law compares favourably with other ASEAN nations, especially its tax guarantees and protection to foreign investors, such as the protection against nationalisation or expropriation, restriction against pricing regulation, no restriction on foreign exchange control and profit repatriation, and intellectual property protection.

“The ability for a Cambodian company to be a 100 per cent foreign owned is a definitive advantage that Cambodia has over other jurisdictions and this should not be understated,” he said.

Echoing the law’s benefits, Stephen Higgins, co-founder and managing partner of Mekong Strategic Partners Co Ltd viewed that the new law would make investing in Cambodia more appealing for some investors.

“… particularly those where the investment decision might be marginal, and the tax incentives can tip them over the line,” he said.

He, however, advised that attracting quality investment was “really important”, citing the development in Sihanoukville as being “detrimental to Cambodia’s reputation”, and that long term, it is “not good” for attracting investments. SImilarly, he warned that attracting coal-fired power stations are “not going to be in Cambodia’s long-term interests”.

Above all , he stressed, building up the broader ecosystem is “far more important”, as for most investors, crucial issues would be things such as logistics, stable government, clear rule of law and cost of doing business – be it people or electricity.

“So, in that sense, the investment law isn’t a magic bullet, but it will absolutely help at the margin, and also send a clear signal that Cambodia is open for business,” Higgins said.