September 26, 2000	atimes.com

Special Reports COUNTRY REPORT: The Kingdom of Cambodia 1. Basic facts 2. The economy 3. Investment agency Perceived difficulties Investor rights Expropriation and compensation Alien employees Dispute settlement Investment incentives Capital markets Intellectual property rights 4. Important legislation 5. Tax 6. Labor Wages 7. Tourism 8. Exports and imports 9. Investment law 1. Basic facts Location: Southeastern Asia, bordering the Gulf of Thailand, between Thailand and Vietnam Area: Total: 181,040 sq km (land: 176,520 sq km, water: 4,520 sq km) Borders: Laos 541 km, Thailand 803 km, Vietnam 1,228 km Coastline: 443 km Climate: Tropical; rainy, monsoon season (May to November); dry season December to April); little seasonal temperature variation Terrain: Mostly low, flat plains; mountains in southwest and north Natural resources: Timber, gemstones, some iron ore, manganese, phosphates, hydropower potential Natural hazards: Monsoonal rains (June to November); flooding; occasional droughts Geography: Central plain drained by the Tonle Sap (Great Lake) and Mekong and Bassac Rivers. Heavy forests away from the rivers and the lake, mountains in the southwest (Cardamom Mountains) and north (Dangrek Mountains) along the border with Thailand. Poulation: 11.7 million (1998) Growth rate: 3.0 percent Ethnic groups: Khmer 90 percent, Vietnamese one percent, Chinese one percent, small numbers of hill tribes, Chams, and Burmese. Religions: Theravada Buddhism 95 percent; Islam; animism; atheism. Languages: Khmer (official) spoken by more than 95 percent of the population, including minorities; some French still spoken; English increasingly popular as a second language. 2 Economy GDP: US$2,848 million (1998), US$3,289 (1999) GDP growth: four percent 1999 Inflation: 9 percent The Cambodian economy was virtually destroyed by decades of war which effecively only ended in the past few years. Government leaders are moving toward restoring fiscal and monetary discipline and have established good working relations with international financial institutions. Despite such positive developments, the reconstruction effort faces tough challenges because of the persistence of internal political divisions and the related lack of confidence of foreign investors. Rural Cambodia, where the vast majority of the population lives, remains poor and there is scant basic infrastructure there to spur development. Leading industries include rice milling, fishing, wood and wood products, rubber, cement, gem mining, textiles. The main agriculture products are rice, rubber, corn and vegetables. Moves towards a market economy began once the constitutional monarchy was established in 1993, and the country's 1994 Law on Investment establishes an open and liberal investment regime. However due to political instability and the economic crisis in the region, foreign direct investment has been slow over the past few years and the main domestic activity on which most rural households depend is agriculture and its related sub-sectors. More than three quarters of the workforce are engaged in agriculture. The vast majority of agricultural workers are subsistence rice farmers, many of whom supplement their income with hunting, fishing or part time employment. The United Nations Development Program (UNDP) estimates that 39.5 percent of the population falls below the poverty line, which is defined as the minimum income required to provide 2,100 calories per day and basic items such as clothing and shelter. Economic growth in the agricultural sector has not kept pace with the increase in population of about 2.7 percent per year. Thus Cambodia is experiencing a significant migration from rural to urban areas, and from labor intensive agriculture to industrial employment. Manufacturing output is varied but is not very extensive and is mostly conducted on a small-scale and informal basis. The service sector is heavily concentrated in trading activities and catering-related services. Industrial workers only accounted for 6.4 percent of the work force of 5.54 million in 1999. Of these, an estimated 100,000 work in the garment industry in about 200 factories. The garment, timber, tobacco, agro-industry and tourism sectors are the fastest growing businesses in Cambodia. In order to spur investment, the government in January 1999 unveiled a reform program that commits to "strengthening the institutions responsible for promoting investments, notably in order to improve the approval procedures for investment applications, to strictly enforce the rules in effect and banish illegal activities and corruption". Nevertheless, Cambodia continues to be heavily dependent on multilateral and bilateral aid for most of its investment needs, through projects funded by such agencies as the World Bank, the Asian Development Bank and the United nations Development Programe (UNDP). 3. Investment agency The Council for the Development of Cambodia (CDC) This is Cambodia's one-stop foreign investment approval body. Through its operational arm, the Cambodian Investment Board (CIB), it is responsible for processing applications for investment projects and it is required to give a decision within 28 days of submission. It is the highest level authority on investment and is chaired by the prime minister and composed of senior ministers from related ministries. It administers a package of investment incentives. Under the 1994 law, all sectors of the economy are open to foreign investment and there are no performance requirements and no sectors in which foreign investors are denied national treatment. However, an August 1999 sub-decree provides some restrictions on foreign investment. Publishing, printing, radio and television activities are limited to 49 percent foreign equity and there must be an unspecified amount of local equity in gemstone exploitation, brick making, rice mills, wood and stone carving manufacture and silk weaving. While other sectors are eligible for 100 percent foreign investment, investment incentives vary according to the nature of the investment project The CDC is specifically targeting pioneer and high-tech industries, those that create jobs for Cambodians, export-orientated industries, tourism, agro-industries and processing, light electronic assembly, transport and the infrastructure and energy sectors for foreign investment. In addition, it supports industries enhancing provincial and rural development, as well as environmental protection. Perceived difficulties Although there is no discrimination against foreign investors at the time of initial investment or subsequently, some businesses have complained that they are at a disadvantage compred to Cambodian competitors who engage in corruption or tax evasion, or which take advantage of poorly-enforced labor laws, or ignore work place safety, product quality and environmental issues. In a draft action plan on good governance which the government presented to donors in May 2000, Cambodia indicated its intent to pass anti-corruption legislation by late 2001. The government also created an anti-corruption commission within the cabinet in late 1999, but the exact role of this body is not yet clear. There have been reports that the privatization of state enterprises is not carried out in a transparent manner. In several instances, businessmen have learned that enterprises were for sale only after the government has announced a sale to a buyer. Investor's rights include: - Investors are treated in a non-discrininatory manner except for land ownership - only Khmer legal entities and citizens of Khmer nationality have the right to own land. Long leases of up to 70 years, and renewable, are, however, available. - The government will not undertake a nationalization policy which adversely affects the private property of investors - The government will not impose price controls on the products or services of an investor who has received prior approval from the government. - The government allows investors to purchase foreign currencies through the banking system and to remit abroad such currency as payments for imports, repayments on loans, payments of royalties and management fees, profit remittances and repatriation of capital. The Foreign Exchange Law does allow the National Bank of Cambodia (the central bank) to implement exchange controls in the event of a crisis, although the definition of a crisis is not given. The government conducts a daily auction of US dollars in which all licensed traders and companies are eligible to participate. Expropriation and compensation The Cambodian constitution states that "the state's right to confiscate properties from any person shall be exercised only in the public interest as provided for under the law and shall require fair and just compensation in advance." Alien employees Investors are permitted to bring into Cambodia foreign nationals who are: - Qualifies managerial personnel - Technical personnel - Skilled workers Dispute settlement Cambodia's legal system is an amalgam of pre-1975 statutes modeled on French law, communist-era legislation dating from 1979-1991, statutes put in place by the UN Transitional Authority in Cambodia(UNTAC) during 1991-93, and legislation passed by the government since 1993. The legal system is noticebaly weak in the areas of bankruptcy, commercial arbitration and intellectual property rights. There is no anti-monopoly or anti-trust legislation. The legal system favors mediation over adversarial conflict and adjudication, and compromise solutions are often prefered even when the law favors one party in a dispute. The courts are currently the only judicial forum in which to settle commercial disputes, but the system is fraught with difficulties. Judges are poorly paid and they have little access to published Cambodian law. Frequent problems with inconsistent judicial rulings as well as corruption have been reported. There are no laws requiring a Cambodian court to enforce either a foreign judgement or an arbitral award. The government has prepared interim legislation to bring the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards, which Cambodia signed in 1960, into force. Cambodia has signed investment agreements with, among others, Malaysia, Thailand, France, Switzerland, South Korea, Germany, Singapore, the People's Republic of China, and the Netherlands. The agreements provide reciprocal national treatment to investors, excluding benefits deriving from membership in future customs unions or free trade areas and agreements relating to taxation. The agreements preclude expropriations except those which are undertaken for a lawful or public purpose, non-discriminatory, accompanied by prompt, adequate and effective compensation at the fair market value of the property prior to expropriation; guarantee repatriation of investments; and provide for settlement of investment disputes via arbitration. Investment incentives Investors who wish to take advantage of investment incentives must submit an application to the Cambodian Investment Board (CIB), the division of the CDC charged with reviewing investment applications. Investors who do not wish to apply for investment incentives may establish their investment simply by registering corporate documents with the Ministry of Commerce. Once the investor's application is complete and an application fee paid, the CDC is required by executive order to issue a decision on an investor's application within 28 days of submission. The CDC is billed as a one-stop shop, but investors report that in practice licensing requires involves much red tape and visits to multiple government agencies. Once the CDC approves the project in principle, the investor must pay a second application fee, and deposit a performance guarantee of between 1.5 and two percent of the total investment capital at the National Bank of Cambodia, and register the corporate entity at the Ministry of Commerce. Once these steps have been taken, the investor will receive a formal investment license from the CDC requiring the investment to proceed within six months. Once the project is 30 percent completed, the investor is eligible for a refund of the performance guarantee. The government has scaled back its investment incentives, which the World Bank has called "critical impediments to revenue mobilization." The has government committed to review the law on investment before 2001, and further revision is likely. Cambodia is not a member of the World Trade Organization (WTO). Incentives: The law on investment and subsequent decrees create the following incentives: - A corporate tax rate of nine percent, compared to the standard corporate profit tax rate of 20 percent for business enterprises not receiving CDC investment incentives. Natural resources companies, including timber and oil companies and companies mining gold and precious stones, are subject to a 30 percent corporate profit tax rate. - An exemption from the corporate profit tax of up to eight years, depending on the type and location of project. - A five-year loss carry-forward. - Tax-free distribution of dividends, profits and proceeds of investment. - Tax-free repatriation of profits. - 100 percent exemption from import duties on construction materials, machinery and equipment, spare parts, raw materials and semi-finished products, and packaging materials for most projects for the construction period and first year of operation. The period of exemption from customs duties for the above items can be extended for export-oriented projects with a minimum of 80 percent of production set aside for export and projects located in a special development zone, although these have not yet been specified. - Employment of expatriates where qualified Cambodians are unavailable. The list of sectors to which investment incentives apply, without regard to the amount of investment capital, includes: Crop production; livestock production; fisheries; manufacture of transportation equipment; highway and street construction; exploitation of minerals, ore, coal, oil, and natural gas; poduction of consumption goods; hotel construction (three stars or higher); medical and education facilities meeting international standards; vocational training centers; physical infrastructure to support the tourism and cultural sectors; and production and exploitation activities to protect the environment. Investment incentives are available for manufacturing projects in the following sectors when investment capital exceeds US$500,000: Rubber and miscellaneous plastics; leather and other products; electrical and electronic equipment; and manufacturing and processing of food and related products. A minimum investment of US$1,000,000 applies when seeking incentives in the following three sectors: apparel and other textiles; furniture and fixtures; chemicals and allied products; textile mills; paper and allied products; fabricated metal products; and production of machinery and industrial equipment. No incentives: The following sectors are not eligible for investment incentives, although investment is permitted: All types of trading activities; all forms of transportation services; duty-free shops; restaurants, karaoke, and night clubs; business centers; press related activities and media networks; retail and wholesale operations; and professional services. According to Cambodia's 1995 law on the Establishment of the Bar, foreign business firms which wish to offer legal services in Cambodia must affiliate with a Cambodian attorney. Investment sectors in which special incentives do not apply also include the telecommunication sector, and the exploitation of natural resources, with the exception of oil and gas exploration. All fuels, lubricants and other petroleum-based products used as raw materials or intermediate goods are not eligible for expemptions from import duties. No foreign trade zones or free ports operate in Cambodia at present, although the government has reviewed some proposals. The law on investment provides for incentives to encourage investments in "special promotion zones". However, legislation defining this is not yet in place. According to the Ministry of Economy and Finance, in 1999, the total annual flow of foreign direct investment into Cambodia was US$160 million, up from US$120 million in the previousn year. The biggest single investor since 1994 to the end of 1999 is Malaysia, with total investments of US$1.8 billion - 32 percent of the cumulative investment in the country. Capital markets: Cambodia currently has no capital markets. There is no stock or bond market, no companies law and no means to purchase equity in a company except by agreement with the existing owners. Most companies are privately held, the exception being multinational firms. The Cambodian government does not use regulation of capital markets to restrict foreign investment. Domestic financing is difficult to obtain at competitive interest rates for domestic and foreign-owned entities alike. Most loans are secured by real property mortgages or deposits of cash or other liquid assets, as provided for in the existing contract law and land law. Export/import financing is available from multi-national banks through a variety of credit instruments. The U.S. Overseas Private Investment Corporation (OPIC), the International Finance Corporation (IFC), and the Multi-lateral Investment Guarantee Agency (MIGA) offer both investment guarantees and loans in Cambodia. Eximbank does not operate in Cambodia. Cambodia is a member of the Multilateral Investment Guarantee Agency (MIGA). Intellectual property rights: Protection is based on articles contained in the 1992 UNTAC Criminal Code. Cambodia acceded to the Paris Convention in 1998 and it is making progress on legislation and it has drafted trademark, copyright and patent laws. With no trademark law in force in Cambodia, owners of trademarks are unable to seek relief in court. Until the law is passed complaints go to the Ministry of Commerce, which has responsibility for registering trademarks, but it does not have clear legal authority to conduct enforcement activities. Responsibility for copyrights is split between the Ministry of Culture (phonograms, CDs, and other recordings) and the Ministry of Information (printed materials). The Ministry of Culture prepared a draft copyright law in 1998 which is under review. As Cambodia has a very small industrial base, and infringement on patents and industrial designs is not yet commercially significant. The Ministry of Industry has prepared a draft of a comprehensive law on the protection of patents and industrial designs. 4. Important legislation The National Assembly passed a law and associated decree regulating pharmaceuticals in June 1996, giving administrative authority to the Ministry of Health. In May 2000, the National Assembly passed a law on the quality of goods and services, comprising food safety, consumer protection and product liability. Food and product safety issues fall under the jurisdiction of the Cambodian standards authority, Camcontrol, which is under the Ministry of Commerce. Camcontrol, the government's standards-setting arm, does not currently have a mechanism for industry participation in standards setting. There are currently no industry standards-setting organizations operating in Cambodia. Cambodia's banks and financial institutions fall under the supervision of the National Bank of Cambodia (NBC), which is being advised by the International Monetary Fund. In November 1999, Cambodia passed a new law on banking and financial institutions. This law, and subsequent regulations issued by NBC supercede earlier legislation and regulations. An insurance law, which would give the Ministry of Economy and Finance regulatory authority over the insurance industry, is being drafted. 5. Tax The tax system is under revision but currently that affect investors include a profit tax (0-20 percent), a withholding tax (usually 15 percent), a salary (personal income) tax (five-20 percent), a minimum turnover tax (one parcent), a value added tax (10 percent), specific taxes on certain merchandise and duties (rates vary), as well as import and export duties (rates vary). Cambodia does not have double tax agreements with any countries. 6. Labor In 1997, Cambodia replaced its communist-style labor code with a highly-detailed, progressive law which guarantees freedom of association and the right to strike, provides for the free registration of labor unions and collective bargaining, and sets a minimum age of employment. The Labor Law only covers the formal employment sector (defined as jobs in which there is an employer-employee relationship). The Ministry of Social Affairs, Labor and Youth Rehabilitation (MOSALVY) is responsible for issuing labor regulations, and MOSALVY's labor inspection department is responsible for enforcing the labor law. MOSALVY also chairs Cambodia's tripartite Labor Advisory Committee (LAC), which reviews labor laws, including the minimum wage. MOSALVY conducts frequent workplace inspections and mediates workplace disputes. However, the government's enforcement efforts have been hampered by a lack of resources, little knowledge of the law by factory managers and a lack of qualified labor inspectors. Penalties are insignificant and factories frequently defy Ministry orders. MOSALVY refers cases to the courts, where unions complain of corruption, long delays, and inaction. There is no labor court system, even tough it is required under the Labor Law. However, in July 2000, the Ministry of Commerce and MOSALVY issued a joint declaration to improve enforcement of the labor law. The declaration created an inter-ministerial committee that will review labor-related complaints from various sources, and recommend penalties keyed to the severity of the violation. Penalties can include suspension of export privileges. Only a frcation of Cambodia's labor force is organized. Unionization of the work force is not significant outside the industrial sector, and within the sector it is highly concentrated in the garment industry. Only 16 out of 106 registered labor unions are in industries other than garments. There were 76 strikes in Cambodia during 1999, and 35 in the first seven months of 2000. Most related to the lack of enforcement of the labor laws. Wages: Wages are set by market forces, except for civil servants, for whom wages are set by the government. MOSALVY has the right to set minimum wages for each sector of the economy based on recommendations by the Labor Advisory Committee. MOSALVY formally exercised this authority for the first time in July 2000, when it approved a US$45/month minimum wage for the garment and footwear sector. Prior to that minimum wages in the garment industry were enshrined in a memorandum of understanding between the government and the Garment Manufacturers Association. There is no minimum wage for any other industry. Civil service salaries are also far below market levels, requiring government officials to secure outside sources of income. This can result in corruption and conflicts of interest. The Labor Law provides for a standard legal workweek of 48 hours, not to exceed eight hours per day. The law stipulates time-and-one-half for overtime, and double time if overtime occurs at night, on Sunday or on a holiday. Fifteen is set as the minimum allowable age for a salary position, and 18 as the minimum allowable age for anyone engaged in work which may be hazardous, unhealthy or unsafe. There is no public social safety net for workers in Cambodia. MOSALVY has drafted legislation to create a national pension, an unemployment insurance system, and a workers compensation scheme, but that is as far as it has gone. Given the severe disruption to the education system in the Khmer Rouge years in the late seventies, Cambodia's work force is largely unskilled, with an adult literacy rate of about 35 percent. However, the desire to learn is keen and many adults and children enroll in supplementary educational programs, including English and computer training. Workers with higher education or specialized skills are few and in high demand. Many investors must bring in expatriate employees to fill skilled positions, and Cambodian immigration and investment regulations make this relatively simple. 7. Tourism Angkor Wat: Over a period of 300 years, between 900 and 1200 AD, the Khmer Kingdom of Angkor produced some of the world's most magnificent architectural masterpieces on the northern shore of the Tonle Sap, near the present town of Siem Reap, which is considered one of the wonders of the world. The Angkor area stretches 24 km east to west and eight km north to south. Some 72 major temples or other buildings dot the area. The principal temple, Angkor Wat, was built between 1112 and 1150 by Suryavarman II. With walls nearly a kilometer on each side, Angkor Wat portrays the Hindu cosmology with the central towers representing Mount Meru, home of the gods; the outer walls, the mountains enclosing the world; and the moat, the oceans beyond. Angkor Thom, the capital city built after the Cham sack of 1177, is surrounded by a wide moat. Construction of Angkor Thom coincided with a change from Hinduism to Buddhism. Temples were altered to display images of the Buddha, and Angkor Wat became a major Buddhist shrine. Since the Royal Cambodian Government came to power in 1993, international tourism to Angkor has been the cornerstone of its tourism policy. 8. Exports and imports The main exports are garments and footwear. The garment industry accounted for US$597 million in exports (69 percent of Cambodia's total exports) in 1999. About 200 garment factories now employ over 100,000 workers. Cambodia secured Normal Trade Relations status from the United States in 1996, and General System of Prefernces (GSP) treatment in 1997. It has GSP and Most Favored Nation (MNF) status with most of its trading partners including the US, the European Union, Japan, Canada and Australia. In 1998, Cambodia also signed a ground-breaking textile agreement with the United States linking quota levels to Cambodia's compliance with internationally recognized core labor standards. Roughly 75 percent of Cambodian garment exports go to the United States, with the remainder going to Europe. (Cambodia enjoys duty-free and quota-free access to the EU apparel market.) The major imports are gasoline and industrial machinery. 9. Investment law This following law was adopted by the National Assembly of the Kingdom of Cambodia in Phnom Penh on August 4, 1994, during the extraordinary session of the first legislature. Continued: LAW OF INVESTMENT IN CAMBODIA (Special to Asia Times Online)

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