CAMBODIA - UPDATING INVESTMENT AND BUSINESS ENVIRONMENT AND OPPORTUNITIES FOR ENHANCED CONNECTIVITY OF VALUE-SUPPLY CHAINS IN THE MEKONG SUB-REGION

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1 1 The 2 nd Mekong Republic of Korea Business Forum Hanoi, VN, 29 March 2014 CAMBODIA - UPDATING INVESTMENT AND BUSINESS ENVIRONMENT AND OPPORTUNITIES FOR ENHANCED CONNECTIVITY OF VALUE-SUPPLY CHAINS IN THE MEKONG SUB-REGION SOK SOKEN Deputy Director, Private Investment Strategy Analysis Department Cambodian Investment Board (CIB) Council for the Development of Cambodia (CDC) KINGDOM OF CAMBODIA

2 2 Table of contents Putting everything into perspective GVC, GSC (external forces, trends) Regional initiative (ASEAN, APEC) Sub-regional initiative (GMS, BIMP-EGA, IMT-GT) Current Investment and Business environment FDI Policy regimes Investment data Investment promotion materials (including G-PSF) Updates on investment and Business environment Supply chain Infrastructure and Cross border infrastructure (CBI) (hard [transport and energy] and soft [border administration, etc.]) G-PSF and outcomes Opportunities for enhanced connectivity of valuesupply chains in the Mekong sub-region Domestic value chain downstream (agro processing for rice, rubber, cassava, maize) Domestic value chain upstream (parts and components for domestic industry, Fabric production for garment) Regional value chain (miniature motors, wire harness, ignition parts, INTERMEDIARY goods)

3 3 I - Putting everything into perspective Regulatory trend: new rules (CSR, sustainability) Natural disasters (disruptions to key component supplies) Ecological trend: awareness of env. issues (scarce resource costs and supplies) Demographic trend (demographic structure changes demand preferences) Economic trend: emerging markets, BRIC, ROK, Africa (patterns of outsourcing and offshoring) GSC & GVC (80% of global trade, WTO) New technological trend (new business models/platforms) Source: Chang et al. (2012), APEC Policy Supporting Unit

4 4 I Putting everything into perspective Regional and sub-regional initiatives To enhance scalability and expand market through improving supply chain connectivity across borders and improve business environment behind the border: cost, time and uncertainties for trade Regional ASEAN CBI Development Physical Connectivity Transport projects - 9 regional transport agreements (air freight, goods in transit ), ASEAN Highway networks [38,400km], Singapore-Kunming Rail link [7,000km] Energy sector projects (ASEAN Power Grid 14 interconnection projects, trans-asean Gas pipeline 8 gas interconnection projects) APEC Supply Chain Connectivity Framework Action Plan Supply Chain Visibility Initiative (reduce logistics and warehousing costs) Sub-regional GMS 10-year Strategic Framework increase connectivity and competitiveness(11 programmes and 3 economic corridors) Cross-border Transport Agreement (CBTA) facilitates [single stop custom inspection, movement of people, road standards and signage, transit traffic regimes] BIMP-East Asia Growth Area IMT Growth Triangle Pan-Asia Infrastructure initiative: Asian Highway CHALLENGES to supply chain connectivity Gaps in economic and infrastructure development (asymmetric distribution of regional infrastructure) Too many different regulatory requirements

5 5 II Investment and business environment in Cambodia

6 6 Embracing globalization process outward looking economic development strategy JOINING ASEAN JOINING WTO Everything But Arms (EBA) ASEAN Economic Community

7 7 Assessment of FDI Policy Regimes based on legal documents - ASEAN Source: Urata and Ando (2010) + High score indicates open FDI policy regime + Singapore is very open + The Philippines, Thailand, Indonesia and Cambodia are relatively open + Myanmar, Malaysia, Brunei and Lao, PDR are relatively closed.

8 8 Investment environment in Cambodia 14% 12% 10% 8% 6% 4% 2% z 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 0% e GDP Inflation % % % Source: SNEC & MEF

9 9 Rectangular Strategy Phase III - Growth, Employment, Equity and Efficiency

10 10 Encouraged Investment Activities Agriculture and agro-industry Transport and telecommunications Energy and electricity Labor-intensive industries, processing and manufacturing; Tourism Human resource development Oil & Gas, Mining New high value-added and more creative industries Heavy industries Assembly, electronics and spare parts manufacturing

11 11 Council for the Development of Cambodia (CDC) Investment application CDC issues a Conditional Registration Certificate (CRC) to the Applicant 3 working days Company Registration / Ministry of Commerce Relevant licenses, as appropriate / Ministry of Industry and Handicraft Review and approval of construction plan / local authorities- Ministry of Land Management, Urban Planning and Construction. Initial environmental impact assessment / Ministry of Environment 28 working days Tax Department Registration / Ministry of Economy and Finance CDC issues a Final Registration Certificate (FRC) to the Applicant

12 12 Incentives Non-fiscal incentives No nationalization No requirement of local equity participation No discrimination between foreign and domestic investors (except land ownership) No restriction on capital repatriation Special accelerated depreciation for reinvestment of profit No foreign exchange control No price control and quantitative trade restriction Fiscal incentives Low corporate tax at 20% Exemption on import duty and export tax Production equipment and Construction materials imported by Qualified Investment Project (QIP) Production inputs imported by Export QIP Profit tax exemption Trigger period 0-3 years + Grace period 3 years + Priority period 0-3 years determine by Financial Management Law Up to 9 years (Agriculture, Heavy Industry [>5m] and infrastructure [>30m] )

13 China Korea EU Malaysia Vietnam USA Taiwan Thailand HongKong Singapore Japan 13 Accumulated Investments ( ) US$ Million 12,000 Agriculture 10% 10,000 9,611 8,000 Tourism 44% Industry 29% 6,000 4,405 4,000 3,649 Service 17% 2,620 2,000 1,524 1,294 1,

14 14 Investment by Mekong sub-region countries and ROK $1,200,000,000 Investment from Korea, Vietnam, and Thailand in Cambodia $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000,000 $ Jan-Apr 2014 Korea $120,135,261 $1,063,407,238 $163,249,209 $293,288,856 $85,150,716 $44,085,480 Vietnam $352,085,036 $153,252,238 $690,973,515 $84,754,552 $279,661,413 $2,641,181 Thailand $182,899,276 $2,044,408 $8,207,022 $125,831,610 $216,653,329 $16,699,385

15 10 France 0.50 Japan 0.20 Japan 0.86 Singapore 0.20 U.S.A 0.42 France Investment Ranking ( ) Rank $11,420, $6,309,435,594 $3,029,497,634 $7,984,908,645 $2,965,537,652 $3,314,528,763 Country % Country % Country % Country % Country % Country % 1 China Cambodia Korea U.K Cambodia Cambodia Cambodi a China China Cambodia China China Korea Vietnam 5.58 Cambodia China Korea 9.89 Vietnam 4 USA 5.59 Singapore 4.81 Malaysia 8.53 Vietnam 8.65 Japan 9.15 Thailand 5 Israel 2.63 Russia 3.84 Vietnam 5.23 Malaysia 3.03 Malaysia 6.04 Korea Russia 0.92 Thailand 3.53 Portugal 1.66 Korea 2.10 Thailand 4.53 Japan U.K 0.59 Korea 2.89 Australia 1.65 U.S.A 1.78 Vietnam 2.89 Malaysia Austria 0.54 India 1.90 Singapore 1.02 Japan 0.83 Singapore 2.59 Singapore Vietnam 0.51 Malaysia 1.19 Denmark 0.97 Australia 0.31 U.K 0.51 UK Others 1.28 Others 0.32 Others 1.35 Others 0.35 Others 1.21 Others 0.96

16 16 Reasons to invest in Cambodia Political stability and open economy Sound Macroeconomic Environment Competitive Investment Incentives Young and dynamic labor force (median age: 24 years old) Low Labor Cost Strategic Location Preferential Trading Status Market access to major world markets on duty-free quota free basis

17 17 III Updating investment and business environment in Cambodia

18 18 Infrastructure - Improvement of domestic and cross border connections Phnom Penh Ho Chi Minh City Expressway Plan ( travel time and cost savings, bilateral trade up 40%, border crossing up 53%, special border economic zones creating jobs) Bridge (Nek Leoung Bridge, Cambodia and China Friendship Bridge, ) and road constructions ( National Road number 5, and 6, ) are being built. New Phnom Penh Port is built and operated with capacity 150,000 TEUs, will be expanded to 300,000 TEUs by 2015, and 500,000 TEUs after Sihanokville Port has one jetty and two wharfs: The old Jetty have two berths for DWT and DWT vessels at a time.

19 19 Infrastructure Special Economic Zone From 1994 to 2014: 34 SEZs have been approved which has 92 factories are being operated. An informal Bilateral Meeting on Cambodia- Thailand Joint Special Economic Zone Development Cooperation for the Border areas of Bantey Meanchey-Sa Kaeo and Koh Kong-Trat. A new SEZ will be established near by New Phnom Penh Port, and this project is under preparatory survey by JICA.

20 20 Infrastructure Power Supply By 2013, Cambodia has electricity supply about 1100MW. Cambodia will get power supply from hydroelectricity dam 584 MW by 2015 and coal power plant 505MW by Cross-border transportation Royal government signed and ratified to 17 annexes and 3 protocols under Cross Border Transportation Agreement (CBTA). Bilateral agreement with neighboring countries: With Vietnam: 500 vehicles ( 98 trucks ) With Thailand: 40 vehicles ( 4 trucks ) With Laos PDR: 40 vehicles

21 21 Policy and regulatory framework In the process of revising the law on investment (1994) and the law on the Amendment to the Law on Investment (2003) Establishing of the law on Special Economic Zone (currently only in the form of sub-decree). Drafting on Industrial Development Policy

22 22 Labour market Strengthening harmony in industrial relations between workers, employees, and employers through adoption of the law on trade union, updating labor law. Mechanism for reviewing and setting minimum wages. Adopted sub-decree on Cambodian National Qualification Framework. Updating the education strategy plan, master plan on ICT in education and policy on Research Development in Education. Enhancing human resource capacity in science, technology and vocational training, in priority sector: agriculture, industrial, energy, ICT, infrastructure, engineering, and health care.

23 23 Business consultation Government-Private Sector Forum (G-PSF) Government Private Sector Forum (G-PSF) (Chair by Prime Minister) Sectoral Consultative Mechanism (MEF/CDC) Technical Working Groups: 1. Agriculture and Agro-Industry 2. Tourism 3. Manufacturing and Distribution 4. Legislation, Taxation and Governance 5. Services, including Banking and Financial Services 6. Energy, Infrastructure & Transport 7. Export Processing & Trade Facilitation 8. Industrial Relations 9. Paddy Rice and Milled Rice 10.Mine and Energy Sub-committee of Investment Climate and PPI MEF/CDC (World Bank) Policy and Strategy Mechanism Steering Committee for PSD (MEF/MOC) Sub-committee of Trade Development and Trade-Related Investment MOC (World Bank/UNDP) Sub-committee of SME MIME (ADB) Development Partners of PSD Coordination Mechanism (World Bank)

24 24 Business consultation Government-Private Sector Forum (G-PSF) Outcomes from the 17 th Government-Private sector forum held on March 4 th, 2014 Further reduction of 20% of the scanning fee is approved. Scanning fee for 40ft container will decline from USD 40 to USD 32 and for 20ft container will decline from USD 25 to USD 20. The Ministry of Economy and Finance will prepare Prakas for implementing this by 1st April An inspection on export goods for risk management will be done to the maximum at 2% (formerly 5%) of total containers for exporting to trade partners Incentives on the import of raw materials for producing luggage, handbag and hat and similar products for export as provided to the garment and footwear industries. Approved on the establishment of Cambodia Rice Federation (CRF)

25 25 IV Opportunities: 3 strategic paths 1. Upstream valueadded Bicycle parts Fibre, yarn, fabric production for garment manufacturing 2. Downstream value-added Higher value added for agro-industry 3. Involve in regional production chain Wire harness Motor bike ignition Miniature motors There are 12 out of 92 factories which are focusing on spare-part, assembly, electric, and bicycle in Special Economic Zones. Source: Atlas of Economic Complexity Type Cultivated Area (2013) Yield (2013) Cult. Area (2018) Yield (2018) Rubber 328,771 ha (P. estate17%, ECL 41%, smallholder 42%) (Mature: 78,493ha) 85,244 tons >420,000 ha 400,000 tons Paddy 3,052,420 ha 9,389,961 tons 3,34 million ha 10,85 million tons Cassava 377,239 ha 7,933,381 tons N/A N/A Corn 180,327 ha 848,450 tons N/A N/A

26 26 Thank you