Cham Prasidh Reassures Investors Before Election

With the national election looming, the minister of commerce on Tuesday assured international investors that they should put their faith in the country’s economy regardless of the vote, which he said was a foregone conclusion.

Speaking to local business people and a high-level government and business delegation from Hong Kong at a lunch in Phnom Penh, Commerce Minister Cham Prasidh said businesses looking to invest in Cambodia should feel secure that a CPP victory in July would bring about the ideal conditions for investors for years to come.

Mr. Prasidh also hinted to investors that the days of ultra-generous tax breaks for manufacturers in the country could soon be over as the government looks to hike its domestic revenues.

“Political stability is very important,” Mr. Prasidh told the audience, which included Hong Kong Special Administrative Region financial secretary John Tsang and representatives of the Garment Manufacturers Association in Cambodia and the Cambodian Chamber of Commerce.

“Normally, you go to one country and if the elections are approaching, you will see the effects and the stock exchange will go down—people are expecting the government to fall or to win.

“But in Cambodia [there are] no such inconveniences because people know who is going to win next month. It will be still the Cambodian People’s Party of Prime Minister Hun Sen,” he said, adding that he expected the CPP to repeat the two-thirds National Assembly majority it achieved in the 2008 election.

Though Mr. Prasidh on Tuesday thought it necessary to reassure the audience, nobody really expects the ruling CPP to run into any hurdles come July 28. Still, Mr. Hun Sen has repeatedly said in the run-up to next month’s election that the country would descend into chaos if he was not re-elected.

“The prime minister will be Prime Minister Hun Sen again. This is [something] everyone knows already. And maybe you will see me also as minister of commerce,” Mr. Prasidh, who has been in the job for 19 years, said to loud applause.

As well as the “political stability” guaranteed by an election of which the outcome was not in doubt, Mr. Prasidh also said Cambodia offered investors macroeconomic stability—with gross domestic product growth of more than 7 percent last year and a similar performance expected this year.

He also cited the country’s preferential trade deals with the European Union and China as benefits of doing business here.

He said that while Hong Kong was recognized as one of the easiest places in the world to do business, Cambodia aspired to create a similar haven for businesses to operate securely.

“A third key factor is also always for foreigners who come [for] the legal, regulatory framework to be sound, predictable and transparent. That’s why we work on these things, we try also to be transparent, and fight corruption as well,” he said.

Mr. Prasidh said 56 Hong Kong-owned garment and footwear factories are currently operating in Cambodia, employing 35,000 workers.

According to the Council for the Development of Cambodia, investors from Hong Kong pledged $117.5 million in Cambodia in 2012, more than 5 percent of all agreed investment.

In the latest World Bank “ease of doing business” rankings, Hong Kong ranks No. 2 in the world, a long way above Cam­bodia, which is ranked in 133rd place out of 185 countries.

Cambodia National Rescue Party candidate Son Chhay said the argument that continuous rule by one political party was good for business was disproven by the example of prosperous Western democracies.

“In the U.S., Australia or Europe, they have reliable institutions that don’t change [when the administration changes],” said Mr. Chhay, who between 1998 and 2003 chaired a National Assembly committee that deals with commerce.

“Cambodia relies on a strongman dictator to decide everything, and it’s a very corrupt country…. Companies can’t rely on the institutions. Who can believe that the companies would feel safe to conduct business here?”

He also said that Cambodia’s economic growth was unsustainable, having been built on the extraction of timber from the country’s forests, overseas aid and loans from China.

Mr. Tsang, the Hong Kong Special Administrative Region highest-ranking finance official, said in an interview yesterday that the delegation’s trip was intended to capitalize on the “compatibility” between Hong Kong’s advanced service economy and the developing economy here.

“I think for the investors, they would like to see stability because that’s very important for them in terms of the investment. They need to make sure that the policy doesn’t change,” said Mr. Tsang.

Asked about opposition claims that the current administration in Cambodia had outstayed its welcome, Mr. Tsang said, “democracy is exercised in the polls.”

“The establishment [in Cambodia] has done very well, they get the great majority of the support, two-thirds of the support from the people, so the people’s choice cannot be wrong,” he said.

During his speech, Mr. Prasidh also questioned whether Cambodia should scrap tax holidays offered to new firms coming into the country, in which deals of five or seven years without paying tax on profits—depending on the size of an investment—are offered to new companies.

He suggested a system similar to Hong Kong, where tax on profits is 16.5 percent for large companies, whether they are new investors or not.

“What is also important is that our investment law is also the most generous in the region [at present]. But we cannot continue to be generous, because when you are generous, you attract only people who come [to] hit and run,” Mr. Prasidh said.

“If we offer a lot of incentives for tax holiday, people enjoy tax holiday, but at the end of tax holiday, five years or seven years, they run away, or they recreate another factory, resettle again in Cambodia and they have the tax holiday again for the next five or seven years. If we start collecting tax at a low level, I believe…we can get [more revenue].”

Institutions including the International Monetary Fund (IMF) have criticized the government for not collecting enough revenue, leaving the country vulnerable to economic shocks.

In a review of the government’s financial oversight published in February, the IMF said, “While current plans to strengthen revenue ad­ministration are ambitious but realistic, consideration may therefore also need to be given to strengthen direct taxation and enhance buoyancy including by reducing incentives.”

Peter Brimble, senior country economist at the Asian Development Bank’s Cambodia mission, pointed out that not that many companies seemed to be abandoning Cambodia.

“There is a churn factor in the garment industry at the low end,” he said. “But if you look at the big firms that have come in and established themselves, they’ve stayed.”

However, he said Cambodia would have to think about staying competitive with its neighbors, most of which offer tax holidays to new firms.

“I don’t think it encourages hit and run people any more than other [investment incentives], but I think there is probably an opportunity to re-examine the tax incentive structure and put it in the context of the region and what kind of firms Cambodian wants to attract.”

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