Lack of Laws, Implementation Scare Away Foreign Investors

The ongoing land dispute in­volving petroleum giant Caltex has, for some in Cambodia’s business community, become an un­comfortable example of the shifting ground on which investors can find themselves.
From a dearth of laws to the way existing regulations are in­consistently implemented, the legal climate has left many in­vest­ors in a state of uncertainty, which some analysts say is a ma­jor stumbling block to attracting blue-chip businesses to Cambo­dia.
“Stability is a major thing for investors and now there is just uncertainty,” said one Western in­vestor. “What are the ground rules?”
The current system of laws blends French civil laws, laws from the former People’s Re­pub­lic of Kampuchea, State of Cam­bodia-era laws, laws established during the Untac era and laws pas­sed since the 1993 elections.
For investors, many crucial commercial areas lack an up-to-date legal structure: The country needs a corporation law, a law on contracts and especially a land and property law.
“There is a serious lack of laws. There are huge vacuums and gaps,” said David Carrad, a law­yer and adviser to the Minis­try of Commerce.
One of the most commonly cited legal problems is with land titles, a problem which stems from the destruction of records by the Khmer Rouge in the 1970s and then the legalization of informal settlement in the 1980s.
US oil company Caltex, one of Cambodia’s largest investors, has found itself embroiled in a complex dispute over a piece of land it bought last June. The firm is fighting a Jan 29 Supreme Court decision to seize the land and sell it in order to compensate a Bel­gian man who was allegedly swindled out of the land several years earlier.
Caltex officials have said the land is worth $800,000 and have complained that they will not receive any compensation for the loss.
The Council of Ministers have sided with Caltex in the dispute, and in April, National Assembly President Chea Sim wrote a letter to the Ministry of Justice, effectively asking that the court decision be changed.
Caltex officials have warned that the dispute not only calls into question the viability of land deals but also sours the climate for in­vestors.
Carrad said Tuesday that a good land law would not only end disputes of this nature but boost both commercial and residential development. Investors who build and lease factories say that other countries are much more attractive for investment because in Cambodia banks won’t give loans to lenders who don’t have titles they can use as collateral, he explained.
But others say the problem is not so much the dearth of laws as it is the inconsistent way in which regulations are implemented.
Investors and analysts complain that the government flip-flops on regulations and policies. The changes often hit investors who come into Cambodia believing one policy is in effect, one analyst explained, and then are suddenly faced with less attractive regulations.
One example, the analyst not­ed, is the garment industry. Gar­ment manufacturers, many of whom came to Cambodia be­cause of offers of tax breaks and incentives, became angry with a government decision to later im­plement a 1 percent turnover tax, which is the equivalent of a 10 percent tax on profit.
“They try to change the ground rules and that turns people off,” said the Western investor, speaking on condition of anonymity. “It’s a dream economy for short-term investment, but put­ting in infrastructure, put­ting money on the ground—you need stability.”
One of the most serious problems, according to analysts, is with contract dispute resolution.
The short supply of law­yers and judg­es and the fact that many are poorly paid has created a situation where the winner of a dispute is often the one with the deepest pocket, some lawyers say.
Describing the problem as a “hidden corruption tax,” one foreign lawyer explained the need by investors to pay for permits and pay judges.
“The law seems to be interpreted in favor of one person in one case and in favor of another in a different case,” said John Harper, president of the Australian Bus­iness Association of Cam­bodia. “The courts can be overruled by influences at ministerial level—that’s unnerving for some people, especially for some large conglomerates.”
One economic analyst noted that in many instances, there are no ways to resolve disputes, and some multinational companies stipulate in their contracts with local partners that any dispute will be dealt with in the court of their home country.
But several analysts acknowledge that the government has made some significant steps in developing the country’s legal system. Regulations on labor have been introduced and the much-awaited subdecree to the 1994 in­vestment law was presented in January, the economic analyst not­ed.
He added, however, that it will be sometime before investment in­creases en­ough to see whether the subdecree is ef­fective in creating a transparent and predictable system.
Most agree that the only solution is to in­crease both the number of law­yers and judg­es, as well as to in­crease the pay of civil servants to bring an end to the entrenched problem of de­mands for bribes that analysts say often accompany court actions and business deals.
There is also hope among some analysts and lawyers that judicial and legal reform will progress more quickly following the July polls.
The new National Assembly, they speculate, may experience less infighting and deadlock than the current one and pass the draft laws on commercial legislation that have been floating around ministries.
“After the election, things will be formalized in all areas,” said Harper. “Everyone will be re­lieved with one party in power, with a clear mandate.”

“The law seems to be interpreted in favor of one person in one case and in favor of another in a different case.”

—John Harper, Australian Business Association of Cambodia

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