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Cablegate: Investor Interest in Cambodia Surges Despite Challenges

VZCZCXRO2193
PP RUEHCN RUEHDT RUEHGH RUEHPB RUEHVC
DE RUEHPF #1575/01 3651042
ZNR UUUUU ZZH
P 311042Z DEC 07
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 9236
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHHM/AMCONSUL HO CHI MINH 0133
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0713
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 PHNOM PENH 001575

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EAP/MLS, EB/TPP/ABT, EEB/TPP/MTA, EEB/TPP/BTA
STATE PLEASE PASS TO USTR--BISBEE AND WEISEL
STATE PLEASS PASS TO US TRADE AND DEVELOPMENT AGENCY--WINKATES
BANGKOK FOR USAID--KISSINGER, FCS--BACHER, FAS--MEYER
HANOI FOR FAS--WADE AND RALPH, FCS--NAY
HO CHI MINH CITY FOR FCS--MARCHAK AND LE
COMMERCE FOR ITA/OTEXA--D'ANDREA, ITA/MAC--MIKALIS
AGRICULTURE FOR FAS/OCRA--RIKER
TREASURY FOR INTERNATIONAL AFFAIRS--CHUN AND WALSH

E.O. 12958: N/A
TAGS: EINV ETRD KCOR EAGR EAID CB CH
SUBJECT: INVESTOR INTEREST IN CAMBODIA SURGES DESPITE CHALLENGES

REF: PHNOM PENH 1506

PHNOM PENH 00001575 001.2 OF 003


1. (U) Summary: A dramatic surge in investor interest in Cambodia
was evident during a recent investment conference held in Phnom
Penh. Presenters emphasized a realistic view of Cambodia--a country
with tremendous business opportunities, but where operating
challenges such as corruption, poor infrastructure, and human
capacity limitations must be overcome. Government officials pledged
to promote economic diversification and use expected oil revenue
wisely, though Prime Minister Hun Sen downplayed Cambodia's
corruption problems. End summary.

Surge in Investor Interest
--------------------------

2. (U) Foreign investor interest in Cambodia has surged in recent
years, with foreign direct investment increasing 12-fold between
2004 and 2006 to USD 4.3 billion. Attendance at this year's
investment conference was nearly double that of the last conference,
held two years ago, with international businesspeople from a wide
variety of industries accounting for roughly two-thirds of
registrants. Brett Sciaroni, Amcit president of the International
Business Club, noted that this investor enthusiasm flies in the face
of Cambodia's dismal rankings on global indices of transparency and
ease of doing business. Four key factors explain Cambodia's
investment boom, Sciaroni said: sound macroeconomic policies which
have created economic growth; legal and regulatory reform; political
stability; and the government's extremely responsive approach to
working with investors. (Comment: FDI appears to have slowed down
considerably during the first six months of 2007, though when asked
about this trend, the head of the Council for the Development of
Cambodia, the government's investment-approving body, explained that
it was largely about the timing of the approval of several large
projects that would span years. Talking to Econoff after a
different event, he laughed off others' concerns, saying, "Let them
worry, I'm too busy approving new investments." End Comment.)

Prime Minister: China's Rise is Opportunity, Not Threat
--------------------------------------------- ----------

3. (U) Senior government officials at the conference described
regional and global economic integration as a high priority, saying
they hope to take advantage of neighboring countries' infrastructure
and markets. They described an ambitious vision of an integrated
road, telecommunications, and power network spanning Cambodia,
Vietnam, Thailand, Laos, Burma, and southern China by 2012, and an
equally ambitious regional trade network which would ultimately
extend to nearly all of South and East Asia by 2017.

4. (U) Prime Minister Hun Sen was the first of several speakers to
identify China's rise as an opportunity, saying that when people
asked him if he was concerned by China's growth, he responded that
he'd "rather have a million Chinese tourists than a millions Chinese
migrants." Larry Strange, Director of the Cambodia Development
Resource Institute (CDRI), observed that Cambodia is well-placed to
benefit from Chinese growth and should become part of a greater
China production and marketing network for agribusiness and tourism.
Furthering this idea, Commerce Minister Cham Prasidh noted that
China has already extended duty-free, quota-free access to many
Cambodian agricultural and textile products. Both countries are
looking to increase trade through the ASEAN-China Framework
Agreement on Comprehensive Economic Cooperation.

Economic Diversification Critical to Continued Growth
--------------------------------------------- --------

5. (U) Government speakers repeatedly emphasized their desire to
diversify the economy away from its current dependence on tourism
and garments, and outlined opportunities in agriculture, mining,
energy, finance, manufacturing, labor-intensive industry, and
infrastructure development. Cambodia is one of only 27 countries
worldwide to have maintained an average growth rate of more than 6%
for nine years or more, the World Bank's Stephane Guimbert said.
Guimbert cautioned that maintaining such a high level of growth
would be very difficult, and said that the key was diversifying
exports. Several speakers highlighted Cambodia's special economic

PHNOM PENH 00001575 002.2 OF 003


zones (SEZs), predominantly situated near the Thai and Vietnamese
borders, as sites for manufacturing and export expansion. The SEZs
boast relatively low labor costs; easier export-processing through
one-stop service for all government permits; and close connections
to the better infrastructure of Vietnam and Thailand. CDRI Director
Strange noted that increased investment in the financial,
telecommunications, and organic agriculture sectors is a promising
sign that the Cambodian economy is beginning to develop a broader
base.

6. (U) Several speakers highlighted agriculture, which employs more
than 75 percent of the population, as a key sector for development.
Strange said there was a consensus that agriculture is the engine of
growth in Cambodia. Prime Minister Hun Sen said the government
would allocate more resources towards developing the agriculture
sector and would make large economic land concessions to investors
interested in developing agricultural projects. Deputy Prime
Minister Sok An suggested that he would like to use future revenues
from oil to improve the agriculture sector, as well as building
human and physical capacity. (NOTE: World Bank analysts are not as
convinced Cambodia is ready for plantation-sized agribusiness,
rather they argue that medium-sized freeholding plots tilled by many
farmers all supplying large downstream food processing plants may be
a better economic model for Cambodia. END NOTE.)

7. (U) Hun Sen and Sok An both expressed hope that Mondulkiri
province, in the east, and Preah Vihear province, in the north,
could become significant mining sites for bauxite and iron ore,
potentially leading to billions of dollars in investment. Hun Sen
referred specifically to negotiations with Australia's BHP Billiton
to develop bauxite. On the issue of petroleum production, however,
both leaders struck a more cautionary note, highlighting that no
company has announced that oil or gas have been discovered in
commercially extractable quantities. The senior officials expressed
hope that, in the future, the domestic oil supply could help reduce
the price of electricity, which currently is a major impediment to
competitiveness for local industry. Hun Sen also promised to use
petroleum earnings to reduce poverty; promote economic growth; and
improve infrastructure, education, and health.

Prime Minister Downplays Corruption Problems
--------------------------------------------

8. (U) The Prime Minister downplayed concerns about corruption
suggesting that the rise of Western businesses interested in working
in Cambodia was proof that corruption was not a deterrent for
businesses. In an apparent misunderstanding of a USAID-funded
report, the Prime Minister mocked US-funded consultants for
suggesting USD 15,000 per month salaries as a way to reduce
corruption in the Customs Department. (Note: The report actually
notes that some Customs officials reported paying up to USD 15,000
in bribes to obtain their positions. It also recommends increasing
salaries, but does not suggest a particular amount. End Note.)

9. (U) The Ambassador responded to the corruption issue indirectly
in his speech at an Embassy-hosted reception for conference
participants. The Ambassador lauded the Cambodian government and
people for dramatically changing the economic atmosphere via legal
and customs reforms and a liberal investment regime. He then
remarked that Cambodia must develop its work force, improve
infrastructure, and, most critically, combat corruption if the
country is to compete successfully with its neighbors. Emboffs also
confirmed with the Ministers of Finance and Commerce the correct
interpretation of the consultants' report.

Private Sector Worries: Corruption, Poor Human Resources, and High
Electricity Costs
--------------------------------------------- ----------

10. (U) Private sector participants raised concerns about
government transparency, weak human resources, and the high price of
electricity during sectoral breakout sessions. Participants in
several sectors felt obtaining action from the government is
difficult without establishing personalized networks, creating an
enabling environment for corruption. Lack of qualified workers also
hampers business development across sectors. Participants also

PHNOM PENH 00001575 003.2 OF 003


worried about competitiveness when electricity costs significantly
more in Cambodia than in neighboring countries and demand for
electricity is increasing by 50% per year.

11. (U) In response, Commerce Minister Cham Prasidh explained that
Cambodia is starting from a very low base, following the elimination
of capitalists and intellectuals by the Khmer Rouge during the
1970s. Today, the population is very young and is acquiring skills
to contribute to the workforce. He invited investors to train the
youth while Cambodia is an LDC, thereby developing a workforce at a
relatively low price. The minister expressed hope that cross-border
electricity supply from Thailand and Vietnam could ameliorate the
electricity problem in the near-term, and investment in a variety of
power sources could limit energy-dependency in the medium to
long-term. He also encouraged interested participants to take their
concerns to the Government-Private Sector Forum created to improve
the business environment across sectors.

COMMENT
-------

12. (SBU) Cambodia's economic leaders clearly understand that
rather than resting on its laurels, the Cambodian government needs
to encourage economic diversification and work to promote increased
investment if it is to maintain the country's remarkable levels of
economic growth. Hun Sen's defensive comments about corruption were
unfortunate and show the government's sensitivity about
international pressure to manage resources wisely. Some private
sector participants were sympathetic to the government's position,
with one quipping, "Advice (about the oil revenue) is the one thing
this country isn't short of." By the end of the conference, the two
most striking factors were the government's laudable overall
commitment to improve the investment climate and the enthusiasm
among would-be investors.

MUSSOMELI

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