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IIST e-Magazine (For the Japanese version of this article)

Cambodia’s Economic Development and Environmental and Energy Conservation Business Chances Hirohito Ishige Deputy General Manager Tepia Corporation Japan METI-Registered SME Management Consultant [Date of Issue: 28/April/2016 No.0254-1008]

Date of Issue: 28/April/2016

Cambodia's Economic Development and
Environmental and Energy Conservation Business Chances

Hirohito Ishige
Deputy General Manager
Tepia Corporation Japan
METI-Registered SME Management Consultant

In recent years, the development of a logistical network in Indochina and the advance of neighboring countries have drawn increasing attention to Cambodia. The possibilities for environmental and energy conservation business were surveyed as areas where economic development is expected to foster demand growth.

The establishment of business operations in ASEAN by Japanese and other foreign companies has maintained a steep upward trajectory since the 1980s. On Cambodia's western border, Thailand has enjoyed a stream of inward investment, particularly in the automobile industry, while on Cambodia's eastern border, Vietnam too has seen investment increase in recent years, but despite its location between these two countries, Cambodia's lack of infrastructure and other factors have restricted the inward investment flow. Over the last few years, however, there have been signs of change. The number of Japanese companies with an operation in Cambodia has tripled over the last five years,(*i) and foreign capital from US, European and Korean companies in particular has been driving steady economic expansion, with Cambodia registering nominal GDP growth of 7-8 percent every year.

Better transport infrastructure and neighbors' changing investment environments boost economy

One factor behind Cambodia's economic development has been the improvement of roads, ports, airports, and other transport infrastructure in the Indochina region, Cambodia included. Particularly along the East-West Economic Corridor where the Japanese government has been supporting development through cooperation with the Asian Development Bank, not only has the road surface been improved and bridges built across rivers, but progress is also being made on 'soft' aspects such as simplifying border customs procedures.

Next, there is the change which has occurred in the operating environments of Cambodia's neighbors. Both Thailand and Vietnam, albeit to different extents, are more economically developed than Cambodia at this stage. Many Japanese companies have operations in Thailand, from the capital Bangkok through to the provinces of Chonburi and Rayong, but they suffered from personnel costs rising, with the minimum wage rising nationwide to 300 bahts (approximately 1,050 yen) per day as of 2013. In addition, unrest is expected to accompany the process of transition from the current interim military government to civilian rule, representing a major potential risk in terms of political stability. In the case of Vietnam too, while industrial zones have formed in Ho Chi Minh in the south, Hanoi in the north and Da Nang in central Vietnam, personnel costs continue to rise every year, and in 2014 the monthly wage level for workers had reached US$180. Companies with production bases in Thailand and Vietnam are therefore starting to shift some of their processes to neighboring countries, and in Cambodia too, Japanese firms with operations in Thailand and Vietnam are moving to set up branch factories within the Special Economic Zones (SEZ) in the city of Poipet on the Thai border and Bavet on the border with Vietnam.

Cambodian industry: Process industries on the horizon

While more foreign firms are investing in Cambodia and it seems that progress is being made toward industrialization, most of this activity is still in textile and shoe manufacturing, with almost no machinery-based processing industries such as component casting, forging and cutting, let alone large-scale process industries.(*ii) While environmental technologies are needed in the household sector, such as general waste and wastewater, in the industrial sector, there are almost no manufacturing processes requiring industrial waste and wastewater processing, and the amount of electricity used is also limited. In quantitative terms, then, environmental and energy conservation needs must therefore be described as limited at present.

Countries develop through a national-level 'lifecycle,' whereby at the developing stage, they use cheap labor to develop primarily labor-intensive industries, upgrading to process industries as personnel costs rise, and then specializing in advanced industries and R&D as they become developed nations. While Cambodia might currently be characterized primarily by labor-intensive industries such as textiles and shoes, personnel costs have been climbing by an annualized 15 percent for the past few years, and a shift to process industries is highly likely in the near future. Denso Corporation has just invested around 2.24 billion yen to build a new plant in the Phnom Penh SEZ which began manufacturing magnetos (small power generators for bicycles) and oil coolers, etc., in March this year.(*iii) This is the first large-scale process industry operation to be established in Cambodia, and if the process industry now begins to grow, the opportunities for energy conservation business too will increase.

Electricity charges and the state of supply and demand

When measuring demand for energy conservation business, one important factor is the cost of electricity. A power supply shortfall has made power charges for the manufacturing industry in Phnom Penh the highest among ASEAN's cities.(*iv) Total domestic power generation at present only covers around 60 percent of consumption, with Cambodia heavily dependent on imports from other countries. To address the supply-demand-supply gap, Cambodian government plans to build a new 2,500 MV power plant and develop an intercity power transmission grid by 2020.

If Cambodia can resolve its current power supply problem—its biggest obstacle in terms of attracting foreign capital—the number of companies will grow and energy conservation business needs in the industrial sector will also increase. At the same time, it should be noted that with Cambodia's currently high power prices expected to fall, consumer appetite for energy conservation too is actually waning.

Energy conservation and energy creation demand outside electricity

Turning to energy conservation demand in relation to fuel oil and natural gas, at the time of this survey, oil was more expensive than LPG, so demand is likely to emerge for machinery that uses gas as the cheaper fuel—boilers in hotels, for example. However, this will depend heavily on what happens with energy prices, given the impact of the recent slump in crude oil prices.

In the field of renewable energy generation-solar power, wind power and biomass, for example—Cambodia currently has no feed-in tariff system, so selling sustainable energy with its high generating costs has limited business feasibility, but it should be possible to sell off-grid solar power systems as a means of saving on steep power charges.

Characteristics of Cambodia's infrastructure business

As noted above, the environmental and energy conservation business has limited possibilities in Cambodia at present, but these could well expand over the next several years. In terms of engaging in business in these fields in Cambodia, attention needs to be paid to the extent of government involvement in infrastructure development.

In developing countries, it is common for the government to control the granting of licenses and permissions for infrastructure such as power generation, waste processing and wastewater treatment, and for that infrastructure to be operated by the government itself or by a public company. In Cambodia, however, private firms operate most of the infrastructure. In fact, most power producers are IPPs backed by private capital, while waste recycling in the capital Phnom Penh is outsourced to the private firm Cintri.

Public-private infrastructure projects are usually approached by creating an intergovernmental framework and developing systems and providing technical assistance while promoting the introduction of Japanese technologies. In the case of Cambodia, however, to the extent the conditions can be agreed with a local private firm, it is also quite possible to develop markets on a business basis. In other words, it could work quite well to use JICA's overseas business development support scheme for Japanese small and medium enterprises (SMEs), for example. In fact, JICA too has developed many environmental and energy conservation projects in Cambodia in recent years. Using such schemes to advance large-scale projects on a business basis offers an effective way to clear away the obstacle of vested interests that commonly occurs in developing countries.

At the same time, a lack of government involvement is not always an advantage. In Cambodia, companies need to be prepared for problems such as having to observe compliance and still triumph against rival firms that aren't shy about the methods they use to win contracts, as well as informal pressure from those in power.

(original article : Japanese)

(This article summarizes the results of a field survey undertaken in July 2015 as an FY2015 International Economic and Industrial Exchange Program sponsored by IIST and METI Kansai Bureau.)

(*i) As at July 2015, 156 companies belonged to the Japanese Chamber of Commerce and Industry in Cambodia, more than tripling over the five years since 2010 when the membership was only 50.
(*ii) This figure was derived by aggregating the value and number of cases of inward direct investment from the 2014 JETRO Global Trade and Investment Report. Apparel, textiles and shoes accounted for around 78 percent of total investment cases, around 70 percent in terms of monetary value.
(*iii) Denso Corporation press release
(*iv) JETRO investment cost comparison
(For the Japanese version of this article)

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