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