Cambodia getting ready to enhance its presence in GVCs
Cambodia’s investment law that was put in place for the first time in 1994 consisting of 9 chapters was amended in 2003 to revise a number of articles (RGC, 1994 and 2003). The 2003 Amended Law on Investment was an important step, among others, with regard to the investment approval scheme by adopting the automatic approval system of the investment projects which must be completed within 31 working days after the investment project was filed to be considered for approval (RGC, 2003, Article 7 New).
The essence of an investment law
The major objective of having investment law in most cases is to attract new investment and reinvestment by providing various incentives serving the Government’s policy directions in promoting the economic development. With the right combination, the investment law is potentially able to contribute to social and economic development through promoting economic growth, diversifying and integrating economy, developing targeted industries, improving competitions, creating jobs, reducing poverty, and transferring technology and skills. The key components of investment laws that attract investors are technically the treatment and operation, guarantee and rights provided by the law which include national treatment or non-discrimination, protection or guarantee of compensation for expropriation, guarantee of free transfer of funds abroad, the use of investor-state international arbitration and other incentives.
Key giveaways under Cambodia’s 2021 Investment Law
The adoption of Cambodia’s Investment Law (Law, henceforth) at this time came from the priority workplan which has been indicated under Cambodia’s Industrial Development Policy 2015-2025 (RGC, 2015). It brings the following improvements:
- The key basic elements of the Law have been well-preserved and strengthened. The Law has been amended on couple of occasions subsequently over the past years. The latest version has consolidated these changes and still continues to uphold the key basic elements of investment law namely equal treatment without discrimination regardless of nationalities, non-discrimination with regard to compensation or other resettlement based on market value, the guarantee of Government on compensation for expropriation, free transfer of funds abroad and protection of investors’ intellectual property.
- Providing more generous incentive schemes to eligible investment projects. Under the latest version of investment law, incentive schemes have been categorized into three types: (1) basic incentive aiming for income tax exemption or capital expenditure (RGC, 2021, Article 26); (2) additional incentive further exempting from the certain obligations such as import tax, excises (or special tax) and VAT (RGC, 2021, Article 27); and (3) special incentive for specific investment project that potentially contributes to the economic development (RGC, 2021, Article 28). These new ingredients of generous incentive schemes under the 2021 Law are expected to draw more national and foreign investment projects to Cambodia.
- New targeted sectors under the incentive schemes have been revised. This version of Law has a much broader scope and deals with the key sectors which will potentially assist Cambodia in positioning itself in the global and regional supply chains. Enhanced presence in supply chains will support Cambodia’s industrial development, promote economic diversification, and accelerate technology and skills transfers to Cambodia. More importantly, based on last Paragraph in Article 24 of the Law, it gives a lot of realistic flexibilities for the Government to manoeuvre its investment policy direction in the timely manner so to enable it to seize the incoming opportunities without having to amend the Law. With that, the Government is able to incentivise specific investment projects which were not fully captured in the Article 24 in order to attract those emerging investment inflows.
- Investment project registration. The new Law allows the registration procedure to be done not only through the Council of the Development of Cambodia, but also through provincial/city administration. The new Law has also shortened the period of the automatic approval system of the investment projects further from 31 working days (RGC, 2003, Article 7 New) to only 20 working days (RGC, 2021, Article 12). On top of that, registration procedures can be done via the new online integrated platform which is a welcome step toward efficiency and effectiveness expediting the registration procedure and building confidence among investors.
- Investment project cancellation. The new Law requires investors to meet tax and other obligations before and after the investment project cancellation. Taxes need to be levied for construction materials, supplies and others in case that the intended project for cancellation has been literally operated less than 5 years after granted incentives. This is in order to avoid tax evasion. In addition to that, conditions and other requirements for cancellation procedures are still applied.
Looking toward the post-pandemic recovery, with the high rate of fully vaccinated population relative to other countries in the Southeast Asia together with the timely response measures to control the pandemic, Cambodia is optimistic to manage its normalization and economic activity resumption much earlier than others. The promulgation of Cambodia’s new Law at this time sets off the right combination between the global context in terms of the global production network restructuring and the readiness at the national level reflecting through the generous incentivize scheme and others under the new Law.
There are two mega trends that are pushing toward global and regional fragmentation of production processes and also toward resilient international network restructuring. Since the Global Financial Crisis of 2008, the expansion of global value chains has slowed down because of two major reasons: (1) lower global economic growth and investment and (2) the lack of major liberalization initiatives in recent years (World Bank, 2020). However, with Regional Comprehensive Economic Partnership Agreement (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which are the modern mega-regional FTAs with its huge ambitious market access liberalization and the harmonization of rules of origin, would start out the new wave for regional and global fragmentation of production, particularly in the Asia-Pacific region. Furthermore, the Covid-19 pandemic has significantly disrupted the global FDI flows. Based on the UNCTAD report, in the developing Asia, only China recorded an increase of FDI inflows by 6%, and countries in Southeast Asia experienced 25% decline. Under the pressure of the current pandemic crisis, Multinational Enterprises seek to improve their supply chain resilience, including by restructuring their production networks and relocating their production bases, seeking a more resilient supply chain management, and mitigating certain risks (UNCTAD, 2021).
In order to fully utilize the generous incentive scheme under the Law, Cambodia’s international trade policy needs to enlarge market access for exports of Cambodian firms. Cambodia has a small market and the best available option to increase productivity and cuts costs for its firms is to ensure their access to foreign markets. Therefore, Cambodia should keep looking for potential and dynamic trading partners all around the world interested in an FTA or other forms of preferential arrangements. It should also improve the utilization of the existing ones. Recently, we have seen Cambodia actively involved in FTA negotiations multilaterally and bilaterally. Using the leverage of the 2022 ASEAN Chair, Cambodia is determined to strongly push several ambitious issues onto the agenda. Among its key priorities and deliverables as the Chair and for the next rotating chair as well, are, for example, the official launches of negotiations between ASEAN-EAEU FTA, ASEAN-EU FTA, ASEAN-Canada FTA and ASEAN-UK FTA. Beyond the ASEAN framework, Cambodia will need to obtain cost-benefit analysis to properly assess opportunities of the membership in CPTPP as one of the largest markets of interest to Cambodian producers. Cambodia has never had FTA with some of the members of the CPTPP, including Chile, Mexico, Peru and Canada. Bilaterally, Japan is one of the trading partners with the highest trade potential so Cambodia should consider having a separate bilateral FTA. Furthermore, with a better market access that Cambodia would obtain from China, Japan and Korea, Cambodia might experience so-called the “CJK effect” in terms of the interconnected production hubs in Asia. Needless to say, these negotiations require skillful and experienced negotiators with greater preparation and collaboration from line ministries and private sector to ensure the benefits from the outcomes of negotiations. Thus Cambodia should be investing in building its capacity for such engagements before too long.