INVESTMENT CLIMATE STATEMENT FOR CAMBODIA

Reference ID: 08PHNOMPENH318

Created: 2008-04-10 01:07

Released: 2011-08-30 01:44

Classification: UNCLASSIFIED

Origin: Embassy Phnom Penh

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STATE FOR EAP/MLS DORSEY

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STATE PASS USTR FOR BISBEE

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E.O. 12958: N/A

TAGS: EINV OPIC USTR KTDB CB

SUBJECT: INVESTMENT CLIMATE STATEMENT FOR CAMBODIA

REF: 07 STATE 158802

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1. Cambodia, a developing country, began the transformation from a command economy to the free market in the late 1980s. It is now integrating into the regional and world trading framework. In 1998, Cambodia joined the Association of Southeast Asian Nations (ASEAN) and in September 2004, became a member of the World Trade Organization (WTO). It has shown interest in participating in other international trading arrangements, including the Asia-Pacific Economic Cooperation forum (APEC).

2. As part of its WTO commitment to strengthen the investment climate for both foreign and domestic businesses, Cambodia committed to enact 46 new laws or regulations to address areas where existing law did not meet WTO requirements. Cambodia has been behind schedule in fulfilling its WTO commitments to pass necessary business legislation. However the country has made progress recently, passing several significant laws in 2007 including a Customs Law, Law on Water Resources Management, Law on Land Traffic, Law on Insolvency, and Secured Transactions Law. The government has either completed drafts of most of the required laws or is waiting for their approval by the legislature. According to the Economic Institute of Cambodia, an independent think tank, in 2007 the government promulgated an additional six of the 21 remaining laws required by WTO accession.

3. Since the re-establishment of a constitutional monarchy in 1993, the economy has grown steadily, except for a period between mid-1997 and late 1998 when Cambodia suffered political instability and the Asian financial crisis affected business ativity. The economy began to rebound in late 1998 with the establishment of a new coalition government.

4. Real GDP averaged 8.4 percent growth during the 1994-2006 period. Despite dire predictions surrounding the expiration of the Multi-Fiber Agreement on January 1, 2005, through which Cambodia obtained limited duty-free access to the American market for garments, the economy grew at 13.4 percent in 2005 -- the highest rate in a decade -- and in 2006 expanded by 10.4 percent. During the same period, per capita GDP grew from $440 to $513. Success in garment and tourism sectors and good weather for agriculture generated the high growth. For 2007, the growth rate decreased slightly to an estimated 9.6 percent, mainly due to the slower growth of the garment and agriculture sectors, and per capita GDP was $590.

5. Inflation increased sharply in 2007, as it did in many countries throughout Asia. According to the National Institute of Statistics, in January 2008 the year-on-year inflation rate reached 18.7 percent. The rising price of fuel, depreciation of the dollar, and dramatic increase food prices continued to fuel inflation in the first quarter of 2008. Apart from the composite consumer price index, land prices continue to reach record levels, with the price of residential property in Phnom Penh increasing by more than 100% in 2007.

6. Foreign Direct Investment (FDI) approved by the Council for the Development of Cambodia (CDC), Cambodia's investment approval body, has dramatically increased in recent years, with approved proposals reaching $871 million during the first nine months of 2007, compared with $201 million in all of 2004. The CDC does not have a functional mechanism to monitor implementation of projects, so it is not clear how many of these proposed projects will be fully implemented. However the increase in investor interest may be attributed to increased political and macroeconomic stability, and ongoing government reforms designed to integrate Cambodia into the regional and global marketplace. Corruption has been singled out as one of the most serious deterrents to further private investment. Given inadequate private investment and poor revenue collection, Cambodia remains dependent largely on foreign donor funding for budget assistance, capital expenditure, and social services.

7. Since early 1999, the Cambodian government has intensified its economic reform program, a process the international financial institutions and donors encourage, participate in, and monitor closely. In recent years the government has publicly committed itself on numerous occasions to fighting corruption, pursuing good governance, and increasing transparency and predictability. This strategy is set out in the government's latest public reform effort called the "Rectangular Strategy for Growth, Employment, Equity, and Efficiency."

8. The government has initiated specific measures to promote business, especially small and medium-sized businesses, by reducing

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costs and the time required for business registration and by establishing a number of committees for trade facilitation and business promotion.

A. Openness to Foreign Investment

9. Cambodia's 1994 Law on Investment established an open and liberal foreign investment regime. All sectors of the economy are open to foreign investment and 100% foreign ownership is permitted in most sectors. Article 44 of the Constitution provides that only Cambodian citizens and legal entities have the right to own land. Aside from this, there is little or no discrimination against foreign investors either at the time of initial investment or after investment. However, some foreign businesses have reported that they are at a disadvantage vis-a-vis Cambodian or other foreign rivals, who engage in acts of corruption or tax evasion, or take advantage of Cambodia's poorly enforced legal regulations.

10. In addition, there are a few sectors that are open to foreign investors subject to conditions, local equity participation or prior authorization from relevant authorities. These sectors include manufacture of cigarettes, movie production, rice milling, exploitation of gemstones, publishing and printing, radio and television, manufacturing wood and stone carvings, and silk weaving. The government has issued a sub-decree restricting foreign ownership of hospitals and clinics and forbidding the employment of non-Cambodian doctors in any specialty in which the Ministry of Health considers there to be an adequate number of Cambodian practitioners.

11. Under a sub-decree dated September 2005, Cambodia prohibits certain investment activities, including investment in production or processing of psychotropic and narcotic substances, poisonous chemicals, agricultural pesticide/insecticides, and other goods that use chemical substances that affect public health and the environment. Processing and production of electric power by using waste imported from foreign countries are prohibited, as is forestry exploitation.

12. The privatization of state enterprises and transactions involving state property has not always been carried out in a transparent manner. In several instances, the public learned that enterprises were for sale or swap only after the government announced a sale or deal to a particular buyer.

13. Investor rights (investment guarantees) provided for in the Law on Investment include:

--Foreign investors shall not be treated in a discriminatory manner by reason of being a foreign entity, except in respect to land ownership as provided for in the Constitution of the Kingdom of Cambodia.

--The Royal Government of Cambodia shall not undertake a nationalization policy that adversely affects the private property of investors.

--The Royal Government of Cambodia shall not fix the price of products or fees for services.

--The Royal Government of Cambodia, in accordance with relevant laws and regulations, shall permit investors to purchase foreign currencies through the banking system and to remit abroad those currencies as payments for imports, repayments on loans, payments of royalties and management fees, profit remittances and repatriation of capital.

B. Conversion and Transfer Policies

14. There are no restrictions on the conversion of capital for investors. The Foreign Exchange Law allows the National Bank of Cambodia (the central bank) to implement exchange controls in the event of a crisis; the law does not define what would constitute a crisis. The U.S. Embassy is not aware of any cases in which investors have encountered obstacles in converting local to foreign currency or in sending capital out of the country.

15. The U.S. dollar is widely used and circulated in the economy. The 2007 exchange rate was stable, although slightly depreciated compared to 2006. At the end of 2007, the exchange rate was $1 = 4,003 riel. The government is committed to maintaining exchange rate stability.

C. Expropriation and Compensation

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16. Article 44 of the Cambodian Constitution, which restricts land ownership to Cambodian nationals, also states that "the (state's) right to confiscate properties from any person shall be exercised only in the public interest as provided for under the law and shall require fair and just compensation in advance." Article 58 states that "the control and use of state properties shall be determined by law." The Law on Investment provides that "the Royal Government of Cambodia shall not undertake a nationalization policy which adversely affects the private property of investors."

17. In spite of various legal protections, protection of immovable property rights is complicated by the fact that most property holders do not have legal documentation of their ownership rights. Numerous cases have been reported of influential individuals or groups acquiring property through means note entirely in keeping with the constitution or laws. These actions are usually directed at poor people unable to protect their rights. According to press reports, authorities in Phnom Penh carried out 29 mass evictions affecting more than 7,900 families between 2004 and 2007. If granted at all, compensation in these cases has been less than the market value of the property being taken.

18. The Ministry of Economy and Finance is drafting a law on expropriation which will set broad guidelines on land-taking procedures for public interest purposes and define public interest activities such as construction of infrastructure projects, development of buildings for national protection and civil security, construction of facilities for research and exploitation of natural resources, and construction of oil pipeline and gas networks.

19. To date, there are no known investment disputes involving government expropriation of property belonging to U.S. citizens. Up to 17 Thai businesses sustained varying degrees of damage during anti-Thai rioting in Phnom Penh on January 29, 2003. The Cambodian government pledged to compensate Thai business owners, and the majority of claims have been resolved.

D. Dispute Settlement

20. Cambodia's legal system is a mosaic of pre-1975 statutes modeled on French law, communist-era legislation dating from 1979-1991, statutes put in place by the UN Transitional Authority in Cambodia (UNTAC) during the period 1991-93, and legislation passed by the Royal Government of Cambodia since 1993.

21. Cambodian culture and its legal system have traditionally favored negotiation and conciliation over adversarial conflict and adjudication. Thus, compromise solutions are the norm, even in cases where the law clearly favors one party in a dispute. In civil cases, courts will often try conciliation before proceeding with a trial. The Ministry of Commerce is currently working on draft legislation to create a Commercial Court by 2009 that will likely include a pre-trial mediation component.

22. Cambodia's court system is generally seen as non-transparent and subject to outside influence. Judges, who have been trained either for a short period in Cambodia or under other systems of law, have little access to published Cambodian statutes. Judges can be inexperienced and courts are often understaffed with little experience, particularly in adjudicating commercial disputes. The local and foreign business community reports frequent problems with inconsistent judicial rulings as well as outright corruption.

23. The Cambodian judiciary system is beginning to undergo reform. To provide the necessary background knowledge, judges and court staff from around the country are being trained by the Royal School for Judges and Prosecutors, which was created in 2002 and is the only school of its kind. In an effort to clean up the court system, the Prime Minister has announced anti-corruption measures, including the dismissal, replacement, and transfer of judges and prosecutors.

24. To handle specific disputes with regard to labor, the Ministry of Labor and Vocational Training established an Arbitration Council in May 2003. Basing its decision on the provisions of the Labor Law, the Council has 30 arbitrators. The Council is an independent body whose function is to resolve collective labor disputes that the Ministry is unable to solve by conciliation. The Council's decisions are non-binding but it has been very successful in reducing the number of industrial actions in the garment sector. The Council plays a vital role in contributing to the development of healthy industrial relations in Cambodia. The Council's success in the garment industry has prompted unions in other sectors, e.g., the hospitality and tourism sectors, to seek the Council's arbitration

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and mediation services.

25. Under the 2006 Law on Commercial Arbitration, a National Arbitration Center (NAC) will be established in the Ministry of Commerce. When active, parties involved in a commercial dispute that have a written arbitration agreement will be able to settle commercial disputes in a quasi-judicial way without involvement of the Cambodian courts. Parties will be able to select arbitrators without direct government interference. The law also allows the Chamber of Commerce to establish its own arbitration center for disputes between members or between members and third parties. Neither of these proposed arbitration centers has been established to date. The Law on Commercial Arbitration also mandates recognition of arbitral awards made outside of Cambodia. Arbitration awards can be appealed to the Appellate and Supreme Court of Cambodia based on limited grounds.

26. Although party to the Convention for the Settlement of Investment Disputes between States and Nationals of Other States, Cambodia has not yet had any cases taken to the International Center for the Settlement of Investment Disputes.

E. Performance Requirements and Incentives

27. The Council for the Development of Cambodia (CDC), Cambodia's foreign investment approval body, administers a package of investment incentives. The CDC was created as a one-stop shop to facilitate foreign direct investment.

28. Seeking to increase government revenue, the international financial institutions recommended that the Cambodian government scale back its investment incentives. Consequently, the Cambodian government amended the Law on Investment in 2003. The law creates regimes for profit (20%), salary (5 to 20%), withholding (4 to 15%), value-added (10%) and excise taxes (rates vary).

29. The amendments to the Law on Investment eliminated the special nine percent corporate tax rate for all new investments. Investments approved prior to the amendment to the Law on Investment were entitled to the special nine percent rate for a transitional period of not more than five years. After this five-year period expires in 2008, such investments will also be subject to the standard 20 percent rate. The amendments brought to an end the tax-free reinvestment of profits and the rights to tax-free repatriation of earnings and other incomes by approved enterprises. While some incentives have been eliminated, the law also provides a simplified, more transparent, and faster mechanism for investment approval

30. Under the amended Law on Investment, the profit tax exemption is allocated automatically on the basis of activity and minimum investment amounts as set out in the sub-decree. To maintain the incentives under the law, qualified investment projects (QIP) are required to obtain an annual Certificate of Compliance from the CDC and file this with the annual tax return.

31. The amended Law on Investment includes the following provisions, which include the exemption, in whole or in part, of customs duties and taxes, for QIPs:

--An exemption from the tax on profit imposed under the Law on Taxation for a set period. The tax exemption period is composed of a trigger period + three years + n years (n to be determined according to the Financial Management Law depending on the economic sector). The maximum allowable trigger period is to be the first year of profit or three years after the QIP earns its first revenue, whichever is sooner.

--100% exemption from import duties for construction material, production equipment and production input materials for export QIPs and supporting industry QIPs in accordance with the provisions of sub-decree.

--Transfer of incentives by merger or acquisition.

--Renewable land leases of up to 99 years on concession land for agricultural purposes and land ownership permitted to join ventures with over 50% equity owned by Cambodians.

--No price controls on goods produced or services rendered by investors.

--No discrimination between foreign and local investors.

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--100% exemption from export tax or duty, except for activities specifically mentioned in the Law in Customs.

--Employment of foreign expatriates where no qualified Cambodians are available. QIPs are entitled to obtain visas and work permits.

--A QIP that is located in a designated special economic zone (SEZ) is entitled to the same incentives and privileges as other QIPs as stipulated in the law.

32. The September 2005 sub-decree on the Implementation of the Amendment to the Law on Investment also details investment activities that are not eligible for incentives, although investment is permitted. They include the following sectors: retail, wholesale, and duty-free stores; entertainment (including restaurants, bars, nightclubs, massage parlors, and casinos); tourism service providers; currency and financial services; press and media related activities; professional services; and production and processing of tobacco and wood products.

33. Incentives are also not eligible for production of certain products with an investment of less than $500,000 such as food and beverages; textiles, garment and footwear; and plastic, rubber, and paper products. Investors are encouraged to refer to the sub-decree for details of other investment activities that are not eligible for incentives.

34. Investment activities that are eligible for customs duty exemption, but not eligible for the profit tax exemption, are telecommunication basic services; exploration of gas and oil, including supply bases for gas and oil activities; and mining.

35. Cambodia has agreed to allow foreign lawyers to supply legal services with regard to foreign law and international law. It also agreed to allow them to supply certain legal services with regard to Cambodian law in "commercial association" with Cambodian law firms. Cambodia's WTO General Agreement on Trade in Services (GATS) commitment defines "commercial association" as any type of commercial arrangement, without any requirement as to corporate form. Thus, there are no equity limitations on the practice of foreign and international law by foreign enterprises and there are no equity limitations on the formation of "commercial associations" under which foreigners may practice certain legal services with regard to Cambodian law.

36. Investors who wish to take advantage of investment incentives must submit an application to the Cambodian Investment Board (CIB), the division of the CDC charged with reviewing investment applications. Investors not wishing to apply for investment incentives, or who are ineligible, may establish their company simply by registering corporate documents with the Department of Legal Affairs of the Ministry of Commerce. Once an investor's application is submitted, the CDC will issue to the applicant either a Conditional Registration Certificate or a Letter of Non-Compliance within three workdays. The Conditional Registration Certificate will set out the terms, such as approvals, authorization, clearances, permits or registrations required. If the CDC fails to issue the Conditional Registration Certificate or Letter of Non-Compliance within three workdays, then the Conditional Registration Certificate will be considered approved.

37. The CDC has the responsibility to obtain all of the licenses from relevant government agencies on behalf of the applicants. The relevant government agencies must issue the required documents no later than 28 workdays from the date of the Conditional Registration Certificate. At the end of the 28 days, the CDC will issue a Final Registration Certificate.

38. The Sub-decree on the Implementation of the Amendment of the Law on Investment adopted on September 27, 2005 does not require investors to place a deposit guaranteeing their investment except in cases in which the deposit is required in the concession contract. Investors who wish to apply are required to pay an application fee of seven million riel (approx. $1,750) representing the administration fees for securing the approvals, authorizations, licenses, or registrations from all relevant ministries and entities including stamp duty.

F. Right to Private Ownership and Establishment

39. There are no limits on the rights of foreign and domestic entities to establish and own business enterprises or to compete with public enterprises. However, the Constitution provides that only Cambodian citizens or legal entities have the right to own

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land. A legal entity is considered to be Cambodian when at least 51% of its shares are owned by Cambodian citizen(s) or by Cambodian legal entities. Investment incentives vary depending on the nature of the investment project.

40. Under the 2001 Land Law, foreign investors may secure control over land through concession, a long-term lease, or renewable short-term lease. If investors intend to take a long-term lease interest in land or ownership interest through a 51% Cambodian company, it is essential that caution be exercised to ensure that clear and unencumbered ownership of the land is verified.

41. The Land Law establishes a comprehensive legal framework for long-term leasing. The leaseholder has a contractual interest in the land, which means the lease can be sold or transferred through succession and can be pledged as security in order to raise financing. It is also important to make sure that the land ownership is clearly and legally established before entering into any leasing agreement.

42. Qualified investors approved by the Council for the Development of Cambodia have the right to own buildings built on leased property. However the law is unclear as to whether buildings from qualified projects can be transferred between foreigners or whether foreigners can own buildings built through projects not approved by the CDC.

G. Protection of Property Rights

43. Cambodia has adopted legislation concerning the protection of property rights, including the Land Law and the Law on Copyrights and Patent and Industrial Design. Cambodia is a member of the World Intellectual Property Organization (WIPO) and the Paris Convention for the Protection of Industrial Property.

44. Chattel and real property: The 2001 Land Law provides a framework for real property security and a system for recording titles and ownership. Land titles issued prior to the end of the Khmer Rouge regime in 1979 are not recognized due to the severe dislocations that occurred during the Khmer Rouge period. The government is making efforts to accelerate the issuance of land titles, but in practice, the titling system is cumbersome, expensive, and subject to corruption. The majority of property owners lack documentation proving ownership. Even where title records exist, recognition of legal title to land has been a problem in some court cases where judges have sought additional proof of ownership. Although foreigners are constitutionally forbidden to own land, the 2001 law allows them a long or short-term lease. Foreigners may also legally transfer ownership of buildings and improvements on the land that they lease. By law, foreign investors are allowed to own buildings on the long-term land lease. Cambodia has yet to establish the means by which such ownerships can be registered.

45. Intellectual property rights (IPR): As a WTO member, Cambodia's IPR regime is in compliance with its WTO commitments; however, comprehensive enforcement remains problematic. The 1996 U.S.-Cambodia Trade Agreement contained a broad range of IPR protections, but given Cambodia's very limited experience with IPR, the WTO agreement granted phase-in periods for the Cambodian government to fully implement IPR protections. On November 9, 2005, the WTO granted a deadline extension until 2013 for Cambodia and other least developed countries to enforce copyright laws and begin accepting patents.

46. Trademarks: The Cambodian National Assembly approved the Law Concerning Marks, Trade Names and Acts of Unfair Competition to comply with Cambodia's WTO obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Signed in February 2002, the law outlines specific penalties for trademark violations, including jail sentences and fines for counterfeiting registered marks. It also contains detailed procedures for registering trademarks, invalidation and removal, licensing of marks, and infringement and remedies.

47. Despite lacking clear legal authority to conduct enforcement activities, the Ministry of Commerce has taken effective action against trademark infringement in several cases since 1998. The Ministry has ordered local firms to stop using well-known U.S. marks, including Pizza Hut, McDonalds, Nike, Scotties, Marlboro, and Pringles. In 2007, the Ministry of Commerce solved 32 cases of trademark disputes.

48. Since 1991, the Ministry of Commerce has maintained an

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effective trademark registration system, registering more than 30,000 trademarks (over 5,500 for U.S. companies) under the terms of a 1991 sub-decree, and has proven cooperative in preventing unauthorized individuals from registering U.S. trademarks in Cambodia.

49. Copyrights: Copyrights are governed by the Law on Copyrights and Related Rights, which was enacted in January 2003. Responsibility for copyrights is split between the Ministry of Culture and Fine Arts, which handles phonograms, CDs, and other recordings, and the Ministry of Information, which deals with printed materials. Before the adoption of the law, there were no provisions for enforcement of copyrights.

50. Although Cambodia is not a major center for the production and export of pirated CDs, videos, and other copyrighted materials, they are widely available in Cambodian markets. Pirated computer programs, VCDs, and music CDs are widely used throughout the country.

51. To protect and manage their economic rights, authors and related rights holders are allowed by law to establish a collective management organization (CMO). The creation of the CMO requires authorization from either the Ministry of Culture and Fine Arts or the Ministry of Information, depending on the nature of their work. The Ministry of Culture and Fine Arts hopes to draft a sub-decree on collective management in 2008.

52. Patents and industrial designs: Cambodia has a very small industrial base, and infringement on patents and industrial designs is not yet commercially significant. With assistance from WIPO, the Ministry of Industry, Mines, and Energy (MIME) prepared a comprehensive law on the protection of patents and industrial designs which went into force in January 2003. The law provides for the filing, registration, and protection of patents, utility model certificates and industrial designs. The MIME has also issued a sub-decree on granting patents and registering industrial designs.

53. Encrypted satellite signals, semiconductor layout designs, and trade secrets: The Ministry of Commerce is preparing a draft law for trade secrets while the Ministry of Industry, Mines, and Energy is drafting a law on integrated circuit protection. Cambodia has not yet made significant progress toward enacting required legislation on encrypted satellite signals, although it obtained a model law on encrypted satellite signals and semiconductor layout designs from WIPO in March 1999. Cambodia has committed to the WTO to promulgate a law by 2009.

54. IPR enforcement: With the exception of the trademark enforcement actions described above, the Cambodian government has taken few significant actions to enforce its IPR obligations. One of the few such actions was a police raid in October 2007 on a local market where police seized 15 illegally copied books about the Angkor era and the Khmer Rouge. However, in January 2008, at the annual conference of the Ministry of Culture and Fine Arts, the government suggested it would increase prosecutions for copyright violations on domestically produced products before expanding prosecutions for foreign products. Cambodian copyright law allows IPR owners to file a complaint with the authorities to take action. Law enforcement action taken at the request of owners is directed only against the piracy of domestically produced music or video products, but not against piracy of foreign optical media. The owners requesting crackdowns must pay support costs to the authorities for conducting the operation. Crackdowns on such IPR violations are not conducted on a consistent basis.

55. Infringements of IPR are pervasive, ranging from software, compact discs, and music, to photocopied books and the sale of counterfeit products, including cigarettes, alcohol, and pharmaceuticals. Authors and local producers, particularly of optical media, frequently complain of the pervasive piracy.

56. The Ministry of Commerce has plans to put in place measures to stop IPR-violated products at borders, as post-inspection mechanisms are unlikely to be effective. During the TIFA discussions in November 2007, Cambodia requested technical assistance for a draft Sub-decree on Border Measures detailing procedures at the borders allowing IPR owners to file an application with customs to suspend clearance of suspected counterfeit goods.

H. Transparency of the Regulatory System

57. There is no pattern of discrimination against foreign investors in Cambodia through a regulatory regime. Numerous issues of

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transparency in the regulatory regime arise, however, from the lack of legislation and the weakness of key institutions. Investors often complain that the decisions of Cambodian regulatory agencies are inconsistent, irrational, or corrupt.

58. The Cambodian government is still in the process of drafting laws and regulations that establish the framework for the market economy. In addition to existing law and regulations, in 2007, the government adopted the Customs Law, Law on Water Resources Management, Law on Land Traffic, Law on Standards, Law on Insolvency, and Secured Transactions Law. A commercial contract law and other important business-related laws such as commercial court, e-commerce, telecommunications, and personal property leasing laws are in draft or still pending promulgation.

59. Cambodia currently has no anti-monopoly or anti-trust statutes. On a practical level, Cambodia has indicated a desire to discourage monopolistic trading arrangements.

60. Amendments to the tax system have brought substantial changes to the taxation regime applicable to businesses operating in Cambodia. The tax system currently includes a profit tax (20%), excluding certain natural-resource development projects and including all QIPs registered with the CDC; a withholding tax (4-15%); a salary or personal income tax (5-20%); a value added tax (10%); various property taxes; registration taxes; and specific excise taxes on certain merchandise (rates vary). There is a minimum turnover tax (1%). Some foreign inputs are exempt from this levy, but have to pay a 1% advanced profits tax instead. There are also import and export duties (rates vary). The U.S. and Cambodia have not signed a Double Taxation Treaty.

61. Cambodia is currently working on the establishment of standards and other technical measures based on international practice, guidelines, and recommendations. Under the Law on Standards in Cambodia, passed in 2007, the Institute of Standards in Cambodia (ISC) was created within the Ministry of Industry, Mines, and Energy (MIME) as a central authority to develop and certify national standards for products, commodities, materials, services, and practices and operations. When fully functional, the ISC will serve as the secretariat of the National Standards Council which will consist of representatives from various government ministries, state-controlled academic/research institutions, the private sector, and a consumer representative created to advise as well as approve standards.

62. The responsibility for establishing industrial standards and certifications currently resides with the Department of Industrial Standards of Cambodia of MIME which will become part of the Institute of Standards of Cambodia in the future. The Department has been assigned as the focal point for technical barriers to trade (TBT) and as the agency responsible for notifications and publications required by the WTO TBT Agreement. The Ministry of Health is charged with prescribing standards, quality control, distribution and labeling requirement for medicines, but this responsibility will be brought under the ISC in the future.

63. Quality control of foodstuffs, plant and animal products is currently under the Department of Inspection and Fraud Repression (CamControl) of the Ministry of Commerce. Cambodia is a member of the Codex Alimentarius Commission. Currently CamControl creates standards for foodstuffs and is the national contact point for Codex Alimentarius. Its primary responsibility is the enforcement of quality and safety of products and services relating to sanitary and phytosanitary (SPS) measures.

64. The Cambodian Constitution and the 1997 Labor Code provide for compliance with internationally recognized core labor standards. The law authorizes the Ministry of Labor and Vocational Training to set health, safety and other conditions for the workplace. (Section N of this report discusses the labor situation in more detail.)

65. The National Bank of Cambodia supervises Cambodia's banks and financial institutions while the Ministry of Economy and Finance regulates the insurance industry. The insurance market in Cambodia is relatively new, but has recently begun to gain credibility and expand its scope. Currently, there are a few major insurance companies operating here such as Asia Insurance, the state-owned insurance company Caminco, Forte Insurance, and Infinity Insurance.

66. To stay competitive in the world market, the government introduced specific measures to facilitate business, in particular exports, by attempting to reduce informal costs and streamline bureaucratic hurdles. Measures included: (1) introduction of a

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joint inspection by CamControl and the Customs and Excise Department and issuance of a common inspection report valid for both agencies and "Federal Office" in order to reduce the amount of time spent applying for goods inspection; (2) based on this common report, MIME and the Ministry of Commerce will issue the Certificate of Processing (CP) and the Certificate of Origin (CO), respectively; (3) reduction of the costs of registration from $615 to $177 and of the time limit for Cambodian government issuance of registration from 30 days to ten and a half working days; and (4) reduction of time required to acquire documents related to CO and exports and for goods inspection.

67. Cambodia has renewed its commitment to creating a favorable environment for investment and trade. During the TIFA discussions in November 2007, the government further committed to reducing unofficial fees and costs of imports and exports.

I. Efficient Capital Markets and Portfolio Investment

68. Cambodia is moving to address the need for capital markets. In November 2006, the National Assembly passed legislation to permit the government to issue bonds and use the capital to make up budget deficits. The Budget Law for 2007 permits the government to issue bonds worth $250,000. In 2007, the government also passed the Law on the Issuance and Trading of Non-government Securities, and, in partnership with the Korean Stock Exchange, plans to establish a stock market by the end of 2009.

69. The Cambodian government does not use regulation of capital markets to restrict foreign investment. Domestic financing is difficult to obtain at competitive interest rates. A new law addressing secured transactions, which includes a system for registering such secured interests, was promulgated in May 2007. Most loans are secured by real property mortgages or deposits of cash or other liquid assets, as provided for in the existing contract law and land law.

70. Export/import financing is available from multinational banks through a variety of credit instruments. The U.S. Overseas Private Investment Corporation (OPIC), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA) offer both investment guarantees and loans in Cambodia. The Export-Import Bank of the United States does not operate in Cambodia.

71. The total assets of Cambodia's banking system as of August 2007 were approximately 11,351 billion riel (approx. $2.8 billion), an increase of 66% from the same period of 2005. Loans account for about 50% of the banking system's assets. It is impossible to estimate the percentage of loans that are non-performing. As of September 2007, credit granted by the commercial banks amounted to 5,200 billion riel ($1.3 billion). Loans made to services and the wholesale and retail sectors accounted for some 50% of total loans.

72. The banking sector has shown significant improvement, but requires continued progress to gain international confidence. Under the amended Law on Banking and Financial Institutions, all of Cambodia's commercial banks had to reapply for licenses from the NBC and meet new, stricter capital and prudential requirements by the end of 2001. As a result, there was a significant shakeout and consolidation within the banking sector with the closure and liquidation of 12 banks. Since the shakeout, Cambodian banks have gradually increased in number with 17 commercial banks in operation as of December 2007. As a supplement to commercial banking, seven specialized banks and dozens of microfinance institutions also offer financial services to the public. In January 2008, Cambodia's banks were given their first-ever risk assessment from Standard & Poor's. Their placement was alongside that of banks in Venezuela, Bolivia, Ukraine, and Jamaica.

J. Political Violence

73. Cambodia is relatively peaceful compared to its pre-UNTAC history. Election-related violence has decreased in each national election held at five-year intervals since 1993. The most recent commune council election held in April 2007 was generally peaceful. The next national election is scheduled for July 27, 2008.

74. Political tensions have eased, and the current situation is relatively stable. However, Cambodian political activities have turned violent in the past, and the possibility for politically motivated violence remains. In November 2000, an anti-government group based in the U.S. led an attack against government buildings in Phnom Penh. During the anti-Thai riots in 2003, the Royal Embassy of Thailand and Thai-owned commercial establishments were

PHNOM PENH 00000318 010 OF 015

attacked. More recently, in November 2006, police arrested six people for allegedly plotting to conduct bomb attacks in Phnom Penh during the Water Festival.

75. On July 29, 2007, three improvised explosive devices (IEDs) were planted at the Vietnam-Cambodia Friendship Monument in Phnom Penh. One of the IEDs partially exploded, but the others failed to detonate and were recovered by Cambodian authorities. No one was injured, primarily because the explosion occurred during the early morning hours. Police subsequently arrested several individuals suspected of constructing the devices and planning the bombings. While there is no indication this attack was directed at U.S. or other Western interests, the possibility remains that further attacks could be carried out.

K. Corruption

76. Despite increasing investor interest, Cambodia continues to rank poorly on global surveys of competitiveness and corruption. The World Economic Forum's 2007 competitiveness survey ranked Cambodia 110 out of 131 countries surveyed, similar to its 2006 rating of 103 out of 125. The World Bank also ranked Cambodia near the bottom of the list, 143 of 175, on business climate. The 2007 Transparency International Global Corruption Barometer ranked Cambodia second-worst in corruption with 72% of those surveyed reporting that they paid a bribe to receive a service in the previous 12 months.

77. Business people, both local and foreign, have identified corruption, particularly within the judiciary, as the single biggest deterrent to investment in Cambodia. Corruption was cited by 80% of respondents to the World Economic Forum survey as the most problematic factor for doing business in Cambodia. A 2007 USAID-funded survey of the Phnom Penh Chamber of Commerce also found that corruption is considered to be the main obstacle for doing business.

78. Public sector salaries range from $20-60 per month for working level officials, and less than $800 per month for high-ranking officials. Although there has been a recent salary increase of 15%, these wages are far below the level required to survive in Cambodia, and as a result, public employees are susceptible to corruption and conflicts of interest. Local and foreign businesses report that they must often pay extra facilitation fees to expedite any business transaction. Additionally, for those seeking to enter the Cambodian market, the process for awarding government contracts is not transparent and is subject to major irregularities.

79. Current Cambodian laws and regulations and their application are insufficient to address the problem of corruption. Laws dating from the UNTAC period (1991-93) against embezzlement, extortion, and bribing public officials exist, but are enforced rarely, often for political reasons.

80. Cambodia is not a signatory to the OECD Anti-Bribery Convention, but has endorsed the ADB/OECD Anti-Corruption Action Plan for Asia and the Pacific. In September 2007, the government also signed the UN Convention Against Corruption, and is considering joining the Extractive Industries Transparency Initiative governing the oil sector.

81. After a draft national anti-corruption law was sent to the National Assembly but not voted on in 1999, the Cambodian government undertook to revise the draft with cooperation from local and international NGOs, and international donors. The draft, which is still pending, applies only to acts of corruption within Cambodia, and falls short of international standards due to limited independence of the proposed anti-corruption commission and weak declaration of assets provisions.

82. Cambodia is under increasing pressure from donors to address the issue of good governance in general, and corruption in particular. In a draft action plan on good governance presented to donors in May 2000, Cambodia promised to pass anti-corruption legislation by late 2001. After missing the first deadline, the government again promised to pass anti-corruption legislation by July 2003. In the December 2004 Consultative Group (CG) meeting of development assistance agencies, donors established a benchmark to have a new anti-corruption law submitted to the National Assembly before the next CG meeting, which was held March 2-3, 2006. Nevertheless, this deadline was not met and donors have become increasingly frustrated with the government's failure to act.

83. The Ministry of National Assembly-Senate Relations and

PHNOM PENH 00000318 011 OF 015

Inspectorate (MONASRI) has an anti-corruption mandate, but is largely inactive. In 2007, however, MONASRI, with technical assistance from USAID, created a draft Access to Information Policy. The draft has yet to be forwarded to the Council of Ministers. The government also created an anti-corruption commission within the cabinet in late 1999, which has undertaken a few investigations, one of which resulted in the dismissal of a mid-level official in late 2001. Also in 2001, the government established a National Audit Authority, which has been ineffective because of its lack of independence and secrecy. In 2007, the National Audit Authority conducted 39 audits of government institutions, projects, and companies doing projects with the government.

84. Ignoring the existing commission, the government established the Anti-Corruption Body (ACB) in August 2006, a temporary body designed to address corruption until the anti-corruption legislation is passed. The mission of the ACB is to focus on preventing corruption, strengthening law enforcement, and obtaining public support for combating corruption. The first investigation of ACB resulted in the arrest of five illegal car importers and 39 officials; 10 mid-level officials have been removed from their positions. Other investigations are underway. However the ACB is considered to be ineffective because of its lack of independence and capacity.

85. In its most comprehensive reform strategy, the Rectangular Strategy adopted as the government platform in 2004, the Cambodian government once again renewed its commitment to fight corruption and make good governance the centerpiece of reform. The strategy acknowledges the importance of taking action against corruption, but the challenge remains a daunting and long-term one that will require political will at the highest levels of the government.

L. Bilateral Investment and Agreements

86. Cambodia has signed bilateral investment agreements with Australia, Austria, Burma, China, Croatia, Cuba, the Czech Republic, Egypt, Indonesia, Japan, France, Germany, Malaysia, the Netherlands, North Korea, the Organization of the Petroleum Exporting Countries (OPEC), Pakistan, the Philippines, Singapore, South Korea, Switzerland, Thailand, and Vietnam. Future agreements with Algeria, Laos, Libya, Russia, the United Kingdom, and Ukraine are planned. The agreements provide reciprocal national treatment to investors, excluding benefits deriving from membership in future customs unions or free trade areas and agreements relating to taxation. The agreements preclude expropriations except those that are undertaken for a lawful or public purpose, non-discriminatory, and accompanied by prompt, adequate and effective compensation at the fair market value of the property prior to expropriation. They also guarantee repatriation of investments and provide for settlement of investment disputes via arbitration.

87. In addition, in July 2006, Cambodia signed a Trade and Investment Framework Agreement (TIFA) with the United States, which will promote greater trade and investment in both countries and provide a forum to address bilateral trade and investment issues. Two very successful meetings were held under the TIFA in 2007 in which the U.S. and Cambodian governments discussed WTO accession requirements, trade facilitation and economic development initiatives, and progress on intellectual property rights.

M. OPIC and Other Investment Insurance Programs

88. Under the Quick Cover Program, the Overseas Private Investment Corporation (OPIC) offers financing and political risk insurance coverage for projects on an expedited basis. Cambodia is eligible for this program. OPIC currently provides assistance to a local bank for micro-financing projects, and may expand to 2-3 banks in the future. With most investment contracts written in U.S. dollars, there is little exchange risk. Even for riel-denominated transactions, there is only one exchange rate, which is fairly stable.

89. Cambodia is a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which offers political-risk insurance to foreign investors.

N. Labor

90. According to government statistics, the labor participation rate was 75 percent in 2005. However, unemployment and underemployment are major problems which are not fully captured in government statistics. The country has an economically active population (defined as being ten years of age and older) of some 7.8

PHNOM PENH 00000318 012 OF 015

million people out of a population of 14.1 million. The Economic Institute of Cambodia estimated that the total labor force stood at 8.4 million in 2007.

91. The economy is not able to generate enough jobs in the formal sector to handle the large number of entrants to the job market. This dilemma is likely to become more pronounced over the next decade. Cambodia suffers from a large demographic imbalance. According to the 2004 Intercensal Population Survey (CIPS), persons 20 years of age or younger account for 53 percent of the total population. As a result, over the next decade at least 200,000 new job seekers will enter the labor market each year.

92. Approximately 73 percent of the labor force are engaged in subsistence agriculture. About 350,000 people are employed in the garment sector while over 235,000 Cambodians work in the tourism sector.

93. In the 2005-2006 Global Competitiveness Report of the World Economic Forum, an inadequately educated workforce was identified as one of the most serious problems in doing business in Cambodia. Given the severe disruption to the Cambodian education system and loss of skilled Cambodians during the 1975-79 Khmer Rouge period, workers with higher education or specialized skills are few and in high demand. A Cambodia Socio-Economic Survey conducted in 2004 found that about 12 percent of the labor force has completed at least an elementary education. Only 1.2 percent of the labor force completed post-secondary education.

94. Overall literacy, for those age fifteen and over, is 74 percent with male literacy rates considerably higher than those for females in both urban and rural areas. Many adults and children enroll in supplementary educational programs, including English and computer training. Employers report that Cambodian workers are eager to learn and, when trained, are excellent, hardworking employees.

95. Cambodia's 1997 labor code protects the right of association and the rights to organize and bargain collectively. The code prohibits forced or compulsory labor, establishes 15 as the minimum allowable age for paid work, and 18 as the minimum age for anyone engaged in work that is hazardous, unhealthy or unsafe. The statute also guarantees an eight-hour workday and 48-hour work week, and provides for time-and-a-half pay for overtime or work on the employee's day off. The law gives the Ministry of Labor and Vocational Training (MOLVT) a legal mandate to set minimum wages after consultation with the tripartite Labor Advisory Committee. In January 2007, the minimum wage for garment and footwear workers was officially set at $50 per month. In April 2008, a temporary $6 per month cost of living allowance was instituted to offset high levels of inflation. There is no minimum wage for any other industry. To increase competitiveness of garment manufacturers, the labor code was amended in 2007 to establish a night shift wage of 130 percent of day time wages.

96. Cambodia does not currently have legislation governing worker health and safety, but there are various detailed ministerial regulations regarding payments in the event of on-the-job accidents. In labor disputes in which workers complain of poor or unhealthy conditions, MOLVT and the Ministry of Commerce have ordered the employer to take corrective measures.

97. Enforcement of many aspects of the labor code is poor, albeit improving. Labor disputes can be problematic and may involve workers simply demanding conditions to which they are legally entitled. The U.S. Government, the ILO, and others are working closely with Cambodia to improve enforcement of the labor code and workers' rights in general. The U.S.-Cambodia Bilateral Textile Agreement linked Cambodian compliance with internationally recognized core labor standards with the level of textile quota the U.S. granted to Cambodia. While the quota regime ended on January 1, 2005, a "Better Factories" program attempts to build on the labor standards established.

98. Cambodia has seen reasonably low inflation and high economic growth rates during the past few years, keeping inflation-driven wage increases in check. However, inflation increased rapidly during the last quarter of 2007 and the first quarter of 2008, leading to demands for higher wages.

O. Foreign Trade Zones

99. To facilitate the country's development, the Cambodian government has shown great interest in increasing exports via geographically defined special economic zones (SEZs), with the goal

PHNOM PENH 00000318 013 OF 015

of attracting much-needed foreign direct investment.

100. Cambodia has yet to pass the Law on Industrial Zones which will define SEZs and establish the rules under which they will operate. The law is currently in draft form and awaiting approval from the National Assembly.

101. In late December 2005, the Council of Ministers passed a sub-decree on Establishment and Management of Special Economic Zones to speed up the creation of the zones. The sub-decree details procedures, conditions and incentives for the investors in the zone.

102. Since issuing the sub-decree, the government has approved 11 SEZs, located near the borders of Thailand and Vietnam, Phnom Penh, Kampot, and at Sihanoukville, and six others have obtained conditional licenses from the Cambodia Special Economic Zones Board (CSEZB) pending successful implementation of conditions of the license.

P. Foreign Investment Statistics

103. Foreign Direct Investment (FDI) proposals approved by the Council for the Development of Cambodia (CDC) have dramatically increased in recent years, with approved FDI reaching $871 million during the first nine months of 2007, compared with $201 million in all of 2004. FDI registered capital however, has been modest since 1995, with an average inflow of $183 million in the period 1995-2007. The FDI registered capital figures probably understate actual investment, since they report only registered capital and not fixed assets. CDC statistics for fixed assets, however, are based on projections, and the CDC has no effective monitoring mechanism to determine the veracity of the numbers. The FDI registered capital flow into Cambodia is uneven and gradually declined from $135 million in 1999 to $30 million in 2003. In 2006, FDI increased to $209 million.

104. Total FDI registered capital flows into Cambodia for the years 1995-2007 (October) are presented in the table below, in US$ million. (Source: CDC) (Note: statistics from the National Bank of Cambodia and the Ministry of Commerce differ significantly from CDC's figures and from each other.)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (

Oct.)

---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

1,556 351 294 320 135 74 81 50 30 45 383 209 323

105. Figures from the CDC for registered capital of approved projects as of October 2007, including domestic investment, and broken down by country of origin and economic sector, are provided below. The FDI registered capital figures below may overstate investment because they include projects that have not yet been, or may never be, fully implemented and retention of dormant or defunct projects from earlier years makes the investment figures appear higher.

106. Total cumulative registered investment projects approved, by country of origin, August 1994 to October 31, 2007. (source: CDC)

----------------------------------------

Country US$ millions pct.

----------------------------------------

Malaysia 1,730

34.11

Cambodia

1,340

26.42

China

522

10.29

Taiwan

386

7.61

Singapore

181

3.57

Thailand

162

3.19

U.K.

127

2.50

South Korea 141

2.78

Hong Kong

117

2.31

Canada

1.14

Indonesia

1.06

Australia

1.03

USA

1.05

France

0.73

Japan

0.28

Other

1.91

----------------------------------------

Total

5071

----------------------------------------

107. Total cumulative registered investment capital by sector, from August 1994 to October 31, 2007 (source: CDC).

PHNOM PENH 00000318 014 OF 015

-----------------------------------------

Sector

US$ millions

No. of Projects

-----------------------------------------

Industry

2,363

1,001

- Food Processing 161

- Garments

579

- Petroleum

264

- Wood Processing

255

- Footwear

Agriculture

188

Services

486

115

- Construction

161

- Telecommunications 163

Tourism

1,881

-----------------------------------------

Total

4,918

1312

-----------------------------------------

108. New investment projects in US$ millions, by country of origin, 1998-2007 (October) (source: CDC).

--------------------------- -------------------------

Country 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(Oct.)

--------------------------- -------------------------
Malaysia 22.6

17 1.6 28 na 3.6 7.8 10.6 2.5 15.3

Cambodia 110 98 28 47 21 44 15 78.5 116.8 192.8

USA 2.3 4.4 3.7 5.2 na na

2.1

2.2

4.3

1.5

Taiwan

35.6

4.6

4.1

16.4

10.0

Singapore 12

2.3

3.1

3.3

1.6

5.3

3.8

China

3.9

4.2

28.3

31.1

South Korea 4.0 na

7.6

4.1

4.5

17.29

Hong Kong 48 22

0.7

0.3 1.5

0.6

France

0.6 0.6

3 na

1.7 0.6

0.4

Thailand 53

3.1

3.1 2.0

10.0 0.8

U.K.

0.4 1.5

6.5

1.5

0.4

0.5

1.5

Canada

2.1 0.2

2.2

1.7

0.6

1.5

Indonesia 10 0.4

Australia 1.4 0.02 0.8

0.6

2.5

Japan

2.1

0.2

1.2

0.7

2.9

Other

8.3

2.8

1.3

1.7

13.6

8.1 45.5

----------------------------- --------------------
T

otal

430

233

103

129

74.3

379

209.7 323.1

----------------------------- --------------------

109. New investment projects in US$ millions, by sector, 1998-2007

(October)

--------------------------------------------- ------

Sector 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (Oct.)

------------------------------ ---------------------

Industry 298

101

22.5 41

53.5

325

173.4 218.4

- Food

8.0

2.4

1.5

1.6

22 9.1

Processing

- Garments 91.6 49.5

12.6 42

41.9

32.5

- Petroleum 1

200

- Wood

1.3

Processing

Agriculture 44 31.3

8.5

6.2

2.0 2.0

4.0 2.0

Services 22.1 55

5.2

5.5 5

32 16.3 82.2

- Construct 1.2 16.4

na 3.0

31 6.0

- Telecom 13.4 22

na 2.

9 10 na na na 42.2

Tourism

67 45.5

36.5

26 5.5

22.5

------------------------------- -----------------

Total

430

233

129

74 66

379

210

323

------------------------------- -----------------

110. The CDC has registered approximately $55 million in U.S. investment since August 1994. Caltex has a chain of service stations and a petroleum holding facility in Sihanoukville; Crown Beverage Cans Cambodia Limited, a part of Crown Holdings Inc., produces aluminum cans; and Chevron is actively exploring offshore petroleum deposits. In July 2007, General Electric opened a branch office, and in January 2008 Cargill opened a representative office.

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There are also U.S. investors in a number of Cambodia's garment factories.

111. Major non-U.S. foreign investors include Asia Pacific Breweries (Singapore), Asia Insurance (Hong Kong), ANZ Bank (Australia), BHP Billiton (Australia), Oxiana (Australia), Infinity Financial Solutions (Malaysia), Total (France), Cambodia Airport Management Services (CAMS) (France), Samart Mobil Phone (Malaysia), Shinawatra Mobile Phone (Singapore), Thakral Cambodia Industries (Singapore), Petronas Cambodia (Malaysia), Charoeun Pokphand (Thailand), Siam Cement (Thailand), and Cambrew (Malaysia).

112. Some major local companies and their sectors are: Sokimex (petroleum, tourism, garment), Royal Group of Companies (mobile phone, telecommunication, banking, insurance), AZ Distribution (construction, telecommunication), Mong Rethy Groups (construction, agro-industry, rubber and oil palm plantation), KT Pacific Group (airport project, construction, tobacco, food and electronics distribution), Hero King (cigarettes, casinos and power), Anco Brothers (cigarettes, casinos and power), Canadia Bank (banking and real estate), Acleda Bank (microfinance), and Men Sarun Import and Export (agro-industry, rice and rubber export).

113. In January 2008, Acleda Bank announced it obtained permission to operate in Laos, and the bank has plans for further expansion into Vietnam and China. Statistics on Cambodian investment overseas are not available, but such investments are likely minimal.

MUSSOMELI

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