Despite a slow start, SEZ profits booming

Special economic zones (SEZs), billed as a one-stop shop for potential investors, have had a slow start in the Kingdom – only 13 out of 30 registered zones are operational – with many failing to get off the ground given the difficulty in providing the requisite infrastructure and facilities investors expect.

However, despite the limited number of SEZs in play, exports from these zones are expected to reach $1.2 billion by the end of the year, with Commerce Ministry records released this month showing that $964 million worth of shipments were achieved as of November.

This would represent a 45 per cent increase over the $672 million exported last year, with ministry officials banking on the opening and expansion of new SEZs this year to lift exports to the $1.2 billion mark.

Sam Serei Rath, undersecretary of state at the Commerce Ministry, said he was optimistic about reaching the expected export target, adding that the significant increase could be attributed to investors’ better understanding of Cambodia’s incentive and investment policies.

According to Rath, there are a number of factors that are causing a boost in exports, including factories moving towards value-added products, improving skill levels, and a number of big brands entering these zones.

“Some factories are starting to produce high-skill products,” he said. “When the factory owners train their workers for years, they become skillful and [owners] can update their products.”

The Cambodian government is in the process of tweaking its investment law, to compete with Thailand, Vietnam and Myanmar, as well as drafting an SEZ law, both of which were expected this year but have been delayed.

“Another thing is that foreign investors are getting a better understanding of the incentives we provide, and amendments to the investment laws will see more favourable conditions [for investors], ” Rath said.

But as the fortunes of Cambodia’s SEZs continue to improve, the threat of labour strikes, such as those roiling Bavet this month, looms over factory and SEZ owners.

Speaking amid the recent strikes, Larry Kao, managing director at the Manhattan SEZ in Bavet, said that SEZs were making good progress but that strikes and protests could quickly derail this success.

“All achievements can be easily and totally wiped out by illegal and violent strikes instigated by bad elements, as is happening now in Manhattan and other SEZs in Bavet,” he said.

Kao said that it has taken a long time to develop Cambodia’s economy and such strikes will nullify the gains made by workers’ efforts, as well as diminish investor confidence.

Despite the threat of further industrial action, experts say the Kingdom still has the potential to attract more SEZ investments given the country’s relatively cheap labour and investment policies that are being aggressively pushed by the government.

Last week, during Prime Minister Hun Sen’s visit to Thailand, the government signed an agreement to develop more SEZs along the Banteay Meanchey-Sa Kaeo and Koh Kong-Trat border areas.

Additionally, as the Thailand+1 and China+1 policies – aimed at installing ancillary or new manufacturing facilities to supplement the working of the main factory – begin to take hold, Cambodia is expected to see an influx of businesses looking to set up in SEZs.

“This is an insurance policy that has value, and not just in bad times. Even in good times, facilities can operate at normal capacity, but capacity can be increased much more quickly if the facility exists,” said Jayant Menon, lead economist for Asian Development Bank’s office for regional economic integration.

According to Menon, as production costs in China begin to increase, and local manufacturing loses the competitive edge it’s held so far, investors, both Chinese and international, are looking at other investment avenues.

“A lot of investment is coming out of China, and not necessarily from Chinese firms,” he added.

One of the beacons in the SEZ market is the Phnom Penh Special Economic Zone (PPSEZ), which has this year seen two factories expand their operations, as well as a $100 million investment by Coca-Cola into a new facility.

Building on this success, the economic zone is in line to list on the Cambodia Securities exchange early next year, as a means to raise capital and increase investment in the zone.

Hiroshi Uematsu, chief executive of the PPSEZ, said that, while they didn’t have export figures yet, the rise in shipments is down to a combination of expansion and consolidation by factories within their premises.

According to Uematsu, “more factories are in operation this year” and he sees this trend continuing into next year.

“Minebea’s third factory will be operational, and Denso will start operations from a small rental factory as well,” he said.

Another upside to this increase in exports is its impact on lowering the cost of logistical services, though Uematsu said there were still small issues that needed to be ironed out.

“Camcontrol [inspections] is not necessary for export items. This is long-time pending issue.”