Business hub set to tackle key challenges before listing

[geovalin]

Charles Rollet

The Phnom Penh Special Economic Zone has 77 tenants from nine countries and 80 per cent occupancy, but high electricity costs and corruption remain a drag on profits

Eight kilometres west of Phnom Penh’s airport, in an area mostly made up of dusty grassland and rice fields, an unlikely flag is flying in the distance – Turkey’s.

The flag is flapping in front of the Phnom Penh Special Economic Zone’s main office to welcome a delegation from the Turkish embassy as it visits WEIBO – a Turkish textiles group and PPSEZ tenant since 2012.

Since its founding eight years ago, 77 companies from nine countries – ranging from Taiwan to Belgium – have set up shop here, although the majority of the firms are Japanese.

The 357-hectare PPSEZ can claim to being the most developed of the 33 SEZs in Cambodia. Its tenants have invested $365 million so far, which PPSEZ says is the highest in the Kingdom. It plans to list on the Cambodian stock exchange by mid-year – which would make it the third company on the Kingdom’s fledgling bourse.

The idea behind an SEZ is to set up a sort of commercial oasis, where the traditional infrastructural and regulatory challenges of starting a business in a developing country are minimised.

PPSEZ chief executive Hiroshi Umaetsu Vireak Mai

Five separate government authorities are located on site, while the site contains its own highway, water treatment plant and power plant.

But as it prepares to list, PPSEZ is tackling deep-seated challenges.

The main issue is electricity costs, says PPSEZ chief executive Hiroshi Umaetsu. “If [electricity] goes from 19 cents to 15 cents [per kilowatt], then I can be confident,” he said.

For the future of Cambodian manufacturing, which hinges on diversifying from low-level textile production, machinery is essential, Umaetsu added.

And right now the raw materials used at PPSEZ must be imported. “In order to produce, there must be machinery, but they need to consume more electricity,” Umaetsu said.

On January 1, a 5 per cent reduction rate was passed on to investors after “proactively challenging” the Electricity Authority of Cambodia, but the reduction still isn’t enough, which has led the PPSEZ to begin constructing a power plant fuelled by renewable biomass energy.

Electricity isn’t the only worry. Corruption causes logistical costs to increase, already an issue due to poor infrastructure outside the zone.

Within PPSEZ, some companies have had to pay extra costs for its shipping containers, passing down costs to the consumer. “There’s a published rate you pay and get an invoice for, and there’s the actual rate, which includes beer money,” said Charles Esterhoy, PPSEZ’s chief operations officer.

Esterhoy said such “fees” deter European and American companies from investing in Cambodia due to laws such as the US’s Foreign Corrupt Practices Act, even as PPSEZ aims at signing up more Western firms.

“I close one eye to it,” Umaetsu said. He added that the beer money would stop flowing once PPSEZ signs a memorandum of understanding with the Anti-Corruption Unit on February 23 or 24.

Despite such challenges, PPSEZ says it is profitable, although representatives declined to give more specific figures because of the audit process the zone is undergoing due to its listing.

Until now, PPSEZ’s 77 tenants have given the zone an occupancy rate of about 85 per cent. And it’s getting international attention. “The PPSEZ challenges the conventional wisdom about FDI in Cambodia – i.e., that it is predominantly garment and footwear manufacturers from China or Taiwan,” a UBS report from February reads.

Given that no specific tax incentives are offered to Cambodian SEZs, PPSEZ’s draw lies in its physical infrastructure and close links to government agencies.

Senior adviser for consultancy group DFDL Lucas Vosch said that if well-managed, SEZs could be a boon to the economy, although the 33 approved SEZs in Cambodia vary greatly. “It’s very different if you go there and it’s just scrub,” he said. “If you see it, you can believe it.”

At times, PPSEZ seems like a Western office park, with spacious, spotless buildings separated by seas of grass and a well-paved highway.

As PPSEZ customer service representative Lim Sokkea passed by the American diamond polishing firm Laurelton Diamond, a Tiffany subsidiary whose office in Cambodia looks like a minimalist luxury hotel, she noted the buildings were all “very nice” with a sigh.

“American standard.”

http://www.phnompenhpost.com/business-hub-set-tackle-key-challenges-listing