Introduction

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Located just 18km away from the city center of Cambodia’s burgeoning capital city, Phnom Penh, the Japanese-managed Phnom Penh SEZ (PPSEZ) was one of the first Special Economic Zones approved by the Kingdom of Cambodia in 2006.

Although Japanese Special Economic Zones have received significantly less media coverage than Chinese ones, they are nevertheless essential to study in order to get the full picture on China’s Belt and Road Initiative. This is particularly true in South East Asia, where many countries have, at least until recently, had much closer ties to Japan’s government and major corporations than China’s. The PPSEZ, and Cambodia overall, is one such example where Japan is seen as a pioneer of the Special Economic Zone industry, and continues to outperform its rivals in many regards despite having been overtaken in others.

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History of the Zone

The Phnom Penh SEZ was approved in 2006, only a few months after the introduction of Cambodia’s SEZ scheme and the establishment of the Cambodian Special Economic Zone Board (CSEZB).  

The PPSEZ was granted 357.3 hectares, to be built in three phases. The first phase of the project was completed in 2008, encompassing 137.9 hectares of the total terrain. Operations began the same year, welcoming manufacturers from all around the world involved in the production of numerous products ranging from garments, to electrical parts, and snack foods.

The PPSEZ is one of roughly a dozen operational SEZs in the Kingdom of Cambodia, with about 20 additional SEZs having been approved.

Recent Economic Success

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Today, the PPSEZ is home to approximately 100 companies, roughly half of which are Japanese. A substantial number of these companies are focused on the domestic market, but almost twice as many are export based, shipping their products to Japan and elsewhere. One of the most notable investors in the zone is Coca-Cola, which opened a $100m plant in the zone in December 2016. This plant has the capacity to produce up to 54,000 bottles and 60,000 cans of the popular beverage every hour for exports all across the ASEAN market. In addition, suppliers and subsidiaries of several world-famous brands are found in the PPSEZ, including Timberland, Puma, Apple, Old Navy, Sony, IBM, and Canon, to name a few.

The PPSEZ is showing positive signs of growth, as the larger (161.6 hectares) second phase of the zone is scheduled to be opened for business later this year. A second SEZ on the border with Thailand, the Poi Pet PP SEZ (managed by a subsidiary of the Phnom Penh SEZ Plc), was approved in 2014 and started operating last year.

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Phnom Penh SEZ Plc was the fourth out of only five companies currently listed on the Cambodian Securities Exchange, under the ticker PPSP. It was also the first special economic zone and second private company to be listed on the exchange.

In October 2018,  the PPSEZ sold nearly $10m worth of shares in what is considered the first ever private offering by a listed company in the Kingdom. Today, PPSP is valued at about $35m, and is one of two Japanese SEZs listed on the Cambodian Securities Exchange.

Qualified Investment Projects (QIPs) and Regulatory Advantages in the Zone

In order to establish their operations within an SEZ, companies must seek Qualified Investment Project (QIP) status.

QIPs enjoy a number of incentives, including the choice between a profit tax exemption (of up to 9 years depending on the break-even point), or a special depreciation scheme (providing a 40% depreciation allowance on the value of new or used tangible properties used in production or processing). QIPs are also entitled to duty-free imports on certain goods such as production equipment and construction materials, as well as a full exemption from export taxes except in the case of a few excluded activities. Finally, additional VAT incentives are available for QIPs in the agricultural, garment, textile and footwear industries. All of the rights, privileges, and entitlements of a QIP can be transferred or assigned to a person who has acquired or merged a QIP subject to the approval of the relevant authorities.

SEZ developers such as the Phnom Penh SEZ Plc are themselves granted QIP status but are also granted a few supplementary incentives. These include customs exemptions on goods destined to the construction of not only the Zone itself but also infrastructure related to the operation of the Zone such as roads between the Zone and nearby cities. They may also obtain a land concession from the State for establishing the SEZ in areas along the border or isolated regions in accordance with the Land Law and may lease this land to Zone Investors.

Despite QIP status being a requirement for the operation of a company within an SEZ, being located in an SEZ is not required to obtain QIP status. Indeed, a great number of Cambodian QIPs are established outside of SEZs. The actual advantages of being based inside a Zone such as the PPSEZ are therefore not precisely regulatory or fiscal in nature.

One such advantage common to all SEZs in Cambodia is the local presence of a “One-Stop” office where specially trained government officials representing a number of government ministries, as well as the local provincial authority, are stationed on-site to provide administrative services. The available services include company registration, licensing, customs, work permits, and many more. In the PPSEZ, the one-stop service is provided by SAHAS PPSEZ Co., Ltd, a subsidiary of Phnom Penh SEZ Plc in partnership with the CSEZB. In addition to facilitating the previously mentioned government services, SAHAS also offers recruitment services, labour management services, round-the-clock private security, garbage collection and disposal, canteen and dormitory facilities for workers, legal, administrative and accounting services, and more.

Unions and Labor Regulations

There is another, more controversial, advantage of being located inside a Cambodian SEZ, and that is the practical restrictions for union action inside the Zone. The Cambodian constitution and labour laws are very strict in their protection of worker rights, and union membership can therefore not be explicitly excluded from Cambodian SEZs. However, it is not practically feasible for unions to mobilize or recruit workers within an SEZ, or to organize strikes and peaceful demonstrations; movement into and out of SEZs is tightly controlled, since such Zones must by law must be fenced, and their operators are allowed to forcefully remove or deny entry to any individual on a discretionary basis.

In 2016, two union-affiliated men were each given 6-month suspended sentences and were ordered to pay fines and damages for allegedly trespassing into a garment factory on the PPSEZ, inciting strikes involving some 2,000 workers, and “intentionally causing damage” to property. The men claimed that the charges were false, that there was no damage to property and that the non-violent strikers were merely demanding that the company adhere to Cambodian labour law.

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Zone Infrastructure

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The PPSEZ also offers a number of unique advantages, including an independent power plant and water supply system, a dedicated wastewater treatment facility and reliable telecommunications system, not to mention the privileged location of the Zone relative to the Phnom Penh international airport and the Phnom Penh river port. Considering, for instance, the frequency of electricity outages in the rest of Cambodia, it is easy to see why so many companies choose to place their operations inside an SEZ instead of elsewhere in the developing country.

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Cambodia also has its drawbacks for potential investors; first, the cost of electricity is comparatively high for the region, and infrastructure outside of special economic zones is often unreliable or insufficiently developed. Secondly, although efforts have been made to train the local workforce, the availability of skilled or specialized labour has been a limiting factor on the growth of Cambodian SEZs. As of April 2016, the PPSEZ only employed about 20,000 workers despite having the capacity to provide 80,000 jobs, and the steady increase of the Cambodian minimum wage (from US$61 in 2012 to $140 in 2016 and $182 in 2019) has seen many of the more labour-intensive Japanese companies such as low-end garment manufacturers leave the Kingdom. In their place, the PPSEZ has welcomed producers of goods which are more cost-effective to ship by air cargo, such as luxury and electronic goods including for example automotive parts, pharmaceuticals, and wire harnesses.

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In spite of all of this, Japanese investments in Cambodia have continued to grow , and were valued at approximately US$1.6 billion in 2017. One of the factors that has contributed to this has been the recent introduction of direct flights between Cambodia and Japan. These flights have brought about a surge in the number of business travelers to the Kingdom and encouraged the emergence of a number of businesses catering specifically to Japanese visitors; Japanese restaurants, convenience stores, banks, and even a mall, the Aeon mall in Phnom Penh.

Geopolitical Factors

Another extremely important factor has been the launch of the ASEAN Economic Community (AEC) in 2015, which has ushered the so-called “Thailand Plus One” strategy. The strategy takes advantage of Thailand’s geographical location and its more advanced economy, as well as the lower labour costs and resources of the neighbouring “CLMV” (Cambodia, Laos, Myanmar, Vietnam) countries. This development has driven many of the Japanese companies that have historically held strongholds in Thailand’s industrial clusters to invest in the CLMV region with the support and advice of the Thai government, which has been keen to encourage such expansions of supply chains.

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The geopolitical implications of these developments must be interpreted in the context of China’s Belt and Road Initiative (BRI), which according to the ASEAN secretariat database has brought an inflow of about US$11.3bn in Chinese FDI (Foreign Direct Investments) to the region in 2017 alone.  China’s investments in Cambodia surged two-fold in 2018 to about US$3.9bn across 150 Chinese companies (up from 82 in 2017). These investments account for nearly 60% of total FDIs in the Kingdom, of which US$1.9bn alone was spent on an expressway project linking Phnom Penh with the port of Sihanoukville. Meanwhile, Cambodia’s second-biggest investor, Japan, increased its commitments 14-fold during the same period, spending US$889 million across 8 projects.

According to official statistics, China has recently overtaken Japan as both Cambodia’s largest investor and donor, with the People’s Republic having pledged to donate $600 million between 2019 and 2021, as well as pushing bilateral trade to $10bn by increasing rice imports. In comparison, Japan donated US$1.2bn to Cambodia between 1992 and 2008. This accounted for 20% of Official Development Assistance (ODA) to the Kingdom, with a total donation of US$168m in 2018 alone. It is undeniable that China’s investments have earned it a lot of influence in the region, and that this has prompted Japan to take a counterbalancing role, giving Southeast Asian countries the opportunity to hedge against the Chinese, who are regarded by some as being less reliable in delivering on their promises. As an example, China only delivered US$5.9bn of the US$107bn in aid it had pledged to East Asian countries between 2001-2011, whereas Japan delivered the entire US$12.7 it had pledged over the same period.

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Public opinion in Cambodia also strongly favors Japan, as Chinese investments are much more closely connected to forced relocations of local residents, environmental damage and defective or short-lasting infrastructure. Japanese companies are perceived to make more long-term investments with more consideration for public welfare. In keeping with this spirit, the PPSEZ agreed last year to build 3,136 affordable homes on more than 7 hectares of land in the zone, in collaboration with the United Nations Development Programme (UNDP). Since 2010, Phnom Penh SEZ Plc is also ISO 9001 and ISO 14001 certified, demonstrating its commitment to quality management and environmental control respectively.  In 2017, Sia Phearum, head of the Housing Rights Task Force, told the Khmer Times: "We believe Japanese companies won't develop in a way that causes distress to the people.”. This sentiment can also be observed at the Sihanoukville Autonomous Port, which today mainly serves Chinese companies, but still prides itself for having been built according to Japanese technical standards, according to the front page of its official website.

In the future, we can expect China and Japan to continue to compete heavily in South East Asia, and we can also foresee that Special Economic Zones such as the PPSEZ will have a central role in this Sino-Japanese rivalry. All 7 of Japan’s major Sogo Shoshas (general trading companies) are likely playing a role in this, as there is evidence of each of them having significant investments in SEZs worldwide, in what appears to be an effort to mirror and benefit from the development of the BRI. In doing so, Japan’s largest corporations are giving their government a fighting chance against Chinese hegemony across the continent. However, Sumitomo Corporation will probably be particularly worth keeping an eye on; Sumitomo is the third largest Sogo Shosha by total and net assets, it also happens to be the PPSEZ’s main distributor and overseas representative, and the Corporation appears to be the Sogo Shosha that is most publicly involved in the development of new SEZs around the globe.

In addition to the PPSEZ, some of the Special Economic Zones in which the Sumitomo Corporation has invested include: The Thilawa SEZ in Myanmar (in a consortium with Mitsubishi Corporation and Marubeni Corporation), the Andhra Pradesh Industrial Infrastructure Corporation (APIIC) in India, the Duqm SEZ (SEZAD) in Oman, two different SEZs in the Araihazar and Mirsarai region of Bangladesh, the First Philippine Industrial Park Inc. (FPIP) in the Philippines, the Mahindra World City and the cancelled Positra SEZ project in India, amongst many more which we will be writing about on this blog.

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