The pursuit of attractiveness

Focus Asean, Volume 2 | April 2012
By Philippe Beco,
Cambodia Interview with Douglas Clayton

Cambodia is broadly applauded by investors for its openness to
foreign businesses as well as low tax and regulatory regimes.
Douglas Clayton of private equity firm Leopard Capital shares his
views on what gives the Kingdom that special factor.

A pioneer investor in frontier markets, Douglas Clayton is used to betting on Cambodia's growth potential. The founder and managing partner of Leopard Capital, the Kingdom's first private equity fund with investments in energy, financial services, real estate and consumer goods businesses, talks about the Kingdom's pull factor and the sectors investors should consider.

What should push an investor to start a business in Cambodia rather than its neighbouring countries? What are the country's competitive advantages?

Cambodia has one of the most open economies in the region. The government is not trying to control economic development as in some neighbouring countries and leaves it to the market to decide. It has an open licencing policy for most sectors and doesn't prevent the arrival of newcomers in order to protect incumbents, so it is quite easy for foreign businesses to enter this market. Cambodia is also attractive thanks to a low cost base in terms of land and labour, although it has higher energy and transportation costs.

What is your personal assessment of the ease of doing business in Cambodia?

Cambodia rates low on various international surveys, but the reality for the business community here is that this is a favourable place to invest. The government allows 100% foreign ownership, it has a low tax regime and doesn't throw a whole lot of regulations at businesses. These balance against the inefficiencies that are also part of the system here, like the process of registering a business and certain things that are not modern and efficient. This is a land of opportunity and the government shares an interest in the private sector succeeding, investing more and unlocking the country's potential.

Does Cambodia need more, or less, regulation to attract foreign investors?

Investors usually favour low levels of regulation. Cambodia is exemplary in several aspects that it doesn't get full credit for. The country has a simple flat tax code and the economy is not distorted with unfair subsidies for certain interest groups. However, we would welcome more regulation on things that are harmful for society like exploiting less powerful people or harming the environment as they can give Cambodia a bad image. Protecting the public good is important.

The cost of electricity remains a major barrier for businesses. When you look at the various plans and initiatives, do you believe it will be removed soon?

At the moment, a lot of the country is not connected to the grid, and the places that are connected face very high tariffs; but it is a solvable problem. A lot of initiatives are underway. This is a not a big country, and a lot of investors are willing to support this sector. I think we will see dramatic improvement in the next 10 to 20 years.

Will Myanmar be a new competitor to Cambodia in attracting foreign businesses?

Myanmar is the story of tomorrow, Cambodia is the story of today. Myanmar will need to become more like Cambodia. When it does, it will offer a much larger investment opportunity due to the population difference and the geographical size. However, currently you can go in and create a factory in Cambodia and know what the rules are. In Myanmar the rules are changing, and we don't know what they will be, but we have great hopes that they will match those of Cambodia.

As a fund manager, what sectors are you particularly looking at in Cambodia?

The most attractive opportunities we've found are bringing goods, services and employment to the rural population. Urban Cambodia is already modernised, while rural people still have a very traditional lifestyle. In many instances they can afford goods and services that are not available to them yet, so anybody that can deliver them could gain attractive margins through a lack of competition. These services include rural banking and micro-finance, utilities such as electricity and telecommunications, and businesses related to agriculture and food processing which are the core activities of rural areas.

Which agriculture products are you specifically considering?

The opportunities are in Cambodia's traditional sectors of rice and rubber, as well as a number of newer crops that show promise including corn, soybeans, cassava, coffee, cashew nuts and pepper. Cambodia is a flat country with plenty of water and a lot of arable land. Productivity gains are possible by using modern seeds, fertilisers and farming equipment.

The country's rice production potential is well known and Hun Sen has earmarked it as an important growth area, but the sector still appears underfinanced. What is the problem?

A mill can only process a limited amount of rice per day. Therefore you need to buy a lot of rice when it is harvested and then stock it in a warehouse in order to run a mill all year long. This requires working capital. However, the banking system here traditionally lends against land titles and does not take the rice as collateral because banks are afraid that it could disappear if the borrower gets into trouble. In Thailand, the government buys the rice and stores it. In Cambodia, the government does not intervene in what is a free market. That is a good thing in theory but it means millers have trouble getting the capital they need to stock rice.

Don't risk capital investors have a role to play in this?

It is not traditionally a private equity business because we tend to make longer-term equity related investments rather than working capital loans. We are looking at potential investment in land or in milling companies but the opportunities have not materialised yet. To solve the problem, banks may look at guarantees from development banks or the government, so they can have confidence to lend against rice. The government may also want to set up a central warehousing system where the rice could be stored and used as a controlled collateral.