The less developed countries of Cambodia and landlocked Laos are often overlooked as potential host countries for foreign direct investment. With relatively small domestic markets, significant infrastructural weaknesses and opaque regulatory environments, they tend not to generate the kind of excitement that neighbouring Vietnam did a decade ago or Myanmar is doing right now. And yet Cambodia and Laos provide some interesting propositions for those direct investors with a tolerance for some of the risks associated with frontier markets.
The capitals of Phnom Penh and Vientiane recently opened stock markets as part of a bid to become more investor friendly, even if the combined universe of stocks is just three at present. Some might argue they are just white elephant bourses, more symbolic statements than genuine investment vehicles. But away from the aspirations of domestic capital markets, it is the natural resources and beauty of the two countries where the greatest wealth and commercial promise lies.
The geography of both countries is dominated by the Mekong River that runs right through them, as it makes its way from its source in the Himalayas to its mouth in the South China Sea. For Laos, the river and its tributaries offer considerable hydroelectricity generation potential if it can secure a market for the power, as well as the corporate finance needed to erect a tranche of hydropower plants. The government recently tested the waters with its first foreign currency-denominated sovereign bonds on the Thai market.
There have also been a small number of successful gold and copper mines in Laos. Such energy and resources projects have shown that large-scale and lucrative investments can be enacted in the country. On a more modest scale, eco-resorts and high-grade Arabica coffee plantations have also worked well.
For Cambodia, the Mekong river creates a fertile plain for intensive agriculture, with the large Tonlé Sap lake at the centre of the country supplying much of the country’s fish. Plugging household farmers into more lucrative, but also more demanding, soft commodity value chains offers great potential for growth. One example is providing fresh and organic food for the luxury hotels in Cambodia’s burgeoning tourism sector.
Cambodia’s and Laos’ immediate and larger neighbours – China, Thailand and Vietnam – tend to view the two countries through the prism of largely competing geostrategic interests, some of which is enacted through investment activities. Until recently at least, Chinese companies seemed to have the upper hand in Cambodia, but the poor showing of Cambodia’s prime minister, Hun Sen – in power for 28 years – in the July 2013 national elections suggests this could change. The extent to which recent political developments in Myanmar have resulted in a pronounced and damaging change in the fortunes of Chinese investment in that country serves as a salutary lesson.
In Laos, both Vietnam and China have a significant presence, ostensibly filling the vacuum left when ‘Thailand Incorporated’ retreated during the Asian financial crisis of the late-1990s. All three countries are members of an increasingly small community of communist regimes and yet tensions between them can run high. Vietnam in particular is concerned that the plethora of hydropower dams being constructed and proposed for Laos' upstream Mekong and its main tributaries could spell disaster for its agriculturally crucial Mekong Delta region. Hanoi recently sought to use its leverage with Vientiane to get the controversial $3.6bn Xayaburi Dam project halted, or at least delayed, with little success.
As for China, in April Beijing offered to construct a 420-kilometre express railway line through Laos, thereby linking Thailand and China for the first time. The cost of the investment, equivalent to almost 90% of Laos’ national GDP (or $8.3bn), is to be largely financed by a loan from China that will inflate Laos’ aggregate external debt levels considerably. Despite having no prior history of railways to speak of in this mountainous country, the Lao leadership is keen to proceed. “We will definitely develop the project,” said Lao deputy prime minister Somsavat Lengsavad in a speech at the National Assembly, according to local media reports.
Poor investment climate
For those investors interested in even modest investments, there are more immediate challenges in both Cambodia and Laos. The regulatory regimes are opaque, open to corruption, poorly enforced by weak state institutions and generally give little comfort for the more risk-averse investors. Indeed, the statistics do not make pleasant reading. Cambodia came 133rd in the latest World Bank Doing Business survey of 185 economies, while Laos came 163rd. In terms of protecting investors, Laos ranked 184th. Similarly, in the latest Corruption Perceptions Index by anti-corruption organisation Transparency International, Cambodia ranked 157th and Laos 160th in a survey of 176 countries.
Such issues were recently highlighted by the case of a $85m hotel and slot machine project near Vientiane, 60% owned by a Macao-based investor Sanum. The company alleges that individuals connected to the Lao government have sought to seize full control of the lucrative project, citing alleged illegitimate tax demands and penalties amounting to $23m, in a bid to eject the foreign investor.
The company's president, Jody Jordahl, told Radio Free Asia that when Sanum attempted to assert its rights in a Lao court, the government appeared to have little regard for due process or the rule of law, and the "clearly arbitrary proceedings" ended after only a short period of deliberation. Sanum has since submitted a petition to the World Bank’s International Centre for the Settlement of Investment Disputes for a ruling on the case.
There are also various reputational risks for foreign investors working in Cambodia and Laos, where the regulatory environment and state agencies that enforce it are far from robust, resulting in illicit practices that can attract international attention and criticism. These include issues such as pollution and environment damage (particularly for mining projects), human and labour rights, forcible relocations (notably for power projects) and other hot topics for institutional shareholders.
For example, a recent report by campaign group Global Witness, Rubber Barons, alleged that a number of large foreign organisations were financing Vietnamese firms that were participating in forced land seizures in both countries for plantation projects. “We’ve known for some time that corrupt politicians in Cambodia and Laos are orchestrating the land-grabbing crisis that is doing so much damage in the region,” says Megan MacInnes of Global Witness.
In Laos, some power generation companies have taken a bold leap of faith and committed substantial sums, but have typically sought financial guarantees from such multilateral institutions as the World Bank and the Asian Development Bank. Laos’ recent accession to the World Trade Organisation should also be a boon. “Laos now seems to be genuinely competitive, unlike before," Hal Hill, a professor at the Australian National University, told Reuters in late 2012.
In Cambodia, garment manufacturers have sought to leverage the low domestic wage rates and favourable import tariffs offered by various export markets to establish operations in the country.
One sector where both Laos and Cambodia have experienced a growing level of FDI activity is in hospitality and tourism, particularly around the former Lao royal capital of Luang Prabang and Cambodia’s famous ruins at Angkor Wat. The growth potential in this sector remains strong and has been helped by liberal reforms in the countries’ entry visa procedures, as well as the burgeoning budget airline industry in south-east Asia.
The very heavy floods encountered by Thailand in October 2011 caused problems for a number of production networks – particularly in the electronics sector – and prompted some foreign investors to consider diversifying some of their Thailand projects. Nikon of Japan announced earlier this year that it would establish a camera assembly plant in Laos; probably the most technically advanced business the country has hosted. The plant will employ about 800 people, making it one of the country’s largest employers and, if successful, more investments of this kind may follow.
But Cambodia and Laos are unlikely to develop large-scale manufacturing sectors, if only because of the human capital constraints they face. Rather, the two countries will remain the preserve of foreign investors with relatively high risk tolerance levels, focusing on a small number of sectors where very specific and sustainable business opportunities are believed to exist. Even so, methodical research and due diligence are essential when considering investing in these otherwise beguiling south-east Asian countries.