Special Economic Zones

A Special Economic Zone (SEZ) are geographical areas that possess special economic regulations that are often different to those that apply to other areas in the same country. The regulations that apply to SEZs are generally market-oriented and conducive to foreign direct investment, and include tax incentives and lower tariffs.

The definition of SEZ has evolved over the years, but in general an SEZ is a geographically distinct area that is usually physically secured, or fenced-in. An SEZ will tend to have a single management or administration, streamlined investment procedures, and in many cases a separate customs area providing duty-free benefits.

As the SEZ concept has evolved, a variety of zones have emerged, each with differing characteristics and aims. These zones include free trade zones, export processing zones, free ports, enterprise zones, and single factory export processing zones, amongst others1.

There are various rationales behind developing SEZs, but the typical SEZ package of import-export exemptions, tax-breaks, streamlined customs, and liberal trade policies are all aimed at increasing the area’s competitiveness and reduce business costs. Proponents of SEZs assert that this in turn may aid a country’s wider economic reforms by helping to diversify exports, reduce unemployment, provide testing-grounds for application of new policies, and attract foreign direct investment.2

Cambodia’s Special Economic Zones

Special Economic Zones were formally introduced in Cambodia in 2005, and there are currently 22 approved SEZs. The authority responsible for Cambodia’s SEZs is the Cambodia Special Economic Zone Board (CSEZB), which operates under the umbrella of the Council for the Development of Cambodia (CDC).3 Cambodia’s approved SEZs can be viewed here, and are as follows:4

 1.  Sihanoukville Special Economic Zone (SSEZ) Sihanoukville
 2.  Sihanoukville Port SEZ Sihanoukville
 3.  Neang Kok Koh Kong SEZ Koh Kong
 4.  Suoy Chheng SEZ Koh Kong
 5.  S.  N.  C.  SEZ Sihanoukville
 6.  Stung Hav SEZ Sihanoukville
 7.  N.  L.  C.  SEZ Svay Rieng
 8.  Manhattan (Svay Reing) SEZ Svay Rieng
 9.  Poipet O’Neang SEZ Banteay Meanchey
 10.  Doung Chhiv Phnom Den SEZ Takeo
 11.  Phnom Penh SEZ Phnom Penh
 12.  Kampot SEZ Kampot
 13.  Sihanoukville SEZ 1 Sihanoukville
 14.  Tai Seng Bavet SEZ Svay Rieng
 15.  Oknha Mong SEZ Koh Kong
 16.  Goldfame Pak Shun SEZ Kandal
 17.  Thary Kampong Cham SEZ Kampong Cham
 18.  Sihanoukville SEZ 2 Sihanoukville
 19.  D&M Bavet SEZ Svay Rieng
 20.  Kiri Sakor Koh Kong SEZ Koh Kong
 21.  Kampong Saom SEZ Sihanoukville
 22.  Pacific SEZ Svay Rieng

According to the Cambodian Government’s SEZ website, businesses within SEZs “benefit from a number of fiscal incentives, including income tax, customs, and VAT benefits.” Cambodian SEZs are designed to offer a ‘One-Stop Service’ for imports and exports, and have specially trained government officials stationed on-site to provide administrative services. Applications to establish businesses within SEZs are dealt with on-site, as is company registration and investment licenses, work permits and labour books for workers. Investment approvals, customs inspections and import-export procedures are also conducted onsite. Other benefits listed on the SEZ website include tax holidays up to 9 years, 0% VAT, full import duty exemption for raw materials, machinery, and equipment, no export tax, permanent visas for families of investors and free repatriation of profits.5

Cambodian Law on SEZs

The main law covering the definition, procedures and administration for SEZs in Cambodia is currently the 2005 Sub-decree on the Establishment and Management of the Special Economic Zone. The stated aim of this sub-decree is “to establish and manage the Special Economic Zones and improve the investment climate conducive to the enhancement of productivity, competitiveness, national economic growth, export promotion, employment generation in order to reduce poverty.”6 Under this law, SEZs are defined as: “the special area for the development of the economic sectors which brings together all industrial and other related activities and may include General Industrial Zones and/or Export Processing Zones. Each Special Economic Zone shall have a Production Area which may have a Free Trade Area, Service Area, Residential Area and Tourist Area.” 7

Under the sub-decree, an SEZ must meet a number of basic requirements:

  • It must cover an area of more than 50 hectares, with precise location and geographic boundaries;
  • It must have a surrounding fence;
  • It must have management office buildings, zone administration offices, road networks, clean water, electricity, telecommunications networks, fire protection and security system;
  • It must have a water sewage network, waste water treatment system, location for storage and management of solid wastes, environmental protection measures and other related infrastructures as deemed necessary; and
  • It must comply with technical requirements, regulations and basic rules on construction, environment and other obligations defined in instructions issued by relevant ministries pursuant to the existing laws, national and international standards.8

The sub-decree sets out the procedure for “zone developers” to apply for approval of an SEZ. This application is made to the Cambodia Special Economic Zone Board (CSEZB) which will review the application and submit to the Council for the Development of Cambodia (CDC). After receiving approval, the zone developer has 180 days to prepare a detailed economic feasibility study of the project along with a master plan of all necessary infrastructures. If a zone developer fails to develop at least 30% of the proposed project within 1 year of receiving a final registration certificate for the SEZ, the CSEZB has the right to withdraw its approval.9 After the SEZ is established, interested “zone investors” must submit registration applications to the SEZ Administration office at the site of the SEZ.10 A Special Economic Zones Trouble Shooting Committee (SEZ TSC) exists in the CDC and has the duty to resolve any issues that come up within the SEZ and resolve any conflicts between SEZ developers and SEZ investors.11

In addition to playing the role of “One-Stop Service” for SEZ developments, the CSEZB also decides on the incentives that will apply to each SEZ.12 Incentives include an exemption on tax on profits of up to 9 years, a waiver on any tax or duty on equipment or materials needed for the construction of the zone, and 0% VAT on any re-exported products. SEZ developers also receive further incentives as set out in Article 14.1 of the Law on Amendment to the Law on Investment (see links below).13

In addition to detailing the process of application and approval of SEZs, the sub-decree on SEZs also sets out a number of duties of SEZ developers. All SEZ developers must:14

  • Have sufficient capital and means to develop the infrastructures in the zone, including the human resources to manage the activities of the zone;
  • Have the legal rights to possess the land for establishing the SEZ;
  • Construct the necessary infrastructures in the zone, and maintain it;
  • Lease the land and provide services to the zone investors;
  • Arrange security personnel and public order in the zone;
  • Promote and attract investments in the zone and provide detailed information on the formalities, procedures, and eligible benefits for investing in the zone;
  • Submit reports to the Cambodian Special Economic Zones Board upon request and perform tax liability obligations by maintaining proper accounting books; and
  • Cooperate with and assist the Special Economic Zone Administration regarding the functioning of the zone and maintain a close relationship with local authorities in order to address issues.

SEZs must employ a majority local work force, and all though foreign managers, technicians and experts may be hired, the foreign staff should not exceed 10% of the total workforce. Zone developers should also work with the Ministry of Labour to conduct vocational training to promote new skills and knowledge in the workforce.15

In addition to compliance with the sub-decree on SEZs, as with any commercial operation, investors are bound to respect all the relevant laws and regulations of the Kingdom of Cambodia. This includes compliance with labour law and regulations on environmental protection. In particular if the SEZs operations fall under any of the categories of projects set out in the annex of the Sub-decree on Environmental Impact Assessment Process, an EIA should be conducted in compliance with the relevant legislation. The developer must also observe the provisions of the Land Law which protect the rights of existing landowners and legal possessors, and as stated in Article 4.4 of the sub-decree on SEZs, the developer must first have rights to the land before the SEZ is established.

Prospects for the future

The 3rd pillar of Cambodia’s Rectangular Strategy for Growth, Employment, Equity and Efficiency is “strengthening the private sector and attracting investments”. In keeping with the Cambodian Government’s belief that the private sector is the potential “engine for economic growth”, promoting foreign investment is a high priority, however, the SEZ program has got off to a slow start. Several reports over recent years have suggested that due to the global financial crisis, Cambodia has not been as successful as was initially hoped in attracting investors to the Special Economic Zones, and of the 22 SEZs currently approved, only 7 currently have occupants, 1 is under construction, while the remaining zones are still in the early stages of development or idle.

Cambodia seeks to emulate the successes of some other East Asian SEZs, which have generated thousands of jobs, diversified production and facilitated larges increases of foreign direct investment. In particular, Cambodia hoped to diversify away from garment production, which still make up a large percentage of Cambodia’s exports, and leave the country susceptible to global economic downturns. Although most SEZs have struggled to attract investors, a handful have enjoyed modest success. The Sihanoukville SEZ is Cambodia’s biggest SEZ at over 1,000 hectares, and the developers state that this $320 million development has capacity for 300 factories and could generate 80,000 jobs – although at present it is reported to have just 10 occupants. Svay Reing’s Manahttan SEZ was Cambodia’s first SEZ and commenced construction in 2005, and currently has around 10 tenants. The Phnom Penh SEZ has apparently had greater success in attracting investors, in mid-2011 had over 30 tenets, although all remaining slots are now either sold or booked. 16

November 2011

Links

1 World Bank Group, Investment Climate Advisory Service, Special Economic Zones: Performance, Lessons learned, and implications for zone development, April 2008.
2 World Bank Group, Investment Climate Advisory Service, Special Economic Zones: Performance, Lessons learned, and implications for zone development, April 2008.
3 http://www.cambodiasez.com/about/about.htm
4 Full details available at http://www.cambodiasez.com/listofsezs/listofsezs.htm
5 http://www.cambodiasez.com/
6 Sub-decree No146 on the Establishment and Management of the Special Economic Zone 2005, Article 1.
7 Sub-decree on SEZs, Article 2.
8 Sub-decree on SEZs, Article 3.1.
9 For full details of the application process see Sub-decree on SEZs, Article 3.2.
10 Sub-decree on SEZs, Article 3.3.
11 Sub-decree on SEZs, Article 4.1.
12 Sub-decree on SEZs, Article 5.
13 Sub-decree on SEZs, Article 6.
14 Sub-decree on SEZs, Article 4.4.
15 Sub-decree on SEZs, Article 11 & 12.
16 According to 2011 3rd quarter report of Invest in Cambodia website: http://www.investincambodia.com/economic_zones/sezs.htm