Cambodia’s Extractive Industries Sector: Opportunities and Risks
Cambodia has great potential in the extractive industries (EI) sector that could provide much needed local revenue and earn healthy returns for foreign investors. There is an estimated two billion barrels of recoverable oil and 10 trillion cubic feet of gas, as well as untapped mining potential with deposits of gold, iron, bauxite, manganese, limestone, phosphate, coal, and gemstones. Yet Cambodia is very much a frontier market with many challenges for foreign companies to overcome such as corruption, lack of transparency and joint venture disputes.
Governance Issues
In the most recent Resource Governance Index – which measures the transparency of governance in the oil, gas and mining sector – Cambodia was given a failing grade. The report rated 58 countries on four categories: Institutional and Legal Setting, Reporting Practices, Safeguards and Quality Controls, and Enabling Environment. While Norway scored an impressive 98 out of 100, Cambodia scored a dismal 28. And while regional neighbor Myanmar scored the lowest of all countries surveyed, the country has begun the process of implementing the standards set up by the Extractive Industries Transparency Initiative (EITI) and there is optimism that greater transparency will transform Myanmar’s extractives sector into a more favourable and safer industry for foreign investors. Yet Cambodia is not a signatory of the EITI and the country’s business practices and governance remain extremely opaque in the EI sector, making foreign investment in the sector much more risky.
Corruption and Reputational Risks
Corruption has long been a serious issue adversely affecting local and foreign businesses while the ruling Cambodian People’s Party’s (CPP) has been either unwilling or unable to reign in the widespread practice. The financial, legal, and reputational risks associated with corruption are not confined to the government and local companies but foreign firms are also at risk. In 2014 Australian mining giant BHP Billiton ran afoul of the U.S. Foreign Corrupt Practices Act for allegedly providing $2.5 million in “tea money” to Cambodian government officials to secure a bauxite concession. In addition to the U.S. Foreign Corrupt Practices Act, the United Kingdom has the UK Bribery Act and Canada has the Corruption of Foreign Public Officials Act that can scrutinize allegations of corrupt practices by foreign firms and their joint venture partners.
The legal frame-work governing mining in Cambodia is still weak and needs developing, while lack of transparency presents a number of operational concerns including a lack of definitive boundary lines on concessions in many cases and communities are often unaware that a company has been given a mining concession for their area until operations have already begun. Thus, it is important for any foreign firm to engage the community and have an active corporate social responsibility program in which the local community benefits.
Transparency and corruption are also the most serious obstacles in setting up and maintaining a successful joint venture in the Cambodian extractives sector. Many foreign entities can benefit from the local knowledge that a Cambodian company can provide and local firms benefit from their capital and technology. Yet prior to entering into a joint venture, a foreign firm should complete a vigourous due diligence process to mitigate the potential risks that new partnerships may have. Various watchdog agencies like Global Witness have issued scathing reports and have been “naming and shaming” local companies, government agencies, security forces and foreign companies that have problematic business partnerships. Such watchdog agencies have listed a litany of accusations of human rights abuses, nominee shareholders, widespread corruption, land confiscation, tax evasion, proxy ownership, and environmental damage – all toxic associations to foreign companies, and even more so for publically listed companies.
While many see great potential in the future of the EI sector in Cambodia, the perceived risks and potential reputational issues have made some foreign investors weary of exposure in this frontier market. And while Cambodia has not made significant efforts promoting greater transparency or combatting corruption, companies that can successfully navigate the risks will be poised to reap the rewards.
