RESTRICTED Report No

RESTRICTED Report No. EAP- 1 3a

Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report moy not be published nor may. it be quoted as representing their views.

INTERNATIONAL B.ANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

REPORT OF ECONOMIC MISSION

CAMBODIA - 1969

(in three volumes)

Public Disclosure Authorized VOLUME II

SECTORAL ANNEXES

October 1Z, 1970 Public Disclosure Authorized

East Asia and Pacific Department CURRENCY EZUIVALENTS

Before August 18, 1969

(a) US$ 1.00 = Riels 35.00 Piel 1. 00 = US$ 0.1029 Piels 1 million = US$ 28,571

(b) F Fr. 1.00 = Riels 10 Riel 1.00 = F Fr. 0.10 (= US$ 0.020) Riels 1 million = F Fr. 100,000

After August 18, 1969

US$ 1.00 = Riels 55.5 Riel 1.00 = US$ 0.018 Piels 1 million = US$ 18,004

(F Fr. 1.00 = Riels 10 = US$ 0.18)

lote: On August 18, 1969 the new parity for the Riel was defined as 16 milligrams of fine gold, which corresponds to the new parity of the French Franc (which was devalued on August 10, 1969) at the same rate of exchange:as before. However, the exchange rate for non-Franc currencies was brought in line with the Franc rate. Foreword

This is the report of a World Bank economic mission which visited Camboclia in October-November 1969. The report considers the

Cambodian economic situation only up to that time. The writing of the report was completed in February 1970 and there have been no changes since-then to take account of subsequent developments in

Cambodia.

Members of the mission were:-

Rudolf Hablutzel Chief of Mission

Miss H.J. Goris Economist

George C. Maniatis Economist

Yves Franchet National Accounts

Maurice Gaide Agriculture (Consultant)

Martin Karcher Transport

Raymond H. Rollet Power

Jeremny Bonnett Tourism

Miss G. Gagnon Secretary

CURRENT ECONOMIC POSITION AND PROSPECTS OF CAMBODIA

VOLUME II

Pagte No.

Annex I: The Transport Sector 1

Annex II: Power 24

Annex III: Tourism 40

Annegc IV: Manufacturing Industry 58

Annex I: THE TRANSPORT SECTOR

TABLE OF CONTENTS

Page No.

A. Introduction 2

B. The Highway Sector 4

The Highway Network 4 Highway Admainistration and Planning 5 Highway Coxxstruction and Maintenance 6 Highway Finance 7 Road Transport 7

C. The Royal Cambodian Railways 9

General 9 Traffic 10 Physical Plant and Operations 11 Operating Results -12 Financial Position 13 Outlook for the Future 14

D. The Ports 16

Phnom Penh Port 17 Sihanoukville Port 19

E. Inland Wate.r Transport 20

F. Civil Aviation 21

Airports and Traffic 21 Royal Air Cambodge 22 -2-

Annex I: THE TRANSPORT SECTOR

A. INTRODUCTION

1. Cambodia's population, economic activities and transport requirements are concentrated in the Central Plain, which extends clear across from the Thai border in the northwest to the Vietnamese border in the south- east, along the Tonle-Sap, the lower Mekong and the Bassac. The plateau and mountainous regions in the north, northeast and southwest are sparsely populated, with densities as low as 5 inhabitants per square-kilometer, and generate little demand for transport, except along the borders, for strategic reasons.

2. Cambodia is favored with an extensive network of navigable rivers, and up to the opening of Sihanoukville Port on the Gulf of Siam in 1960, relied exclusively on river transport on the Mekong for its overseas traffic. In addition, Cambodia's Central Plain is served by a fairly well developed system of primary roads and by a railway, which links the rice producing Province of Battambang with Phnom Penh and, since the end of 1969, with Sihanoukville Port. The small size of the country has so far militated against the development of domestic civil air transport which, aside from mainly international tourist traffic between Phnom Penh and Siem Reap, remains virtually non-existent.

3. Since independence, investments in the transport sector, which have been absorbing a sizeable proportion of Cambodia's domestic and external resources, have led to the following major developments:

(i) the creation and subsequent extension of a seaport at Sihanoukville;

(ii) the construction of a 4-lane highway (224 km) and a railway line (262 km) from Phnom Penh to Sihanoukville;

(iii) the construction of two international airports at Phnom Penh and Siem Reap; and

(iv) the construction of a bridge over the Tonle Sap in Phnom Penh and of a road (not yet completed) joining with the northern and northeastern road network and avoiding a ferry crossing on the Tonle Sap.

4. Following these additions, the transport system will not require further major extensions in the near future, but instead it will need improvements in the standards and in the maintenance of the existing infrastructure. While less glamorous than the construction of new facilities, -3-

the task of upgrading and maintaning the system is at least as rewarding economically, and the flow of investment funds (and recurrent expenditures) to the transport sector should not be allowed to drop drastically from its estimated level of CR 500-700 million in the past four years.

5. The task of providing the transport infrastructure and transport services is shared by the Ministry of Public Works, provincial and local authorities, various autonomous public and mixed enterprises (e.g. Rail- ways, Ports, Airline) and private operators of road and inland water transport services. The Ministry of Public Works is responsible inter alia for the development and maintenance of the highway network, of the airports and of the inland waterways; it also regulates road and inland water transport, and approves changes in tariffs 1/ jointly with the Ministry of Commerce. In addition, it reviews and approves investment projects of the state-owned public enterprises, that is, the Railways and the Phnom Penh and Sihanoukville Port Authorities.

6. It appears, therefore, that Government influence on the transport sector is fairly extensive. It manifests itself mainly through investment decisions, rather than by regulations affecting the operation of the transport industry. The Government tends to rely on competition on the basis of price and service for the proper allocation of traffic, and has refrained from restrictive licensing practices. Whether this attitude will also prevail in the case of the Phnom Penh-Sihanoukville rail versus road competition is less clear, but chances are that it would. However, the Govern- ment has allowed the state-owned transport enterprises to follow pricing policies that do not permit these enterprises to recover their capital investments through adequate depreciation charges, much less to earn a return on their investments. The argument has been that transport services are needed to meet national, social and economic objectives and should not be used to further financial gains.

7. While there may, in fact, be some economic merit in promoting the utilization of existing facilities by charging less than would be required to recover the full cost of such facilities from users, the initial decision to invest in a facility should be based on firmly established economic grounds. Since the Government is primarily responsible for providing costly infrastructure for all modes of transport, and since the economic feasibility of new projects has so far never been thoroughly investigated, it is extremely important for the Government to encourage - and shortly to require - that all new projects proposed for implementation be supported by detailed and solid evidence of their economic justification. In particular, traffic forecasts should be made much more carefully than hitherto, so that facilities would not be over-designed or built prematurely and resources would be used more productively. As further stressed in the present report, careful economic analysis is required before deciding on the scope and timing of future investment projects in all modes of transport.

1/ For road and inland water transport, Government decrees set maximum tariffs only. - 4 -

B. THE HIGHWAY SECTOR

The Highway Network (See Map)

8. Cambodia's primary road network consists of some 4,200 kilometers of national highways and 1,700 km of provincial highways (Table 9.1). The major road arteries radiate from Phnom Penh and connect all the important centers of economic activity. The density of the road network is highest around the capital, particularly since most of the provincial roads are also to be found in the Provinces surrounding Phnom Penh. About 60% of the national highways and less than 10% of the provincial highways are paved with a bituminous surface. The remainder is about equally divided into gravel and earth roads. In addition, there are some 13,000 kilometers of earth tracks, which have been built by local authorities and by the Cambodian armed forces to serve rural or military traffic. They are usually poorly maintained and impassable for motorized traffic, especially during the rainy season.

9. Most of the primary network dates back 30 to 40 years and was built to standards, which were adequate to handle light traffic, but which could not cope with modern traffic. While roads have been progressively improved and some new roads constructed to modern standards, the greater proportion of the network remains unsuited to large traffic volumes. In particular, pavements.and shoulders are narrow; pavement widths typically range from 4 meters to 6 meters, and 7-meter pavements still constitute the exception. Moreover, low embankments, built with sand and clay materials and insufficiently compacted, are subject to annual flooding during the monsoon; this causes.iserious breakdowns in the pavements and gives rise to costly reconstruction expenditures following the monsoon. On provincial highways, most bridges are single-lane wooden or steel structures, with load restrictions as low as 6 tons; even on national highways, a number of bridges need urgent replacement or reinforcement.

10. Manual traffic counts taken on major national highways in 1964 through 1968 show relatively high traffic volumes typically ranging from 500 to 2,500 vehicles per day, with a roughly even distribution of the number of motorcycles, light and heavy vehicles. The highest recorded traffic volumes (up to 3,100 vehicles) were on the Phnom Penh-Sihanoukville highway; the lowest (about 60 vehicles) on the northern highway to Stung Treng. As the location of the traffic counting stations was not always the same, and as traffic counts fluctuated widely from year to year, it would be imprudent to infer precise growth rates of road traffic from the existing data; nevertheless, indications are that road traffic has indeed been growing in most cases over this short period. On provincial highways, traffic rarely exceeds 100 vehicles a day, mainly because of the low standard of these roads. -5-

Highway Administration and Planning

11. Responsibility for the design, construction and maintenance of the national highways system is vested in two departments of the Ministry of Public Works, the Direction du Genie Civil (DGC) and the Direction du Materiel et des Travaux Neufs (DMTN). Provincial Governments look after the provincial highways, but in effect, they lack funds and equipment to maintain and improve the provincial roads, so that (i) about 90% of what little maintenance is done on these roads is done with equipment borrowed from the DGC and (ii) the condition of the roads is such that they can only accomodate light vehicle traffic. For the bulk of the local village roads, the situation is even more critical, since the initial standards were lower and hardly any maintenance takes place.

12. DGC assumes the main responsibility for planning and engineering road and bridge construction and reconstruction works, and for maintaining the national highway system, including carrying out major repairs and periodic resurfacing. DMTN's main function consists in the actual construction of new roadis, bridges, airports and even rail embankments, as welL as in the operation and maintenance of ferries at four major river crossings. The dual organization stems from the creation in 1960 of a special office to take over the equipment used in the Phnom Penh-Sihanoukville highway construction, which later became the DMTN. The division of responsibility between the two departments is less than clear-cut and the allocation of duties to a large exitent depends on orders given by the Minister of Public Works himself. Inev:Ltably, such a dichotomy leads to some conflicts and frictions, a lesser :Lnterchange of equipment between the two departments and a lower utilizat:Lon of this equipment than would otherwise be possible, and also to some dupLication of personnel and efforts. For instance, both departments have theiLr own design section, which in view of the very limited budget allocations for road investments appear to have been overstaffed. This question deserves further study to determine whether both departments could not be merged amd operated more efficiently and economically under a single direction.

13. For new works, little economic investigation takes place and economic feasibility studies of road investments have yet to be introduced into the planning process. Actually, decisions to build new roads are taken at very high levels by the Chief of State, the Prime Minister, the Ministers of Public Works or Agriculture, the Armed Forces, etc., on political and military as much as economic grounds. Once the decision has been taken, it: is conveyed to the DMTN and the DGC, who then prepare preliminary and detailed engineering studies, including estimates of quantities and costs. The studies, in turn, are! 3ubmitted to the Ministers of Public Works and Finance for approval. Most frequently, the Minister of Finance releases credits for individual works in small yearly installments from CR 500,000 to CR 15 million. Consetquently, new workslare undertaken which will take a very long time to complete. For instance, a 45 km road linking Chrui Changwar (across the Tonle Sap at Phnom Penh) to the northwestern and northeastern road networks was started in 1964 and still awaits completion; out of a total cost of CR 240 million, about CR 190 million have been spent and, given DMTN's total annual road budget of some CR 40 million, it may take another few years before the road is finally opened to traffic. The result is that funds, which are stretched over a great number of new works, remain unproductive for years, whereas a more concentrated approach would produce higher returns.

14. As budget allocations for heavy deferred maintenance and road improvements have been equally scarce (see below), planning lhas consisted mainly in distributing the funds among the important roads according to their condition and to the traffic which they served and in undertaking the most urgently needed repairs to keep the road system open, especially following monsoon damages. Moreover, DGC has often had to content itself with makeshift solutions, such as building single-lane bridges on heavily travelled highways, or resurfacing a road without strengthening the weak foundations. Unavoidably, such practices reduce considerably the economic life of the investments.

Highway Construction and Maintenance

15. Except for some major bridge works which were awarded to con- tractors on the basis of international bidding, construction and reinforcement works are usually executed by force account. DMTN estimates that it would have the capacity to construct about 100 km of roads yearly against actual construction of about 30 km only. At present, DMTN has some 8 projects under construction or in an advanced state of engineering, out of which 4 would serve border areas along the Vietnamese and Thai frontiers, with the intent that the settlement and development of these areas would make them safer from incursions of foreign elements. Because of the insecurity created by acts of war along the Vietnamese border, some works had to be suspended.

16. A major constraint has been the poor condition of the equipment, most of which dates back to the construction of the 4-lane Phnom Penh- Sihanoukville higlhway in the late 1950's; since 1964, DMTN has practically not received any new equipment. A study is under way to determine the desirability of creating 4 new workshops in Kratie, Siem Reap, Battambang and Stung Chhai, in addition to the central workshop located near Phnom Penh, and of providing each workshop with its own lot of equipment. The cost is estimated at some CR 400 million and would not seem justified unless yearly allocations of investment funds for road construction were greatly expanded.

17. Until investment funds for road development become again more abundant, essential stopgap measures should aim at preserving the existing road plant and increasing maintenance efforts, in order to reduce road transport costs generally on the system. To achieve even this limited objective will require an influx of new maintenance equipment and spares since most of the present stock is in a state of disrepair or immobilized for lack of spare parts. Out of 186 trucks, less than 25% were listed in good condition in ].967; all of the heavy equipment (rollers, tractors, graders, etc.) is now over 9 years old and sometimes close to 15 years old, and has reached the limits of its economic life. The foreign exchange required to replace and supplement the existing equipment could amount to about 2.5 - 3.0 million US dollar equivalent.

Highway Finance

18. Expenditures on highways are financed mainly out of annual (national) budget appropriations, and, during the first 5-year plan (1960- 64) from special plan allocations. In addition, there are some direct contributions from the Chief of State's own development funds, as well as limited allocations from the provincial governments' budgets. DMTN's records of new road construction expenditures were not available to the mission, except for 1968 and 1969 when they amounted to some CR 40 millioll. Budget allocations for highway maintenance and reconstruction are presentisd in Table 9.2; they indicate that after a rapid increase from CR 14 million in 1955 to nearly CR 200 million in 1961, budget allocations dropped subsequently to CR 61 million in 1968 and CR 48 million in 1969, about a third and a fourth respectively of DGC's estimate of minimum requirements.

19. These expenditures are far below the level of investments proposed in the second 5-year plan for 1968-72, which would have averaged some CR 300 million annually. They are also much below the receipts which accrue to the general budget from taxation on road transport. Although no systematic study of taxation on road transport has been made, it appears that by 1966, duties on imported gasoline and gasoil (the fuel most common- ly used by diesel trucks and buses) amounted to some CR 545 million. In addition, taxes on commercial and private vehicles yield some CR 60 million annually. Even disregarding import duties on vehicles and other minor taxes on tires and spares, revenues from taxation on motor transport thus exceeded CR 600 million, twice the level of annual road expenditures proposed in the second 5-year plan and about 6 times the actual level of expenditures in 1968 and 1969. The bulk of these revenues appears to have! been coiLecZed on sales of gasoline (CR 506 million in 1966, the last year for which statistics are available), so that it does not necessarily follcv that commercial road transport - by diesel trucks and buses - is overtaxec; nevertheless, the size of the surplus of tax revenues over highway spendirng goes to support DCG's and DMTN's arguments for substantially increasing expenditures on road improvements and maintenance, as road users amply demonstrate their willingness to pay for better roads. Road Transport

20. Over the past decade, Cambodia's motor vehicle fleet increased at an average rate of over 9% from about 15,300 vehicles at the end of 1959 to about 36,350 vehicles as of September 1969. As shown below, passenger cars increased fastest, followed by trucks and buses: Approximate 1959 1969 Annual Growth Rate

Cars 9,078 25,366 10.9%

Trucks 5,193 9,626 1/ 6.

Buses 1,035 1.356 2 o.

Total 15,306 36,348 9.1%

In addition, there are some 16,170 motorcycles and scooters, 2,170 tri-cars (3-wheel vehicles) and 94,000 motorbicycles (Table 9.3). In relation to the size of the population, the level of motorization is relatively small; there are about 200 people for every 4-wheel motor vehicle, as compare- with about 160 people per vehicle in Thailand and 37 people per vehicle in Malaysia.

21. Statistics of annual sales of gasoline indicate a rapid increase from 74.5 million liters in 1960 to 91 million liters in 1963, followed by a sudden decline to 58 million liters in 1964 and a levelling off at 47 - 49 million liters up to 1968. The decline came after - and was probably caused by - the imposition of a special duty on gasoline in 1963. Conversely, sales of less heavily taxed gasoil increased steadily from 15 million liters in 1960 to 74 million liters in 1967 at a rate of 25% per annum, resulting from a changeover from petrol to diesel-engine vehicles, as well as an undetermined increase in motorized transport. Of late, trucks have been switching to diesel oil, which is cheaper than gasoil, but more damaging to the engines. In order to prevent such harmful dis- tortionary effects of fuel taxation, the Government should undertake a study to determine the optimum fuel taxation policy.

22. Both passenger and freight road transport enterprises are in pri-vate hands. Government controls over the road passenger cransport industry consist in technical inspections of vehicles, setting of maximum fares and route licensing of bus and taxi-bus operations. In fact, actual fares have generally been well below the maximum authorized tariffs because of keen competion. The route licensing system is fairly flexible to take into account traffic demand. In addition to buses, there is a large number of taxi-buses (2,042 units, mainly 3-wheel vehicles) which ply either on regular routes within urban areas or within a given district (srok), and cars for hire (1,045 units) which may ply anywhere in the country. The competition from these vehicles may explain the slow rate of growth of buses of only about 2.8% per year in the 1960's.

1/ About half of the trucks have a capacity of 5 tons or more. - 9 -

23. For road trarnsport of freight, similar Government controls exist, except that there is no route licensing. However, on the most important route, between Phnom Penh and Sihanoukville, two trucking associations composed of former customs agents share the monopoly of import/export traffic on account of SONEXIM. With the opening of the new railway line, at the end of 1969, this monopoly is being seriously threatened, and in fact, the Railways have been seeking for themsselves the monopoly for the transport of rice, iron, cement and any other freight that can be pelletized. So far, the Ministry of Public Works has not reacted favorably to the Railways' request and matters have been left pending in the expectation of a decision about SONEXIM's possible dismantlement. The Minister of Public Works rightly felt that forced allocation of traffic to a particular mode would prevent competition from playing its beneficial role in fostering better and cheaper services. An essential advantage of road transport lies in its greater flexibility, speed and economy of handling operations; these factors will be particularly decisive in ship loading and unloading operations at Sihanoukville Port, because of possible demurrage charges.

24. A 1967 GoverrLment decree fixes maximum freight rates of CR 1.0 per ton-kilometer for intercity road transport. However, the Government does not have any practical means of enforcing the provisions of this decree, and since the miaximum does not include terminal handling charges nor ferry crossing charges, total tariffs may in fact exceed the maximum legal charge, especially on lesser roads and during the peak traffic demand season. During the slack season, however, truck rates fall well below the legal limit. Freight rates on the Railways average CR 0.75 per ton-kilometer and would compare favorably with truck rates, except for the difference in service amd terminal handling costs.

C. THE ROYAL CAMBODIAN RAILWAYS

General

25. A state-ownecd autonomous public enterprise, the Royal Cambodian Railways (the Railways) operate two lines of 647 km of meter-gauge single track:

(i) the old line from Phnom Penh to Battambang and the Thai border (385 km) built in two sections between 1930 ancl 1940; and

(ii) the new line from Phnom Penh to Sihanoukville (262 km) which has been under construction since 1960 with assistance from France, Germany and Mainland China; it was opened to traffic over its entire length at the end of 1969. - 10 -

26. The old line links up with the Thai Railways at Poipet; it was part of the former Indochina network and was to be extended from Phnom Penh up to Saigon to provide a rail connection between the three neighboring countries. Its main function, however, was--and remains--the linking of Phnom Penh, the capital, with the rich rice producing area of Battambang. Since October 1961, no international traffic has been moving over the line, as diplomatic relations between Cambodia and Thailand were severed.

27. By connecting Phnom Penh with Sihanoukville Port and with the oil refinery near the port, the new line provides an alternative to road transport for import-export and oil traffic. It also serves the two provincial capitals of Takeo and Kampot, but so far, traffic on the Phnom Penh-Takeo and Takeo-Kampot sections, on which operations started in 1966 and 1967 respectively, has been disappointingly low.

Traffic

28. Freight: Over the 1951-1968 period, freight traffic fluctuated extraordinarily widely, without any apparent growth trend. Tonnages carried in 1951, 1961, and 1967 settled around the 275,000 ton mark; the nadir was reached in 1955 with 135,000 tons and the apex in 1965 with 388,000 tons (Tables 9.4 and 9.5). The Railways' overwhelming dependence on agricultural production as the main source of traffic accounts for the magnitude of these fluctuations. On the average, agricultural products represent over two-thirds of total freight carried, so that poor harvest years (1955, 1961, 1962) are also years of low rail traffic (Table 9.6). The balance of freight traffic, which consists principally of manufactured goods, heating and construction materials and forestry products, was consistently lower in the 1960's than in the 1950's, indicating a decline in the Railways' share of such traffic in favor of road transport.

29. A direct consequence of the Railways, reliance on agricultural production for their freight traffic has been the lopsided directional traffic distribution: between 1960 and 1967, traffic moving in the Battambang-Phnom Penh direction accounted for almost 90% on average of total freight traffic (Table 9.6). Moreover, the demand for transport of agricultural products is seasonal and concentrated in the months of March through June. Both features have serious implications for the Railways' operations, commercial policies and finances.

30. Passengers: Contrary to freight traffic, passenger traffic exhibited a sustained growth during the 1951-1968 period. From 675,000 passenger journeys in 1951, traffic rose to 2.4 million passenger journeys in 1968 at an average annual growth rate of 7.8% (Table 9.4). Passengers kilometers rose slightly faster, at 8.2% per annum, from 45.2 million to 173 million, indicating an increase in average lead from 67 km to 72 km. - 11 -

31. A favorable development for the Railways' revenues has been the more rapid growth of first and second class passenger traffic as compared with third class passernger traffic: in 1955, first and second class passengers made up 24% of total passenger kilometers on the old line, whereas they accounted for almost 40% in 1967. As a result, passenger receipts increased even faster t:han passenger kilometers, from CR 17.1 million in 1955 to CR 35.1 milliorL in 1967 (Table 9.7), with only a slight enhancement in fares. Whether the faster growth of first and second class passenger traffic represented a favorable development from the Railways' net income point of view cannot be determined in the absence of detailed cost studies. Nevertheless, the spread between average receipts from first and second class passenger-kilometers (CR 0.45) and those from third class passenger- kilometers (CR 0.25) appears reasonable.

Physical Plant and Operations

32. The old line was equipped with 25 kg/m rails allowing for axle- loads of up to 13-15 tons. However, structures and bridges have become weak, restricting axle-loads to 10 tons. The new line has 45 kg/m welded rails allowing for 20 tons per axle-load. As the heavier locomotives and freight cars ordered for the new line are being placed into service, the task of reinforcing structures and bridges on the old line is becoming more urgent, in order to permit through traffic over both lines. However, even after such reinforcement works are completed, axle-loads on the old line will be restricted to ]L5 tons, so that the new freight cars will not be allowed on the line fully loaded.

33. Except for recent acquisitions related to the construction and operation of the new li.ne, the Railways' fleet of locomotives and rolling stock has remained relatively stable: there have been few additions and practically no replacements (Table 9.8). In fact, traffic on the old line would not have warranted any addition to the fleet as the degree of utilization of the fleet remai.ned low, even in years of higher traffic. In the peak traffic year (1965), the average daily mileage per steam locomotive was as low as 105 km and the average net load per train was only 81 tons 1/; in 1966, it dropped to 33 tons. While the under-utilization of the Railways' fleet is the result partly of excess capacity, it is due mainly to the lopsided distribution of t:raffic, its seasonal character and the wide fluctuations from year to year. The Railways have requested the French Government to second a railway operations expert. to assist them in the improving the operational efficiency, but no reply had been received at the time of the mission.

1/ As computed by the Railways, this represents the tonnage carried divided by the number of trains. A more informative indicator would be the quotient oif ton-kilometers divided by train-kilometers; this works out to 153 tons in 1965 and 76 tons in 1966, which is still quite low. - 12 -

34. Up to 1965, the year preceding the opening of the first section of the new line, the Railways' permanent staff had been following a slow- rising growth trend from 1,240 staff in 1951 to 1,600 in 1965, at an average rate of less than 2% per annum. Since then, there has been a 49% increase in the number of personnel up to 2,385 in 1968 (Table 9.9), due to the start of operations of the new line. Over half of the increase was in permanent way staff, who nearly doubled. Administrative staff increased by 31%, operating staff by 25% and mechanical staff by 20%. The Railways' board recently set a maximum limit of 2,500 staff, but as this covers permanent staff only, the Railways' management retains some flexibility in hiring temporary staff, who number about 600 at present. In view of the small volume of traffic handled by the Railways, it is safe to suggest that personnel could in fact be reduced, 1/ although a detailed study would be required to determine the extent and service-wise distribution of such a reduction.

Operating Results

35. Freight traffic has traditionally been the main source of revenue for the Railways, and therefore, the financial results could not but reflect the vagaries of agricultural traffic. While in the record crop of 1965, gross receipts from freight (CR 70.6 million) were nearly double those from passengers (CR 36.6 million), freight receipts in the following year actually fell almost 20% below passenger receipts (CR 28.4 million versus CR 34.8 million). Other revenues,, which account for about 15 - 20% of total revenues, are derived from railway service traffic, investments in securities, rents, and miscellaneous operations, such as a railway-owned saw-mill and printing works.

36. In sharp contrast with the fluctuations of up to 35% from one year to the next in gross operating revenues, operating expenses have shown a much more stable and predictable pattern of growth (Table 9.10). However, the 21% increase in operating expenses between 1965 and 1968 was largely due to (i) a rise in the depreciation allowance from CR 4 to CR ll million and (ii) increases in staff costs and fuel and material consumptions following the opening of the new line. Staff costs in 1968 represented about two-thirds of working expenses and about 60% of operating expenses, which is comparatively high. These proportions should come down to more acceptable levels once the new line becomes fully operative and if proper depreciation charges are allowed for.

37. Over the 1953-1968 period, gross operating revenues exceeded working expenses in all but the three poor harvest years (1955, 1962, and 1966). In all but five years (1955, 1962, 1966, 1967, 1968) did the Railways earn

1/ For instance, in 1967 the Senegal Railways, which are by no means understaffed, handled roughly 5 times more freight and twice more passenger traffic with less than twice the staff. - 13 -

a positive net operating income after meeting depreciation charges. How- ever, in retrospect, annual depreciation charges were set at such unrealis- tically low levels as to invalidate the accounting results and to deprive the Railways of the capacity to replace worn-out assets out of their own reserve funds. Up to 1965, depreciation charges were less than half of what they should have been, based on the non-revalued historical book-value of the Railways' assets. Since 1966, depreciation charges have been computed on the basis of the old line's and fleet's book-value, but are still grossly inadequate, as the book-value nowhere nearly reflects the assets' replacement costs, taking into account two sizeable devaluations of the Cambodian currency and the general increase in domestic and world prices. 1/ A re- valuation of the Railways assets appears indispensable to arrive at real- istic depreciation charges; however, the time lost for building up an adequate depreciation reserve will not easily be made up, as the depreciation reserve fund available at the end of 1968 was only CR 27 million and as road competition would prevent the Railways from substantially raising their tariffs and income.

Financial Position

38. As revealed by their balance-sheet, which is summarized in Table 10.11, the Railways are in an extremely uncomfortable and tight financial position, with long-term debts as of December 31, 1968 of CR 1,622 million, amounting to over 4 1/2 times their equity funds (capital and reserves). This situation developed because the funds for the construction of the new line, which were obviously beyond the Railways' internal financing capabilities, wetre lent to the Railways, rather than put up as equity capital. The redeeuLing factor from the Railways' point of view is that, except for a 79 million loan from the Federal Republic of Germany, 2/ the creditor is actually the Government through its Caisse Nationale d'Equipe- ment (CNE). According to a revised October 1966 loan agreement with the CNE, interest on the loan is due at 3% per annum from the date of disbursement, and from 1970 onwards principal and interests are payable over a 50 year period in constant annuities.

39. By an official report dated April 1968, the Railways drew the Government's attention to their inability to meet interest payments during construction and full principal and interest payments later; they rightly urged that the loans be converted into a Government contribution to their capital, leaving the Government to assume the financial obligations under the loans. While this request still awaits a final settlement, the Govern-

1/ Even before the August 1969 devaluation, the Railways reckoned that some freight cars would have cost over 15 times more than their book- value; railcars, which were procured in 1946 and 1951, would have cost about 6 or 7 times more.

2/ As of December 31, 1968, only 7.9 million riels out of this loan had been disbursed, as shown in the balance sheet (Table 9.9). - 14 - ment has in fact been meeting the Railways' obligations under the German loan and has granted the Railways a de facto moratorium on the CNE loan. In exchange for the conversion of the loan funds into equity capital, the Railways offered to turn over to the Government their net income after due allocations to the reserve funds. What are, in effect, the prospects for the Railways' profitability?

Outlook for the Future

40. With the delayed opening of the new line in November instead of July as foreseen in the budget, 1969 was still a year of transition for the railways, during which traffic receipts on the new line must have fallen substantially short of budget anticipations. By October 1969, the Railways found it necessary to appeal to the Government for a cash contribution of CR 15 million to solve their immediate liquidity problems. It is likely, therefore, that the final 1969 results will show a much larger operating deficit than the CR 4.8 million forecast in the 1969 budget, which did not even allow for depreciation charges on the new line (Table 9.10).

41. As the chances for mitigating traffic characteristics and operations on the old line are slim, any materials improvement in the Railways' earning position must come from the new line. On the new line, the Rail- ways expect a more balanced directional distribution of traffic, less seasonal variations and empty hauling, heavier trains and cheaper tractive power. Whether in the end, the new line will pay for itself in financial terms remains doubtful and that will depend on the Railways' ability to compete effectively with road transport and to raise some of its tariffs. Whether it will pay for itself in economic terms is even more open to question.

42. The four main sources of traffic on the new line are (i) import- export freight through Sihanoukville Port, (ii) oil distillates from the Sihanoukville refinery, (iii) cement traffic from the factory at Kampot and (iv) passenger traffic. Just to break even financially, the Railways will have to capture a substantial proportion of this traffic away from road transport, which up to now has enjoyed a monopoly position and which uses a 17% shorter route than the Railways between Phnom Penh and Sihanoukville. Except for local requirements in the Sihanoukville area, refined oil products will most probably switch over to rail transport, which offers attractive rates and private sidings at both ends: given Cambodia's domestic yearly consumption of some 250,000 cubic meters of oil distillates, the revenues to the Railways at CR 130 per cubic meter could amount to some CR 30 million. For other traffic, projections appear more uncertain.

43. Not only are there no reliable traffic projections for Sihanouk- ville Port, but the share of rail transport in such traffic is very much in doubt. The Railways have been seeking an agreement with SONEXIM (Societe Nationale d'Exportation et d'Importation) and SONAPRIM (Societe Nationale des Produits Importe's) that would reserve for the Railways the - 15 -

transport of rice, iron, cement, and any other freight that can be pallet- ized. SONEXIM stated that it would have no objection, provided the Rail- ways could guarantee both the same rates and performance as truckers, particularly with respect to safety and speed in transit and during loadini; and unloading operatiLons. As the Railways found it obviously difficult to commit themselves to particular performances and as SONEXIM's fate in the current liberalization drive was still undecided, the negotiations were put off. Nevertheless, the Railways estimate that they could capture between half and two--thirds of Sihanoukville Port's traffic, or roughly 300,000 to 400,000 tons, which at the average rate of CR 0.75 per ton-kilometer, would yield some CR 59 to CR 79 million. Unless an agreement such as the one just mentioned is reached and enforced, despite the Ministry of Public Works' unfavorable initial reaction to it, it seems improbable that traffic will reach the upper mark.

44. Similarly, cement traffic from the Kampot factory, located 166 km south of Phnom Penh, has been variously forecast by the Railways at 100,000 to 150,000 tons, yielding CR 12 to CR 19 million in gross receipts. This seems optimistic when compared with total freight receipts on the Phnom Penh-Kampot section of only CR 1.3 and CR 0.8 million in 1967 and 1968 respectively.

45. Despite a 40% reduction on regular fares, granted as a reward for the voluntary labor force which assisted in the construction of the new line, passenger traffic on the Phnom Penh-Takeo section has remained below the Railways' expectations, with revenues of some CR 9 million in 1968 and 1969. With the opening of the Kampot-Sihanoukville section and the return to normal fares, passenger receipts could increase to about CR 20 million in future years.

46. Total expected receipts from the new line thus range from about CR 125 to 160 million, including receipts from miscellaneous traffic of about CR 5 - 10 million. To achieve even the lower estimate of the range may take years and will require aggressive commercial policies on the part of the Railways, short of outright protection from the competition of road transport.

47. These estiDates of gross receipts compare with (i) estimates of working expenses attributable to the new line of about CR 60 million 1/; (ii) depreciation charges of roughly CR 60 million 2/ in pre-devaluation terms; and (iii) interest charges on the CNE loan of about CR 60 million. It follows that even in the best of circumstances (from the Railways' view-

1/ In 1968 the Railways estimated working expenses on the new line at CR 57 million, base!d on 1965-67 data for the old line.

2/ Computed at an average depreciation coefficient of 3% on investment costs including interest during construction. - 16 - point), the new line would not be financially viable. Rather, the Railways' claim that they will not be able to meet their financial obligations under the 1966 loan agreement with the CNE appears amply'substantiated. More- over, it is doubtful that they will be able to charge proper depreciation based on the assets' replacement value, at least for a number of years and with the present tariff levels, which the Railways feel they could not increase substantially without attracting road competition.

48. Future Investments: Now that the new line is almost completed, the Railways are turning their attention to investment requirements for the rehabilitation of the old line. In particular, the task of reinforcing structures and bridges on the old line is becoming more urgent in order to permit through traffic of new rolling stock over both lines. The Railways are preparing plans and cost estimates for the reinforcement works. Sub- sequently, the Railways will face problems of track and rolling stock renewals. However, because of the utter lack of renewal reserve funds, no investment plan nor cost estimates had been firmed up at the time of the mission. Any such plan should rest on (i) an integrated operations plan for both the old and new lines, that would allow for the fullest utilization of the new rolling stock and (ii) a careful assessment of the economic returns from the investments based on a comparison with alternative road transport costs and investments requirements.

D. THE PORTS

49. Not until 1960 did Cambodia have a seaport for its overseas trade, which previously was handled exclusively at the river port of Phnom Pehn 332 km from the Mekong's estuary. The decision to build a deep-sea port has proved sound, as navigation on the Mekong has been seriously hampered by the war situation in Vietnam. Since November 1966, ships transiting through Vietnam are required to wait for weekly convois, and are thus liable to substantial delays. - 17 -

50. Since 1960, traffic at Phnom Penh and Sihanoukville Ports has been as follows (in l:ons):

Phnom Penh Sihanoukville Total

1960 842,000 34,700 876,700

1961 741,000 95,500 836,500

1962 898,000 166,300 1,064,300

1963 962,500 369,600 1,331,600

1964 707,800 714,800 1,422,600

1965 595,400 754,600 1,350,000

1966 517,100 548,500 1,065,600

1967 535,200 545,200 1,080,400

1968 453,100 747,800 1,200,900

1969 (9 morLths) 227,700 358,300 1/ 586,000

1/ Excluding 392,000 tons of oil traffic using the refinery's own sea-lines located 11 km north of Sihanoukville Port.

Phnom Penh Port

51. Phnom Penh's share of traffic has declined considerably in favor of Sihanoukville. Firstly, Phnom Penh no longer handles any traffic other than traffic with origin or destination in the Far East, namely Saigon, Singapore, Indonesia, Hong Kong and Japan. Secondly, traffic to or from socialist countries unfriendly with South Vietnam is being diverted to Sihanoukville. Thirdly, since the opening of the refinery in Sihanoukville at the end of 1968, Phnom Penh definitely has lost the oil import traffic: in 1967 and 1968, imports of oil distillates represented 46% and 50% respectively of Phnom Penh total traffic.

52. Nevertheless, Phnom Penh's future importance in Cambodia's maritime traffic should not be underrated, as its closeness to Cambodia's main production and consumption centers gives it a marked advantage over Sihanoukville Port, especially for shipments to and from ports in the Far East. While no systematic comparative study of the two ports has been made and while reliable traffic projections are conspicuously lacking, Phnom Penh may recoup a considerable slice of the traffic now handled at Sihanoukville, as soon as the war situation in South Vietnam quiets down and the navigational conditions on the lower Mekong are relaxed. - 18 -

53. At present, the mooring facilities at Phnom Penh Port consist of two reinforced concrete piers of 183 meters in total length and four steel pontoons of 40 meters each. In addition, there are 24 pontoons servicing inland water crafts and barges. The water depth ranges from 5 to 7 meters between the Mekong estuary and Phnom Penh; the maximum draft of vessels which can navigate the river at high water is restricted to 4.1 meters in April and 5.1 meters in September at the estuary. Phnom Penh Port receives ships up to 4,000 DWT, but of 2,000 - 2,500 DWT on average. After increasing to a maximum of 625 in 1962 and 1963, the number of ship calls declined to 279 in 1968, and will not have exceeded 200 in 1969 (Table 9.12).

54. In 1964, Phnom Penh Port was set up as an autonomous entity with its own budget, under the direction of a Board headed by the Minister of Public Works. Despite the setbacks in traffic over the past five years, and the difficult operating conditions imposed by the system of weekly con- voys, the Port prides itself of continuing to operate at a profit, with tariffs unchanged since 1958. Two main reasons account for this: one, in 1967 the Phnom Penh Chamber of Commerce turned over to the Port the administration and substantial revenues of public warehouses; two, depreciation is charged only on assets acquired after the Port became autonomous in 1964, all other assets being treated as already fully amortized. 1/ While the present reserve funds of some CR 14.5 million (including net earnings) available at the end of 1968 would be utterly inadequate to replace the present facilities, the Port does not see any compelling reason for drastically increasing its reserve funds, ad they are deposited with the treasury and do not earn any return, and as the Port expects the Government to provide the funds required for any major expansion. Following the August 1969 devaluation, however, some tariffs may be increased.

55. The Japanese have shown interest in the development and transfer of Phnom Penh Port from its present location on the Tonle Sap to a new location on the Mekong (a short distance away) by participating in a preliminary techno-economic study in 1965-66. The implementation of the project, which would also have been part of an urbanization plan, would have permitted deeper draft ships to call on Phnom Penh, but was postponed indefinitely for financial and political reasons. In particular, the project would have required the dredging of the Mekong estuary by the South Vietnamese. This is covered by an international convention between the two countries. The project's estimated cost is about 240 million riels at the post devaluation rate; it would provide for the construction of 4 piers of 105 meters each, new warehouses and access roads, as well as for handling and miscellaneous equipment. With the large decline in traffic since 1965, however, there is no immediate problem of congestion at Phnom Penh Port; in the future, the development of Phnom Penh and Siha- noukville Ports should be studied jointly.

1/ The two reinforced concrete piers have been built in 1952 and 1960 respectively and could not have been fully amortized by 1964. -19-

Sihanoukville Port

56. The site for Sihanoukville Port was chosen in 1956 for the water depth allowing for 10,000 - 12,000 DWT ships in the entrance channel and at the pier and for the protection from the high waves of the Gulf of Siam by a string of islands to the West. In a first phase, cost- ing some CR 400 million, Sihanoukville Port was equipped with a 285-meter long pier (28 meters wide), providing two berthing places on either side, and with two warehouses of 120 by 54 meters each. As traffic soon exceeded initial projections, a second phase was undertaken in 1964, providing for two quays (350-meter long), a turning basin of 500 meters in diameter, two warehouses and two breakwaters at a total cost of about CR 600 million. As part of this phase, Sihanoukville Port also acquired a dredger which was delivered in April 1967. However, because of disagreements between the Port and the French supplier about the dredger's performance, the Port had not yet taken formal delivery of the dredger in November 1969, and, in the meantime, siltation had reduced the available draft in the turning basin and at the new quays from -10 meters to -6.5 meters. As a result, the two new berths have not been fully utilized. It was hoped that a settlement would be reached before the end of 1969 with the French supplier of the dredger, so that work on deepening the turning basin could be started soon.

57. As shown in paragraph 50 and Table 9.13, traffic reached levels of about 750,000 tons in 1965 and in 1968. In the first 9 months of 1969 traffic declined sharply and was unlikely to exceed 500,000 tons. The loss of traffic was due to poor harvests and balance of payments difficulties, and although the Port has not made any traffic projections, it feels that the present capacity , which it estimates at 600,000 tons annually, is inadequate and should be increased. However, this estimate of the port's present capacity is based on an average capacity per berth of 100,000 tons, which is low not only in comparison with similar ports, but also in relation to Sihanoukville Port's own performance over the past 5 years. Once the two new quays become fully functional and assuming reasonable operating efficiency, the Port should have sufficient capacity to handle traffic volumes of the order of a million tons per year. Moreover, Phnom Penh Port has some excess capacity, that cogld be used in the case of emergency. It follows that there is sufficient time to undertake a thorough study of traffic prospects, before proceeding with further major extension of the Port's facilities. Such a study should take a coordinated look at the development of both Sihanoukville and Phnom Penh Ports, and if it appears that Sihanoukville Port's extension is required mainly because of the proposed industrial zone, the actual development should await concrete indications that the industrial zone will materialize. - 20 -

E. INLAND WATER TRANSPORT

58. Historically, inland water transport played the dominant role in Cambodia's communication systems. While road and rail may by now have supplanted it, its function still remains far from negligible. In some areas, particularly on the left banks of the Mekong and the Tonle Sap, water transport remains the only viable means of communication with the rest of the country. As in many countries, however, reliable statistics on inland water traffic are hard to come by ,thus preventing meaningful intermodal comparisons; nevertheless, the length and depth of navigable waterways and the size of the registered fleet attest to the continued importance of inland water transport in Cambodia.

59. Some 660 km of waterways (equivalent to the length of the rail network) are navigable all year round, whereas an additional 930 km are accessible to motor-launches during the high water season. The main waterways are the Mekong River (up to Kratie), the Tonle Sap and the Bassac. Ocean-going vessels can travel on the Mekong River some 200 km from the Vietnamese border as far as Kompong Cham, with maximum draft restrictions of 4 to 5 meters in the dry season. Further upstream to Kratie, draft restrictions of up to 1.5 meters limit navigation to smaller crafts. Bet- ween Phnom Penh and Kompong Chnang, the Tonle Sap River (90 km) is accessible to 50-ton motor-launches, whereas the Great Lake takes mainly smaller launches (5-25 tons) and fishing boats. Because of the irregular river- bed and channels and of road competition, the Bassac (90 km) has lost its former importance and is now used mainly by junks and barges in the transport of building materials and wood. Other year-round navigable rivers are found mostly in the coastal Provinces.

60. The registered fleet comprises 824 motor-launches, of which 220 carry mixed (passenger and freight) traffic, and 604 carry freight traffic exclusively. While a few boats are licensed to carry up to 250 passengers or up to 120 tons of cargo, the average capacity (68 passengers and 8.6 tons) is relatively small. Actually, a good proprotion of the cargo-launches are used as tug-boats for the junks and barges, of which 2,400 are registered with loading capacities over 16 tons. The size of the fleet has remained stable for a number of years, but the proportion of small boats (7-10 tons) has been increasing; nevertheless, there has been an important switch-over from steam or petrol engines to diesel engines over the past ten years.

61. For passenger boats, a route licensing system similar to that for buses exists. Some 60 scheduled services call daily at Phnom Penh Port, where about 700,000 passenger journeys originated or terminated in 1968. Regular services reach as far as Kompong Chhnang (100 km in about 8 hours) and Kratie (212 km in about 15 hours). Fares on passenger boats are about half of bus fares. On the basis of the registered capacity of 15,000 passengers and of an estimated average daily run of 15-25 km at full load, annual passenger traffic could amount to some 80-140 million passenger-km - 21 -

and compare with 173 million passenger-km on the Railways in 1968. Similarly, judging by the registered capacity of cargo-launches, junks and barges (about 120,000 tons), freight traffic moving on inland waterways may be substantial, although difficult to estimate in the absence of utilization indicators. However, as mooring facilities at river ports are generally rudimentary and inefficient, it is unlikely that the fleet's utilization could be high. Commodities shipped by water include rice and other agricultural products, building materials, wood, charcoal, potteries, fish and cattle. The rates charged are usually below the maximum authorized of CR 1.04 per ton-km.

62. Except for some CR 4 million of maintenance expenditures annually on the lower Mekong, no public funds have been allocated in recent years for the maintenance or development of waterways. Mooring facilities usually are in privalte hands. Given the importance of inland water transport, it seems likely that greater efforts on the Government's part in improving the waterways navigability would prove highly justified, and a study on river transport should be undertaken as a first step.

F. CIVIL AVIATION

Airports and Traffic

63. While Cambodia may boast of having as many as 26 airfields, civil. air transport is almost exclusively concentrated at the two major airports of Phnom Penh (Pochentong) and Siem Reap. At present, there are no scheduled services to any of the other airfield, which serve administrative, military and some private traffic. Distances between the main cities are too short and potential markets for air services too small to make domestic air transport on economic alternative to rail and road transport. In fact, most of the present traffic consists of international traffic, and foreign tourists account for a major share of traffic on the only scheduled domestic air-route between Phnom Penh and Siem Reap.

64. Passenger traffic at Phnom Penh and Siem Reap airports has been increasing rapidly. Over the 1968-69 period, the number of plane movements at Pochentong grew at. the annual rate of 6%, while passengers increased by 15.5% yearly, from 30,000 to 127,000 1/ (Table 9.14). At Siem Reap passengers increased from 28,200 in 1966 to 47,700 in 1968, a 70% rise in two years. Statistics for the first semester of 1969 show a further 33% increase in total passenger traffic over the first semester of 1968. Up to the opening of Siem Reap to Boeing 707-type planes in November 1969, Pochen- tong was the sole port of entry for international traffic. Since about 50% of this traffic continued by plane to Siem Reap, it is likely that from

1/ Arriving and departing passengers, excluding transit passengers. - 22 - now on the importance of Siem Reap airport will increase in relation to Pochentong, as part of the tourist traffic will call directly at Siem Reap - Angkor, where Cambodia's unsurpassed tourist attractions are located. Freight traffic remains negligible at less than 1,000 tons in 1968.

65. Over the past six years, the bulk of the investments in airport facilities (CR 256 million) was directed at the development of Siem Reap Airport with financial and technical assistance from Mainland China and France. While the landing strip (2,550 meters by 45 meters) is adequate for Boeing 707-type planes, the terminal building is already undersized for handling important volumes of traffic and will require early extension, including a more functional layout. Investments at Pochentong (CR 64 million) went for (i) the lengthening of the landing strip from 2,400 meters to 3,000 meters (the width is only 40 meters and does not meet international standards), and (ii) the extension of the parking area and miscellaneous works. In addition, Sihanoukville airport received a traffic control tower, Stung Treng a new landing strip (1,250 meters X 40 meters) and an air terminal building, and Kompong Cham a terminal building.

66. New investments of about CR 300 million are required at both Pochentong and Siem Reap airports to improve the presently low safety standards and to increase the limited capacity of the air terminal buildings. At present, Cambodia has to rely on Saigon for the control of its airspace, and with the strained relations between both countries, this arrangement has become less than satisfactory. In addition, both airports require new fire-fighting equipment and telecommunication equipment. It is also planned to complete the parking area at Pochentong (40 million riels) and to widen the Pochentong runway from 40 to 45 meters (30 million riels). At the time of the mission, a Government commission was studying the needs and priorities for the extension of the two airports, in connection also with the eventuality of "Jumbo" jet traffic by 1972/73. It seems that any such extension must be linked to prospects for increasing hotel accommodations, so that airport and hotel developments do not lag behind one another. Further, it should be established whether and when the provision of "Jumbo" jet facilities would be economically justified - and for which of the two airports - by estimating the losses to Cambodia from tourist traffic foregone in the event such facilities were not provided.

Royal Air Cambodge

67. Cambodia's national airline, Royal Air Cambodge (RAC), was founded in 1956 with 60% Cambodian and 40% French participation, and started operations by chartering aircrafts. At present, RAC owns and operates three aircrafts (1 Caravelle, 1 DC-6 and 1 DC-4) on the Phnom Penh - Siem Reap route and on a number of international routes, including Hong Kong, Singapore, Bali and Canton. Traffic has been increasing rapidly from 27,300 passengers in 1964 to 70,600 in 1968, at an average rate of 27% annually. Except for 1966, RAC has been operating at a loss in the 1965- - 23 -

68 period, which has caused a heavy drain on RAC's liquidities. With the disappearance of the exchange rate disparities, the situation is expected to improve, as the receipts from international traffic will be exchanged at the new parity, which now corresponds to that used to calculate depreciation charges on the aircrafts purchased in French Francs.

68. RAC is planning to acquire a second Caravelle in 1970 or 1971. But here again, insufficient hotel accommodations, particularly in Angkor may prove to be a bottleneck to the expansion of traffic and the competition from an increasing number of foreign airlines with landing rights in Cambodia may limit RAC's share of the market. - 24 -

Annex II: POWER

TABLE OF CONTENTS

Page No.

A. Historical Evolution ...... 30

B. Present Structure of the Sector ...... 31

C. Past Investments ...... 34

D. Existing Facilities ...... 35

Generation Installed Capacity ...... 35 Transmission Lines ...... 36 Distribution ...... 36 Consumption Rates ...... 37

E. Future Requirements ...... 37

Southwestern Area ...... 38 Northwestern Area ...... 44

F. Conclusions ...... 46 - 25 -

Annex II: POWER

A. Historical Evolution

1. During the period of French administration in Cambodia, all problems related to electricity and water supply were the responsibility of the Public Work Office. Until 1929, however, there was no public distribution of electricity. In that year, two private companies -- "Com- pagnie des Eaux et de l'Electricite d'Indochine" (CEE) and "Union Electri- que d'Indochine" (UNEDI), owned by the same French groups -- were authorized to produce and distribute electricity in Phonm Penh and 7 other large towns. In 1948, the "Societe Franco Khmere d'Electricite" (SFKE) was appointed to operate the public utility service in Battambang. Several other systems have grown in secondary centers, under the management of municipal agencies or local private companies.

2. Besides these officially authorized distributors and producers of electricity, a number of private producers appeared on the scene over the years, either because of the lack of public systems (e.g., in rubber plantations) or for such reasons as the inadequacy of public distribution and high electricity rates.

3. When Cambodia attained its independence in 1953, the Ministry of Public Works took over the responsibilities of the French Public Work Office. As an elemerLt of the Ministry, the "Direction de l'Hydraulique et de l'Energie" (DHE) was created to control the production and distribution of electricity and to supervise the development of the power and water sectors.

4. The Government acquired CEE and UNEDI in 1958, and created "Electricite de Cambodge" (EDC) as a semi-public entity to take over the properties of the two private companies. In 1963-64, EDC's area of operations was extended to 7 secondary centers, one of which was the newly built: seaport of Sihanoukville. In 1968, "Socie'te Nationale des Grands Barrages" (SNGB) was created ai a public corporation to build and operate all future dams and hydroelectric plants in Cambodia.

5. On the basiLs of the statistics established by EDC and SFKE and the estimates made for the private producers, the national consumption of electricity can be broken down as follows: - 26 -

Phnom Penh 75%

Other EDC distribution 9%

SFKE (Battanbang) 3%

Secondary centers 3%

Private producers 10%

National consumption 100%

Statistics for the past 10 years are available only for EDC's and SFKE's areas of operations, whose consumption represents 87% of the national consumption and 96% that of the public distribution. In those two areas the average annual rate of growth in demand from 1958 to 1963 was about 13%; consumption decreases slightly in 1964-65; since then the average annual rate of growth has been about 5%. This slowdown can be explained in part by the Government's nationalization policy for several sectors of the economy, and in part by the overload in the distribution systems and the high rates.

B. Present Structure of the Sector

6. The Ministry of Public Works, through the "Direction de l'Hydraulique et de l'Energie" (DHE), administers the public services for the supply of electricity and water (drinking and irrigation water). DHE has control over the entities that operate these services; it sets up the administrative/technical regulations, issues the contracts, and centralizes the data and statistics. As the responsible agent for developmental planning for the sector, DHE initiates and coordinates all projects related to the production, transmission and distribution of electricity and water.

7. The "Societe Nationale des Grands Barrages" (SNGB) is assigned the following responsibilities:

- to study, construct and operate all dams built for power generation and/or irrigation;

- to construct and operate all the auxiliary works of these dams, such as complementary thermal plants, transmission lines, substations, etc.

- to sell electricity and water produced by the dams; and

- to handle all the technical, industrial or financial problems related to the purposes of SNGB. - 27 -

SNGB's responsibilities could lead to conflict with DHE over various studies and projects for the sector. But thus far confusion in this respect has been avoided, as they function with a common staff. DHE's role is now mostly that: of taking care of only the administrative aspects of problems, while SNGEB is in charge of the financial and technical studies.

8. SNGB is managed by a Board of Directors whose Chairman is nominated by the Public Works Ministry and appointed by the Government, which also appoints the 7 other members of the Board. Control of SNGB is exercised through a Commissioner appointed by the Ministry of Public Works and an Auditor appointed by the Ministry of Finances. Government grants constitute the capital of SNGB. Its revenues are derived from energy sales; irrigation water eventutally will be a source of revenue. SNGB pays the service charges on loans contracted by the Government for financing works in the sector.

9. "Electricite du Cambodge" (EDC) is managed by an 8-member Board of Directors, who elect the Chairman. The Government appoints some of the Directors, who represent it, and the others are elected by the General Assembly of Stockholders. There are two auditors -- one appointed by the Government, the other chosen by the General Assembly of Stockholders. EDC's capital at present is CR 225 million (US$ 41 million), 85% of which is owned by the Governmtent. The responsibilitits of EDC, as set forth in its Articles of Incorporation, are as follows:

- to carry out the production, transmission, distribution, import and export of electric power in the country;

- to carry out all extensions and improvement of works required to meet the needs of the people, of industry, commerce and agriculture;

- to undertake the sale and manufacture of all electric material and machinery; and

- to purchase all patents, licenses or trademarks and to regulate the same.

10. It is to be noted that the last two tasks are unrelated to the function of a public producer and distributor of electric power; they should not have been in,cluded in EDC's Articles of Incorporation. Furthermore, a source of conflict exists between SNGB and EDC, both of whom are charged with the production and transmission of electricity in Cambodia. There is no good reason for SNGB to operate the hydroelectric plants and eventually the "complementary thermal plants," while EDC normally operates the other thermal plants. In practice, a case of conflict has not yet arisen; EDC initiates its own plans for developing thermal power production, while SNGB plans the projects for hydroelectric plants. - 28 -

11. An example of their lack of coordination however has been the situation where EDC pushed the capacity of its thermal plants at Phnom Penh up to 45 MW at the same time that SNGB started supplying hydro energy to the Phnom Penh area, first from the Kirirom Dam, and in the near future from the Prek-Thnot Dam; the peak load in 1968 when Kirirom Dam went into operation reached only 20MW. It was well known, at the same time, that the rate of growth in consumption was restrained by two bottlenecks -- the high electricity rates and the obsolete and overloaded distribution system. Better coordination between the two agencies would have led EDC to lower its investment in thermal plants and to increase its budget for rehabilitation, improvement and extension of the distribution grid.

12. Such lack of coordination should be avoided in the future. It might already help to strengthen cohesion and coordination if the two agencies had one or more common directors, and perhaps even a common engineering staff. For a lasting solution, however, the government ought to reconsider the terms of reference for both agencies with a view to rationalizing their future division of labour.

13. "Societe Franco Khmere d'Electricite" (SFKE) is a private company which produces and distributes electricity in Battambang. Its franchise is about to expire and decision has not yet been reached whether to renew or transfer the franchise to EDC. SFKE's capital at present is CR 2 million (US$ 360,000).

14. In 59 smaller centers, the public utility services are provided by either municipal offices or local private companies. Distribution is for only several hours during the day; energy is charged at a rate fixed according to the number of electric light bulbs each consumer has, as there are no industrial consumers in these smaller centers. When the operating hours for distribution are increased at a future time, the use of meters should be developed.

15. The staff at SNGB/DHE, and at EDC as well, seem technically proficient. The engineers, who seem to be all too few in number to meet requirements, have been trained in foreign universities (French, Canadian, Russian, Japanese, Yugoslav); from time to time they are sent to advanced training sessions in foreign countries. EDC has a modern professional school provided by "Electricite de France" in which foremen and workers receive specialized training. Although the SNGB/DHE and EDC staff are able to operate the public utility systems in Cambodia, they are in need of the assistance of consultants for projects work, special studies, and administrative/organizational improvement. The UNDP permanent mission in Cambodia is presently studying ways of achieving better coordination in the sector's future development, and is also assisting DUE and SNGB. - 29 -

C. Past Investments

16. As mentioned in paragraph 4, EDC took over the assets of the two French companies which until 1948 operated in Phnom Penh and several other centers. The equipment consisted of the diesel power stations and the medium and low voltage distribution grids. The only power plant in Phnom Penh was the Northerni diesel plant, whose installed capacity was 10 MW. ECC pushed the capac:Lty up to 22.5 MW and built the new Southern steam plant, whose original capacity in 1961 was 5.3 MW and in 1966/67 reached 23.5 MW. This plant's capacity has been reduced to 18 MW, after two steam units were sold to a private producer and 3 diesel units transferred to Siem Reap when Kirirom power became available in Phnom Penh. New distribution networks were built in the suburbs and new housing developments, but it seems that no important investments were made for the original downtown networks. EDC has put up a headquarters building in downtown Phnom Penh, and recently completed the construction of the professional school mentioned above.

17. In the small centers, investments apparently have been kept at the minimum needed to maintain the installed capacity of generation plants at the level required to meet consumer demand. Nothing important has been done to improve distribution capacity.

18. In Battambang, the diesel plant's capacity in 1957 was 1.0 MW and is now 1.8 MW. The distribution system does not seem to have had any important alteration fcor the past several years.

19. SNGB's first investment is the Kirirom Dam, whose sole purpose is the generation of power, and the 110 kv transmission system from the site of the dam to Phnom Penh. Total cost of these works was about US$ 10 million. SNGB has recently started construction of the Prek Thnot project including a power unit for 18 MW. External finance is being provided by loans and grants fromi 12 countries, totalling $19.3 million toward a total cost of the first stage of about $ 28 million.

D. Existing Facilities

Generation Installed Capacity

20. Shown below is the breakdown of the installed capacity of present generation facilities. - 30 -

Kirirom hydroelectric plant 10.0 MW (50 Gwh/year) Phnom Penh Northern diesel plant (EDC) 22.5 MW Phnom Penh Southern steam plant (EDC) 18.0 MW

Total for Plinom Penh 50.5 MW (1968 peak load 20 MW) Siem Reap diesel plant (EDC) 2.5 MW (1968 peak load 0.8 MW) Sihanoukville diesel plant (EDC) 1.0 MW (1968 peak load 0.8 MW) Battambang diesel plant (SFKE) 1.8 MW (1968 peak load 0.8 MW)

In 1972, the Phnom Penh area will utilize the capacity of the Prek Thnot hydroelectric plant -- 18 MW (50 GWL/year). In the small centers, the installed capacity is less than 1 MW per unit. Private producers in Phnom Penh have a total capacity of about 12 MW and in the Provinces about 8 MW; this total capacity of 20 MW is much too large considering their average load factor.

Transmission Lines

21. The first transmission line went into service in 1968 between Kirirom and Phnom Penh (110 km). Its characteristics: towers, ACSR, 110 kV, 30 MW, optimal capacity (Kirirom 10 MW and Prek Thnot, not yet installed, 18 MW). There is no system inter-connecting the various load centers.

Distribution

22. In the Phnom Penh area, two distribution systems are in service: downtown, the original (1929) network, two-phase at 2x4,400/2x220 volts; and in the suburbs and new developments, three-phase networks at 15,000/ 280-220 volts. Interconnection between the two systems is limited by the power of Scott transformers (2.5 NW for a load of more than 20 MW). In fact, the two systems operate separately, the two-phase system being supplied by the Northern power plant and the three-phase system being connected to the Southern and Kirirom plants. In such a situation, it is impossible to utilize the entire production of Kirirom, to which Prek Thnot's production will be added in a few years. The two-phase system has become quite overloaded; the voltage fluctuations reach 30-40% and there are many breakdowns.

23. In the secondary centers, most of the distribution systems are at only low voltage (220 V). In Battambang and Sihanoukville, however, 6.3 kV voltage is used. In Siem Reap a 15 kV line has just been put in service between the power station and the new international airport. It will supply the hotels in the Angkor area.

Consumption and Rates

24. In the areas served by EDC and SFKE, the total consumption was 75 million kWh in 1967 and probably reached 83 million kWh in 1969. Lighting and home use account for 70% of the total, street lighting 3%, - 31 - and industry only 18%; 35% of the consumers use less than 50 kWh per month, 58% use less than 100 kWh, and 2% use more than 1,000 kWh a month. The load factor in all the systems is about 55%. The power factor is very low, about 0.7.

25. In Phnom Penh, electricity is sold at CR 3.96/kWh (US¢ 7.2) for lighting and about CR 2/kWh (USe, 3.6) for industrial use. These rates, particularly for industry, seem rather high, e.g. by comparison with current rates in Bangkok which are about half of those charged in Phnom Penh. In the Provinces these rates are even higher as CR 6.325/kWh (USe. 11.5) and CR 4/kWh (USe 7.2), respectively.

26. "Electricite de France", as a sub-contractor for the UNDP, has just completed a tariff study which is awaiting Government approval. The new rates are expected to be effective from the beginning of 1970, and once in force can be expected to result in a significant increase in connections to private consumers in Phnom Pehn and several other towns.

E. Future Requirements

27. The problem oE power development in Cambodia has several rather unusual aspects. Irrigation is the main goal of DHE and SNGB because the economy is agriculture-oriented. But since returns on the irrigation works, if any are realized, cannot be expected for some time, the tendency has been to "tack on" generation to the irrigation works so as to provide immiediate returns on the SNGB investments. Meanwhile, the need to open markets to the new hydro energy seems to have been neglected. Thus, at present, the main problem is to coordinate the planning of various dam projects with expected developments in industry, tourism and other sectors.

28. Looking to the distant future, one can see that it will be necessary to utilize a national 220 kV grid to distribute the hydro power to the various load centers and to concentrate the complementary thermal production into a reduced number of plants.

29. In a first phase, given the various projects under study (dams, development plans for industry, tourism, etc,), two main load centers are taking shape

(i) the Southewestern Area with Phnom Penh, Sihanoukville (seaport and prospective industrial center) and Kampot (cement factories); and

(ii) the Northwestern Area with Battambang (textile and sugar industries) and Siem Reap - Angkor, where tourism is about to realize a high rate of development. - 32 -

The sources of energy production in prospect for the two areas and the development of consumption in each one are discussed below.

Southwestern Area

30. As noted above, the present production capacity is 50.5 MW (including Kirirom hydro plant with a maximum of 10 MW which would seldom be reached - average capacity would be 5.5 MW, the minimum 3 MW).

31. The Prek Thnot Dam will provide an additional capacity of 18 MW (maximum), 6 MW (average) and 4 MW (minimum) from 1972 onward. This will bring the hydroelectric capacity in 1972 to a maximum of 28 MW and a minimum of 7 MW. Annual production of energy should be between 48 GWh and 100 GWh.

32. Thermal capacity is now 40.5 MW. the Northern diesel plant providing 22.5 MW. Most of this plant's engines are two-phase and will become obsolete over time. Therefore, the plant's capacity would decrease to 12 MW to 12 MW by 1975 and become nil in 1979.

33. Chart 1 shows the variations in the total production capacity (thermal and hydro), which will reach a maximum of about 50 MW and decrease to about 25-30 MW by 1979.

34. A Japanese firm is about to complete a preliminary study of the Stung Chinit Dam project, north of Phnom Penh. This dam will provide both irrigation and power at a rate of 3-5 MW (18 GWh/year) to the Phnom Penh area. Its cost may be about US$ 20 million, of which US$ 8 million would be local currency.

35. The consumption in Phnom Penh's public distribution system is about 80 GWh/year) at present (1969) and the peak load about 22 MW; the growth rate is quite low because of the poor condition of the distribution network. Hence, high priority is to be given to power distribution. Two projects, whose study was financed by the UNDP, are ready to be carried out. These projects are as follows:

(i) A 110 kV grid around Phnom Penh to permit interconnection of hydro and thermal supply and the possibility of supplying the distribution networks at several points. The cost is estimated at US$ 2.2 million, of which US$ 1.7 million would be foreign exchange. The tender documents are ready; EDC is able to provide the local currency, and financing has been requested from the Asian Development Bank to cover foreign exchange. - 33 -

(ii) Medium and low voltage distribution systems (15,000/380-220 V). A study for the first phase, to be completed in 5 years, has been finalized and the tender documents could be prepared soon. The project's cost would be about US$ 4.8 million, including US$ 3 million foreign exchange. EDC is able to provide the local expenditure, but foreign exchange financing is; not yet in sight. The UNDP has recommended that a revised rate structure be adopted, and sub-contracted to "Electricite de France" a study which has been completed and awaits Government approval of its conclusions. The new rates are expected to become effective early in 1970.

36. In the projiections below it is assumed that both of these UNDP projects will be undertaken immediately. In the event their implementation is postponed, the entire power development in the Phnom Penh area would come to a halt. Assuming the projects get underway at once, one can expect that for the present consumers in the area the annual rate of growth in demand will reach 7%, that the private producers gradually will be connected to the public network, and that EDC will be able to satisfy the new consumers' demand. The UNDP study concludes that the rate of development might be about 15% during the 5 years following completion of the works, and thereafter about 9%. Thus the average rate in forthcoming years would be about 11%. The consumption would be as follows:

In 1974 -- 125 GWh with a peak load of 34 MW

In 1979 -- 230 GWh with a peak load of 60 MW

In Chart 1 it can be ;seen that there will be a shortage in the production capacity from 1975 onward, reaching about 35 MW by 1979. Even if the Stung Chinit project were undertaken between 1975 and 1979, it would still be necessary to utilize an additional source.

37. In the seaport of Sihanoukville, EDC is able to finance the expansion of the distribution system. The new rates are to become effective there at che same tima as in Phnom Penh. It is therefore expected that the various important factories coming under the project will be connected to the public system, particularly since the oil refinery (in operation since early 1969) will furnish heavy residues at low cost for power generation. Industrial projects under consideration are a fertilizer (urea) factory and a paper plant, financing for which has been requested from the French Government. Several other new industries are expected to be set up in Sihanoukville during 1974-1979. Under all these conditions, then, the consumption would be as follows:

In 1974 -- 32 GWh with a peak load of 8-10 MW In 1979 -- 140 GWh with a peak load of 30 MW (see Chart 2) - 34 -

At the same time that new industries are established, the existing 1 MW diesel plant would have to be replaced and a new power station (burning the heavy residues of the oil refinery) constructed. The size of the units would depend on the demand of these industries.

38. Given the location of the Kirirom dam at about 80 km from Sihanoukville, and the fact that for some years the Phnom Penh area will not be able to absorb the whole amount of power available from Kirirom and Prek Thnot, it would seem evident that a transmission line should be built between Kirirom and Sihanoukville.

39. However it must be noted, first that steam might be required in Sihanoukville to operate the proposed fertilizer factory, and using this steam also to produce electric energy might be a financially satisfactory solution.

40. Secondly, as the capacity of the 110 kV transmission line between Kirirom and Phnom Penh is just sufficient to transport the power of Kirirom and Prek Thnot, it will not be suitable to form part of the future main transmission system of the South Western area, without important alterations, to be operated at 220 kV. Even if such alterations are feasible, it seems that the construction of a second 220 kV transmission lines could not be avoided, and how such a system should be technically workable would need to be further studied.

41. If it is not, it would have to be ascertained that the Kirirom- Sihanoukville transmission line can be amortized in a rather short time.

42. In Kampot, the cement factory produces energy by means of an old coal-burning steam plant with an extremely unfavorable conversion factor. An extension of the factory is planned for 1973. The power demand of the expanded factory and the population in the area would reach 5 MW in 1974 and 7 MW in 1979 (see Chart 2). Being near Sihanoukville, Kampot should be able to obtain energy quite easily from the Sihanoukville thermal plant via a transmission line.

43. At this point in our survey, we reach the following conclusions (see Chart 2):

- In the near future, the Phnom Penh area and the Sihanoukville-Kampot area will provide their own energy; a thermal plant has to be constructed in Sihanoukville, and a transmission line from Kirirom to Sihanoukville might be considered as a possibility. - 35 -

- In 1974-75, a supplementary source will become necessary in both of these areas. In 1979, the power demand for these two areas that comprise the Southwestern Area will reach about 70 MW. Several hydroelectric sources are under stuidy.

44. The Kamtchay dam project on a river in the Cardamones Hills in southwestern Cambodia, near Kampot, is being studied by "Hydro-projects" (Moscow). It has been proposed to proceed in three phases:

- An upstream dam allowing the installation of 50 MW with an annual production of 145 GWh.

- An intermediate dam allowing 65 MW and 216 GWh.

- A downstream plant, without water storage, capable of producing 70 GWh/year.

Only the second phase (intermediate dam) of the Kamtchay project has been completely prepared including feasibility and bidding documents. ^1The cost was estimated to be US$ 48 million (before the currency was devalued from CR 35/US$ to CR 55.5/US$). This would appear to be too high a"cost for power generation without irrigation. It seems that a variant to the project should lead to a better feasibility. Such a variant would be to build only the upsteam dam and a hydroelectric plant working under the-total head; this might produce 370 GWh/year, with installed capacity of 80-90 MW, and might permit the irrigation of 30,000 ha. It is of the utmost importance that this variant be- 9studied in detail.

45. The Sambor dam project on the Mekong River is being studied by Japanese consultants. It would be mainly for power generation and irrigation of 35,000 ha. The power plant would have a capacity of 875 MW, producing some 7,000 GWh/year. Total cost would be about US$ 358 million. This project would produce more power than needed by the prospective market, unless the aluminum refinery planned for Sihanoukville should prove feasible. It appears however that a recent Japanese study has arrived at unfavorable conclusions.

46. The Mekong Committee is looking into the possibility of another dam upstream of the Sambor dam porject on the Mekong River, at the site of Stung Treng. A study of the map indicates 'the dam would have a water storage capacity of 110,000 million m3, which might allow power production of 5,000 MW and water flow regulation down-river, chiefly in the Delta (South Viet- nam). Execution of such an ambitious project presupposes that an international market could be found. It is obviously outside the scope of the present study. - 36 -

47. If the Kamtchay dam (the variant discussed above) proves feasible and is built, its energy would not be available before 1976. Consequently, another thermal power station may still be necessary; its best location is to be studied. Whether the location of the power station turns out to be Sihanoukville, Phnom Penh or elsewhere within the Southwestern Area, a transmission line must be erected that could convey the eventual power load from Kamtchay. If the Sambor dam project were justified, the transmission line would be even more necessary. Such a line would be the first phase of the national 220 kV grid which is being planned for the long term in con- junction with the great dams on the Mekong River.

48. Our conclusions with respect to the Southwestern Area are as follows:

(a) Both of the UNDP projects related to the distribution system in Phnom Penh must be undertaken as soon as possible (provided the new electricity rates become effective) in order to meet potential demand for power and reduce average costs by utilizing hydro power from the Kirirom and Prek Thnot dams.

(b) A detailed study of the Sihanoukville thermal plant has to be made. Bidding documents must be prepared for the first unit, the size of which has to be calculated on the basis of expected new industries.

(c) The feasibility study of the 220 kV transmission line between Sihanoukville and Phnom Penh should be made on the basis of two alternative assumptions -- without the Kamtchay dam project and with it.

(d) A detailed project study of the Kamtchay variant must be made in order to complete the overall study of the South-western Area power sector.

Northwestern Area

49. The existing diesel power plants in Battambang and Siem Reap will be sufficient for local needs for the next several years, even if the distribution systems are improved.

50. For the Battambang dam project, it is proposed to proceed in three phases:

- Diversion dam and irrigation (mainly in dry season) of 20,000 ha. Cost is estimated to be US$ 17 million including US$ 7 million local expenditure. The Asian Development Bank has expressed interest in financing this first phase. - 37 -

- Main dam and power installation. The height of the dam and the installed capacity will be decided in accordance with the final evaluation of requirements of both water and electricity in the area; at present, a first phase envisages a power capacity of 5 MW (25 GWh/year to be raised at a later stage to 31 MW (175 GWh/year). Cost is estimated to be US$ 30 - 36 million including US$ 10 million local expenditure.

- Extension of the irrigation system to 68,000 ha at a cost of US$ 18 million including US$ 9 million local expenditure.

The phasing of the Battambang dam project is likely to be revised following a new study, sponsored by the Swiss Government, focusing on a power market study in the Northwestern Area, and is expected to be completed in March 1970.

51. In Battambang itself, development in power consumption is limited by the weakness of the distribution system and by the tariff policy. Two textile factories in the town produce their energy by diesel power stations, privately owned. A sugar factory is planned for Battambang. The production facilities there are:

SFKE (public system) 1,100 kW

Private (1,100 + 1,500) 2,600 kW

In 1968, the peak loans were:

SFKE (public system) 760 kW

Private 1,250 kW

As SFKE's franchise is about to expire, DHE hopes to negotiate with SFKE an agreement for improving the distribution system and putting into effect in Battambang the new rates recommended by the UNDP. Failure to reach such an agreement would cause the Government not to renew the franchise and to turn it over to EDC. In the event, the development of consumption could reach a normal rate. The peak load could reach 5,000 kW by 1979 and the consumption 25 GWh. The present diesel capacity of production should be able to meet the demand up to 1976; in 1979 there might be a shortage of about 2 MW.

52. In Siem Reap, near Angkor, EDC's present diesel power capacity is 2,500 kW. In 1969, the peak load was about 800 kW. The new international airport and the hotel under construction will reqjuire supplementary power - 38 - amounting to 800 kW. The 1971 peak load might be 1,800 kW. Since several other hotels are planned and tourism is expected to grow considerably, this plus the new rates should bring about a corresponding increase in consumption. The peak load may reach 2,600 kW in 1974 and 3,500 kW in 1979. From 1974 on, there would be a shortage of power generation which in 1979 might reach 1,000 kW.

53. A transmission line is proposed that would connect the future Battambang hydroelectric plant to Siem Reap. The plant's installed capacity should be adjusted so as to be able to meet the future needs of the Northwestern Area, which could be 4.6 MW in 1972 and 9 MW in 1979.

54. The sugar industry planned for Battambang may not significantly affect these forecasts for the area, because the sugar factory can produce its onw energy (steam and electricity) by burning the bagasse derived from sugar cane.

F. Conclusions

55. Given the fact that the Kirirom Dam exists and the Prek Thnot Dam is under construction, first priority should be given to power distribution in Phnom Penh. It is thus of primary importance that the Cambodian Govern- ment find a source of financing for the foreign exchange requirement related to completion of the two UNDP projects.

56. For the Northwestern Area, the results of the Swiss consultants' study will furnish preliminary information for a pre-investment study.

57. For the Southwestern Area, on the other hand, a preinvestment study cannot be undertaken until many questions have been answered. For example:

(a) A general survey of the prospective industrial development should be undertaken so as to get a better view of the power market. At present, the only industrial projects for the area which are under study are the fertilizer factory, the Kampot cement factory, and the paper industry. It is very difficult to have any precise ideas about Sihanouk- ville's future development without more systematic study.

(b) A detailed study of the proposed variant of the Kamtchay dam project should be made as soon as possible in order to give some definitive idea about the project's feasibility. - 39 -

(c) A study should be made to determine what might be the capacity of Sihanoukville's new oil refinery to produce heavy oil residues and where would be the best location for the future thermal plant for the Southwestern Area. (See para 43) The results of such a study would give the basis for the decisions on the size of the thermal plant in Sihanoukville and the construction schedule for the Sihanoukville-Phnom Penh transmission line, as well as a possible transmission line from Kirirom to Siha- noukville.

CHAFRT I CAMBODIA: POWER DEVELOPMENT IN THE PHINOM-PENH AREA I,000 I I I I I I I I I I I1, Oo0 800 MEGAWATTS 800

600 _)ANNUAL RATE OF GROWT 60

400 400

200 200

100 =__ I(O 80 80

60 POWER DEMAND60

;/om///X- S /goX/H,, -- t4t,.vovo,o,os1MAXI

40 ...... is ...... 4/D- THERMAL POWER CAPACITYV'> TOTAL POvEA CAPAC ITY

20 -- *-- 21 MAXI . . . . . _. 2

PREIK TH1NaT

M~ ~~~IO //// ////// 2///////////%/////////// 6

2 2

SEMI - LOGARITHMIC SCALE

1968 '69 '70 *71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83

IBRD - 4816

CHART 2

CAMBODIA: POWER DEVELOPMENT IN THE SOUTHWESTERN AREA 1,000 I I , I I I I I I I 1,000 MEGAWATTS 800 800 600 600

400 400

200 200

100 ______locibC 80 3 0 60 60

40 - ______-r___-i4 TOTAL PO*ER DEMAN y 40______

20 .- POWER DEMAND PHNOM PENH .- 20

POWER DEMAND SINANOUKVILLE:¾.- 10 -10

8 - - - 8...... 6 ...... 6

6~~~ . __ ,_-6 -f 4 ______POWER DEMAND KAMPOT 4

:1 2 2

I __ - - *______I 0.8 __- , __ 0.8 0.6 0.6

0.4 .----- 0.4

SEMI - LOGARITHMIC SCALE 0.2 I I I I _ _ _ _ _ I_ _ _ 0.2 1967 '68 '69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82

TOTAL PRODUCTION CAPACITY

! |J WITH KAMTCHAY

WITNOUT KAMTC.AY

0-0-0 WITH SAMBOR AND WITI.IOUT KAMTCHAY IBRD - 4817

- 40 -

Annex III: TOURISM

TABLE OF CONTENTS

Page No.

A. CAMBODIA'S TOURISM DEVELOPMENT POTENTIAL 41

The Khmer Temples 41 Access 42 Regional Location 42 Other Tourist Altractions 42

B. ACCOMMODATION AiD OTHER TOURIST FACILITIES 43

Phnori Penh: Accommodation 43 Siem Reap: Accommodation 44 Construction Costs -46 Other Facilities 47

C. RECENT TRAFFIC E'ATTERNS 47

Volume of Traffic 47 Seasonality 48

D. FUTURE DEMAND FOR TRAVEL TO CAMBODIA 49

Average Length of Stay in Siem Reap 50 E. INFRASTUUCTURE 51

Airports 51 Roads 51 Public Utilities 52 Siem Reap Development Plan 52

F. GOVERNMENT INVOLVEMENT & POLICIES IN THE TOURISM SECTOR 53

The Department of Tourism 53 Investment Policy 54

G. SOME ECONOMIC IMPLICATIONS OF TOURISM DEVELOPMENT 54

Tourism Receipts 54 Employment 55

H. PRE-INVESTMENT STUDIES 55

I. NOTE: Calculation of the Likely Volume of Visitor Traffic to Cambodia in 1972 and 1975 56

- 41 -

Annex III: TOURISM

A. CAMBODIA'S TOURISM DEVELOPMENT POTENTIAL

1. Cambodia's tourism potential is influenced by three main factors. The first is the presence of some magnificent and unique IX-XIV century AD stone temples built by the Khmer civilization in the area of Siem Reap Province (often referred to as Angkor). The second is the availability of good air access to these temples and the third is the country's geographic- al position, lying asi it does in the center of the South-East Asia tourist circuit.

The Khmer Temples

2. The Khmer temples forming the Angkor complex cover an area of some 160 sq. kms. to the north of the present town of Siem Reap. About twelve major temples are included in this area in addition to many smaller monuments. Of the major temples, Angkor Wat and Angkor Thom are perhaps the most famous, due to their great size and complexity. (The walls of Angkor Thom are 16 km6s long and once enclosed a large city of several hundreds of thousand inhabitants. The wooden houses and palaces have now disappeared under the forest but at the center there remains the immense stone temple, the Bayon, with its forty nine towers each having four stone faces carved upon its sides.) The temples in the Angkor complex are linked by asphalt roads forming the, so called, small and large circuits (27 kms. and 37 kms. respectively). More temples of major importance (especially Bante"ay Srei) lie within a radius of about 30 kms. from Siem Reap; these temples, which do not form part of Angkor, are increasingly visited as part of established organized tours.

3. Some of the Angkor temples were covered by dense forest for several centuries and their discovery and restoration has helped to spread the fame of the complex as a whole. The temples are large, beautifully symmetrical, structures which contain such delicate stone carvings and sculptures that even the non-expert visitor can find considerable interest in them. A few of the temples in Angkor remain unrestored and the invasion of the immense forest trees, the stillness of the atmosphere and filtered quality of the light are perhaps even more impressive than the restored temples themselves. 'Certainly, the peace and tranquility of the forest settings of all of the temples is a considerable part of the attraction for the average visitor.

4. Although much of the construction of the Khmer civilization was concentrated in the Angkor region, many more temples have been discovered in other parts of the country. Five of these other temples are situated in Siem Reap and Kampong Thom Provinces, to the north and east of Angkor. UNESCO is studying the possibility of restoring these structures and, at the same time, of opening them up to visitor traffic by - 42 - means of a road running from Siem Reap town. There are prospects, therefore, that the range and number of temples accessible to visitors will increase in the future, although the UNESCO project, which is further discussed in later sections of this report, is not likely to materialize for several years, at least.

5. The restoration and preservation of the temples in the Angkor complex has been carried out by the "Conservation d'Angkor" a partly Cambodian and partly French financed authority. The resources of the "Conservation" are limited, however, and it is not certain that on its present budget it can meet all of the problems which it faces. It may be that, if the temple carvings and the structures themselves are to be fully protected from natural and man-made hazards, more resources should be diverted to this purpose. One danger which may be of immediate significance is the noise vibrations resulting from the introduction of large jet aircraft at Siem Reap airport, close to the temples. The mission believes that the security of the temples should be fully examined and that this could be done within the context of the master plan for tourism development in. Siem Reap, suggested in section E of this Annex.

Access

6. In the past, visitors have had to transit Phnom Penh, the capital city, in order to take onward road on air connections to Siem Reap. At the beginning of November 1969, however, Siem Reap airport opened to direct international flights. Several companies including Royal Air Cambodge, Air France, Cathay Pacific and Malaysia-Singapore Airlines now link, or intend to link, Siem Reap with such tourist centers in the region as Hong Kong, Bangkok, Singapore and Bali. The availability of these direct air links adds considerably to the traffic potential for Siem Reap by replacing what was an inconvenient sidetrack from the main air-routes (and one which added to the price of the air ticket).

Rego_na1 Location

7. The third factor which influences the potential traffic to Cam- bodia, and in particular Siem Reap, is the fact that the country is located within the established tourist circuits in South-l:ast Asia which include Hong Kong, Thailand, Singapore, Philippines and, latterly, Bali. There is a growing traffic within this area which has, until now, barely touched Cambodia and which originates from Japan, Australia and neighboring countries as well as from North America and Europe.

Other Tourist Attractions

8. While the major tourist attraction in Cambodia is the temple area of Siem Reap, this is not to say that other attractions do not exist or could not be developed. Thus, Phnom Penh, which is an attractive city with several points of interest such as the museum and the Royal Palace, can certainly hope to derive increased pleasure visitor traffic from the flows of visitors primarily arriving in Cambodia to visit Siem Reap. The beaches - 43 - and islands in the vicinity of Kep and Sihanoukville are also potential visitor destinations which already have some accommodation facilities and cater, at present, to mainly weekend traffic of Cambodian residents. The Government is hopeful that foreign visitors will visit these seaside resorts in increasing numbers, but the mission is, on present evidence, doubtful as to their immediate potential for long-haul foreign visitors. This judgment is related to the existing tour itineraries of South East Asia, which typically include several countries and with which the attractions offered by Cambodia's beaches are not especially competitive. However, there may exist a demand for beach holidays among residents of neighboring countries and this possibility ccould be investigated with the travel trade in the area. In any event the mission believes that demand will develop more slowly for these areas than for Cambodia's main attractions and their development should only be undertaken after a careful market study has been carried out.

B. ACCOMMODATION AND OTHER TOURIST FACILITIES

9. The provision of tourist facilities is not only a question of building hotels, restaurants and night clubs but also one of providing a certain quality of food and service. Cambodia is fortunate to have a tradition of cuisine (French as well as Chinese, Vietnamese and Khmer) and, to a lesser extent, of hotellerie. Trained personnel exist already and represent a very valuable resource. In addition, the long standing need for good quality meat, vegetables and other foodstuffs have induced the local production of these commodities for the market. In these ways Cambodia is relatively well placed to cater to foreign visitors and to offer a high quality oi! accommodation, food and service.

Phnom Penh: Accommodation 1/

10. At the end of 1969 in Phnom Penh there were some 340 rooms available in seven hotels which the Department of Tourism classifies as international class. This excludes rooms blocked by airlines or permanent- ly occupied. Other hotels do exist but are rarely used by foreign visitors. Of the seven hotels, two, the Royal and Monorom, having 119 rooms available, are of slightly higher standard and cater to mainly European and American business and vacation visitors, including some groups. The other hotels cater more to Japanese and Chinese visitors as well as to foreign students and younger people. Prices for air-conditioned rooms in the two h-ligher standard hotels vary between $8-12 per day double occupancy and in the other five hotels between $6-10 per day double occupancy.

1/ See Table 10.5. - 44 -

11. Except for the Hotel Royal 1/ annual room occupancy rates are low (20-40%) and it is not likely that any new capacity of the existing type will be required for several years. There is, however, a need for a higher standard of hotel offering good service and accommodation. For the time being, the Hotel Royal substitutes and in 1970, a further 40 rooms will be added to it at a cost of CR 15 million (US$272,000). 2/ A new 250-room hotel (Cambodiana) is presently being constructed for a semi-state owned company, Societi' Royale d'Hotellerie, which is intended to be Phnom Penh's luxury class hotel. The project is several years behind schedule and is now expected to open in 1972. The cost is forecast at CR 250 million (US$4.5 million), which is high, (US$18,000 per room), in the light of the fact that the management states its intention to fix tariffs at around present levels in Phnom Penh and to cater for groups. At such tariff levels it is doubtful if the hotel can made a return on the capital invested. Once the Cambodiana is open and if it does set its tariffs around present levels it is likely that the existing hotels, especially the Royal and Monorom, will either have to lower their tariffs or accept less traffic.

12. The future demand situation for accommodation in Phnom Penh is by no means clear. The opening of Siem Reap airport has meant that those groups and individuals who stayed in the capital before, or after, visit- ing Angkor, now have the possibility of bypassing it completely. To what extent this will happen is difficult to judge at this point in time. It might be expected that demand in Phnom Penh would fall of temporarily as some visitors bypass the capital, but, over a longer period, demand would rise as some proportion of the increasing number of visitors to Siem Reap decided to visit Phnom Penh. Given this uncertain situation and also the presently low occupancy rates in classified accommodation, plans for further investments in accommodation in the Capital should be carefully reviewed and probably delayed until the demand situation in the year following the opening of Siem Reap airport has been assessed.

Siem Reap: Accommodation 3/

13. In Siem Reap there are 300 rooms catering to foreign visitors; 265 of these are in comfortable hotels with full public rooms and restaurants. All of the rooms are managed by the 80% state owned Societe Khmere des Auberges Royales (SOKHAR), which also provides the largest travel agency service in Cambodia and owns a hotel in Sihanoukville. Since

1/ The Royal is State owned but managed by the concession holding company "Societe Cambodgienne d'Hotellerie et de Tourisme" (SOCHOT).

2/ SOCHOT is making this investment out of its own resources in return for the extension of the Hotel Royal concession for a further fifteen years.

3/ See Table 10.6 - 45 -

1967, some 110 rooms have been added to the hotels and extensive remodel- ling has taken place including the addition of a swimming pool at the Auberge Royale des Temples. The occupancy rates indicate that the growth of capacity has kept pace with demand, but, in 1969, the occupancy rates began to approach thetir maximum, which is probably 70-80% per year, given the effect of seasonal demand fluctuations, operating inefficiencies and cancellations etc. The price of an air-conditioned room, double occupancy, is just under $11.00 in the two main hotels (265 rooms) and just over $8.000 in the smaller hotel (36 rooms).

14. Two additions to capacity in Siem Reap are expected in 1970; SOKHAR is expected to add a further 60 rooms to the Auberge Royale des Temples at a cost of CR 16 million (US$291,000) and the Societe Hoteliere du Cambodge (48% owned by Air France) will open a 200 room hotel (later to be extended to 300 rooms) in April/May 1970 at a cost of CR 150 million (US$2,730,000). Prices in the new hotel will be in the range of $16-17 per air-conditioned room, double occupancy, reducing to US$13-14 for groups of 25 or more. Although good class room capacity in Siem Reap will therefore nearly double in 1970 there is unlikely to be a problem of over capacity; both hotel companies stated that they had full bookings in 1970 for the new capacity and, due to slippage in completion dates, are now having to cancel previously made reservations.

15. In addition to the planned 100 room extention to the Air France Hotel, mentioned above, several other hotel projects are planned for Siem Reap by, both, local and foreign companies. The combined capacity of these projects, if they were all realized, would be in excess of 1,000 rooms. It is very difficult, however, to estimate how many of these projects will be carried through in the next few years because of the various reasons which have, so far, impeded the concretization of the many possible hotel projects which exist for Siem Reap. These reasons are, firstly, that some long-haul airlines who would like to invest in hotels have had difficulty in obtaining the necessary landing rights in Cambodia (this being partly a political question as well), secondly, that the availability of hotel sites has not been planned or coordinated and recently became even more confused when the Chi-ef of State, independently and against the advice of the ministers concerned, allocated a site to one hotel group which had succeeded in meeting him. A third reason has been the unplanned and, inadequate nature of the infrasturctural facilities in Siem Reap leading to uncertainties in thie minds of potential investors and, a fourth reason has been, the shortage of Cambodian capital available for hotel investments; this has constrained hotel development, despite the availability of substitute foreign capital, because of the Government's policy of endeavor- ing to maintain a ceritain percentage of each investment in Cambodian hands. The problem of foreseeing how these constraints may develop is a major difficulty in the estLmation of future hotel capacity. (Although it is obvious that capacity up to 1972 is fairly predictable, given the lead time involved in any maJor hotel project). An added factor, whose influence is difficult to predict, is if the Master Plan for Siem Reap's tourism development, which is proposed in this report, is carried out, it could - 46 -

provide the planned basis for a more rapid expansion of hotel capacity. In this uncertain situiation, the mission finds it impossible to say how many hotel rooms are likely to be available in Siem Reap by 1975 and therefore (by implication) what the maximum traffic throughput in that year could be.

16. Despite what is said above, concerning the impediments in the way of an expansion of hotel capacity, the long-term problem at Siem Reap is unlikely to be one of a shortage of hotel capacity; with traffic pres- sure growing the mission is convined that the airlines, operators and hoteliers will come forward with hotel projects and that the Government will encourage the provision of more accommodation. The problem however, will be the prevention of the temples losing their attractive forest settings by being surrounded with a proliferation of hotels, shops,cafes, vending stalls, etc. Already the airport, the Auberge Royale des Temples and the Angkor Hotel (Air France) have been sited very close to the temples. New hotel sites have been requested close to the temples and one appears to have been already approved. (Holiday Inn project for a 300 room hotel). In addition, the present practice of building low, one storey structures risks being abandoned. The Department of Tourism is tending to ignore the problem of preserving the specific attractions of Angkor in its eagerness to increase hotel capacity. If more hotels and associated developments are permitted near the temples the situation may deteriorate quickly and some of the world's finest temples will be closed in by conspicuous commercial buildings.

Construction Costs

17. Construction costs in Cambodia do not appear to be abnormally high from the examples of past and present hotel constructions. Costs have been kept low in Siem Reap by the construction of low structures requiring neither steel reinforced structures nor elevators. However, the hotels have provided their own electric generators and water supplies which has raised costs. From the examples available it appears that new hotels of fairly high standard can be built for around CR 550,000-800,000 (US$10-15,000) per room and extensions to existing structures can be made for around CR 250,000-400,000 (US$5-7,000). At these cost levels, tariffs competitive with those in other parts of the region can be charged and a reasonable return obtained. The import component of hotel construction costs is, as yet, difficult to assess. It is clear that apart from basic materials such as wood, sand and cement much of the materials such as glass, steel, paint, air-conditioning equipment, etc. require importation. However, given the relatively simple structures required, in Siem Reap at least, there would seem little reason why the import component should exceed 50% of the total costs and in general it should be around 30-40% of the total. - 47 -

Other Facilities

18. In general, ithe hotels themselves have restaurants and bars which provide a high standard of food and drink for the foreign visitors. Prices of fixed menu meals ranging from US$3-6 are, however, not cheap. In Phnom Penh a wide range of Chinese and other restaurants exist outside of the hotels and provide less expensive meals. Night Clubs charging reasonable prices also exist in Phnom Penh. Shopping is an attraction for the foreign visitors, especially silverware and the rubbings taken from the stone temple carvings. However, as yet, no shops exist at the hotels and in Siem Reap the main retail outlets for handicrafts and temple rubbings are children who await in hordes for the foreign visitors at each temple entrance. The organization of the sale of art and other handwork and the control of quality and authenticity should be a task to which the Depart- ment of Tourism should address itself with additional vigor.

19. Another field where more control is required is the provision of guide services which, in a country where English is spoken little and where the main attractions require explanation and description, are an essential part of the tourist facilities. Both the Department of Tourism and SOKHAR have made considerable efforts to provide friendly, helpful and literate guides, but from the mission's observations, it is clear that frequently the knowledge of the temples and their carvings is rudimentary and sometimes inaccurate. More stringent entry qualifications and closer supervision would appear to be essential if visitors are to receive value for their money. The price of guide services, excluding transportation, is about US$6 per day, or a guided tour by motorcoach of a temple such as Angkor Wat is about US$2-3.00 per person. For an individual wishing to see the most important temples using a rented car with guide the cost could easily range from US$30-50.00 in two days.

C. RECENT TRAFFIC PATTERNS

Volume of Traffic 1/

20. In the early 1960's visitor numbers 2/ remained at around the level of 22,000 per year; only since 1965 have they shown any rapid growth and in 1969 the volume of visitor arrivals is likely to be double that of 1965. Visitors of North American nationality have grown most rapidly in the last four years and accounted for 30% of the arrivals in 1968. European arrivals while accounting for nearly 40% of the total in 1968 have grown at a slower pace and have therefore declined in relative importance in recent years. Arrivals of visitors from Asia and Australasia accounted for

_/ See Tables 10.1 to 10.4.

2/ As recorded at the frontiers on arrival. - 48 -

27% of the 1968 total but have grown slower than European or North American arrivals in recent years. Within the overall growth of Asians and Austral- asians, however, it is of note that Japanese and Australians represented 9% of the total in 1965 and 14% in 1968.

21. On the basis of hotel records in Phnom Penh and Siem Reap, it is possible to estimate that only 20-30% of all foreign visitors stay in Phnom Penh. If it is assumed that nearly all business visitors would stay at least some of the time in Phnom Penh, it is clear that a maximum of 20-30% of the foreign visitors to Cambodia come for business purposes. The other 70-80% of the visitors came for mainly pleasure reasons. Of these pleasure visitors it is not known how many are part of organized groups. However, on the basis of the mission's observations it is clear that already a substantial number, probably in excess of 50%, of the visitors to Siem Reap are in some form of organized group tour.

22. The volume of bedniglhts generated by these foreign visitors in classified hotels in Phnom Penh and Siem Reap in 1968 totalled in the range of 110,000-124,000. 1/ Thiis would imply an average length of stay of 3.1-3.5 nights per foreign visitor. As would have been expected, the proportion of bednighits spent in Plhnom Penh is higher thian the proportion of visitors staying there, due to a longer average length of stay of business visitors. Thus, some 45% of the total foreign visitor bedniglits were recorded in Phnom Penh hotels in 1968 and 55'/. were recorded in Siem Reap. The implied average lengths of stay were thlerefore 4-5 days in Phnom Penh and 2.0-2.5 days in Siem Reap. The overall length of stay of foreign visitors has probably been falling in recent years and is likely to fall in the future as traffic to Siem Reap increases at a faster rate than that at Phnom Penh. In 1968 foreign visitor bednights at Siem Reap grew bv 40% over 1967 while in Phnom Penh they grew by only 5%. For the first six months of 1969, compared with the same period of 1968, a 60% increase in bednights at Siem Reap occured, while in Phnom Penh the growth was in the region of 14%.

Seasonality

23. Due to the small volume of traffic which Cambodia has received up to now, the seasonal pattern which the available statistical series show will not necessarily be typical for the future. Nevertheless, the seasonal pattern which does emerge is approximately that which would have been expected in a country having a dry season from October to April and a rainy season from May to September. Thus, arrivals and bednights, especially in Siem Reap, have tended to be grouped in the seven month period from October to April, but it is also true that the months of July and August seem popular for foreign visitors. The only month in which

1/ Depending on whether the records of the hotels or the "taxe de sejour" statistics are used. Foreign visitor bednights in 1969 are estimated to have totalled around 160,000. - 49 -

the volume of foreign tourism is consistently low would seem to be June. The important conclusion to be drawn from an analysis of the present Cambodian statistics is that relative to the foreign visitor traffic of many countries, traffic has not been highly seasonal. This same conclusion also applies to the neighboring tourist centers of Hong Kong and Bangkok which have considerably larger annual flows of foreign visitors than Cam- bodia. Given that Cambodia's foreign visitor are likely to be those of Hong Kong and Bangkok as well, the indications are that the seasonal pattern of Cambodia's traffic is unlikely to change drastically as it expands in the future, and that:, given the absence of high demand peaks, the hotel industry should be able to achieve relatively high annual occupancy rates and therefore have t:he chance of achieving good profitability.

D. FUTURE DEMAND FOR TRAVEL TO CAMBODIA

24. The Khmer Temples represent a valid attraction for foreign visitors and if hotels and other facilities can be provided, there would seem to be little doubt that tourist traffic to Cambodia will increase considerably. This conclusion is based mainly on the fact that access to the country has improved and that present tourist traffic to South-East Asia is already considerable and would seem to have very good chances of growing at a high rate in the future, especially when the Vietnam war ends.

25. The demand for travel to Cambodia is intimately linked with that for the whole of South East Asia and if Cambodia was already receiving a reasonable share of regional traffic it would be necessary to pin future demand for Cambodia close to future demand for the area as a whole. This, however, is not the case; Cambodia did not share in the growth of tourism in the early 1960s and up to recently tourist numbers have not grown at the same rate as those to other countries in the area. 1/ Tourist arrivals to Cambodia represent only 2-3% of arrivals recorded at the borders of the major tourist receiving countries 2/ in the area and it is likely that visitors numbering between 150,000-200,000 pass over Cambodian territory by air each year in travelling to Hong Kong and Thailand. Cambodia receives at most 20% of this number.

26. It may therefore be argued that, in view of the improved access to Siem Reap and the Government's desire to develop the tourism sector, increases in foreign visitor numbers could be considerable in the period 1970-1975. However, judging from the situation prevailing in 1969 and from the difficulties reported by the travel trade in obtaining hotel reservations in Siem Reap for 1970, it is likely that for the next two or

1/ Visitor arrivals to Thailand, Singapore, Philippines and Malaysia have grown at an annual average rate of 20% since 1964.

2/ Total arrivals in Malaysia, Philippines, Thailand, Singapore and Hong Kong. - 50 -

three years, at least, traffic growth to Siem Reap will be limited by the expansion of accommodation capacity (which can be fairly closely estimated). Therefore, on the basis of seasonal demand patterns and technical factors, such as, double occupancy ratios, it has been possible to calculate that the maximum and,therefore, probable volume of foreign visitor bednights in Siem Reap in 1972 would be in the range of 224,000-240,000 1/. This would compare with an estimated 105,000 in 1969 and imply growth rates in the three years of an average 29-32%. (cf. 40% in 1968 and an estimated 55% in 1969). For 1975 it is not possible to estimate likely hotel capacity in Siem Reap and, in any case, it is not clear that traffic growth would be closely related to it. In these circumstances it has been postulated that growth of foreign visitor bednights will fall in the range of 20-30% per year in order to obtain some rough order of magnitude as to the likely volume of traffic. The range chosen has been based on some past examples of tourism growth in South East Asia (Singapore's foreign visitors increased on average by 29% a year in the period 1964-68), and on the evaluation of the real and solid tourist attraction which the Khmer temples represent. The estimated possible totals of foreign visitor bednights in 1975 are therefore in the range of 390,000-530,000. The mission feels that the average length of stay in Siem Reap is unlikely to rise significantly in the future (see para 28) and therefore that the increases in the bednight totals given here imply equivalent increases in the numbers of foreign visitors.

27. As stated in para 12 the future demand situation in Phnom Penh is by no means easy to foresee, however, for the purposes of establishing orders of magnitude of total foreign visitor bednights in Phnom Penh in the next five years, reasonable alternative growth rates of 10% and 15% per year have been applied to the estimated 1969 bednight volume of 54,000. 2/ Adding the projected foreign visitor bednights for Siem Reap and Phnom Penh gives totals in the range of 300,000-320,000 for 1972 and 490,000-660,000 for 1975. These totals are clearly no more than rough guidelines as to the possible volume of foreign visitor demand in Cambodia in the next five years, but they do provide a basis for the examination of possible economic benefits contained in section G of this report.

Average Length of Stay in Siem Reap

28. In order to visit the most important temples in the Angkor complex and to absorb a little of the atmosphere of forest tranquility, at least two full days stay is required at Siem Reap and present average lengths of stay approximate closely to this. The Government hopes that this average length of stay can be increased by adding diversions such as golf and sailing (on the "Tonle Sap" Great Lake, less than 20 kms from Siem Reap or on the West Baray lake, close to Angkor Thom). The mission

1/ See Note, paras 47-50 for calculations.

2/ See Note para 50. - 51 - is not convinced that tlhe development of these activities would significantly induce the raising of the average length of stay of foreign visitors; firstly, because it is not certain that these activities will be competitive with the rival attractions in South-East Asia and secondly, because of the daunting prospect of playing golf in the high temperature and humidy levels prevalent at Siem Reap, especially after an exhausting series of temple tours.

29. The Government, in association with UNESCO, hopes that the opening up of additional temples (see para 4) will also lead to an extension of the average length of stay. Again it is not certain that this will be the case, because, for non-expert visitors, it is not evident that the additional temples will be of great marginal, interest after the Angkor complex has been seen. It may be argued, however, that the toturs of the newly restored temples would be interesting for visitors as the tours would have the side advantage of providing opportunities for viewing the people and life of Cambodia. In ainy case, it is clear that careful market research will be required before the UNESCO project is undertaken.

E. INFRASTRUCTURE

Airports

30. Cambodia has two main international airports at Phnom Penh and Siem Reap. The opening of the latter has removed an obstacle to the growth of foreign visiitor traffic and greatly improved the prospects of the tourism sector in Cambodia. However, the existence of two airports poses a problem of investment needs and priorities. In the past, about 50% of the passengers arriving in Phnom Penh departed directlv for Siem Reap, stopping only at the airport. It is reasonable to assume that these visitors will now endeavor to arrive directly in Siem Reap. A reduction of the traffic at Phnom Penh would therefore bring into question the need for some of the additional investments which are proposed for the airport. As for Siem Reap, -the airport terminal will almost certainly require enlargement or replacement at some time in the future if the projected numbers of visitors are to be handled satisfactorily.

Roads

31. The present rupture of diplomatic relations with Thailand pre- vents road traffic entering Cambodia from Thailand at the Poipet border cros.sing. However,, some groups have left Cambodia through this road exit although the road beyond Sisophon is reportedly in a bad state of disrepair. Given the nearness of Siem Reap to Bangkok by road (approximately 350-400 kms) it is conceivable that, once diplomatic relations are restored and the road repaired, visitor traffic to Siem Reap from Bangkok by road could be significant. Tour companies could achieve considerable cost savings by using this road route as opposed to using air transport. However, tourism would be only one of the economic justifications for this road and whether - 52 - the road was repaired or not would necessarily have to be decided in the context of a general roads program for Cambodia. Almost exactly the same can be said for the roads joining Cambodia with South Vietnam; once the war is over, considerable numbers of visitors might arrive from Saigon (and perhaps go on to Bangkok) by road.

32. In the area of Siem Reap it is likely that some new roads will be necessary as the town receives more visitors and these road needs could form part of the study for the planned development of Siem Reap which is proposed in paras 35 and 36.

33. As previously mentioned, UNESCO has been exploring the possibility of opening up and restoring several presently inaccessible temples and his- toric areas to the north and east of Siem Reap. This work, which is envisaged to take between five and ten years, would necessitate, as a first step, the construction of over two hundred kilometers of road. It is unlikely, however, that tourism could justify such investment, at least in the immediate future, and therefore the implications for agriculture, forestry and other industries would also have to be studied.

Public Utilities

34. In Siem Reap present developments in the provision of water, sewerage and electricity are being carried out on an unplanned and uncoordinated basis; individual hotels are providing their own electricity while sufficient central capacity exists. The supply of water is on a piecemeal basis and the Angkor Hotel (Air France) will draw its water from the moat of Angkor Wat and use the same moat as a tank for its partly treated sewage. In the light of the fact that hotel capacity is likely to have increased considerably in Siem Reap by 1975, it is necessary that the provision of water, sewerage and power services should be put onto a planned and coordinated basis.

Siem Reap Development Plan

35. In view of the dangers of uncontrolled hotel development mentioned in section B, the need for coordination and planning of public utilities at Siem Reap and the need for a study of the preservation of the temples themselves (para 5), the mission has proposed that the Government should undertake, as soon as possible, a project for the preparation of a master plan for the development of Siem Reap. A development scheme for a town of "New Siem Reap" already exists but is not based on evaluations of either tourism demand or the physical development possibilities of the area.

36. The proposed project should cover the whole urban area of Siem Reap as well as the area of the Angkor Park and its associated temples on the "small" and "large" circuits. The master plan for the development of the area would allocate development areas and protected zones and set building standards and lot densities, etc. On the basis of an evaluation of the tourism demand potential the study would establish implementation phases - 53 - and show both superstructure (hotels and other facilities) needs and infrastructure needs, including urban roads and the airport, during each phase of the development. IE such a study were carried out rapidly, the waste- ful and damaging implantation of uncoordinated infrastructure works might be avoided and the destructive uncontrolled development of superstructures halted.

F. GOVERNMENT INVOLVEMENT & POLICIES IN THE TOURISM SECTOR

37. In Cambodia, the state's involvement with the evolution of tourism is already considerable 1/ and this helps to ensure that the requirements of the tourism sector will be taken into account in the formulation and execution of general government policy. The importance attached to tourism is illustrated by the existence of a full Department of Tourism with a Cabinet-ranking Secretary of State at its head.

The_Department of Tourism

38. The Department performs many functions, among which may be mentioned the classification and regulation of hotels and their prices, the collection of tourism taxes, guide training and examination, publication of publicity material, the collection of statistical material and the promotion abroad of Cambodia as a tourist destination. In general terms, the Department's activities would seem to lack clear cut policies and a sense of dynamism. The low priority given to statistical and research work is illustrative of the amateurish attitudes prevailing. 2/ Earlier sections of this report have referred to the dangers of the unplanned, haphazard development which is occuring at Siem Reap; the Department of Tourism, preferring to promote investments at any cost, remains largely unconscious of the possibility that the attraction of the temples at Siem Reap could quickly be degraded. If tourism is to develop on a rational and planned basis in Cambodia, it is vital that the Department of Tourism should adopt a more vigorous posture with regard to planning and provide a statistical and study base on which development decisions may be taken.

1/ The state owns 80% of SOKHAR the largest travel agency and hotel comparny in the country, has a considerable holding in the new company which is building the luxury hotel in Phnom Penh and directly owns other hotels.. including the Royal in Phnom Penh. It is also the majority shareholder in Royal Air Cambodge.

2/ Basic statistical collection is carried out in Cambodia from the hotels and at the frontiers. However, the raw data lies unused in.the Dept. of Tourism. Withi minimal staff and equipment a very good and complete system of tourism statistics could be produced in Cambodia. - 54 -

Investment Policy

39. Tourism is recognized as a national economic priority, after agri- ctjlture and industry, hy the Second Five Year P'lan (1,968-1972). Iiowever, the small amounts (CGI 110 million, US$2 million) allocated from the budget for tourism purposes for the five year period, indicate that tlhe Government intends that the private sector should carry out the main part of the investments necessary if the Plan's target of 20% annual growtl in visitor numbers, are to be met. As part of the incentives to private investors, international class hotels benefit from the various fiscal incentives available to investment in industry. The most important of these are the exemption from import duties on imported capital equipment and the exemntion from profits tax for the first five years of the investment (the maximum period of exemption possible). Thus, although not receiving anv special benefits, investment in hotels catering to foreigners would seem to be well treated. However, limitations as to the degree of foreign capital participation, which are fixed in each separate case by the Minister of Finance, have been, and are provinp to be, a limiting factor in the speed at which investments in hotels can take place. Thus, despite readiness of foreign investors to invest more, the lack of Cambodian capital, has delayed the implementation of investment plans. The Govern- ment might reconsider its policies in this direction in order to facilitate the speedy provision of further hotel capacity.

C. SOME ECONOMIC IMPLICATIONS OF TOURISM DEVELOPMENT

Tourism Receipts

40. Foreign exchange earnings from visitors, passing into official banking channels and recorded by the Office National des Changes, totalled $0.8 million in 1966 and rose to $1.7 million in 1968 and $1.1 million in the first six months of 1969. However, the low average daily expenditures obtained by dividing these receipts by foreign visitor bednights (US$12-15), would lead to the conclusion that not all of the receipts from foreign visitors were officially recorded in these years. It is clear, nevertheless, that because foreign visitor bednights did not double between 1966 and 1968 -- even though recorded receipts did -- that an increasingly higher proportion of the earnings was entering the official channels. Following the abolition of the system of multiple exchange rates in August 1969 and a fall in the back market rates, it is likely that a fairly high proportion, if not all, of the foreign exchange earnings from tourism now enters. the official channels. In 1969 an estimated US$3 million were spent by foreign visitors in Cambodia (160,000 bednights x US$20 expenditures per night). By 1975 these earnings could be in the range of US$12-16 million if the traffic projections calculated in section D are realized and if average expenditure per night were in the region of US$25. - 55 -

41. lo estimate Cambodia's net foreign exchange earnings from tourism in the period 1969-1975, it is reasonable to deduct about 25% of gross earnings to allow for the import component of current operating costs and for the foreign exchange element of capital costs falling due in the year in question. On this basis it is estimated that net foreign exchange receipts from tourism totalled US$2.3 million in 1969 (assuming all gross receipts flowed into the official channels) and that net receipti, in 1975 could total in the range of US$9-12 million.

Employmet

42. At the present time the tourism industry in Cambodia probably directly employs some 1,500 people. Of these, about two-thirds are employed in the hotels and the rest are employed in travel agencies, the Department of Tourism, the Civil Aviation Authority, etc. Others will be employed in agriculture, the handicrafts industry or the construction industry, which directly serve the tourism sector, but whose numbers are not known. The staff of the hotels appear to have a fairly high level of productivity (the staff: room ratio is, on average, 1.3:1) and the addition of more hotel rooms is likely to necessitate the employment of extra personnel. By 1975 hotel capacity could have at least doubled and, those directly employed in the sector could well number in excess of 3,000. At the same time, the numbers employed in related occupations in agriculture, etc. also would have increased.

H. PRE-INVESTMENT STUDIES

43. As noted in section E, there is an urgent need for a master plan for the development of tourism in the immediate area of Siem Reap. Such a study could include the allocation of land uses, the establishment of building standards, the setting of development phases, for superstructures and infrastructures, the consideration of the administrative and financial needs for the carrying out of the plan and the evaluation of the stability of the temples in the face of jet aircraft noise and other dangers. This study is required urgently to protect the basic attractions of Siem Reap and to avoid economic waste caused by the haphazard implantation of supporl:- ing infrastructures. An application to UNDP for assistance with such a study is expected to be submitted shortly by the government.

44. In the longer term, a study is also needed concerning the exploil:- ation, for tourism purposes, of more of Cambodia's ancient temples, many of which remain covered and surrounded by dense forest. UNESCO has already undertaken two missions towards this end and the resulting studies form a useful technical basis for a further analysis of the economic justifications and technical feasibility of opening up and restoring further temple com- plexes. It is expected that Cambodia will seek UNDP assistance for the carrying out of the ;necessary studies (with UNESCO as Executing Agency). - 56 -

45. Before the Cambodian Government embarks upon the development for tourism purposes of any of the other areas or attractions of Cambodia, such as the beach resorts of Kep and Sihanoukville, market surveys will be required to establish whether demand for these areas does, in fact, exist.

46. On a wider scale, it is clear that the countries of Cambodia, Laos, Thailand, South Vietnam and North Vietnam form a touristic entity, at the heart of which lies Cambodia. Following the stabilization of the situation in Vietnam, it would be reasonable to envisage the promotion and development of road and air tours of the countries mentioned above, carried out in an integrated and coordinated manner. Clearly the present situation would not permit a useful study of this possibility, but the idea could be retained for a future date.

I. NOTE:

Calculation of the Likely Volume of Visitor Traffic to Cambodia in 1972 and 1975

Siem Reap

47. For reasons mentioned in section D of the main text, it is likely that the growth of foreign visitor traffic to Siem Reap until 1972 will be limited by the capacity of the hotel facilities. The calculation of likely traffic to Siem Reap by 1972 has therefore been based on the amount of hotel rooms estimated likely to be available in that year.

48. The most important factor in determining maximum possible annual visitor throughput in a particular destination is the length of the tourist seaon. In Cambodia, where a fairly long season is possible, maximum annual hotel occupancy rates can be relatively high; the mission has calculated that between 70-80% would be feasible and for the purposes of this calculation has taken a maximum annual occupancy rate of 70%. Another factor determining the visitor throughput is the ratio of double occupancy achieved per room. In 1968 in Siem Reap the ratio was already fairly high (1.7), but given the presence of a high proportion of group traffic the ratio could rise even higher to 1.8 or 1.9. The throughputs possible at double occupancy ratios of both 1.7 and 1.8 have been calculated.

49. From the application of an occupancy rate and a double occupancy ratio to estimated capacity, total visitor bednights were calculated.. In order to separate the foreign-resident visitor bednights from this total, an estimate of local resident visitor bednights was made for 1972 (on the basis of the 1969 estimate increased at an annual average rate of 8%). After deducting the local visitor bednights the remainder represented the possible throughput of foreign visitor bednights.. For the period 19/72-1975, the projected volume of bednights in Siem Reap in 1972 was increased by average growth rates of 20-30% per year, which was taken as the range of reasonable possibility. - 57 -

Phnom Penh

50. The likely visitor demand situation for Phnom Penh is very difficult to estimate given the altered pattern of access to the countrv following the opening of Siem Reap airport. In these circumstances the only possibility was to apply reasonable alternative growth rates (10% and 15% p.a.) to the estimated 1969 total of foreign visitor bednights. The alternative possible foreign visitor bednights were than added to those for Siem Reap to produce a rough order of magnitude of likely total foreigr. visitor bednights in 1972 and 1975 in Cambodia.

Summary of Calculations Siem Reap

Roomnights Roomnights Double Visitor Resident Foreign Available Taken Occ'y.Ratio Bednights Bednights Bednights 1969 1/ 1L09,900 70,600 1.7 120,000 15,000 105,000 (64% occ'y) 1972 206,000 144,000 1.7 245,000 19,000 224,000 (564 rooms)(70% occ'y) 1.8 259,000 19,000 240,000 1975 Projected range of foreign visitor bednights 390,000 in 1972 increased at 20% and 30% per year for 1973-75 50-30,000 Phnom Penh

Foreign Visitor Bednights Foreign Visitor Bednights @ 10%_.a. £ owth @ 15% p_a. growth

1969 1/ 54,000 54,000

1972 72,000 82,000

1975 96,000 125,000 Total Forein Visitor Bednights

Estimate Projections 1969 159,000

1972 - 300,000 - 320,000 1975 490,000 - 660,000

1/ Estimated situation based on partial figures. - 58 -

Annex IV: MANUFACTURING INDUSTRY

TABLE OF CONTENTS

Page No.

A. EVOLUTION AND PROBLEMS OF INDUSTRY 59

1. Past Developments 59

Production and Investment 59 Location 60 Employment and Wages 61

2. Industrial Policy 63

Government 63 Public Enterprises 64 Priorities 65 Investment Incentives 66 Industry Protection 68

3. Constraints 69

Public Sector 70 Private Initiative 71 Bank Credit 72 Infrastructure 73 Price Controls 73

4. Summary and Outlook 73

B. STRUCTURE OF INDUSTRY

Mining 76 The Cement Industry 76 The Fertilizer Industry 77 Precious Metals 78 Food Processing 78 The Beverage Industry 81 The Tobacco Industry 82 The Textile Industry 83 The Paper Industry 85 Timber and Furniture 86 The Rubber and Plastic Industries 86 The Chemical Industry 87 Brick-works, Glass-works and ceramics 88 Metallurgy 88 Other Industrial Activities 88 - 59 -

Annex IV: MANUFACTURING INDUSTRY

A. EVOLUTION AND PROBLEMS OF INDUSTRY

1. Past Developments

Production and Investment

1. At the time of her independence (1953) Cambodia had virtually no industry. Nevertheless the brisk domestic and foreign trade at the time when the country was still part of Indochina had helped create the core of an entrepreneurial class - mostly Chinese and Vietnamese. Notwithstanding the heavy emphasis Eby the Cambodian government during the last fifteen years on state-owned industry, this private entrepreneurial group has been a vital element in the industrial progress so far achieved.

2. Manufacturing today contributes about 12 percent to GDP and employs 3 percent of the active population. The contribution of manufacturing and construction, industries to GDP rose from 13 to 18 percent during the past decade, grcing at a rate of 7 percent a year. Private unincorporated enterprises account for over 60 percent of the value added by the manufacturing sector during the period 1963-1966, private and mixed corporate and mixed corporate undertakings (societes anonymes) for another 34 percent, and state enterprises only for the balance. In the latter case, the percentage rose from 3 to 7 percent between 1963 and 1966. (See Table 8.3.) The share of private firms in aggregate industrial investment is no less important, amounting to 39 percent of the total, while state and mixed enterprises account for 39 and 22 percent, respectively, of the CR 4,310 million of total investment during the period 1957-1968.

3. Total investment in the industrial sector has been very erratic during the period 1957-1968 (see Tables 8.5, 8.8,8.9), reflecting the lumpy nature of individual items as well as changes in policy. Expansion of the manufacturing sector in recent years is far more pronounced with respect to investment by state and mixed enterprises. Private investment shows a definite decline since 1964 when it had reached a peak, and on average accounted for only 28 percent of the total in the following years.

4. Industrial production rose from 11.2 to 15.4 billion riels, or by 37.2 percent, between 1962 and 1966, the last year for which complete data are available, representing an average increase of 9 percent annually (see Table 8.1). Industrial output declined slightly in 1966 (by 2 percen;t). Food and raw materials processing industries dominate the scene, accounting for over 70 percent of the industrial output. Of the other industries, a notable development is observed in the textile industry, where between 1963 and 1965 output was doubled and has continued to rise ever since. Sales of the 250 major industrial enterprises for which information is available for 1967, increased by 20 percent in that year compared to 10 percent in 1966 (see Table 8.2). The allocation of investment amonp industries established in Phnom Penh during the period 1956-1968 is shown below. The lighl: - 60 - engineering and vehicle and appliance assembly industries have attracted over a third of the capital invested, followed by textiles and rubber. It is interesting to note that investment in the food processing and beverage industry represents only 8 percent of the total investment of the period, although the industrv contributes over one-third to the total value added by the manufacturing sector.

Industrial Investment Proposals by Industry in Phnom Penh (1956-1968)

Industry Investment Percent (in million Riels)

Food processing and beverage 122 8.8 Timber and wood products 18 1.0 Light engineering 296 20.0 Vehicle and appliance assembly and repairs 290 19.0 Rubber industry 176 12.0 Chemicals and plastics 153 10.0 Textiles 222 15.0 Paper and printing 153 10.0 Other 82 5.0

TOTAL 1,512 100.0

Location

5. Industrial activity is heavily concentrated in Phnom Penh, where 830 new private units have been established between 1952 and 1968, representing an investment in the amount of CR 1,521 million and creating an estimated 12,000 new jobs. (See Tables 8.6 and 8.7 for a detailed distribution of investment and employment among industries.) From 1965 to 1968 statistical information is available for the entire country which shows that 37 percent of the new private industrial undertakings have been set up in Phnom Penh, accounting in value for 60 percent of the total and 48 percent of the employment generated. Other regions with industrial activity of some importance are the province of Kandal (other than Phnom Penh), Bat- tambang, Kampong Cham, Prey Veng and Kampong Thom. The bulk of investment in Battambang has been in rice and saw mills, while in Kampong Cham mainly in saw mills and tobacco drying ovens.

6. To avoid future concentration of industry in Phnom Penh the government has been eager in recent years to develop Sihanoukville into a second pole of industrial development. The plan is to attract industries producing for exports with imported and locally supplied raw materials, while Phnom Penh would continue to attract industries catering to the domestic market. Although the basic infrastructural facilities have already been completed, so far the little industrial activity that goes on- is - 61 - carried out by state or mixed enterprises and the output (beer, gasoline) is intended for domestic consumption. The only private establishment is a sawmill. To enhance the locational advantages of the harbor, the governmeni: proposes to create a free zone where industrial and commercial activities could be carried out without restraints. The cost to develop the free zone as an industrial estate is estimated at CR 60 million of which only a very small amount has been spent. Budgetary difficulties seem to account for the delay.

7. The future success of the scheme is not evident. For the moment, the vicinity of Viet Nam reduces the attractiveness of Sihanoukville as a location of economic activity, and the present system of a state monopoly in banking and insurance tends to conflict with the notion of a free zone. In general, no malor developments can be expected intil the political situation in the area is stabilized. In the longer run, a rapid growtil of economic activity will largely depend on whether or not foreign industrial and commercial undertakings could profitably use the port as a manufacturing center or as an entrepot for the assembly of components and distribution to a regional market. For this type of activity, Singapore and Hong Kong are of course strong competitors of Sihanoukville, and so far no striking comparative advantages are apparent. Plans by the state or private investors for the future establiLshment of a number of industrial plants in Sihanouk- ville are discussed in paragraphs 60-86 below.

Emplovment and WaLes

8. Information concerning industrial employment is not complete. It appears, however, that there is little unemployment in Cambodia, and given the relative immobility of labor special incentives are used, e.g. to attract workers to Sihanoukville. On the basis of reports to the Minis- try of Labor by the enterprises themselves, the distribution of the industrial labor force by industry appeared as follows in 1967: Indust_y Establishments p1oymen t Food processing 764 4,242 Beverage 58 1,979 Textile 324 5,180 Apparel and shoes 332 1,572 Timber and furniture 281 2,936 Paper and printing 201 2,865 Leather products 28 216 Rubber products 87 1,394 Chemicals 123 1,087 Mineral & non-metallic products 126 2,271 Light engineering 603 5,760 Construction 105 2,433 Other 285 1,467 TOTAL 3,290 33302 - 62 -

9. In recruiting personnel, enterprises are obliged to give preference to nationals. Foreigners employed by enterprises are not allowed to exceed 30 percent of their personnel. In the case of foreign specialists considered as indispensable, the percentage may exceed the limit only after authorization by the Ministry of Labor. The ethnic composition of the industrial labor force is predominantly Khmer. According to a recent survey of 417 industrial establishments in Phnom Penh, 81 percent of the workers employed were Khmers, 12 percent Chinese and the remainder Vietnamese and other minorities. The female participation amounted to 24 percent.

10. The same study indicated that, of the male workers, 5 percent earned a basic wage less than CR 750 a month, 34 percent CR 750-1,250, another 34 percent CR 1,250-2,500, 20 percent CR 2,500-5,000 and only 8 percent CR 5,000 or more. In the case of female workers the distribution is more heavily weighed in the lower brackets. Workers receive in addition family allowances amounting to 15 percent of the basic wage for the wife and 5 percent for each child up to the age of 16. State enterprises further pay medical and hospitalization expenses for their employees as well as one-half of such expenses for their families. Moreover, although they are not obliged, most state undertakings provide free lodgings, electricity and water for about one-half of their employees.

11. Minimum wages have been established since 1959, and at present are CR 25 per day for men and CR 21 per day for women in Phnom Penh, and less in provincial capitals and other areas. Separate minimum wages are in force for minors (CR 15 and 18 per day respectively for minors 12-15 and 15-18 years of age in Phnom Penh). The increase in salaries and wages of government employees last November following the devaluation, which applied particularly to the lower echelons, is very likely to be extended also to the salaries and wages paid by state enterprises and even the private sector. For state enterprises the Mlinistry of Industry is considering a uniform salary and wage structure, proposed as follows:

Technical Services Administrative Services Starting Endog Starting Ending

Direction 5,500-10,000 8,100-15,500 5,500-10,500 8,100-15,500 Application 2,800- 5,500 4,144- 8,140 2,800- 4,800 4,144- 7,104 Execution 950- 3,700 1,406- 5,476 950- 3,000 1,406- 4,440

12. Information regarding labor productivity is not available. There is lack of qualified people for responsible technical, administrative and more so for managerial jobs. A considerable effort has been made during the recent past to promote technical education, and in the very near future a sufficient number of trained people will be graduating from technical schools and universities. Their orientation, however, is more toward the higher rather than the middle levels which are mostly needed. A more general problem seems to be the difficulty in establishing industrial disci- pline, and the passivity at the lowet echelons. Sanctions are not imposed even for major transgressions, and discharge of competent employees runs counter to religious and social convictions. - 63 -

2. Industrial Poliy

Government

13. To cope with the multi-faceted problems that industrial development poses, the Ministry of Industry has recently been reorganized and is now composed of four divisions covering Mines, Industry and Handicrafts, Technical Controls, State and Mixed Enterprises. In addition, the National Productivity Center has been attached to the Ministry of Industry. The Division of Mines is concerned with the survey of mineral resources and their exploitation. The Division of Industry and Handicrafts is responsible for making an assessment of the manufacturing sector, define priorities for new investment, prepare and evaluate feasibility studies, advise on legal, institutional., organizational, economic and financial changes and measures to promote industrial development. Further, it will approve requests for the import: of raw materials and equipment, devising and establishing objective criteria. The Handicraft Bureau of the same division will study the development of wood and pagodite carving, hand weaving, basket-making and pottery. The Division of Technical Control is concerned with quality control, problems of pollution, control over establishments producing under dangerous and unhealthy conditions, control of weights and measures, and the like.. The Division of State and Mixed Enterprises is supposed to coordinate the activities of the government auditors and those of the enterprises, to develop uniform accounting and managerial practices, and to keep the Minister informed on their activities.

14. To improve the management of state enterprises, the government had established in 1966 a Productivity Committee, charged with the task to train cadres in modern managerial methods and techniques. It was composed of officials of the Ministry of Industry and a selection of managers of state enterprises. It was assisted in its work by two ILO experts as well as another two experts in industrial management and accounting. The Committee was recently fused into the National Productivity Center which has been instituted very recently, under the supervision of the Ministry of Industry. The Center is designed to assist state undertakings to cope with management problems, such as procurement, production, marketing, cost accounting, budgeting, maintenance of equipment. To this end, it organizes and runs training sessions on these subjects with the continuing assistance of ILO experts, and supplies the trainees with pertinent material. The activities and services of the Center will be eventually extended and made available also to private firms. The Center at a later stage plans to provide guidance to enterprises on technical matters with the assistance of experts.

15. The effective discharge of its tasks, for which thie Miinistry has not previously been equipped, presupposes the employment of a number of experts who should be rnade available by international organizations or be directly employed, and the IJNDP has been approachied for a senior adviser. Yet, as will be shown fEurther below, there are basic problems of industrial - 64 - policy which cannot be resolved by the Ministry alone and will require the combined support of the government. This concerns In particular the rela- tionship between the public and the private sectors.

Public Enterprises

16. The industrialization of the country has been an early objective of the Cambodian government in order to economize on foreign exchange, to provide productive employment and technical skills to an increasing labor force, and to exploit the natural resources of the country. Given the absence of managerial skills, know-how and inadequacy of private domestic capital willing to venture into modern-size industry, it was assumed that the pioneering function would have to be performed by state-sponsored enterprises. This approach was also in consonance with the ideology of Eastern bloc countries who were prepared to offer financial and technical assistance to build up a nucleus of industries in Cambodia. Furthermore, this form of enterprise permitted industrialization to proceed without undue reliance on the skills and financial resources of ethnic minorities.

17. The technical and economic aid of the People's Republic of China between 1956 and 1960 in the amount of CR 1.2 billion made it possible to establish and operate a textile mill in Kampong Cham, a plywood plant in Dey Eth, a paper mill in Chilong, and a cement factory in Kampot. SONATEX, SONACO, SONAPAP and SONACIMENT emerged as autonomous state enterprises. (See Table 8.4 for the meaning of acronyms and other details on state and mixed enterprises.) A new donation of glass factory (estimated value CR 100 million) in 1963 led to the creation of the state enterprise Ver- rerie d'Etat (1966). A Czech loan in 1961 led to the construction of a sugar refinery and a rubber factory, and another loan was for the construction of an assembly line for tractors; this resulted in the establishment of three additional state enterprises: SONASUCRE, SONAPNEU and SONATRAC.

18. In 1960, the government established the Societe Khmere des Dis- tilleries (S.K.D.) as a mixed enterprise to which the Societe Francaise des Distilleries d'Indochine and the Societe Anonyme des Distilleries Annamites du Sud d'Indochine had to cede their assets. In 1963, S.K.D. was transformed into a full state enterprise and was accorded the monopoly of production, importation and distribution of alcohol. The Societe Nationale des Exploitations Forestieres (SONEF) emerged in 1964, and the Societe Khmere de Jute (SOKJUTE) was established in 1964 to set up model farms for the cultivation of jute, production of fibres, and the manufacture and sale of sacks, initially as a mixed enterprise with 6 percent private participation which was bought out in 1969. Since 1968, the Societe Nationale de Conserverie de Poissons (SONACOP) operates a canned-fish and fishmeal factory, and the Societe Nationaled'Explotation et de Commercialisation des Pierres et Metaux Precieux et Semi-precieux (SONEXPIEROR), carries out industrial processing and trade of precious stones, and surveys for the discovery of new veins of precious and semi-precious minerals.

19. The financial results of the industrial state enterprises for the years 1964-68 are shown in Table 8.10. S.K.D. has earned very large - 65 -

profits and accounts for two-thirds of the net profits realized by the entire group. S.K.D.s' major source of profit is the alcohol monopoly. SONATEX and SONASUCRE show satisfactory profits, at least for certain years, although they derive mainly from the high tariff protection and the way margins are calculated by the government. The rest of the industrial state enterprises either make losses or show a small return on the capital invested which again is influenced by the government price policies. However, financial losses by no means imply lack of efficiency, as profitability does not necessarily reflect the opposite. Of the net profits realized by the industrial state enterprises, about one-third was reverted to the state in 1968. In previous years their contribution to the government has been almost nil.

20. The Plan provides for an investment of CR 3 billion in industrial projects. State enterprises are expected to invest close to CR 2 billion during the period 1968-72 through self-financing and borrowing. In the past, retained earnings have been in the order of CR 100 million a year, most of which in SKD and SONATEX. Surpluses are particularly limited (or losses are persistent:) in those state enterprises which have been earmarked to undertake new proJects (SONACIMENT, SOKJUTE, SONAPAP). It is not clear whether transfers of investment funds between enterprises are envisaged and how.

Priorities

21. Since agriculture has always taken precedence over industry in the thinking of the Cambodian authorities, over-ambitious plans for import substitution industries have never been drawn up. This has also to be seen in connection with the absence of an unemployment problem and the continued ample availability of uncultivated land. Industry is seen as a useful and necessary element for balanced growth, but not as an independent engine for developmen,t. Thus, considerable prudence is applied to the setting of industrial targets, and indiscriminate protection is avoided. Given the small domestic market as well as the short supply of industrial skills, there is a g,ood deal of realism in this approach.

22. The Second Five-Year Plan in general stresses the promotion of activities that will ultimately lead to: (a) the increase in production and improvement of the quality of agricultural products to the end of promoting their export; (b) the improvement of the quality of industrial products and reduction of their cost of production; (c) the restoration of the confidence of the private entrepreneurs and farmers; and (d) the increase in the efficiency of certain public entities and institutions. Specific new industries to be promoted include primarily those which facilitate the growth of agricultural production (e.g. fertilizer), make possible the transformation of raw materials into finished or semi-finished products (e.g. vegetable oils, canneries) and those catering to final consumption (e.g. textiles, cement, sugar, paper). Export-oriented industries relying on certain industrial crops to be developed in the agrarian sector are also given precedence. - 66 -

23. As far as investment targets are concerned, the Plan does not go much bevond enumerating several industrial projects which prima facie are viewed as highlv desirable. Proposed Investment

Typfle of ProJect 1968-72 1968

Fertilizer plants 570 70 Sugar refinery - Distillery 310 30 Starch factory 250 - Vegetable Oil Mill 130 - Animal Feed-stuffs 70 - Textile plants 260 - Paper mill 380 - Cement plant 500 - Steel plant 90 - Motor Pumps and Motorcycles 400 - Other 61 31

TOTAL 32021 131

Although the Plan is now entering its third year, no feasibility study has been produced yet for any project. This would imply that, even if such projects are proven justifiable and bankable, their completion technically should be ruled out by the end of 1972, which is the last year of the Plan. Further, a number of these projects are supposed to be financed by the sponsoring state enterprises out of internally generated funds, but it is clear that these financial resources are far from sufficient. The government itself has also in recent years met with growing financial problems and foreign sources of funds have not yet been identified for specific industrial projects.

Investment Incentives

24. The First and Second Plan had little, if any, direct influence on private initiative, since monetary, fiscal, protective and other regulatory measures were taken on an ad hoc basis and had no relation to the Plan. On the other hand, there was no Plan during the period 1965-1967. The government directs industrial development by means of investment permits and controls over industrial loans. Loans for industrial equipment must be approved by the Administrative Council of the Caisse Nationale d'Equipe- ment for amounts up to CR 5 million or by the High Plan Council ( Conseil Superieur du Plan) for amounts over CR 5 million. Where the market for a product is adequately supplied by the existing enterprises, new entry is forestalled to avoid duplication of facilities and waste of resources, unless the new firm is to introduce more advanced technology or greater capacity leading to substantial cost reductions. New investors may apply - 67 - to the Ministry of Plan for the institution of protective measures. The request is studied by a special committee which submits its report to the High Plan Council. With the latter's approval, the measure is instituted by decree. Moreover, and to the extent possible, the central bank and the competent Minister may guarantee the availability of foreign exchange for the regular importation of raw materials and new equipment. Also, the Caisse Nationale d'Equipement may be advised to grant medium- and long-term loans at low interest rates (4-5 percent).

25. In 1957, a law was passed, which is still in force, whereby certain guarantees and fiscal advantages are granted to potential foreign investors, varying with the importance of the investment for the national economy. Thus, foreign private investment is guaranteed against nationalization for a period of 20 years which can be extended for another 10 years. In the event of nationalization or expropriation as a public utility, a "just and equitable" indemnity will be accorded. The law provides for an exemption from registration fees and stamp duties, import duties on equipment and other materials necessary for the operation of the enterprise, land taxes on rural property and on cultivated land, company profits and dividends, and for accelerated depreciation. Finally, repatriation up to 20 percent per annum of the invested capital as well as transfer of annual profits up to 20 percent is allowed. Despite the favorable terms provided in the law, foreign investment to speak of has not been attracted so far.

26. Although a variety of fiscal charges are levied on industrial undertakings, with the exception of the dividend remittance tax, the tax burden is not onerous. Every industrial enterprise is subjected to a duty for the permission granted to exercise an industrial activity (pat- ente), which is fixed and determined on the estimated rent value of the fixed assets employed. The corporate profit tax (impot sur les bene"fices) is 25 percent. There is a land tax (impot foncier) in the amount of CR 240 per hectare, a construction tax (taxe de construction) CR 10 per square meter, and a duty on auto-engines in the amount of CR 720 per ton. A dividend tax (impot sur le revenue des valeurs mobilieres) is paid by the shareholders and amounts to 20 percent. In addition, a dividend remittance tax (taxe exceptionelle d'e'quipement) has to be paid by foreign shareholders. The tax is 48 percent, or a little less depending on the extent of participation of nationals in the share capital of the enterprise. Salaries are subject to a tax (impot sur les traitements et sal- aires) varying from 1 to 40 percent up to CR 50,000, and 40 percent for salaries over that amount. It is paid by the employee. The sales tax (taxe sur les chiffre d'affaires) is 5 percent. There is also a 14 percent sales tax on imports (taxe sur chiffre d'affaires sur importations). Finally, there are duties and stamps on invoices issued, receipts and salaries, transfer of shares, etc., and certain special taxes, e.g. on the transformation of paddy, on ice. - 68 -

Industry Protection

27. The local industry is protected in a varying degree. In the first place, the authorities may prohibit on an ad hoc basis the importation of a particular commodity which is locally produced or they may in- stitute a quota. Secondly, an important device to ensure protection is the tariff system, particularly since the 1969 devaluation. Cambodia applies either a minimum or a general ad valorem tariff. The general tariff is three times the minimum tariff, and is applied to imports from non-GATT members and countries without trade agreement with Cambodia, and is therefore not significant. The tariff structure for selected commodities is shown below:

Commodities Minimum Tariff

Canned and Preserved Meat 30-70% Preserved Fish 40-60% Vegetable Oils 20-30% Preserved Vegetables 50% Sugar 60% Confectionery 20-50% Fruit Joices 40-60% Beer, Soft Drinks 40% Alcohol 70-100% Cigarettes 100% Hydrocarbons 40% Soap 30- 70% Matches 80% Plastic Products 30-40% Rubber Products 20-40% Wooden Products 60% Paper Products 20-40% Cotton Textiles 40-70% Silk and Synthetic Textiles 70% Hosiery, Apparel 50-70% Shoes 40% Agricultural Implements 20-40%

28. In addition to the import duty and the 14 percent turnover tax, certain commodities are subject to a special tax which is collected at the point of entry. Thus, sugar, beer and certain types of alcohol are subject to a sales tax (taxe de consommation), while cigarettes are subject to a circulation tax (taxe de circulation) in the amount of 40 percent. On the other hand, certain imported commodities are classified as luxury products and are subjected, in addition to the import duty, to a surtax (perequation positive).

29. Although the economic reforms of 1963 did not directly affect the manufacturing sector in the sense that any private industrial enterprises were nationalized, nevertheless the nationalization of banks and of foreign - 69 -

trade greatly changed the environment in which private industry could operate, for example as regards pricing, the ability to obtain the necessary imports investment sanctioning, and credit. Furthermore, they at least cast a doubt on future intentions of the government.

30. Recognizing such fears and associated difficulties, and with the aim of restoring confidence in the private sector and attracting foreign capital, the government in 1968 established a National Investment Committee under the chairmanship of the Minister of Planning, with the major function to coordinate the activities of the various branches of the government to expedite decisions on proposed new investment projects. In March 1968 a Law on the Distribution of Economic Activities was passed enumerating the activities which in principle are reserved to the public sector. These are: extraction of precious stones, minerals and sea salt; the production and distribution of alcohol and alcoholic beverages, arms and ammunition, and pharmaceutical products; the production, refining and distribution of petroleum products; the production of chemical products other than fertilizers; the exploitation of major dams and irrigation systems; further, banking and insurance, foreign trade, wholesale trade in imported products, rail and air transport, and post and telecommunications. Notwithstanding the state monopoly in these activities, permission may be granted to private investors to undertake such activities for a period not to exceed 20 years.

31. All other industries are open to private investors, but if the public interest so dictates (e.g. in case of lack of inadequate response on the part of the private initiative in a field, public order, unjusti- fiable price increases), the state may step in and undertake an activity, otherwise open to private enterprise in competition with private firms on "7equal terms". In vLew of the fact that "public interest" is a concept subject to a wide range of interpretations, and that by the nature of things the state never competes with a private firm on equal terms, the new law did little to remove apprehensions on the part of potential private investors. Only two projects have come forth in the private sector since the law was passed. One is the Angkor hotel (Air France) in Siem Reap, and the other a milk plant sponsored by Comin Khmere, an originally Danish firm established in Cambodia.

3. Constraints

32. The limited size of the domestic market and the absence of a mineral resource basis place import limitations on rapid industrialization. Of no less importance is the lack of technical and managerial skills. But aside from these factors which are inherent in Cambodia's situation, there are certain other elements, some administrative and institutional, some political, which put further constraints on industrial growth but which are capable over time of being remedied. One of these is the lack of managerial autonomy in public enterprises leaving no room for incentives to improve efficiency. Another is discrimination against the private sector in various forms. Credit policy and electricity rates also fall in this category. - 70 -

Public Sector

33. The establishment of state enterprises, dictated in the past by social considerations, has not been based on sound technical and economic feasibility studies. Rather projects have been received from foreign donors, mostly under grant aid, without much scrutiny into the quality of the equipment and the prospective cost of production. As a result, plants of uneconomic size were set up (e.g. cement plant with annual production of 50,000 tons) and with technically outdated equipment. In other cases, such as the plywood factory of SONACO, the factory was built without any prior appreciation of the size of the market.. Since costs of production and quality made exports impossible, the plant initially had to operate 25 percent of its capacity. Techniques were not always adaptable to local conditions. For example, glue was used which was unsuitable for that climate, with the result that plywood was decomposed. Because of a mis- understanding, a sugar refinery was built before the establishment of a sugar mill which would transform the palm sugar into refinable semi-processed brown sugar. Further, sources of raw materials had not been ensured, nor had the needs of foreign exchange for raw materials, spare parts and other inputs been estimated.

34. The management of most state enterprises leaves much to be desired. Managers were often chosen on personal rather than any other grounds, and there is a general shortage of cadres in key technical, financial and administrative positions. Also, top level management is burdened with too much detail, leaving no time to deal with the major problems, lacks responsible advice and is faced with the passivity of subordinates. Workers had to be trained either on the job with the help of foreign experts or by sending cadres abroad (mainly to China, Czechoslovakia, and France) who in turn trained apprentices.

35. A further difficulty arises from the long delay or even the inability to get spare parts for machinery, since the models which have been installed have been discontinued in the countries of supply. This necessitates the production of these parts in local workshops with the attendant problems of delay, fitting, etc.

36. It is very difficult to pass on the operating efficiency of state enterprises since, to a significant extent, inefficiencies have been thrusted upon them. Though the majority of state enterprises show a profit, this does not necessarily imply efficient management. Of course, the opposite is also true. In the first place, though the enterprises have taken on the form of public corporations, their managerial autonomy is virtually non-existent. The prices which they pay for their inputs are set by the government and, in many instances, at very high levels (e.g. jute) for social reasons. In turn, prices of the final products are also set by the government, generally on the basis of cost calculations, but in certain instances at levels below the actual costs of production, so that the enterprise receives a subsidy (e.g. cement). State enterprises present the easiest outlet for the increasing number of graduates from secondary schools and universities. Thus, almost all state undertakings are over-staffed to a varying degree. In addition, state enterprises provide fringe benefits - 71 - such as free lodging, etlectricity, water, medical care, to their employees which have a purely social character, and they contribute to various social funds. Sometimes, part: of the revenue reflects the exploitation of a fiscal monopoly. S.K.D., for example, which has the alcohol monopoly, serves in fact as a fiscal agent. Further, the compulsory intermediation of SONEXIM adds to the costs of production due to the commission that has to be paid for doubtful services or the delays that frequently occur. Finally, Cambodia has been overcharged for certain industrial units and this inflates annual depreciation allowances. In the light of these mrearks, the financial performance of state enterprises reveals very little, if anything, about their actual efficiency.

37. Despite past and present difficulties, the present thinking of the responsible authorities continues to be guided, by and large, by state capitalism, despite a certain degree of dissatisfaction, and they appear determined to go ahead with the projects listed in the Second Five-Year Plan, entrusting their execution to existing or new state enterprises.

Private Initiative

38. While it is true that the introduction of "Khmer socialism" in 1963 did not by itself greatly alter the position of private industries vis-a-vis public enterprises, the core of which had already been formed, the new policy introduc:ed a high degree of uncertainty and widened the mutual distrust betweern the business class and the administration. Busi- nessmen came in effect to be simply tolerated. Strict restrictions imposed on imports of industrial inputs, particularly raw materials, created serious problems and costly delays to industrial firms. The authorities, suspecting that the requests for imports of the firms had been inflated in order to build up foreign exchange accounts abroad or sell a part to the domestic market at much higher prices, would slash, if not refuse to grant the foreign exchange needed. Such an attitude naturally led firms to ask for more than they actually needed in order to obtain at least as much as they had need for, thus setting in a vicious circle. In 1968, for instance, only 25 percent of the demands for foreign exchange were satisfied and allocations depended on factors unrelated to the merit of the case. Businessmen had to have recourse to the parallel market at a premium, or either do without, if not use clandestine sources of supply. Many firms were forced to curtail or discontinue production.

39. The cumbersome licensing procedures and, in particular, the intermediation of SONEXIM in foreign trade transactions create additional problems to businessmen. SONEIXIM lacks experienced personnel, and delays are long and numerous; in any case SONEXIM more often than not limits its real function to the additional processing of documents and the collection of a fee. Even in cases where calls for bids are placed, the ordering firm indicates the desJirable sources of supply and in effect adjudicates and makes the final selection. - 72 -

Bank Credit

40. An adverse factor in the promotion of industrial activitv has been the sharp reduction in short-term bank credit during the period 1964- 68, following the tight money policy applied by the Central Bank. Figures concerning the allocation of bank credit by sector are not available. Bank credit to industry and commerce rose from CR 329 million in 1955 to CR 1,992 million in 1963, dropped to a low CR 722 in 1964 and, increasing gradually, reached CR 2,141 million in 1968, which is very close to the 1963 level. Moreover, in allocating credit, commercial banks have given priority to the working capital needs of the larger state enterprises. Medium and long term bank credit has been relativelv insignificant, very erratic and not easily available to private undertakings. The two commercial banks are wholly-owned by the Central Bank who professes a negative attitude towards small- and thus a big part of private - industries.

41. The National Investment Fund (Caisse Nationale d'Equipement - C.N.E.) whose function is to provide medium- and long-term loans to enterprises for investment in plant and eauipment in the industrial and agricultural sectors, has advanced CR 883 million in medium- and long- term credits to industrial enterprises during the period 1958-68. The bulk of this credit has been allotted to state (58 percent) and mixed enterprises (20 percent), and only the balance (22 percent) to private firms. C.N.E. acts basically as a financial agent for the government. It disburses the budgetary appropriations for the investment projects provided in the Plan, the proceeds from the dividend remittance tax (taxe exceptionnelle d'equipement) which have been earmarked for investment in fixed capital, and the funds allotted for state participation in state and mixed enterprises. The financial resources of C.N.E. include an endowment from the state, which rose gradually from CR 30 to CR 170 million, and advances from the Treasury. It does not accept deposits. In view of the limited resources at its disposal, its impact on the promotion of industrial investment , particularly in the private sector, has not been felt.

42. To fill the gap, legislation has been proposed to transform C.N.E. into a state development bank. The objective of the new bank (Banque Cambodgienne de Developpement - B.D.C.), which is conceived rather broadly, will be to contribute to the realization of investment projects promoting the economic development of the country by according financial and technical assistance. Priority, however, is established for projects leading to the expansion of the agricultural sector. Indus- trial investment projects follow. The activities of the new bank include further the financing of public works and the disbursement of funds placed at its disposal, for the implementation of the Plan and the Investment Program of the government. B.C.D. may participate in the share capital of state and mixed enterprises.

43. The resources of the B.C.D. initially will be the assets of the C.N.E. and government subsidies. The new bank, however, may borrow additional funds from the government, financial institutions, the local money - 73 - market, and national. or international organizations. B.C.D. will accept deposits of individuals and public entities and will have access to the rediscounting facilities of the central bank.

44. The successful operation of the new bank will depend to a considerable extent on the amount of resources it will be able to muster and the competence of its management. Its terms of reference seem too wide to permit the new institution to make a new start in providing financial assistance to, and generally promote, private industries in an efficient way.

Infrastructure

45. The government's efforts to provide adequate infrastructural facilities have been generally well directed as far as transport, communication and the like is concerned. In electricity, although excess generat- ing capacity has been installed at Phnom Penh, the distribution has been highly inadequate. All major industrial enterprises have installed their own generators because of voltage fluctuations in the public system, irregularity of service, and higher price of the electricity supplied. The price at which E.D.C. sells electricity reportedly exceeds by 30-40 percent what it costs to be produced on an individual basis. Private capital has thus been tied up in otherwise tnnecessary installations.

Price Controls

46. The government is trying to regulate the market mechanism by fixing the prices of many raw materials and industrial products. The theory is that monopolistic situations will inevitably emerge, even if they do not yet exist, as a result of the small size of the market. To avoid duplication of facilities and the attendant waste of resources that are assumed would resEult in a competitive system, the government, in sanctioning new invesitment, is in effect trying to prevent the establishment of competitive units. The fact is not appreciated, however, that monopolies of ten may only exist in outward appearance, in view of the presence of close substitutes, and that foreign competition can curb local monopolies far more effectively than any other form of state control. As it is, the system of price control, while seemingly serving the public interest, in effect contributes to general business uncertainty, corrup- tion, and mutual distrust between government and private enterprise.

4. Summary and Outlook

47. The limited size of the domestic market and the absence of a mineral resource basis place important limitations on rapid industrialization. E.lements that hamper industrial development further are the lack of technical and managerial skills, the unclear role of private initiative, the preference for the setting up of state enterprises irrespective of thei:r - 74 - efficiency, the restrictions on imports of industrial raw materials and spare parts and the imposition of state intermediation in all foreign trade transactions, price fixing, and an inflexible bank credit policy.

48. Some of these problems are inherent in Cambodia's situation but many are a result of past decisions and offer scope for action towards a better climate for industrial development. For instance, the role of private initiative in the development effort of the country could be prop- erly delineated. This, of course, touches on the role to be played by the enterprising non-ethnic elements who, as a resul.t of the declared policy to Khmerize industry and trade, have in the past been gradually alienated from the system. The belief that the institution of public enterprises is the proper instrument for promoting industrial development in Cambodia is not, of course, based on economic considerations alone, although there are instances where it is quite justified to assume that private initiative and capital is unlikely to come forth on the required scale. Wha-t 'will be needed is a more explicit use of financial and economic criteria besides the concept of public service in delineating areas reserved to the public sector, and a less ambiguous policy regarding introduction of state competition in areas Totherwise reserved to the private sector".

49. Unless there are good reasons to believe that public management is more efficient than private, or unless private initiative is disinter- ested in economically justifiable projects and thus it is not forthcoming, there is no good case for establishing a public enterprise. It may also be advisable in some cases for the government to divest itself of enterprises which are demonstrably inefficient, or too unimportant to be abl.e to perform the function of preventing an alleged private monopoly situation (e.g. SONASCTiE).

50. The financial performance of state enterprises, as noted, reveals very little, if anything, about their actual efficiency, as a result of the discharge of functions alien to their oblectives, and of the price and mar- gin controls at all levels. A number of state enternrises subsidize in effect the farmers by paying prices for raw materials above the competitive level. It would in many cases be more appropriate if the enterprise paid the competitive price and the government the subsidy through other means to the recipients. Where an enterprise is to perform a public service that a private business cannot perform, the statute of the enterprise (or a decree) should set the objectives for the enterprise while leaving it to the management to choose the most economical way for the fulfillment of the set ends. Removal of fixed prices might in some cases lead to financial losses which, if appropriate, could be borne by the government, and if not, ought to lead to a reappraisal of the whole operation. In this way, the independence of management in the day-to-day operations of the enterprise would be safeguarded, while its performance could be appraised on strictly financial results.

51. Price controls are also applied at present to raw materials and industrial products in the private sector. Aside from their questionable - 75 - effectiveness, they le!ad to all sorts of abuses. The general remark can be made that social objectives are in most cases better pursued directly by the government and not through the price system.

52. As regards imports and exports, the adverse effects of the state monopoly through SONEXIM on manufacturing industry, and in particular its effect as a deterrent for private foreign capital to enter into Cambodia, does not seem to be well appreciated by the government. SONEXIM in many respects remains a superfluous intermediary. It continues, and most probably it will continue, to make use of the services of private operators whom it set itself to supersede. Private exporters continue to put into contact Cambodian sellers with the foreign buyers. For many products, private importers prepare the orders and then pass them on to SONEXIM, which appears as the official importer. Even in the case of calls for bids, which SONEXIM haLs tried to generalize, it is the ordering firm which in effect adjudicates and makes the final selection. Thus, without safe- guarding against frauds, it only adds to costs of distribution, both in terms of money and time.

53. The role of SONEXIM could be confined to that of a regulatory state agency for specific types of commodities, insuring that exporters and other traders do not abuse their power, e.g. by driving the prices of agricultural products to abnormally low levels. For this purpose, SONEXIM may perform a more useful function if it is divested of other activities for which it is not equipped. As it has in fact recently been proposed, SONEXIM might continue to control a portion of the export trade including rubber, paddy and maize.

54. Among the other problems affecting industry, the reduction in industrial rates for electricity, and improvement in the quality of service, are technica:L problems and should be amenable to a solution without raising any thorny political issues. One should think that the same is true with bank credit which ought to take a more consistent and flexible form, ensuring a more reliable supply of funds to the private sector and with less discrimination. In the absence of a capital market, the availability not only of short- but also of medium- and long-term credit becomes an important element in stimulating industrial production and investment. Re- moval of the state monopoly in the banking sector might be a significant contributory factory to the improvement of industrial performance.

B. Structure of Industry

55. In(lustrial activity is carried out by state, mixed and private enterprises. State and mixed enterprises are organized in corporate form while in the private sector unincorporated enterprises (sole proprietorships and partnerships) are predominant. Industrial undertakings for the most part have an artisan character. It is estimated that only 8 percent of the industrial units have annual profits exceeding 100,000 riels. - 76 -

Miting

56. The natural endowment of the country in the domain of minerals is very limited. As a result, mining activitv is of little economic significance and is confined mainly to the extraction and processing of limestone, phosphates and precious stones. The government, however, has decided to carry out a thorough survey of the country's mineral resources and, to this end, the second Five-Year Plan provides for 74.7 million riels to be spent during the period 1968-72 on surveys. The minerals to be surveyed include tin, oil phosphorites, precious stones, hydrocarhonds, and kaolin. A study is also to be made concerning the technical possibility of enriching the available poor bauxite ores. A new mining law whi-ch was promulgated in 1968 stipulates the conditions for obtaining mining exploration permits and concessions. It is notable that although in principle permits and concessions are reserved only for Khmere citizens, such rights can be granted to foreigners by a special decree of the Council of Ministers.

The Cement Industry

57. SONACIMENT operates the only plant in the field at Chakrey-Ting (Kampot). The factory utilizes basically limestone and clay which are extracted locally. Small quantities of other minerals, the spare parts and other materials are imported, mainlv from Red China. Production during the period 1965-8 amounted to 55-60,000 tons per annum, covering about 1/3 of total consumption. With the extensions nearing completion, it is expected that production will increase to 100,000 tons by the end of 1969 and to 150,000 tons by 1970. The increase in production is expected to cut costs substantially, which presently are well above international prices. The output produced is sold to the state commercial enterprise SONAPRIM, which has the monopoly of distribution for cement. In view of the fact that wholesale and retail prices are fixed bv the government, SONACIMENT is compelled to sell at a price which is below its actual cost. SONEXIM subsidizes in part the deficit from the proceeds of a duty levied on the imported cement.

58. The second Five-Year Plan envisages the construction of a second cement factory. As of the moment, no feasibility study has been produced. According to a pre-feasihility study (avant-project) prepared by SONACIMENT, the demand for cement is estimated to increase at a rate of 10 percent per year and is expected to reach 365,000 tons a year by 1974. Given the fact that the annual production of the existing factory after 1970 will be 150,000 tons, it will be necessary to import 215,000 tons by that time and increasing quantities thereafter. It is suggested, therefore, that a new plant be built in the same location where the existing one, with a capacity of 300-600,000 tons, to be completed by 1973. It is assumed that operation at 75 percent of capacity (225,000 tons) ensures profitability. The cost is very roughly estimated at $12 million. Studies, though not yet definitive, indicate the existence of limestone deposits of at least 80 million tons in Phnom-Loang (5 niiles from the location of the present plant), and 10 million tons of clay in Phnom-Sar (8 miles from present site). Water appears to present no problem. - 77 -

59. Aside from the need for a more precise estimate of the available deposits of basic minerals, the minimum optimal capacity of the proposed new plant will have to be determined fairly accurately in order to ensure efficient operation. Of equal importance is the assessment of the future size of the market. An estimate of the rate of growth of the demand must certainly take into consideration the extra demand for cement to arise from the construction of the Stung Chinit, Battambang and Prek Thnot (Secornd phase) power and irrigation projects now under study and the way they will be phased. Moreover, the construction of a number of new hotels now in the planning stage (and more generally the growth of tourism in the longer pull.) will further stimulate demand. Finallv, if construiction, now at low ebb, picks up as a result of the revival of economic activity, demand will receive a further boost. It follows that the realization and timing of these and other infrastructural projects will have a bearing on the necessity of a second cement plant: and on the proper time for its initiation.

The Fertilizer Indust:y

60. In 1963, the Societe Khmere des Phosphates (SOKPH-1OS) was estah- lished to exploit the! deposits of phosphorite in Tuk-Meas (Kampot). State participation in the share capital amounts to 83 percent, while the minority represents French and private Khmere interests. The process involves pulverization of the rock and sacking. The quality of the phosphates thus obtained leaves much to be desired, in view of the low content in P2 05 (15- 16%). To raise the content in P2 0 5 to the desirable level, it is necessary to import much richer phosphates. The annual production, which amounts to 12,000 tons, covers about one-half of the total consumption at the present time. SOKPHOS sells its output to OROC, which is the exclusive distributor of fertilizer in the country, at centrally fixed prices. Expansion is not envisaged as the known deposits of phosphorites hardly suffice for the next decade. No thorough survey had been made at the time the decision was takenl to build the plant to get a precise estimate of the quantity of the available deposits. On the other hand, the location of the plant does not lend itself to processing imported phosphorites. To avoid an eventual close- down of the factory and to meet the increasing need in fertilizers, the Government plans to search for new deposits. Failing this, the idea is also explored whether or not it would be advisable to build a plant with a capacity of 100,000 tons in Sihanoukville for the processing of imported phosphorites.

61. The Plan provides for the construction of a plant for the production of 35,000 tons of urea annually to be located in Sihanoukville and in the vicinity of the oil refinery. It will utilize the residual gases and the light products of distillation of the oil refinery. The cost of the unit is roughly estimated at 500 million riels. The factory is to be operated as a mixed enterprise, with a specialized foreign firm as a minority shareholder. Since nitrogenous fertilizer will have to be used by the farmers in certain proportions with phosphates, it is proposed that another plant: be built, in which the two types of fertilizer will be mixed and marketed ready to use. The capacity for the second plant is fixed at - 78 -

150,000 tons. Its cost is estimated at 70 million riels and its operation is to be entrusted to a state enterprise. It is not clear whether the marketing of the output will be entrusted to the latter, to a new enterprise, or to OROC.

62. The planning authorities claim that the disadvantage of the small scale of the proposed 35,000-ton urea unit (modern plants elsewhere have a capacity of 600,000 tons) will be offset by economies in transportation and handling as well as from the very low price to be paid for the by- products of the oil refinery which otherwise would be wasted. A feasibility study should determine the validity of this claim. On the other hand, there is no agreement among experts concerning the possibility of using the mixture of phosphate and urea in all ricefields. This renders conditional the construction of the second mixing plant. Finally, it is worth noting that the present level of consumption of urea does not exceed 5,000 tons per annum and is expected to reach 50,000 tons only after 10 years. All in all, it is very likely that the construction of a urea plant at this point may be rather premature.

Precious Metals

63. Zircons, sapphires and rubies are obtained by unsophisticated methods in the Battambang and Stung Treng provinces. The precious stones are extracted by private individuals who sell to the recently formed SONEX- PIEROR. It is estimated that over 80 percent of the stones discovered are smuggled out of the country. The Plan provides for an expenditure of 6 million riels on surveys in the regions of Ratanakiri and Pailin during the period 1968-72. Presently, SONEXPIEROR operates a small cutting workshop. A major bottleneck is the severe lack of experienced cutters. Ex- pansion of SONFXPIEROR is conditioned on the possibility of cutting down the illegal traffic of precious stones, the findings of the surveys and the ability to form skills.

Food Processig

64. Paddy is husked in a great number of small-scale rice mills (1,468 units) located mainly in the villages. The lack of modern rice mills affect not only the yield in rice obtained but also its quality (it develops a yellowish color unless husked and shipped immediately) and price, particularly of the exportable quantities. Moreover, under the existing system, the utilization of the by-products is very difficult. On the other hand, the many varieties of rice present milling problems, in the sense that the apparatus of the mill cannot be adjusted to the numerous variations of the kernels and the resulting high percentage of broken kernels lowers its commercial value. To cope with these disadvantages it may be worth exploring the possibility of husking the rice to be exported in modern mills and immediately prior to its shipment from accumulated stocks of paddy. The centralized processing would also make possible the recovery of the oil from the rice brans as well as of the by-products of the extraction. - 79 -

65. A private K'hmere group is studying the possibilitv of setting up a flour-mill in Sihanoukville. All flour used is now imported. A small factory produces manioc flour. 14 bakeries and confectioneries supply adequately the domestic market. Rice-based noodles and related products are produced locally 'by 17 small-scale factories and in quantities sufficient to satisfy the existing demand. Soya-based condiments are produced both on an industrial and semi-industrial scale by over 40 firms.

66. Cambodia has been a traditional exporter of brown sugar (palm sugar) to S. Viet Nam, Hong Kong and Singapore. There are now 35 small- scale sugar mills prodiucing this type of sugar. But the shift of consumers' demand to white sugar and the loss of these markets created difficulties to the farmers. To cope with the problem and to conserve foreign exchange, the Government set up a sugar refinery to refine the locally produced brown sugar. The experiment was fraught with difficulties, the major one being that the brown sugar (masse cuiite) could not be treated directly due to its low content (35-40%) in sacharose. As a result, additional facilities had to be built to concentrate the brown sugar to an 80-85 percent sacharose content. In the meantime, the resumption of the exports of brown sugar to S. Viet Nam resulted in a substantial reduction of the available surpluses, and SONASUCRE now operates to a great extent with imported brown sugar (sucre roux). The production (11-13,000 tons annually) does not cover the local demand and an estimated 7-8,000 tons a year are imported, mainly through illegal channels. Production is expected to reach 16,000 tons by 1970. however, the costs of production remain well above international prices and have been sharply increased further after the devaluation. 'I'he distribution is effecled by MAGETAT at centrally fixed prices.

67. The second Five-Year Plan provides for the construction of a sugar refinery in Kampong Kol. A study has been prepared for a 12,000-ton plant under a set of specific technical assumptions which must be verified. The estimated cost of the plant is 250 million riels and the sugar to be produced is expected to sell at competitive prices. The 150,000 tons of sugar cane needed for the re!finery will be supplied from 3,000 ha., one half of which to be cultivated by 500 families and the other half by SONASUCRE. According to the studv, if the estimated yields will obtain and interest is paid (or imputed) on the capital employed, the undertaking will not be profitable before a decade. So far, the cultivated area is limited to a few hundred liectares, while the yield in sugar cane is less than 40 tons ner hectare, as opposed to 50 tons assumed in the sttudy. It fol 1.oWs, that social considerations, suclh as foreign exclhange savings, diversificatiop of agricultural nroduction, employment, and the like, loom large in a decision to adopt the project.

68. In the dairy products field, the government has established with the aid of the FAO a pilot dalry in a state farm at Stung Meanchev. The dairy collects the local milk which, because of climatic conditions, has a high content of fats and mixes it with imported powdered milk (reconsti- tuted skim milk). To stimulate the development of a livestock of milk- cows, the price naid to the producers for their milk is very higlh. The fact, however, that th,e powdered milk is provided bv the FAO free of charge, makes it possible for the price of marketed milk to remain at - 80 - acceptable levels. The farm will. supply pasteurized and homogenized milk to the Phnom-Penh area. Production has just started an(d is expected to reach 3,500 pints (2,000 liters) a day. In 1968 the mixed enterprise Societe Khmere pour l'Industrie Laitiere (SOKILAIT) was establishied for the production and distribution of dairy products. The participants are the state commercial enterprise Magasin d'Etat pour l'Alimentation (MAGETAT), The Australian Dairy Produce Board and the Danish firm COMIN KHMERE. The shareholding interest of MACETAT is limited to 20 percent of a total capital of $1 million. SOKILATT will start the production of concentrated milk early in 1970. It will use as raw materials skim powedered milk and dis- solved fats. Concentrated milk is now imported, at the rate of CR 80 million a year. The importation of similar products will be prohibited as soon as SOKILAIT will be in a position to satisfy the local demand. The company has been granted duty-free importation of equipment, tax-exemption on profits for 2 years, assurance that the necessary foreign exchange for the importation of raw materials will be supplied, and a guarantee of non- nationalization for 20 years. An affiliated private company, METAL-KHMERE, will commence concurrently to manufacture the tinned metal cans that SOKILAIT needs. METALKHMEHE expects to supply tinned metal cans to other canned goods producers. The possibility of supplying metal containers for oil lubricants is under studv by the oil companies.

69. Lard and ground-nut oil are produced in 16 small scale oil mills, including a modern vegetable oil refinery. Recently, an oil mill utilizing the bran of the rice has been established in Phnom-Penth with an annual capacity of 3,000 tons. Vegetable oil production is estimated roughly at 10,000 tons a year, a quantity which covers the bulk of local demand. Small quantities of refined oil are imported for the most sophisticated consumers and foreigners. The owner of a coconut tree plantation plans to install a small oil mill in his plantation to produce coconut oil, utilizing inferior quality and surpluses of copra in the area.

70. The Plan provides for the construction of an oil mill in Sihanouk- ville with a capacity of 15,000 tons of refined oil. It will utilize cotton- seeds, ground-nuts, kapok and corn, and the entire output is to be exported. The cost of the plant is roughly estimated at 100 million riels. The project, however, should be studied in connection with the prospective development of new coconut plantations along the southwestern coast. The latter scheme seems to present an interesting possibility for industrial processing catering mainly to foreign markets. The Plan further envisages setting up a starch factory (amidonnerie) whichi will process 150,000 tons of corn annually. The 90,000 tons of starch to be produced each year are to be exported. The relatively small size of the plant (processing 500 tons of corn a day versus 800 tons elsewhere) is not expected to affect the profitability of the undertaking. The cost is estimated at 190 million riels. Finally, the Plan provides for the construction of a plant for the production of animal feed. The rationale for its construction is that it will utilize the by-products of the oilmill, of the starch factory, of - 81 - the sugar refinery at Kampong Tram and of the brewery, and the fish meal to be produced by SONACOP. The capacity is estimate at 60-65,000 tons of feed-stuffs annually, mainly for foreign markets. The availability of cheap feed-stuffs would also help promote cattle-raising, which is one of the goals of the Plan. Its cost is put roughly to 50 million riels. No feasibility study have been produced yet for any of these related schemes. The realization of this set of projects is conditioned on the possibility to increase the production of corn to such an extent as to develop a continuous surplus for industrial use. The production of corn, however, after reaching a peak of 204,000 tons in 1964, has dropped to a low 117,000 tons in 1968. The decline should be explained partly as a result of the decline in the area cultivated from 136,000 ha. in 1964 to 100,000 ha. in 1968) and partly as a switch to other cultures, such as vegetables (mainly beans), ground- nuts and manioc. Thus, the production of corn can be raised to the desired levels only through a proper price policy for all products which are close substitutes in production.

71. In the canning and preserved fish field, a factory in Takhmau and 3 other smaller firms produce canned vegetables, sea-fish and meat. "Tuk trey" is prepared in jars and cans in numerous artisan shops (63 units) mainly in the region of Kampot. Both sea and lake fish is ued. To provide an outlet for the surpluses of the fishermen in the Koh King province which abounds with fish, the Government has recently established a canned-fish and fish-meal factory. The plant is operated by the state enterprise SONACOP. The installation of a frozen shrimp unit in Sihanoukville is still in the exploratory stage. A French group plans to organize fishing on an industrial basis in the territorial waters of Cambodia and to establish a plant for deep frozen shell-fish in Sihanoukville for exports. Finally, an agro-industrial project has been proposed to the government by an Australian group, whic'h combines cattle-raising and meat packing. Both projects have been approved in principle by the government authorities over a year ago. The Beverage Industry

72. The production and distribution of alcohol and spirits is a state monopoly entrusted to S.K.D. A number of small private distilleries produce alcohol, which they are obligated to sell to S.K.D. Rice, corn and palm sugar are used as raw materials. Prices are centrally fixed each year. Total production of pure alcohol reached 75,000 hl. in 1968. Soft drinks are produced mainly by 3 large firms, supplying 90 percent of the market, while a large number of small-scale firms (125 units) supply smaller quantities. Total production in 1968 is estimated at 175,000 hl. Two of the large soft drink makers also supply ice, which is made in a number of small esta- blislhments scattered throughout the country. Wines are totally imported. So was beer until 1968, when the brewery of S.K.D. at Sihanoukville commencecl operations. Its production will reach 100,000 hl in 1969 and is expected to increase later, thus reducing imports substantially. The malt is imported through SONEXIM. The location of the brewery is not oriented toward the - 82 - centers of consumption and this shotild affect the cost of distribution. Late in 1967, S.K.D. started the production of orange juice in a newly establislied unit to absorb agricultural surpluses. Production is expected to increase from its present level, of 1.5 to 5 millioni bottles by 1972. Still S.K.D. will be controlling a very small proportion of the soft drinlcs marlket (5 percent). The imported alcoholic beverages are distributed by S.IK.D). in its own retail shops, while the alcoholic drinks which it produces are also sold to private wholesalers and retailers. The beer and the orange juice produced by S.K.D. are distributed by the private firm B.G.I., which has a Ihighily developed national net of distribution. S.K.D. intends to utilize the carbonated gases of the brewerv to produce sodas and otlher carbonated beverages.

73. A problem which the planned new sugar refinery encounters is the regular discharge of the molasses. The dumDing of the molasses into the river hias been ruled out to avoid pollution of the waters of the St np Sangker. On the other hand, the animal feed unit will absorb the molasses only of the existing sugar refinery at Kampong Tram. The easiest way out is to transform them into alcohol. To this end, the Plan provides for the construction of a distillery near the new sugar mill at Kampong Kol with an initial capacity of 3,000 hl annually. The cost is estimated roughly at 50 million riels. Flowever, the domestic consumption of alcohol is relatively stable (100,000 hl a year), while S.K.D. absorbes already the molasses of the Kampong Tram sugar mill. Substitution of molasses for broken rice, altlhough desirable, is not feasible due to technical difficulties and established hablts of the consumers. In view of these considerations, it is proposed to re-distill the alcohol to be produced in a new unit which S.K.D. will install and export part of it. S.K.D. has been charged with the task to survev the markets of lhong Kong and Singapore. Further, 1,000 hl of the alcohol will be produced in the form of rum, which is now imported. A feasibility study has not been prepared yet. Evidently, the project is basically conditioned on the realization of the planned sugar mill as well as on the future export possibilities.

The Tobacco Industry

74. The tobacco industry comprises both a traditional and an industrial segment. In thg former, the tobacco is dried and sold in bulk in markets where small merchants sell coarse cigarettes made on the spot. There are today 162 tobacco leaf drying ovens in the country. Of much greater importance is the industrial segment, which is made up of 3 undertakings producing 3,500-4,000 tons of cigarettes a year. It is estimated that 15-20 percent of this production is exported in a clandestine fashion to S. Viet Nam, because prices are higher and, partly, because of customer allegiance. Manufacture de Cigarettes du Cambodge (M.A.C.), which is a mixed enterprise with 20 percent state participation, akccounts for 60 percent of the industrial production. - 83 -

The Textile Industry

75. The only cotton-gin and spinning-mills in the country belong to SONATEX and are integrated in its 2 factories at Kampong Cham and Battam- bang. The capacity oF the spinning mills is 25,000 spindles and their annual output 3,000 tons. They use local cotton. Fine cotton or synthetic fibers are imported. SONATEX operates 2 weaving mills which produce textiles of current consumption. Annual output is 8-9 million square meters. In the private sector there are 3-4 fairly large weaving mills and another 60 of sma:Ller scale while 3 firms produce cotton and nylon fishnets. SONATEX supplies one half of the needs of the private sector in cotton yarn, the rest being imported. The 2 most important private textiles mills have dyreing and finishing units which also serve the smaller weaving mills.

76. Knitwear is relatively less important. About 20 small-scale enterprises in Phnom-Penh produce underwear and hosiery. Clandestine imports from S. Viet tiam are fairly extensive. One firm produces absorbent cotton-wool and dressing materials. Silk production is limited. Due to religious reasons, this activity is carried out by Vietnamese. The major part of the local demand is satisfied through imports from Japan or China. Silk weaving, involving the production of "sampots" and 'sarongs', is the object of artisan activity. The market is expanding and is expected to increase further with the growth of tourism.

77. In view of the increasing demand for synthetic textiles, the Plan provides for the construction of a spinning mill for synthetic fibres and long staple cotton. I'he latter is expected to be supplied locally, after the successful experimtents of the Ministry of Agriculture. The output is to be used for the production of stuffs for men's clothes and fine lingeries. The capacity of the spinning mill (25,000 spindles) will cover the domestic needs in 1972. Costs of construction are estimated at 190 million riels. Moreover, the Plan envisages the construction of a dyeing and finishing plant, with a capacity of 70 tons a day and an estimated cost of 70 million riels. The combined project will talke the form of a mixed enterprise. The two large private textile mills have been invited to participate. The rationale for such a project is to build an optimum plant, to introduce modern techniques, particularly concerning the dyeing and finishing of synthetic fabrics, to prevent the abuse of the monopoly of the existing two large firms, and to ensure the Khmere character of the enterprise. The participation of a foreign specialized group will ensure, in addition to the know-how, the cooperation among the heterogeneous groups. So far, the private firms seem reluctant to join. The feasibility study for the project has not yet been prepared. Although there seems to be room for import substitution in this field, some of the reasons offered for the project could hardly claim rationality.

78. [Jntil recently jute has been grown on a familial basis in the regions of Battambang and Kandal and on the banks of the Mekong. The small quantities produced have been used to make string, hammocks, straps, - 84 -

and other similar products. Jute sacks have always been imported. Mainly to diversify the agricultural production and conserve foreign exchange, the government has tried to promote the cultivation of Jute and kenaf on a large scale for industrial use. SOKJIJTE has been instrumental in the propagation of these cultures, now to be found in the provinces of Battam- bang, Pursat, Kampong Chhhaz, Kompong Thom, Siemrap and Kandal. Aside from the technical advice it offers, SOKJUTE has taken an inventory of the suitable regions for the promotion of jute and kenaf and supplies the cultiva- tors with machines and motor pumps on credit, seeds, fertilizers, and makes advances on the forthcoming production. Production of jute and kenaf rose from 160 tons in 1965 to 6,000 tons in 1969, and is expected to reach 15,000 and 21,000 tons by 1975 and 1979, respectively. SOKJUTE's jute- mill in Daunteav (Battambang) began operating in 1967 and has reached maximum capacity (5 million sacks) in 1968. 300 tons of string and 400,000 m. of canvas a year are produced as by-products. Costs of production are about 30 per cent higher than the CIF price of the imported sacks. A major reason for the elevated costs is the very high price SOKJUTE has to pay to the growers of jute and kenaf. In setting the price at high levels, the government aims at providing the farmers with a strong incentive to expand production. The sacks to be used for the exported rice are sold to SONEXIM, while the remainder are disposed of by SOKJUTE itself. Prices in both cases are fixed by the government. An additional 6-7 million sacks are imported each year to satisfy the local needs.

79. SOKJUTE had prepared a pre-feasibility study before the develua- tion suggesting the establishment of a second plant in the same location at a roughly estimated cost of 168 million riels to be completed by 1973. The capacity is fixed at 10 million sacks. Under the assumption that demand will grow at a rate of 10 percent annually, it is estimated to reach 15 million sacks by 1979. However, if the rate of production of rice can be speeded up through irrigation and flood control systems, it is conceivable for the demand for sacks to rise much faster after 1975. The region of Battambang is chosen not only because it is the major center of production of jute and kenaf, but also the major center of consumption of jute sacks. Moreover, the problems of labor supply are more easily resolved, while general expenses may be reduced by establishing a common management for the two mills. However, the success of the project is conditioned on several important factors. They include in the first place an appraisal of the future of jute products in the face of the development of synthetic substitutes. It is interesting to note in this context that Pakistan, India and Thailand are promoting the production of jute. Indonesia, on the other hand, has set up a factory for the production of sacks using synthetic fibers, but the end product seems to lack the advantages of jute sacks. Morevover, Japan, though a producer of synthetic fibers, has not tried to develop this type of industry, importing instead jute and kenaf. Fur- ther, technolocial developments in the transportation of rice may severely limit the use of sacks. Thus, if rice can be moved to Sibanoukville in containers, stored in silos and shipped in bulk, obviously the demand for - 85 -

jute sacks will be reduced drastically. Moreover, in view of the heavy reliance of the new mill on the volume of rice production, the possibility of exporting a substantial proportion of its output in the event of a crop failure is of great significance. In this connection, and in view of the high proportion of raw materials in the total costs of production (50 percent), an elusive issue conditioning to a considerable degree the possibility of exports is the price (and subsidy) policy followed bv all jute- producing countries. On the other hand, the increase in the output of jute and kenaf depends on the development of future irrigation possibilities, the extent of use of fertilizers, the availability of suitable labor, the cultivation of the surfaces planned, the development of an adequate rural transport network, and the possibility of producing on an industrial scale.

The Paper Industrv

80. Paper is manuEactured by SONAPAP in its plant at Chhlong (Kratie). Annual production varies between 3.5-4.5 thousand tons a year and includes cardboard, wrapping, kraft, and newsprint paper, and certain other varieties. Production covers 1/3 of the domestic needs. The plant uses as raw materials bamboo and rice sitraw, which represent 1/3 of the quantities needed, the balance of raw materials being imported. The distribution of the final products is entrusted to SONPRIM. Wholesale and retail prices are fixed by the government. Finally, there are over one htndred publishing and printing shops and small-scale enterprises which produce paper products. The Imprimerie Sangkum Reastr Niyum, a mixed enterprise in which the state participates with 40 percent to the share capital, prints the daily Neak Areat Niyum and the monthly Kambuja, books and fills private orders.

81. To meet the increasing demand for paper which is projected to reach 15,000 tons by 1972, the Plan provides for the establishment of a pulp and paper mill for the production of 5,000 tons of pulp, to be increased at a later stage to 15-20,000 tons a year, at an estimated cost of 320 million riels. The new unit would supply pulp to the existing mill in Chhlong and would specialize in the production of newspring and kraft paper. The raw material to be used would be the pine tree which abounds in the regions of Kirirom, Bung Be and Komreng. The studv for this project has been made by a group of experts in the framework of the French Bilateral Cooperation. However, the group has had second thoughts on the economic aspects of the project znd they are now considering the construction of a paper mill of optimal capacity by international standards to be located in the free zone of Sihanoukville. The mill will utilize imported pulp (long staple) and will export the final products to all South East Asian countries. The pulp will be imported from Siberia, where the USSR is en- countering difficulties in disposing of her production after the completion of the big pulp mills irL Vladivostok. What is more, this paper mill will provide an out:Let for the pulp to be made out of rubber wood. The renewal of the old rubber plantations is expected to supply regularly 250-300,000 tons of rubber wood a year. The utilization of rubber wood, however, pre- - 86 -

sents a number of problems. In the first place, the staple is short. This problem can be solved by mixing the rubber pulp with imported pulp. Sec- ondly, there is the problem of eliminating the residual latex from the rubber wood. But according to the experts, this problem has been technically resolved. Finally, the problem of "blueing: (bleuissement) seems to have been resolved successfully by the Japanese. Assuming that solutions are found to thse problems, as they appear to, a plant for the production of 90-100,000 tons of dry pulp (pate seche) can be established, preferably in Tonle Bet on the Mekong, close to the major rubber plantations. One half of this output could be further processed locally and the remainder could be exported in the form of pulp. In view of the size of the undertaking and the limited absorptive capacity of the Cambodian market, it has been suggested that such a project could be promoted under the aegis of the Mekong Committee.

Timber and Furniture

82. There are approximately 500 saw mills scattered throughout the country. SONASCIE operates two outdated mills in Kompon-Ton and Kompon- Speu. Although established to exercise a regulatory function in the market, it can hardly fulfill this role due to the limited share of the market it controls. SONASCIE is unable to modernize due to lack of capital. Private firms have introduced modern equipment and are in a position to compete effectively. SONEF is the sole exporter of timber, such exports being subsidized.

83. Basket-making is an important activity and takes place in small workshops and small-scale industrial enterprises. They produce furniture, domestic articles of all sorts and fishing tackles. The manufacture of wooden furniture also takes place in small workshops.

84. SONACO produced 3,300 cubic meters of plywood in 1968 and expects to reach 4,000 cubic meters by the end of 1969. After the installation of the new equipment which has been ordered, it will increase production to 5-6,000 tons. Each year about 1,000 cubic meters of plywood are exported with the help of a subsidy from SONEXIM. A second factory, which will utilize wood from the region of Cardamomes, now exported in the form of logs, is presently under study by a group of foreign investors. The plant will be set up in Sihanoukville and the entire output is to be exported. By-products which do not meet international norms could be used by local firms for furniture.

The Rubber and Plastic Industries

85. Aside from the numerous artisans, there are 25 larger enterprises which produce rubber products. In view of the low price of rubber and labor, retreading (rechapage) is a flourishing activity carried out by 2 undertakings and many artisans. Tires for bicycles are manufactured by 3 enterprises, the largest of which supplies more than one half of the mar- - 87 -

ket. Tennis shoes, rubber soles for leather shoes, and rubber pipes, straps and rubber rolls for rice mills (patins de rizerie) are manufactured on an artisan scale. SONAPNEU, a state enterprise, began to manufacture tires for automobiles, trucks, motorcycles and tractors in 1967. Produc- tion reached 600 tons by 1968. Since the end of 1967, the monopoly of distribution of the iTnported tires for automobiles and trucks was transferred from SONAPRIM to SONAPNEU. In 1968, SONAPNEU's sales of imported tires accounted for 2,/3 of its total revenue. SONAPNEU collects a duty on the imported tires it sells on behalf of SONEXIM, while it receives a subsidy from the latter on the tires it produces. These duties vary with the dimensions of the tires. SONAPNEII is studying the possibility of producing rubber floor tiles. Finally, over 40 small enterprises produce a variety of plastic items, such as utensils, cups, tubes, sandals.

The Chemical Industry

86. In 1960, the State together with the French Company Air Liquide formed the Societe Khmere d'Oxygene et d'Acetylene (SOKOA) for the production of oxygen, nitrogen, acetylene and compressed gas. The state share- holcling interest is limted to 25 percent of the share capital. Paints and varnishes are produced by 2 firms. Another 2 enterprises manufacture glue from the wastes of fish and tannin,. There is one factorv producing matches which satisfies the lccal needs. The possibility of producing locally madie insecticides is considlered by two foreign grouips. There are about 30 soap- works, 3 of which produce on an. industrial scale. S.K.D. has the monopolv on perfumes which it prepares with imported extracts and local re-distilled alcohol. The manufacture of pharmaceutical products is a monopoly reserved to the state. So is their importation and distribution of the wholesale level, both activities being entrusted to the state enternrise ENAPHAR. However, 2 private enterprises are producing certain products under the control and on behalf of ENAPHAR. The latter operates itself a small work- shon where it nroduces tablets and ampoules. A private enterprise prepares locally made toothpaste under a license from an international firm while four others nroduce their own brands. Finally, the Societe Khmere de Raffinage de Petrole(S.K.R.P.), a joint venture between the state and a French group established in 1967, has built and put into operation an oil refinery in Sihanoukville, which is expected to refine 400,000 tons of crude oil in 1969. The investment in the project amounts to 800,000 riels, half of which financed from a French loan. The state owns 65 percent of the slhares and has the option to buy out the foreign minority interest after 10 years. The annual capacity is 600,000 tons. S.K.R.P. expects to export 30,000 tons of naphtha and 90,000 tons of fuel oil a year. The first severaL years are not expected to be profitable in view of the fact that the capacity of the refinery is much greater than the absorptive capacity of the domestic market. Moreover, the enterprise will be burdened with the high costs of the ex-patriate technicians. However, the refinery ensures independence of the counitry in the supply of oil, since it has no control over the Mekong Delta, which is the most economical rotite. Further, it will economize an estimated $2 million in foreign exchange. Next year, - 88 -

S.K.R.P. plans to install a unit for the production of gas for domestic use. At a later stage, it will complete its installations by establishing a unit for the production of asphalt. The distribution in the domestic market will be effected by the 3 international companies already in existence and the newly-formed mixed enterprise TELEKHMER SHELL has ceded 10 gas stations to TELAKHMERE, wlhile ESSO and CALTEX will cede 10 and 5, respectively.

Brick-works, Glass-works and Ceramics

87. Local needs in bricks, roof-tiles and floor-tiles are covered by the existing 166 brick-works. Except for a modern factory at Takhmau, they are scattered throughout the country. Some of them have semi-industrial installations with Hoffman furnaces, while most of the others use charcoal. A pottery produces on an industrial scale eathenware of many varieties and uses, small portable stores and latex bowls used by the rubber plantations. In the region of Kompong Chhuang, numerous potters supply with earthenware not only the domestic market but also part of South Viet Nam. SONAC produces 10,000 souare meters of floor tiles as well as other ceramics. The galss-works of the Verrerie d'Etat commenced production in 1967. Output reached 3,600 tons in 1968, of which 2,750 tons were bottles and the remainder glassware. Of the raw materials used 3/4 are locally available. The larger manufacturers of soft drinks and S.K.D. are obligated to purchase bottles from the state glass-works. There are also 3 small private glass- works, the 2 of which use broken glass as raw material.

Me tallurBgy

8. Steel consumption in Cambodia is estimated at 50,000 tons a year one half of which is round products. The Plan provides for the construction of an electric furnace, which will transform scrap iron into billets, and a rolling-mill with a capacity initially 10,000 tons, which progressively would be increased to 20,000 tons. During the first years the locally available scrap will be utilized. But subsequently imports of scrap iron will be necessary. Initial cost is estimated at 90 million riels. The feasibility study for this project has not yet been prepared. In view of the large minimum size of plant required for the profitable operation of steel mills, the undertaking of such a project at this stage of development of the country is at least premature.

Other Industrial Activities

89. A wide variety of other products are manufactured locally in over 260 establishments of artisan scale, notably some ironware, agricultural implements, metalware, boats, barges, water pumps, scales. There are a few smelting works, while SONASUCRE and SONACIMENT have well-equipped foundries. Under Japanese licenses, 3 firms assemble transistors, while over 30 enterprises assemble bicycles. Silver-plate, wood-carving and sculpture on pagodite are important activies, and are expected to be fur- - 89 - ther developed with the growth of tourism. There are over 40 auto repair shops. Finally, SONATRAC has installed a line for the assembly of 1,000 tractors and 800 trucks a year, which are imported "knocked-down." Up to now SONATRAC has been operating at 25 percent of its capacity. The reason for such a low utilization of the available facilities is the lack of foreign exchange for the importation of tractors and the lack of a market for trucks. SONATRAiC has the exclusive representation of a French firm and imports its motorcylces. Sales of motorcycles are expected to reach 5,000 pieces in 1959 and are growing fast.

90. The Plan provides for the construction of a plant to manufacture 10,000 motorcycles and 20,000 motor pumps, both considered important for the rural population. The manufacture of certain parts will be farmed otit to local private firns. The production of 20,000 motor pumps a year would permit the irrigation of an additional 100,000 hectares each year. The estimated cost of the plant is 300 million riels. Moreover, the Plan provides for the erection of a service station by SONATRACT at a cost of 11 million riels. The feasibility study has not been produced yet, while the problem of obtaining a license from a foreign maker has not been resolved. Further, the sale of these items to the farmers is related to the yet un- resolved question of agricultural credit.