Britain-based Global Witness said that rights to exploit the resources have been allocated behind closed doors by a small number of power brokers around Prime Minister Hun Sen and other senior officials.

Over the past few years, Cambodia has been buzzing with excitement — and anxiety — about an oil discovery by U.S. energy giant Chevron Corp. off the southwestern coast. There have also been discoveries of other minerals including bauxite, iron ore, copper and chromium, while onshore oil reserves are also being explored.

Some estimate that in coming years Cambodia may reap some $1 billion in annual oil revenues, enough to cut its ties to foreign development aid if the funds are properly utilized.

More than 75 companies, including such internationals as Chevron Corp. and BHP Billiton, were already working in the mining and oil sectors and have paid upfront sums to the government, the report said.

“Companies need to come clean on what they have paid to the government to secure access to these natural resources, or risk becoming complicit in a corrupt system,” the report said.

Of the mine sites investigated in 2008, Global Witness said every one was controlled or owned by members of Cambodia’s political and military elite, including top military commanders and relatives of Hun Sen and cabinet ministers.

The full report is available for download here [PDF - 4.5 MB]

The mood is set right from the beginning, by raising the question :

Can foreign investment flourish in a state notorious for corruption, weak laws and business secrecy?

While we could make up our mind right at this point, let’s continue reading. What kind of risks investors face then ? Entry-strategy risk ? Not only:

While finding suitable targets in Cambodia may be difficult enough, private-equity buyers are also certain to face challenges when they try to exit years from now. “This really is a frontier market,” said Chris Leahy, a managing director in Singapore at risk consultant Kroll Inc.

Then come the three major risk areas:

• Lack of skilled people

Roughly 1.7 million people, a fifth of the population, were killed during the communist Khmer Rouge’s reign of terror from 1975 to 1979. Special attention was paid to exterminating the educated. Three decades later, the consequences continue to ripple through the country; a lack of skilled people hampers efforts to lift millions out of grinding poverty.

• Corruption

Transparency International, of Berlin, ranked Cambodia the 14th most corrupt out of 179 nations in its 2007 study.

• Business contracts law enforcement

“There are issues in Indonesia or Philippines enforcing rights but it’s much harder in Cambodia,” said Kroll’s Leahy. “A creditor needs more than 400 days to get a claim enforced, and that’s assuming the court decides to side with a foreign creditor’s claim”

Despite this, what is attracting private equity funds then ?

“Cambodia offers an enormous potential for future capital gains,” Mr. Faber wrote in a recent newsletter for acolyte investors. Faber and Rogers are advising some of the private-equity firms that will pour upward of $500 million into Cambodia from already completed and continuing fund-raising.

Malaysian interests have been active in the country for years and South Koreans are investing in banking and property, including a $2 billion satellite city on the outskirts of the capital, Phnom Penh.

What is the key to success ?

Given the perception that large-scale business activities require an unsavory accommodation with powerful figures in the government, staying small may be the key to success for private equity investors.

“We want the small- and medium-sized investments below the political radar screen,” said Douglas Clayton, a managing partner of Leopard Asia, which is raising $100 million for its Cambodia fund.

Last but not leats…

But finding enough suitable opportunities to absorb several hundred million dollars of private equity capital is another issue facing investors. The challenge is finding companies with accounting and management standards that approach international norms, said Peter Brimble, managing director of the Cambodia Emerald Fund

So go or no-go ?

The money can be absorbed if the economy continues to grow strongly and the government continues to improve transparency and legal standards, Mr. Brimble said. “As we dig deeper into this country and connect with the entrepreneurial class we are finding a lot of opportunities,” he said.

Finally, this looks like a GO !

“Five hundred million dollars is really just a few golf courses and hotels. A lot more could be absorbed,” said Douglas Broderick, the U.N. Development Program’s resident representative in Cambodia

What I understand from this is that Cambodia actually offers huge opportunities for those who take risks, those who were among the first to step in and now don’t want too many people to join…

Even some of them wave the ugly flag of corruption to keep the big players away by now, I feel like Cambodia is one of the next frontier around here.

1. Impact on local communities

Who is this project harming ? What is the added value created ? How is this added value redistributed ? If you can’t provide the communities with the right answer, there are good chances you might be taught the answer the hard way, especially in a low-wages economy, following the old habit of “If you don’t give then I will take”. Don’t miss out to create a real two-ways relationship with communities and this will greatly help your project sustainability.

1. the NGOs and your Corporate Reputation

Big corporations might think they are evil but NGOs just do their job and you can’t beat them on the communication battlefield. So my advise would be don’t get them angry, involve them instead and work on your corporate reputation.

Seems that the Chinese companies are doing exactly the opposite in Cambodia…

So what’s the point ?

China, hungry for strategic influence and natural resources, is asserting itself as a major investor in Cambodia, sparking concerns that a huge inflow of Chinese cash will fuel existing corruption and exploitation in one of the world’s poorest countries.

What China is bringing at the table ?

China has become one of the biggest investors in Cambodia, with 3,016 Chinese companies making cumulative investments of US$1.58 billion to the end of 2007. Bilateral trade last year rose by 30% from 2006, to $730 million. Since the signing of an investment protection agreement in July 1996, a further $350 million has been pledged, mostly in the forestry sector, power, textiles, construction materials, and agricultural development.

Something else ?

Besides investment and assistance, China has also granted military assistance to Cambodia, providing the country’s dilapidated navy with nine patrol boats in November 2007 and five warships in 2005.

Let me guess… what it a price to pay ?

“The effect of lots of money coming in with few strings attached, going to a lot of people in the government, is generally exacerbating corruption,” Simon Taylor, director of the international anti-corruption group Global Witness, said.

“This manifests itself as land-grabbing, massive plantations and illegal logging, unregulated mining, the building of dams, and so on,” Taylor said.

Meanwhile, workers’ rights are often sidestepped in Chinese-invested factories, especially in the textile industry, activists said.

“The Chinese companies, especially garment factories, today have a lot of problems with Cambodian workers,” Chan Saveth, of the rights advocacy group Adhoc, said.

They have described an atmosphere in which they are constantly pressed into unpaid overtime, with too many financial worries and too little spare time to cause trouble for management. Unauthorized deductions from pay-packets are common, and paid sick leave is rare.

What impact on local communities ?

Chinese money has been tied up with massive agricultural and forestry exploitation projects, which are destroying traditional ways of life such as bamboo-harvesting and resin-tapping, activists said.

The Cambodian government granted a Mondulkiri forest concession of 200,000 hectares – 20 times the legal limit – acquired secretly by Pheapimex, an ethnic-Chinese owned Cambodian conglomerate with close ties to Prime Minister Hun Sen.

Pheapimex formed a joint venture with China’s Wuzhishan plantation firm to exploit the region, displacing indigenous minority people who rely on the forests for their traditional livelihoods.

Global Witness said bigger deals involving Chinese state-backed companies were likely the least transparent and the most strongly defended by government security forces, who responded with military force to anti-logging protests by villagers in Mondulkiri.

He said the outcome of such deals for people living in rural areas was disastrous. “They know nothing until the moment that the bulldozers turn up and start pushing down their houses.”

What is the government position ?

Hun Sen has banned illegal logging and called anarchic logging “the biggest mistake” of his political career, and his views have been backed up by anti-logging speeches by ministers, but with little apparent effect.

Why is China acting this way ?

Chan Sophal said China’s interests in Cambodia were clear. “They help us, but they also look into the resources we have, such as mines, oil, gold, iron, and land. They need land to grow agricultural and agro-industrial crops to meet the demands of the [China's] population.”

China wrote off significant loans to the Cambodian government six years ago, making new loans and grants worth $600 million during the visit to Cambodia of Chinese Premier Wen Jiabao in April 2006.

While no conditions were attached, analysts say Beijing is keen to secure access to the southern port of Sihanoukville for strategic reasons, particularly as a delivery point for imported oil.

This is it. Reminds me of a similar situation… Myanmar maybe ?