The Cambodian economy had grown at a robust rate until 2007 before the growth trajectory tripped on account of the global financial crisis in 2009. The World Bank, in one of its economic updates released in 2014, had named Cambodia as the sixth fastest growing economy in the world to join the “Olympians of Growth”. Infrastructure growth in the kingdom has been tepid thus far. Nonetheless, the country has been quite active in engaging bilateral partners such as China and Japan in its infrastructure development agenda. External funds have also been forthcoming to support Cambodia’s investment plans. Cambodia is quite serious in its approach to stepping up its asset base to keep the growth story alive. Nonetheless, there are factors like slow project execution that paralyse the growth momentum.
Investment flow and global ties
Cambodia has gone all out to build ties with its geographical neighbours to enhance bilateral engagement as well as the multilateral organisations to access development capital. During 2016, the value of committed investments in Cambodia surged to $3.6 billion, an increase of 24 per cent since 2012. On an average, capital by local investors accounted for about 54 per cent of the total investment. Among foreign investors, Chinese investors are the largest and, together with other Asian investors, account for almost 90 per cent of total foreign investments. A large part of the investments were in the industrial and infrastructure segments, which together accounted for 72 per cent of total investments since 2012.
The country is making attempts to cement ties with China. Chinese involvement has been in sectors like roads, bridges and electricity. Most electric power sources and transmission lines in Cambodia have been developed by Chinese firms. A China-funded power transmission system was inaugurated in April 2017. The project includes two substations and a 115 kV line stretching from southern Kandal province to south-eastern Prey Veng and Svay Rieng provinces. Under Phase I, the line is capable of transmitting 150 MW of electric power with the potential of doubling capacity in the future. Notably, all except one hydropower plant in Cambodia have been developed through Chinese participation. Chinese companies have provided 100 per cent financing for all hydropower projects in Cambodia.
China is also dovetailing the “One Belt, One Road” initiative with Cambodia’s development strategy by supporting Chinese companies in participating in Cambodia’s inter-connectivity projects such as highways, airports and ports.
The impact of Japan’s involvement in Cambodia’s infrastructure space cannot be underestimated. Japan was the third largest foreign investor in 2015, with the involvement of 250 companies. China led the field, with 1,055 firms, and South Korea followed, with 278. Japan has substantially supported Cambodia in the roads and bridges segment. In May 2017, the Japanese government agreed to provide a loan of $200 million to Cambodia for the development of a new seaport in Preah Sihanouk province in anticipation of increased shipping traffic on the coast. In a recent announcement, Tokyo Electric Power Company Holdings (TEPCO) will collaborate with Toshiba to manage power grids in Cambodia. T.T. Network Infrastructure Japan, a joint venture (JV) between TEPCO and Toshiba, has signed a memorandum of understanding (MoU) with a Malaysian company handling power transmission in Cambodia. The venture will operate and maintain 130 km of 230,000 V transmission lines that will connect power plants in northern Cambodia to the capital, Phnom Penh. The scope of the order, which is valued at $14.7 million, includes the maintenance of two substations as well as training costs for workers. The contract will last 25 years.
The Japan International Cooperation Agency has developed a master plan for Cambodia’s infrastructure, which seeks co-ordination among all the country’s donors for sustainable infrastructure development that adheres to social and environmental construction standards – in line with Japanese Prime Minister Abe’s quality infrastructure mandate.
In May 2017, Cambodia joined the ASEAN Infrastructure Initiative, which aims to fund infrastructure projects in developing countries. The first of its kind globally, the hub will raise funds from developed countries and private investors for projects across the region, offsetting the risks of long-term investment in infrastructure.
Cambodia is also strengthening investment ties with its ASEAN counterparts. As per reports released in April 2017, Cambodia and Vietnam have unveiled plans to develop an expressway between Phnom Penh and Ho Chi Minh City. An MoU for the development of the expressway was signed between the two countries.
The PPP story
There is no specific public-private partnership (PPP) law in the country. However, Cambodia is developing the legal framework necessary to stimulate investment. The Asian Development Bank (ADB) and the Ministry of Economy and Finance had organised a Consultation Workshop in March 2016, to disseminate the ideas in the draft PPP Policy and seeking feedback to ensure adequate development of PPP in Cambodia. While there are a few agencies responsible for infrastructure projects, there is currently no dedicated PPP agency in Cambodia.
In June 2016, the Cambodian government had approved the Policy Paper on PPPs for public investment project management in the period 2016-20. This policy paper sets out the vision, objective and policy measures to manage public investment through PPPs by end-2020. In order to step up private investment, in January 2017, Cambodia became the first Asian country to sign up for the Sustainable Development Investment Partnership, a global initiative that promotes funding of infrastructure projects through PPPs.
While the PPP footprint has been limited so far, projects such as the Lower Sesan II hydropower dam, backed by China-based Huaneng Group, the Malaysia-built coal-fired plant operated by Cambodia Energy Limited, and the country’s three international airports, developed by France-owned Cambodia Airports, have been implemented on a PPP basis. Each of these projects was implemented on a build-operate-transfer basis, with the concession period ranging from 25 to 40 years. In the road sector, examples of PPPs include a concession for maintaining and servicing National Route 4.
In April 2017, ADB approved financial assistance for the construction of Cambodia’s first large-scale solar power project – a 10 MW farm based in Bavet.
State of infrastructure and planned upgrades
The current infrastructure needs in Cambodia are vast in contrast to other countries in the region. Critical sectors such as roads, railway, seaports and airports need to be developed to promote regional integration and remain internationally competitive. Sound development of physical infrastructure is a key part of the National Strategic Development Plan (NSDP) 2014-18. The Royal Government of the Fifth Legislature has laid out policy priorities to promote the development of infrastructure as part of the strategic plan.
While electricity consumption in Cambodia has increased significantly over the years, almost half the country’s population currently has no access to stable, affordable electricity. Electricity tariffs in Cambodia are higher than those in neighbouring countries, mainly due to the high cost of fossil fuel-based generation and the fragmented power supply system in the country. Under the NSDP 2014-18, the government aims to expand low-cost, high-tech electricity generation from new and clean energy sources. By 2020, the government aims to electrify all villages in Cambodia. The private sector will also be encouraged to invest in electricity generation. The NSDP targets addition of over 12,800 km of transmission lines to the existing network by 2018. The government also plans to step up exploration and commercialisation of the oil and gas sector, which has been largely untapped so far.
The total length of roads in Cambodia was 47,263 km as of 2013; only about 26 per cent of national and provincial roads were paved. The NSDP outlines the government’s plans to upgrade and repair an additional 5,150 km of rural roads by 2018. The Ministry of Public Work and Transportation will improve over 3,500 km of roads by 2018. The ministry also aims to widen 1-digit national roads from the existing two lanes to four lanes. Plans are also afoot to install CCTV cameras on 1-digit national roads to curb the menace caused by overspeeding and overloaded vehicles.
Several big ticket investments have been planned. In 2015, the Cambodian firm Global CAM Project Development Plc had signed an MoU with Korea’s Green Eco Energy Company to construct a 275 km high speed expressway between Phnom Penh and Sihanoukville. The deal is worth more than $536 million. On the policy front, the government plans to formulate a new draft law on road traffic and road transport contracts.
The overhaul of the Cambodian railways has been much delayed. Rail services began again in the 1980s; however, by 2008, passenger services had terminated following prolonged conflicts and decades of neglect. In 2006, a $143 million rehabilitation project was initiated with the support of several external funding agencies. The Southern Line project was completed and opened to freight operations in August 2013. By early 2016, it was being used to transport fuel, coal, cement and container shipments. Passenger services began in 2016.
However, resettlement problems, cost overruns, flooding and construction quality issues caused delays to the Northern Line work. In July 2015, the government allocated a further $33 million to complete repairs to the northern line by 2017, after project partners ADB and AusAID declined requests to provide more funding. Royal Railway currently holds a 30-year concession to operate Cambodia’s railways. Under the NSDP 2014-18, the government plans to complete the rehabilitation of the northern line between Phnom Penh and Poipet and construct the rail freight terminals at Phnom Penh and Preah Sihanouk. The government has also expressed its intention of developing new railway networks and Thailand, Japan and China have reportedly expressed interest in working on projects to expand rail services through Cambodia.
Cambodia’s waterways span a length of about 1,750 km, of which around about 850 km is navigable in the dry season. Industry reports claim that Cambodia’s seaport is the most expensive in Asia. The Sihanoukville Autonomous Port is the country’s only commercial and international deep sea port. The port is undergoing substantial development which is due to be completed in 2017. The state-owned Phnom Penh Autonomous Port is the country’s second largest. In January 2013, the port opened a $28 million container terminal financed by the Chinese government. Expansion plans are underway at the Phnom Penh and Sihanoukville ports. The government also intends to formulate the Cambodian Maritime Code. Other priority areas include completion of the electric marine chart and multipurpose terminal at the Preah Sihanouk port.
Cambodia has three international airports, at Phnom Penh, Siem Reap and Sihanoukville. The airports are managed by Cambodia Airports, which is owned by the French company Vinci (70 per cent) and a Malaysian-Cambodia JV, Muhibbah Masteron Cambodia in a ratio of 70:30.
The capital’s airport has recently undergone an upgrade and roads are being developed, with the government having targeted priority areas for development. Significant upgradation work is currently under way, especially at the Phnom Penh and Siem Reap airports, with about $100 million being invested in new terminal buildings, some funded through a JV between two South Korean companies, Camco Airport Company and Lees A&A. The government plans to further modernise the identified airports, including the operationalisation of the communication, navigation and surveillance, and air traffic management systems.
While Phnom Penh has potable water distribution in Phnom Penh and other cities, an estimated 4 million Cambodians do not have access to safe water. The NSDP 2014-18 targets to achieve improved access to drinking water for the rural population with an increase from 44.2 per cent in 2013 to 60 per cent in 2018. An estimated 9 million people do not have access to adequate sanitation. The NSDP targeted an increase in access to sanitation for the rural population from 37.5 per cent in 2013 to 60 per cent in 2018.
Worrying signs
The overall level of investment in Cambodia fell in 2016 as compared to 2015. Local and foreign investment declined by nearly $1 billion. Moreover, the growth of investment in Cambodia is not high enough for sustained development and this decline will inhibit overall economic growth. Infrastructure projects are reporting losses, which add to the country’s financial woes. Cambodia is continuously faced with a high debt baggage. In 2016, the government made debt service payment to development partners amounting to $186 million, of which 0.05 per cent was public domestic debt and 99.95 per cent was public external debt. As of December 31, 2016, the Cambodian government had a total public debt of $5.867 billion, of which 0.05 per cent was public domestic debt and 99.95 per cent was public external debt. The mounting debt burden will certainly drag down economic growth.
The future holds promise
Cambodia needs $500 million-$700 million per year for infrastructure development in segments such as roads, bridges and power. According to ADB estimates, for Cambodia to retain its growth momentum, which over the past decade has hovered at an average of 7 per cent annually, infrastructure investment will need to be somewhere between $12 billion and $16 billion between 2013 and 2022. The World Bank has predicted that Cambodia’s GDP will increase by a modest 6.9 per cent during 2017 and 2018, and slow down slightly to 6.7 per cent in 2019.
As envisaged in its Industrial Development Policy 2015-2025, the kingdom has committed to maintain its growth momentum until 2018 and beyond at a targeted rate of at least 7 per cent per annum.
On the flip side, Cambodia needs to diversify its borrowing sources and critically consider taking loans from multinational donor agencies like the IMF, the World Bank, ADB as well as other major countries like the US and Japan. While the approval process would be slower, the wait is beneficial because these loans are attached to strict conditions of accountability, transparency and rule of law. At the same time, the country must be aware of the side effects of Chinese investments. It should initiate legal contracts and detail the terms and conditions of the loans and aid in accordance with international standards. n
