The Cost and Benefits of BRI projects, Investments in Cambodia

While BRI projects and Chinese investments have supported Cambodia’s growth, economists advice for prudence to avoid risks of over-reliance and absorptive capacity
River front in Phnom Penh. Kiripost/Siv Channa
River front in Phnom Penh. Kiripost/Siv Channa

It’s election year this year. Much has been happening in the past 12 months, with changes to national policies such as taxation and social security, crackdowns on online gambling, drugs and human trafficking, as well as industrial and infrastructure development.

But slower recovery than anticipated in key exports and tourism, and the graduation to higher income status mean that Cambodia will need to double down efforts to spur economic growth, bring in investors and resolve employment and poverty rates.

One way to inject confidence and elicit faith from the populace with the elections around the corner is to show that development and advancement in sectors are underway. This includes the improvement of its infrastructure and logistics sector, as prescribed by the transport masterplan, where $50 billion is needed for the next 10 years to roll out 300 projects.

Building on its ironclad relationship, China and Cambodia sealed a “diamond hexagon” cooperation framework during Prime Minister Hun Sen’s latest visit to Beijing to develop six priority areas and two corridors – industrial and fish-rice.

It complements a $44 million grant to Cambodia to develop the railway network in Cambodia and a concessional loan to expand National Road 7, as well as pledges by state-owned Chinese construction entities to invest in the transport sector.

Apart from being the largest trading partner with Cambodia, China has continuously emerged as the largest foreign direct investor in Cambodia since 2013, just as the Belt and Road Initiative (BRI) took off.

‘70-percent funded’

In the first nine months of 2022, data by the National Bank of Cambodia (NBC) showed that 107 fixed asset projects with a total value of $2.7 billion were approved. Of that, 35 percent were from mainland China, Hong Kong and Taiwan.

Between 1994 and 2021, nearly 44 percent of $41 billion of Cambodia’s FDI was from the Greater China region (comprising mainland China, Hong Kong, Taiwan and Macau), Chanrith Ngin, an honorary academic of Auckland University, wrote last year.

Investments largely poured into manufacturing, power, finance and real estate, he said, noting that fixed asset investments climbed 67 percent year-on-year to $2.32 billion in 2021.

Official development assistance (ODA) data revealed that Japan’s disbursements since 2020, including those planned up to 2024 amounted to $1.41 billion as of February 19, 2023, followed closely by China at $1.36 billion and South Korea at $838,297,017.

Based on past disbursements of the ODAs, in the form of concessional loans or grants, the amount provided by China and Japan often appear neck-and-neck.

But it is this assertion – Cambodia’s alleged dependence on China – that has often emboldened views of it being a “client state” of China, a notion economists avoid discussing, instead steering deliberations towards the benefits of BRI projects.

An article in ASEAN Briefing last year placed the value of these projects in Cambodia at over $15 billion, two-thirds of which were channelled into energy infrastructure projects.

China has financed around 70 percent of Cambodia’s road and bridge construction, Transport Minister Sun Chanthol once said. With general elections anticipated this July, announcements of public infrastructure projects might be in order to secure the mandate of the electorates.

‘It’s political’

For now, China has agreed to build the Phnom Penh-Bavet expressway at a cost of $1.6 billion, pursuant to the completion of the $2 billion build-operate-transfer Phnom Penh-Sihanoukville expressway by Chinese contractors last November.

“Infrastructure projects in every country are political. Politicians have got a penchant for wanting big infrastructure projects as it’s a sign that they have done something,” said Dr Hal Hill, a H.W. Arndt Professor Emeritus of Southeast Asian economies at the Crawford School, College of Asia and the Pacific of the Australian National University.

But infrastructure projects need to be undertaken at an “arm’s length” and in a “transparent” way. “We know that they are political, they are politicised, and we know that in all countries it tends to be corruption prone, and that is partly because of the scale of the project and partly because of the inherent complexity.”

Sharing his views in a seminar on “BRI: Costs and Benefits, Real and Perceived”, jointly organised by Cambodia Resource Development Institute and ISEAS-Yusof Ishak Institute last October, he asked if Cambodia was getting the best deal with BRI.

“As I understand, the BRI is basically a commercial operation. Cambodia receives very large amounts of ODA, much of that is still concessional in nature,” he said.

EIAs and resettlements

Jayant Menon, a senior fellow at ISEAS-Yusof Ishak, said a lot of the BRI benefits might take time to approve and improve, adding that the improvement of infrastructure projects would materialise in real effects over longer periods of time.

"We are already seeing some of the benefits now but many of them are backended [while] the costs are much more short run, obvious and observant.”

The environmental impacts are already “quite apparent” though, as displacements and land grabbing reported in newspapers regularly.

“These costs are more immediate, although the benefits are more long-term. Even with that difference I think that there is truth that the benefits are going to outweigh the costs in the BRI,” he pointed out in the BRI: Costs and Benefits, Real and Perceived seminar.

That being said, he highlighted concerns involving environmental, social and financial sustainability, issues which were China discussed in the second BRI meet in 2019 along with pledges to address them, particularly with regards to rural communities.

While there are “early signs” that implementation of a lot of projects is becoming more “environmentally friendly”, with efforts to try and deal with environmental issues in the project implementation stage, main concerns remain over inadequate environmental impact assessments (EIAs) and resettlement programmes.

“It is not so much how the project was implemented – for instance whether wastewater is recycled or waste is managed well, [which are] are important – but the premier issues are things like proper EIA, pre-project and proper resettlement programmes at design stage, not just implementation,” he said.

Multilateralising the BRI

Jayant noted that attempts to deal with these types of social safeguard issues have been undertaken by shifting some of the lending to Chinese-owned Asian Infrastructure Investment Bank (AIIB), rather than multilateralising the BRI, likely through multilateral development banks.

However, it raises concerns whether the AIIB itself is the right institution to address social safeguard issues because it allegedly “does not guarantee '' that all issues would be addressed.

The AIIB, he said, adopts the national standards in the host countries in terms of environment, resettlement and other social safeguards.

“We know that Asian Development Bank, World Bank and other multilateral institutions usually have higher standards than the national ones. Of course the issue is not always about the level of the standards, rather if it is implemented safely. So, you can set very high standards but if it fails at the implementation stage or not implemented faithfully then it’s pointless.

“You can see many countries with huge environmental problems that have first world or gold standards in terms of their legal requirements but they are not implemented. If the standards are adopted from the host country and the implementation is also done with the host country, then I think there is a risk of slippage,” Jayant said.

Weighing in, Nick Marro, Hong Kong-based lead analyst for global trade at The Economist Intelligence Unit, said a lot of the attraction to the BRI comes from the fact that, for much of the initiative's existence, project financing has often come without significant conditions attached.

That has made BRI financing more attractive than loans from multilateral agencies, which could demand provisions around policy or administrative reforms, or which come with higher interest rates.

That could be changing now though, given China's experiences with challenging debt repayment and investment returns in countries like Pakistan, Sri Lanka and Zambia.

“It's very likely that the period of ‘easy money’ attached to the BRI is now over, given Beijing's enhanced scrutiny over the initiative,” Marro told Kiripost early this year.

‘Purse strings’

Accordingly, BRI recipient countries need to enhance their own safeguards around debt sustainability and investment feasibility.

For many countries, including in places where governance capacities are weaker, such as Cambodia, Laos, Pakistan, the Maldives and Sri Lanka, this will inevitably require stronger attention to things like corruption and administrative transparency, said Marro.

These are the bigger issues when it comes to BRI sustainability. Many BRI nations have very real infrastructure construction and financing needs; consequently, China's willingness to plug that gap is a good thing.

“The problem is whether pledged funds are being used properly, or whether planned investment projects are actually servicing a real economic or investment need.

“BRI host nations play a big role here, as it will be their own authorities and jurisdictions which oversee BRI project implementation. And there's mutual benefit here, although China often controls the purse strings, it is similarly interested in ensuring that BRI financing is being used appropriately.

“But in many cases, the question often comes down to the willingness of BRI recipients to see that through,” he added.

Client state?

While the common critique depicts Cambodia as a client state of China, Jayant feels that the government has been careful to “avoid crowding out” aid and investments from other sources, even with its alleged growing reliance on one country.

“I think the government may have been successfully leveraging on the growing relationship with China to catalyse more aid and investment from competitors, especially Japan, but also Korea, Taiwan and other countries in this region,” he said.

In that, Cambodia has ensured a crowding in on both aid and investment and is “playing off” this growing dependence on China to encourage other countries to compete for their favour. “This has worked well.”

But there is a “big doubt” whether massive investments in casino complexes in Sihanoukville have actually crowded out to some extent other types of more inclusive investments in manufacturing, especially the type of manufacturing that allows Cambodia to diversify its economic structure and plug into global supply chains, Jayant said.

“These [manufacturing] are things that Cambodia has listed as objectives in its strategic plans. And, the question whether massive investments in the non-tradable sector in the entertainment complexes is actually limiting that type of diversification,” he mused.

Inconclusive findings

Additionally, investment absorptive capacity, especially in transitional economies might be an issue to be considered over a certain time period, as there are constraints to the amount of investments that flow in.

“Most countries often present themselves as foreign investors and boast about increasing FDI almost as if there is no limit to the amount of FDI that can be absorbed. That is not true.

“Massive FDI inflows over a short time frame can lead to appreciation of the real exchange rate and cause Dutch disease type effects where the tradable goods sector loses its competitiveness and in the extreme case it can lead to a period of deindustrialisation,” Jayant said.

Therefore, Cambodia needs to be selective about the types of projects that are financed by FDI or borrowings if it is aiming for sustainable and inclusive growth.

Asked to comment on this, economist Oudom Cheng of National Bank of Cambodia said Cambodia’s open economy status with a highly liberalised capital account regime means that it does not impose restrictions on capital inflows.

However, Cambodia has strengthened the process of analysing and approving investment projects overtime, including both private and public sectors, to reap the benefits from inward investments.

In addition to quality checks, Oudom said more needs to be done to ensure that the investment projects contribute to sustainable and inclusive development goals of Cambodia.

“For example, it should contribute to the creation of higher skilled jobs, transferring of technology and innovation, or improving Cambodia’s access to international markets,” he said.

There should also be a right balance between investment benefits and public interests, like abiding by environmental, social and governance (ESG) principles so that Cambodia can absorb quality gains from various investment projects.

So, are BRI projects beneficial to Cambodia? University of Auckland’s Chanrith Ngan in his report on “The Undetermined Costs and Benefits of Cambodia’s Engagement with China’s BRI” said the full economic impacts have not been holistically scrutinised, although some “adverse impacts” have been recorded on livelihoods and the environment.

“It is crucial to undertake more comprehensive studies of the costs and benefits of BRI schemes. Without a proper comprehension of project-specific or sector-based performance, the public assessment of policy and business decisions can be easily distorted,” he said.