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Two to tango: Cambodia and Chinese aid and investment

by Shahar Hameiri on July 30, 2019

The debate about China’s rapidly growing global investment and development financing footprint has focused on deciphering Chinese intentions—whether China aims to revise or maintain the US-led ‘liberal international order’. A manifestation is the controversialdebt trap diplomacy’ trope—the idea that China is using its money to ensnare recipients in unequal relationships that secure Chinese geostrategic interests.

But the role of recipient governments in promoting large-scale Chinese projects and shaping their impact is, with few exceptions, often neglected.

Cambodia is a case in point. Observers often view Cambodia as China’s staunchest ally in Southeast Asia, even as a ‘vassal state’. Cambodia’s refusal, when ASEAN Chair in 2012, to release a communique criticising China’s conduct in the South China Sea was seen as evidence of this.

China is Cambodia’s biggest aid provider. Recent data show average annual Chinese expenditure of US$250–300 million in 2016–18, well ahead of second-placed Japan at US$120–170 million. Chinese investors hold almost a quarter of Cambodia’s total FDI stock. Distinguishing Chinese aid from investment is difficult, but there is no doubting China’s huge economic impact in Cambodia.

Yet the Cambodian government is often the driving force behind the biggest Chinese-financed projects. Keen to maintain the flow of economic opportunities to the crony-capitalists whose support underpins the regime, Cambodian leader Hun Sen has reached out to China to finance controversial and sometimes financially unviable projects, especially in the hydropower sector.

The characteristics of China’s sprawling and fragmented development financing domain enable this. Chinese leaders often pledge headline-grabbing sums of money to particular countries or regions. In Cambodia’s case, US$500–700m per annum were pledged in 2014. But disbursing the funds depends on project-by-project negotiations, typically between recipients and Chinese officials from local embassies and state-owned companies. China’s development financing is also generally ‘demand-driven’, so project ideas usually come from recipients—although state-owned enterprises often propose projects to recipients informally.

In Cambodia, the demand-driven system is shaped by patronage politics centred on Hun Sen and the Cambodian People’s Party. Unlike any other development partner, Chinese development financing is managed directly from the Prime Minister’s office, not via the Council for the Development of Cambodia, affording Hun Sen considerable scope to shape China’s development financing in Cambodia.

A prominent example is the Lower Se San 2 (LS2) dam—the biggest Chinese-financed project in Cambodia, costing over US$900 million. Construction of the dam displaced around 5000 Cambodians, mostly ethnic minorities. Tens of thousands more have been negatively affected by the dam’s effects on water flows and fish migration.

Cambodia’s ruling elites developed an interest in hydropower in the early 2000s, initially for export, but later to provide electricity to rural areas that currently receive only 10 per cent of Cambodia’s total power supply. Hun Sen has promised to provide electricity to 70 per cent of households by 2030, partly in an effort to address his party’s declining electoral support in its rural heartland because of increased land-grabbing by cronies.

The LS2 originated in Cold War-era surveys by American consultants and a 1999 Asian Development Bank report. In 2003, Cambodia’s Ministry of Infrastructure, Mines and Energy identified the site as one of 14 priority projects. The Cambodian government struggled to finance these costly projects and turned to the ‘Build, Operate, Transfer’ (BOT) model to attract investors. It offered generous terms, including tax breaks, free licences for dam construction and water use, and rapid environmental approvals, also pledging to guarantee energy purchases and buy out operating companies in case of force majeure.

Initially the Cambodian government signed a memorandum of understanding with Electricity Vietnam (EVN) to develop the site. In 2008, EVN’s subsidiary conducted a feasibility study, project design and resettlement plan. Cambodia’s Ministry of the Environment approved the environmental impact assessment in 2010, despite considerable external criticism. It soon transpired that EVN was struggling to raise sufficient finance.

In January 2011 EVN announced that Royal Group—a company owned by Cambodia’s richest crony-capitalist, Kith Meng—had taken a 49 per cent share in the project, allegedly at Hun Sen’s insistence, despite having no experience in the energy sector. Rumours circulated that EVN was trying to pull out. In November 2012, after Cambodia’s Council of Ministers approved LS2, it was suddenly announced that the state-owned China Huaneng Group had become the project’s largest shareholder with a 51 per cent stake. EVN became a sleeping partner, holding 10 per cent while Royal Group retained 39 per cent.

After lengthy negotiations, Huaneng, the national utility company Electricite du Cambodge and the Hydro Power Lower Se San 2 Company agreed on a financing deal, which Cambodia’s National Assembly signed into law in February 2013. The dam company agreed to pay 30 per cent of the cost from unknown sources, with the remainder coming from a bank loan for 15 years at 6.5 per cent interest. The loan’s source has been kept secret but is thought to be the China Development Bank.

Huaneng agreed to own and operate LS2 for 45 years, far longer than a typical BOT agreement. Electricite du Cambodge pledged to purchase all the electricity generated for an agreed price, backed by a government guarantee. The government also agreed to buy out the project if it could not be implemented for political reasons.

Far from being directed strategically by China, or even a buccaneering state-owned enterprise, the impetus for LS2 appears to have come from the recipient—the Cambodian government, and Hun Sen personally. Huaneng, via its subsidiary HydroLancang, only got involved after the project had been designed and approved. Exactly how it was drawn in is unclear, but every account underscores Cambodian agency.

Powerful Cambodian interests are also instrumental in LS2’s harmful social and environmental impacts. HydroLancang’s approach was to focus exclusively on dam construction while leaving negotiating and implementing resettlement to its local partner. Due to Cambodia’s weak regulatory system, which powerful interests often simply ignore, Royal Group displaced villagers for a fraction of what a similar resettlement would have cost in China. Villagers suffered while Royal Group exploited its close ties with the regime to profit enormously.

The dam’s reservoir covered 16,000 hectares of pristine forest, providing a bonanza for Kith Meng’s timber companies. Logging began almost immediately after the LS2 agreement was signed. The timber company began harvesting luxury hardwood without approval from local authorities or communities. According to media and bystander reports, it also allegedly felled trees illegally, outside the reservoir area.

As the Cambodian example makes clear, the recipient, not just the investor, can have a considerable effect on the distribution of benefits and the outcomes of Chinese development financing and investment.

This post was previously published at East Asia Forum Quarterly

Shahar Hameiri
Shahar Hameiri is Associate Professor of International Politics and Associate Director of the Graduate Centre in Governance and International Affairs at the School of Political Science and International Studies, University of Queensland. His recent books are International Intervention and Local Politics (Cambridge University Press, 2017), co-authored with Caroline Hughes and Fabio Scarpello, and Governing Borderless Threats (Cambridge University Press, 2015), co-authored with Lee Jones. He is co-editor of Navigating the New International Disorder: Australia in World Affairs, 2011-15 (Oxford University Press, 2017). He tweets @ShaharHameiri.

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