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China Uses Debt-Free Infrastructure Financing Model in Cambodia. It Ended up Being Popular

File image of the Chinese-financed and built Phnom Penh-Sihanoukville Expressway in Phnom Penh, Cambodia. Imago / Alamy Stock Photo

Cambodians are eagerly waiting for the country’s first waterway system, the Funan Techo Canal, to kick off construction scheduled late this year. Aside from the excitement for economic benefits that the canal promises, it has also brought more attention to the project’s investment scheme called Build-Operate-Transfer (BOT).

The BOT schemes usually involve a government entity granting to a private sector party the right to construct and operate a project for an agreed, specified time period. At the end of this time period, operation of the project is then transferred to the government entity. It is a model that has helped build infrastructure projects around the world, including bridges in the U.S.’ Indiana and Kentucky.

China, a major partner and financier in various infrastructure projects in Southeast Asia, has also used BOT in the region. Cambodia, though, emerges as the top place where China has used the BOT approach most frequently.

This is mainly because “the Cambodian government prefers BOT over other investment schemes,” according to Po Sovinda, a director at the Center for Southeast Asian Studies (CSEAS). This preference comes from the fact that BOT is debt-free, allowing the Cambodian government to divert its national budget to other prioritized areas. 

“There is no interest rate there… The government can save money for other sectors,” Sovinda said.

In 2022, BOT-funded expressway project Phnom Penh-Sihanoukville opened to the public. The government said that the expressway attracted over 4.6 million vehicles in just a year of operation. While drivers need to pay between $12 for a small car and up to $60 for a cargo truck for one-way travel, the expressway also reduces time travel from five to two hours from Phnom Penh to Sihanoukville.

The success of the Phnom Penh-Sihanoukville expressway boosted the public’s approval of China’s BOT investment approach in Cambodia, and pushed the government to pursue more BOT deals.

Last year, Cambodian Prime Minister Hun Manet and a number of senior Cambodian government officials flew to Beijing twice to meet with a group of Chinese investors. These visits produced a total of 23 cooperation agreements on various sectors such as investment, defense, and infrastructure development projects that will potentially employ the BOT model.

Beginning with the visit of the late Premier Li Keqiang to Cambodia in January 2018, there has been a fast-climbing rate of China’s BOT investments in mega projects in Cambodia, said Aun Chhengpor, a Research Fellow at Future Forum, an independent Cambodia-based public policy think tank. For Cambodia, the approach works as it relieves the country of loan burdens.

“While BOT enables Cambodia to achieve its infrastructure development, the Cambodian government does not need to worry regarding the loan payment to China,” said Sam Seun, a policy analyst at the Royal Academy of Cambodia (RAC).

Still, some skeptics say that even without debts, Cambodia may still be under heavy Chinese influence. The country owes around $4.5 billion, or about 40% of its total foreign debts, to China.

It is worth noting that Cambodia has always been able to meet its debt obligations with zero defaults so far. Compared to Laos, Cambodia’s debt is less than 40% of its gross domestic product (GDP) while Laos’s debt share stands at more than 100% of its GDP. 

In any case, the BOT approach allows Cambodia to maintain its debts. Aun Chhengpor, the Research Fellow at Future Forum, believed that it’s a win-win solution in this sense. 

“The country gets the facilities to utilize, the company gets the funding and the profits, the government gains its performance-based legitimacy, and the national debt level is contained,” he said. 

Maintaining debts is important for many Cambodians. While for some it’s about avoiding China’s so-called “debt trap”, for others, it’s also about effectiveness.

“Since there is no accountability and transparency regarding the project implementation under the Cambodian government, I do not think that the government can effectively use loans for constructing its own project”, said San Mala, a human rights and environmental defender in Phnom Penh, who has been involved in defending human rights and environment since 2016. 

He pointed to the Kampot International Tourism Seaport project as an example. The seaport took a $18 million loan from the Asian Development Bank (ADB) in 2018, and despite being scheduled to finish construction by the end of 2021, it remains in progress with the Cambodian government continuing to seek investors.

Transparency Needed

While there are many upsides, China’s heavy BOT presence in Cambodia still has some drawbacks.

Aun Chhengpor, the Research Fellow at Future Forum, said it remains a concern when Cambodia’s most critical infrastructure, including the airport and the trading checkpoints comes from a single source. “Foreign state-owned companies with half-century control over the facilities could bring the hosting nation’s autonomy and sovereignty into question,” he added.

Chhengpor suggested that there should be more transparency on how terms and conditions of these projects have been negotiated and written. The source of funding of those projects should also be diversified, and there should be a fair bidding process so that various companies from multiple sources can participate.

Most of China’s BOT investment projects in Cambodia are built, financed, and managed by Chinese companies for a period of around 45 to 50 years. 

San Mala, the human rights activist, suggested the government create a clear mechanism regarding the quality of infrastructure under the BOT model. This is to ensure that when a project is transferred to Cambodia, infrastructure will still be in good shape and able to generate income.

Mala also noted that along with the increase of Chinese investments in Cambodia since 2013, there has been an increase of forced relocations among local and indigenous people and its effect on the environment. 

A report by Rhodium Group, a New York-based research provider, revealed that while Chinese companies investing in Southeast Asia generally comply with host countries’ minimum requirements around ESG practices, they usually do not go further. In the case of Cambodia, there is indication that there is poorer compliance by Chinese companies compared to when it engages with other Southeast Asian countries.

Sam Seun, the policy analyst, said that environmental concerns could be politicized. Where there are some real environmental fallouts, Cambodia has proved to be cautious, he said. 

For example, Cambodia is the first country in the Mekong region to postpone hydropower dams in the Mekong river for ten years from 2020 to 2030, while Laos and Vietnam, who have strongly advocated for environmental protection, have never stopped building dams along the Mekong River.

By 2022, there were around 102 dams along the mainstream Mekong river, of which 23 are under operation and seven are under construction in Laos, while there are 10 under operation in Vietnam. There are four dams in Cambodia which are under construction. The rest are in China and Thailand.

“In conclusion, the Cambodian government already has the procedure and knowledge on how to protect the environment,” Sovinda said. He added: “The environment can only be effectively protected when there is strong political commitment from the government.”

Cambodia is a developing country with a GDP of $32.17 billion in 2023 and annual economic growth of around 5-6%. With its limited budget, experts said that China’s BOT approach has proved to help Cambodia develop its own infrastructure while continuing to invest in other sectors.

Sok Bophea is a researcher based in Phnom Penh.

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