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 of this approach 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 often neglected.

Cambodia is a case in point. Observers often view Cambodia as China’s staunchest ally in Southeast Asia. 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 and 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 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$500–700 million per annum was 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. Construction of the dam displaced around 5,000 Cambodians. Tens of thousands more have been negatively affected by its 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. 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.

The Cambodian government struggled to finance costly priority projects, and turned to the ‘Build, Operate, Transfer’ (BOT) model to attract investors.

It offered generous terms — tax breaks, free licences for dam construction and water use, rapid environmental approvals and pledged 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, but 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 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 a 51 per cent shareholder in the project. 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…

Author: Shahar Hameiri, University of Queensland

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