The Belt and Road Initiative in Cambodia: Costs and Benefits.

• Date: 01 April 2024
• Author: Menon, Jayant

1. Introduction

It is widely recognized that Cambodia and China have a strong and special political and economic relationship. Perhaps what is less well known is how old this relationship is, with diplomatic ties dating as far back as the thirteenth century (Zhou 2007). Cambodia's growing reliance on China for investment, trade, aid and finance has reached such a level that it is sometimes referred to disparagingly as a "client state" of China. As a small but independent, sovereign state, Cambodia is faced with the challenge of managing this relationship and ensuring that its national identity is preserved while its national interests are served. There is little doubt that the strengthening of ties between the two countries has been aided by the strong, personal relationship between President Xi Jinping and former Prime Minister Hun Sen. The relationship has also been aided by Cambodia's increasing isolation from and by the West, especially the US and Europe, which have imposed various punitive measures in response to a perceived deterioration in governance standards and human rights violations. The US and Europe have also been steadily increasing such pressures over time, starting with the 1997 coup that ended the power-sharing arrangement with Prince Ranariddh and installed Hun Sen as the sole Prime Minister.

An important factor driving the intensification of the economic relationship between the two countries is Cambodia's active participation in China's Belt and Road Initiative (BRI). Cambodia has been a vocal and enthusiastic proponent of the BRI since its inception in 2013. In Cambodia, the BRI focuses mainly on loans provided for the development of physical transport infrastructure, although it has also been associated, either directly or indirectly, with the development and transformation of the port city of Sihanoukville in the south. There are also investments in agriculture, energy, and manufacturing, apart from strengthening ties through people-to-people exchange.

This paper assesses the impact of the BRI, focusing on its costs and benefits, both real and perceived. Without a comprehensive, quantitative cost-benefit analysis of the BRI in Cambodia, the analysis relies on project assessments, qualitative studies, and perceptions of its costs and benefits. These perceptions are derived from various actors within the country itself--government, private sector, and citizens--and therefore aim to provide a narrative from an insider's point of view.

Following criticisms from the US and other non-BRI members, China expressed its commitment to improving the quality of BRI investments at the second BRI summit in 2019. Commitments were made to multilateralize the Initiative by adopting international standards and norms in project selection and all aspects of operation and implementation. The BRI projects were also expected to be more sustainable--financially, environmentally and socially--from the borrowing country's point of view. Although data is still limited, an attempt is made to try and assess whether these commitments from the second BRI summit are being reflected in the implementation of ongoing projects or the selection of new ones.

The paper comprised of six parts. The next section describes the growing relationship between Cambodia and China, focusing on the role of the BRI, and how this affects its stated aim of pursuing diversification in various forms. The third section aims to provide a working definition of BRI and the types of projects that are included in it. Following that, an assessment of the costs and benefits of the BRI is undertaken, drawing on existing studies. The perceptions of the BRI and its impact on the public sector, private sector, and the people of Cambodia are the subject of the fifth section. The final section concludes.

2. BRI, Growing China Reliance, and Diversification

As a transitional economy and Least Developed Country (LDC), Cambodia needs to attract foreign direct investment (FDI) or incur external debt if it is to grow at a rate faster than that determined by its low domestic savings rate. There is a sustainability element associated with each of these flows, however. The need for long-term debt sustainability is widely recognized and perhaps better understood than the need to ensure that FDI inflows do not exceed absorptive capacity. The latter is associated with ensuring that the external competitiveness of the tradable goods sector is not impaired by a sharp appreciation of the real exchange rate due to massive inflows of FDI. This could lead to a process of deindustrialization similar to that described as Dutch Disease. The relevant point here is that an economy like Cambodia should be selective in its choice of projects, whether financed by foreign investment or borrowings, if it is to grow in a sustainable and inclusive manner.

The increasing reliance on a single country for both its economic and non-economic needs carries obvious risks. Cambodia's total public debt stood at US$10.72 billion as of September 2023, of which just over 40 per cent was owed to China. As a share of GDP, this was about 15 per cent. As the China growth juggernaut starts to slow, diversifying trade and investment partners can spread risk by reducing vulnerability to country-specific shocks. Domestic structural changes by diversifying sources of growth will be enhanced by increasing the share of new investors that can help plug Cambodia into new markets and manufacturing global supply chains. (1) There are costs associated with increased concentration and need to be considered in assessing net benefits of future engagement. (2)

But has the increasing reliance on Chinese investment and aid associated with BRI reduced or crowded out engagement with other investors and donors? There is evidence to suggest that this may not have been the case. For instance, Calabrese and Cao (2021) find that the Cambodian government has employed its Development Cooperation and Partnerships Strategies (see CDC 2013, 2019) to coordinate aid to develop both BRI and non-BRI-related infrastructure to meet its economic needs. Despite China dominating the funding of infrastructure development through the BRI, there are many other donors and financiers involved in transport and energy infrastructure development in Cambodia. As shown in Table 1, total disbursements associated with ODA from China between 2019 and 2021 are only marginally higher than those from Japan over the same period (Ngin 2022).

Table 1 also indicates that planned disbursements between 2022 and 2024 from China and other donors will continue their historical trend of decline. The drop is particularly sharp for 2024, which may simply reflect increased uncertainty that far into the future. Even after putting aside 2024, should this trend be a source of concern for the future of the BRI in Cambodia? There are several reasons to suggest that it should not. First, the decline is not as sharp as that of the other major donor, Japan. Second, it may reflect changes in the composition of BRI activities from hard to soft infrastructure, which involves lower financial outlays. This could be in response, at least in part, to the second BRI summit. Last but certainly not least, it may also reflect a shift towards non-ODA financing. A shift towards greater Chinese equity investment and private sector involvement has already started and this trend could increase in the future.

Therefore, despite the growing reliance on Chinese aid and investment, the government has been careful to avoid crowding out aid and investment from other sources. Some see the government leveraging the growing relationship with China to strategically catalyse more aid and investment from competing sources in the region.

3. Defining BRI Projects in Cambodia

There is no official list of BRI projects in Cambodia. To avoid including all China-related investments or loans as part of the BRI, Wang (2022) provides a set of criteria to be used in determining which projects should be included. Projects are classified as being part of BRI if they are: (i) financed, either totally or partially, by loans from Chinese financial institutions; (ii) invested in by Chinese enterprises (either state-owned or private); (iii) invested in by joint ventures between Chinese firms and their local partners; and (iv) part of China's foreign assistance programme. It is clear that this is a very broad set of criteria and in a developing country like Cambodia would cover almost all Chinese investments, joint ventures or loans.

Based on the criteria listed above, Wang (2022) identifies 101 projects in Cambodia that can be considered part of the BRI. A significant share of projects relates to loans provided for the development of physical transport infrastructure. These include major road networks, such as the US$2 billion, 190-kilometre Phnom Penh-Sihanoukville Expressway, major new airports such as the Siem Reap International Airport and another in Phnom Penh, and various smaller connectivity projects. As of June 2021, China had built 3,287 kilometres of road and constructed eight main bridges with a total length of about 7.7 kilometres as part of the BRI.

The BRI in Cambodia has received a lot of negative press coverage through its association, either directly or indirectly, with the development and transformation of Sihanoukville. Large amounts of Chinese investments have transformed Sihanoukville from a...