Is Chinese investment going to swamp Cambodia in debt?

YUAN

Direct foreign investment from China into Cambodia now outstrips that from all other sources combined. Is this a problem?

Right now the biggest national issue that everyone is talking about in Cambodia must surely be the topic of Chinese investment. Due to sizeable land transfers particularly around Sihanoukvlle, and with the instant-high-rise nature of Phnom Penh there is a strong and palpable perception that China is disenfranchising local Khmer people.

Property and real estate are the leading forms of foreign investment. In part because the effort going into starting an actual new business (such as a clothes or bicycle factory,) is still harder work in Cambodia than in most of its Asian neighbors. The World Bank puts Cambodia 138th on their Ease of Business Index – with neighboring Vietnam 69th and Thailand 27th by comparison. Cambodia lacks clear business laws and is penalised for the level of paperwork required.

So a big hotel is simpler. Sold as a property development – on a land concession made simple by the Government – the advent of Chinese-built hotels, run for Chinese tourists, with minimal wages going to local Khmer staff (who work 12 hour shifts) and with profits going straight back to China is a highly visible form of direct foreign investment that is hardly leading to a wealthier populace.

The Government has already overturned morality based laws (gambling for money is illegal in Cambodia but has been legalised for visitors to the little-Macau Chinese casinos of Sihanoukville.) So much for sovereignty.

Land concessions are also a big part of the perceived problem. Human Rights Watchdog LICADHO estimate that 2 million hectares of land have been made available for developers, local and foreign, but often at the cost to local land owners who have been kicked off their farms.Dispossessed, (as the ABC of Australia reported of farmers who lost their land to a Sofitel development in March 2016) protestors were shot and wounded by armed forces on behalf of the hotel group.

Here is a map detail land concessions across Cambodia. Concession awarded to Chinese interests are marked in red, local interests are in blue while Vietnamese interests are in green.  Source map is bigger, clearer and interactive. Click here.

CAMBODIAN LAND CONCESSIONS

But is Chinese money exposing Cambodia to a future of debt-laden servitude? Right now Cambodia’s foreign debt as a proportion of GDP is relatively modest, though climbing quickly. There are two prices to be paid though.  One is the social debt – the idea that Cambodians are becoming, and will remain, in a cheap labour economy.

Then there is the fiscal debt. Here Cambodia needs to watch itself. The question is: who owns the infrastructure. Historically this has always been the business of Government, but China has the capital and human resource to come in and extend the sea port, put in hydro schemes and develop the currently struggling road network – then the ‘rates’ must surely get paid to the country that funded these things.

This from the Hong Kong Trade Development Council website: August 2018.

At the end of last month, Cambodia’s Ministry of Public Works and Transport (MPWT) announced that work had been completed on 2,000 kilometres of new roads, seven major bridges and a container terminal servicing the Phnom Penh Autonomous Port. All these initiatives had largely been backed by the Chinese mainland, with funding provided from within the framework of the Belt and Road Initiative (BRI).

In an article published by the Phnom Penh Post, on March 27th, 2018, journalist Robin Spiess noted that China’s financing and investment of the Belt & Road projects in Cambodia could lead to a significant rise in public debt, and even take it to ‘distress’ levels.

According to a policy paper released by the Center for Global Development, Cambodia will likely see a significant rise in debt to China as a result of the Belt and Road Initiative. At the end of 2016, Cambodia’s total public and publicly guaranteed debt was $6.5 billion, a relatively low percent of the country’s $20 billion GDP. About half of that $6.5 billion debt was owed to China, according to the report.

Miguel Chanco, lead Southeast Asia analyst for the Economist Intelligence Unit (EIU), noted that the report was accurate regarding the risks to Cambodia, but also said any prediction of future debt levels was complicated by the overall lack of transparency of BRI projects.

“Our estimates put the country’s public debt stock at around 35 percent of GDP, which is well below the median for Asean and emerging markets at large,” Chanco said. “Having said that, I am concerned about the lack of transparency in many of China’s projects in Cambodia, as it makes it difficult to determine the latter’s overall sovereign debt commitments.”

Publicly declared projects at the end of 2016 were predicted to leave Cambodia indebted to China by an additional $3.5 billion though this figure might well be much higher.

One example is China’s proposal to develop over two million kilometers of national expressways [in Cambodia] by 2040”, which is a broad-brush swoop of a figure to begin with, and given the geo-technical engineering risks of building on a flat, sand-based terrain could easily blow out beyond the estimated cost of around $26 billion. A blow-out could leave the Kingdom significantly more in debt to China.

Meanwhile estimates of the national debt to 2020 is less fuzzy.

The EIU forecasted a rapid rise in Cambodia’s external debt in the next few years, according to Chanco. “We expect the country’s total foreign debt stock to rise to $17 billion by 2020,” he said.

Right now Chinese investment hasn’t pushed Cambodian debt prospects over the brink, unless you factor in the very real human rights costs. But in pure money terms Cambodia is going for the quick and easy path to economic growth.  It has a long wayto go however, before it becomes an economy – like that of Singapore – where business is easy to conduct and where locals are not in underpaid jobs. Current policy is growing the economy, but it is a recipe for dissatisfaction and a real sense of disenfranchisement.

I write these blogs as an observer of changing Cambodia. I’ve been involved in a small NGO since 2004 back when the tallest building in Phnom Penh was 8 storeys high. I hope expats, volunteers and others in the Cambodian community find these reports useful.  I try to compile hard data from credible sources.

Meanwhile: China and the US square-off in dispute over recent history.  Click here.

 

Cambodia’s balancing act on bicycles

New bicycle!

New bicycle!

Bicycles are the most common form of transport in Cambodia and yet there aren’t enough of them. When the photo above was taken, in late 2005, the boy had been the victim of a cycle theft; a first at Savong’s School. The thief had waited until class was in, and then helped himself to one of the many parked bicycles. The victim was distraught and it was not a good event for the brand new school’s reputation. We made good by promptly replacing the boy’s bicycle with a new one – and we placed the students’ bicycles under guard from then on. None have gone missing since.

But bicycle thefts are common in Cambodia, a signifier of the poverty that still plagues the country, as well as the thirst, especially, for new generation mountain bikes with their virtually puncture-proof tyres and sophisticated Shimano gears. One Facebook friend of mine lost his within 60 seconds after stopping at a roadside stall. He turned around and his Giant bicycle was gone.

As anyone who has ridden one knows, bicycles represent freedom. You can sail a bicycle further than you can comfortably walk, and it is the provision of bicycles that makes the difference for children in poor, remote areas between attending  school and missing out school completely.

Not surprisingly then, a large number of charitable organisations are dedicated to providing bicycles for disadvantaged Cambodian children.These include:

Readers are invited to add others – there are many such initiatives.

The irony is, while we collectively buy new bikes, or gather and recondition used bikes from the west, and send these by container to Cambodia, the Kingdom is probably flooding your market and mine with bicycles made, actually, in Cambodia.

Cambodia is one of the five biggest bicycle exporters

These Cambodian made bicycles are selling fast in Europe where sales have climbed from 200,000 units per annum to more than 600,000 units (estimated) in just three short years. Cambodia is now the second biggest exporter of cycles into Europe now, behind only Taiwan.

Today, several Taiwanese-owned bicycle manufacturers are operating in Cambodia. They include Atlantic Cycle and its subsidiary A&J, who have operated in Cambodia since 2006, as well as relative newcomers Smart Tech (Cambodia) and Worldtec Cycles (Cambodia). The manufacturers are located in Svay Rieng province, near the Vietnamese border enabling components to be imported from Vietnam, and finished product ready for export across the border.

More recently the well regarded manufacturer of Specialized bicycles has also begun assembly in Cambodia.

To put things into perspective, here is the league table of global bicycle exports, as tracked by Daniel Workman, the founder of World’s Top Exports (WTEx) website: a great analysis of world trade patterns. Below are the 15 countries that exported the highest dollar value worth of bicycles during 2013:

  1. China: $3,189,787,000 (34.1% of total bicycle exports)
  2. Taiwan: $1,749,182,000 (18.7%)
  3. Netherlands: $669,720,000 (7.2%)
  4. Germany: $560,742,000 (6.0%)
  5. Cambodia: $437,076,000 (4.7%)
  6. Belgium: $275,488,000 (2.9%)
  7. Italy: $254,054,000 (2.7%)
  8. Spain: $185,760,000 (2.0%)
  9. Portugal: $173,618,000 (1.9%)
  10. Indonesia: $140,457,000 (1.5%)
  11. France: $139,044,000 (1.5%)
  12. Hungary: $137,902,000 (1.5%)
  13. United States: $125,300,000 (1.3%)
  14. Czech Republic: $118,654,000 (1.3%)
  15. Bulgaria: $115,392,000 (1.2%)

That was 2013, and exports have jumped since then.

Three reasons why Cambodia is the hot nation for bicycles

Why all this action? The answer is based on three things: cheap labour, anti-dumping moves against Chinese and Vietnamese manufacturers, and zero-tariffs for Cambodian sourced bikes into EU.

It is most probably the anti-dumping sentiment in Europe that kick started the growth of Cambodian cycle manufacturing. In Europe there was a concerted response to Chinese and Vietnamese made bikes that were flooding the market and threatening to damage, if not destroy the local bicycle manufacturing industry. Some manufacturers got round this by simply moving. their assembly factories from Vietnam to Cambodia

Besides labour costs in Cambodia are significantly lower than in neighbouring Vietnam and Thailand, which has also seen an out-migration of cycle manufacturing. With factory workers earning little more than $US65.00 for a 6 day week of full-time work, and the promise of fast-track approval by Government to remove any business red-tape, Cambodia has become attractive as an assembly point for bicycle manufacturers.

But here’s the clincher. Where bicycles from China or Taiwan or Thailand attract a 14% tariff in the lucrative EU market, Cambodian bicycles attract zero tariff.

The zero tariff goes back to an UNCTAD (United Nations Conference for Trade And Development) initiative, adopted by the EU, to encourage economic development amongst the world’s poorest nations (the so-called GSP List) by cutting tariffs.

According to the website of UNCTAD the scheme helps foster growth and job creation in developing countries. But according to the UNCTAD website the brakes may be coming on. Europe is likely to apply “cumulation” criteria to all bicycle imports. Put simply, if the parts are made in wealthier countries, and all Cambodia does is assemble these into bicycles, then the free tariff ride may be over.

Will the local cycle industry be big enough and resilient enough if this happens? And will the factory workers – whose conditions have been overshadowed by the garment workers case – get more than a living wage?

And does it make any sense to export bikes to a country that accounts for 5% of global cycle exports?

The answers, as usual in this complicated country, are not simple. The outcomes seldom fair.

Foreigners can help Cambodia by cleaning up their investments

Homeless land grab victims seek redress from the ANZ.

Homeless land grab victims seek redress from the ANZ. Photo: Siv Channa/The Cambodia Daily

One of the biggest social problems in Cambodia today is the relentless issue of land concessions to foreign (and some local,) owned companies who present the Government with grand plans of turning subsistence farm holdings into consolidated wealth-producing fields of rubber, palm-oil production or similar. It will create jobs, they promise. It will be sustainable. There will be minimal social cost. In fact local villagers will be better off!

Yeah right. A recent study by international watchdog organisation Rights & Resources Initiative found that practically all concessions end up in social failure, with villagers displaced, often with no compensation. Nearly three-quarters of a million Cambodians have been affected in this manner.

For more on the R&RI report, see this piece in the Phnom Penh Post, dated December 8th, 2014.The report says the Cambodia experience matches the global pattern of land grabbing by corporates.

The majority of the disputes evolved at the initial stages when companies set project proposals into action without input from locals.

“Second, risks can be reduced by maintaining strong environmental standards,” the report says, as environmental regulations were the most common source of noncompliance related fines and lawsuits.

Additionally, without strong relations with the community, even well-intentioned relocations or compensation fail.

However, evictees from the Borei Keila community – who had been promised relocation housing in 2003, but found themselves abandoned – said the problem is lack of accountability.

“If the company and the government officials especially had respected and implemented the contracted agreement, our people would have gotten more benefits from this project,” said Chhay Kim Horn, a representative. “It is the authorities and the company together that left us disappointed.

In 2011 the World Bank imposed a freeze on all new lending to Cambodia, reported Cambodia Daily,  in protest at the government’s forced eviction of some 3,000 families from Phnom Penh’s Boeng Kak neighborhood. Now three years later those residents are still urging the World Bank to keep the freeze in place because they still seek adequate compensation.

Increasingly, investor activists are joining the dots between where their investment dollars are going, and what these dollars are being used for. In Australia the ANZ Bank came under fire this year, back in April, when they were publicly shamed for pouring investor dollars into locally owned Phnom Penh Sugar – without ensuring that displaced villagers would be compensated (they accepted a paper promise but did not undertake further due-diligence) nor that adequate health and safety standards would be implemented. The Oxfam report which uncovered these failed promises was scathing of the ANZ for its hands-off approach on ethical issues – despite glowing mission statements advertised by the bank.

Australia’s ABC report is well worth viewing. Click here.

A year earlier, following intense scrutiny by Oxfam and watchdog Global Witness, Deutsche Bank of Germany divested of itself holdings in Vietnamese owned Hoang Anh Gia Lai Group a huge corporate in the rubber industry.

Here’s a quote from the German broadcaster DW’s report 03.12.2013:

In the report titled “Rubber Barons,” HAGL was accused of numerous rights abuses in relation to tens of thousands of hectares of land the Cambodian and Laotian governments have granted it.

Global Witness’ report assessed the environmental and social effects of HAGL’s rubber plantations in Cambodia and Laos. It stated that the company was flouting the law when it came to protecting the land rights of indigenous people, was illegally clearing forest, and held tracts of Cambodian land nearly five times greater than the 10,000 hectare legal limit.

“Families affected are impoverished, face food and water shortages, and get little or no compensation,” Global Witness said at the time. “Indigenous minority peoples’ spirit forests and burial grounds have been destroyed. When they resist, communities face violence, arrest and detention, often at the hands of armed security forces that are on the investors’ payroll.”

There are several failures here. On the frontline, the big corporates are acting as rapaciously as untethered giants did, I’m thinking of the United Fruit Company, a century earlier. They are in it for the quick dollar.

Second is the blind-eye being turned by authorities. The Hun Sen government wants growth at any price, and appears unwilling to enforce its own laws. There is a 10,000 ha land limit enshrined in law – but numerous corporates exceed this; even locally owned corporates. Then there are the issues of social justice to which the Government appears oblivious.  In fact, as dispossessed people protest their situation, the police have been called in to jail these protestors.

But third – and just as culpable – are the investors, the big banks or managed funds, and the mom and pop investors, who bankroll these operations.

Deutsche Bank never gave reasons for its divestment in HAGL, but it is pretty obvious they had been shamed by the difference between their ethical promise and their actual actions. First world investors need to connect these dots more often.

Cambodia – opinion poll captures cautious public mood.

I have long been a fan of public opinion polls because they bring an often ignored voice – that of the public – to the attention of those in power. A wise government need not necessarily be a slave to public opinion, the best decisions may be considered to be unpopular at the time, but it should always heed the sentiment of the public.

Having enjoyed a history of tight media controls, (the television broadcasters fundamentally ignore politics in favour of game shows and pop music,) Cambodia’s Hun Sen government is now operating in a much more openly informed environment. The press, namely the Phnom Penh Post, as well is Cambodia daily, have been active champions for journalistic freedom. Add to that, the Voice of America which, perhaps unlike the VOA the 1960s and 70s, which was very much a propaganda mechanism for the United States, is respected these days for bringing fair reportage to the Cambodian public.

As witnessed in the 2013 elections, the voice of the people themselves – using social media such as Facebook – has emerged as a potent voice in the political mix. The swell of support for the opposition clearly rocked the government. It is perhaps little wonder that this government is now actively gathering of intelligence from the Internet: identifying “troublemakers” in an effort to maintain some kind of control public opinion.

But here’s the thing: the public in any nation tends to have a good common sense understanding of whether the nation is heading in the right or wrong direction.

Right now, 59% of Cambodians feel their nation is heading in the wrong direction.

This is the finding of a significant survey, diligently conducted face-to-face, (I don’t envy the fieldwork design that must have gone into this study,) of 1000 citizens aged 18+.

The news is not all bad for the government, not at all. There is a general sentiment that the public considers the growth of the economy and the development of infrastructure to be good things for the nation. But they sound warning bells – highlighting corruption, deforestation and economic inequities as being causes for real concern.

From my perspective, as a researcher, and as an observer of Cambodia, the The Asia Foundation poll seems to be eminently fair. The Asia Foundation is a watchdog organisation, and for sure, they have an agenda –  “to assess attitudes and priorities of the voting public that may contribute to or constrain democratic reforms,’ but this hasn’t hindered the from asking balanced, non-leading questions, and enabling the public to voice their opinions in their own words.

This from Germany’s public news broadcaster DW.

Survey shows Cambodians increasingly concerned about country’s direction

Despite rapid economic growth, more Cambodians than at any time since 2004 feel their country is moving in the wrong direction, a new poll found. Corruption, deforestation, and economic issues top the list of concerns.

The nationwide survey, published by The Asia Foundation on Wednesday, December 10, shows that while 32 percent of respondents feel Cambodia is heading in a positive direction, a majority (59 percent) believes things in the Southeast Asian nation are going the wrong way.

Conducted between May 19 and June 9, and titled Democracy in Cambodia – 2014: A Survey of the Cambodian Electorate, the public opinion poll cites corruption (19 percent), deforestation, and economic issues (26 percent) as the main reasons for the increase in pessimism. The tangible results of infrastructure (27 percent) and economic growth (21 percent) are cited by those who believe the country is going in the right direction.

The representative survey is the organization’s third on democracy in Cambodia, a follow-up to polls conducted in 2000 and 2003 and is based on 1,000 face-to-face interviews with Cambodian citizens aged 18 and older in 23 provinces (excluding Kep) and the capital Phnom Penh.

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Malnutrition still a problem in Cambodia

Rice production is rising in Cambodia - but as agriculture develops there is still a serious malnutrition problem.

Rice production is rising in Cambodia – but as agriculture develops there is still a serious malnutrition problem.

For anyone who visits Cambodia regularly  there is a palpable sense, upon each visit,  that this troubled little nation is making rapid strides economically.  In 2004 I remember my motorcycle driver in Phnom Penh  taking me to see the most dazzling symbol of the modern age: Cambodia’s first escalator. He had never actually set foot on it before, and it was a pleasure watching him take his first ride.  At the time as a Westerner, I felt very much like a visitor from another and very privilegedplanet.

Today the sky line-up Phnom Penh is sprouting high-rise buildings at a rapid rate, smart phone usage across the nation is soaring, roads are becoming congested with cars and at first glance it appears that the days of poverty are basically over. This poses a question for any supporters of NGOs in Cambodia: at what point do we say, the job is done –  mission accomplished?

Well, don’t pop the Champagne just yet. According to some recent figures published this year, and funded by the Independent European based organisation;  Global Governance for Hunger Reduction Program productivity by Cambodia’s agricultural sector has soared, at least in US dollar terms,  since 2007 –  basically doubling in that time from US$3.5 billion  to US$7.9 billion in 2011.  Now those figures include the tremendous price spike in commodity prices that occurred in 2008 –  but even so,  if we measure cereal yields (rice, maize etc)  we see yields growing  by 16%  in terms of tonnes per hectare over the same time. (The real revenue is being generated by rubber, palm oil and sugar,)

The government  has a medium to long-term strategy of increasing the value and quality of agricultural output so that the rice, for example, meets the stringent quality standards demanded by Western markets who in turn will pay premium prices. Cambodia will be sharing this story at the Milan Expo 2015.

But the same source of facts and figures has a few warning signals.  Right now Cambodian farmers,  who make up 65% of the total national workforce, are focused on low value add commodities – namely rice – whereas Cambodia’s main commodity imports,  measured in dollars,  a spearheaded by the importation of, get this: cigarettes.  Economists often  illustrate their science by giving examples of guns and butter,  but in this modern example Cambodia appears to be trading cheap rice for expensive cancer.

That’s my judgement anyway,  but the figures also highlight the degree of malnutrition that is occurring even today in booming Cambodia.

Since 2007  the poverty rate in Cambodia has halved,  but it still sits at 20% of the entire population below the line of  $30 per month. The poverty gap is widening. The wealth is trickling upwards quicker than downwards.

One measure of malnutrition is the incidence of underweight children under five years old. In 2007 when the poverty rate was closer to 40%, some 28.8% of children were reported as underweight. Two years later the figure was virtually unchanged.

According to the authors of the report the number of Cambodians undernourished in 2009  was 2.9 million. Today the figure is improving –  but the figure is still over 2 million people.

Finally, they report the improvement between 2007 and 2011  of the percentage of Cambodians who have access to clean water sources. Again, this is improving, but has a long way to go. In 2007 some 59% had access to clean water. Four years later  the figure had improved to 67%. Still, that leaves close to 5,000,000 Cambodians without access to improved water sources today.

The economy may be booming, but with 80% of Cambodians living in rural circumstances, there is a sense in the data that many are toiling  hard, but getting no further ahead.

Is this Cambodia’s most precious resource?

From the air we see these rice paddies as watery fields.

From the air we see these rice paddies as watery fields. But the rice economy relies in equal measure on another resource.

Every day hundreds of dump trucks, open topped Chinese vehicles that look they were inspired by Mongolian fortress design, ply the roads of Cambodia, delivering their mountains of cargo. It suddenly struck me, one afternoon, that this is the stuff that the Cambodian economy rests on. Not coal. Not iron ore. Not bauxite.  But sand.

Sand makes the difference in a land of which 75% lies within one meter of the water level: of being just one typhoon away from being submerged or emergent.

When you buy a property in Cambodia the first thing you do is put up a wall, and then build up your property with truckloads of sand.  This will prevent flooding. It will allow your trees to grow. Water won’t pond after a heavy storm, and mosquitoes won’t breed.

Sand builds the walkways that rice farmers use to navigate their paddy fields. Many of these walkways are hundreds of years old, and the work of predecessors who knew the power of irrigation, but also the efficiency of roadways wide enough to carry the harvest.

Sand forms the understructure of the Number 6 Highway that forms the economic spinal column of Cambodia – a two lane blacktop road that, given the floodplains it travels over, is a greater engineering marvel than most of us realise. How much of this goes back to raised sandbanks built a thousand years ago during the Angkor years? There are clues along the roadway, for example the ancient bridges near Dam Daek 30 kms East of Siem Reap.

Sand. Unstable sand. Many of us were raised on the parable of the wise man who built his home on rock, and the fool who built his house on sand. Yet here is a whole Kingdom, resting on the stuff and – so far – proving pretty wise about it. Those trucks keep moving it around, one step ahead of the next typhoon.