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Power Woes Dim Economic Outlook

Power Woes Dim Economic Outlook

In 1992 Cambodia's GDP grew by at least 8 percent making it one of the fastest growing

economies of the region according to a United Nations (UN) report released at the

end of February. But despite this dramatic figure, all the more impressive for being

recorded during times of continued political uncertainty, such growth has largely

been stimulated by the U.S. $2-3 billion United Nations Cambodia operation, which

has placed more than 20,000 personnel in country as part of the United Nations Transitional

Authority in Cambodia (UNTAC). The same UN report later acknowledges that "very

little of economic growth has been directly activated by domestic sources."

Since 1989, a decade after coming to power, Cambodia's government began moving from

a centrally planned economy toward free market ideas which paved the way for privatization

of state enterprises, real estate and natural resources. In terms of social unrest

these changes occurred peacefully apart from minor demonstrations over allegations

of corrupt asset selling in December 1991 plus the expected public dissatisfaction

with price increases and soaring inflation as state subsidies were withdrawn.

Leasing is the most common form of privatization and officials of the Cambodian Ministry

of Industry confirm that they have already leased or sold 48 firms out of a total

68. While such asset stripping has raised much needed hard currency particularly

from the 5 foreign companies involved in Cambodian oil exploration, because of Cambodia's

negligible legal framework an unknown amount of this wealth has ended up in personal

rather than state coffers. Further more foreigners have bought land-largely by using

the names of 'sleeping' Cambodian partners-despite formal government policy to the


Private Sector

Thus while much of state enterprise is being sold and the remainder decays under

continued state control, a dynamic private sector has developed over the last 12


Nevertheless despite such proliferation there are certain very important caveats.

Firstly the most common industries of construction and services (restaurant, bars,

hotels) have shown a direct growth correlation with the UNTAC mission. Villa accommodation

and office space in Cambodia's capital Phnom Penh largely aimed at UNTAC civilian

personnel hit peak rental-rates from the first until the last quarter of 1992 when

leases were anything from $10,000-$30,000 per annum and higher.

As UNTAC soldiers were increasingly redeployed from the capital Phnom Penh throughout

1992 and once most UNTAC civilian personnel moved their work places into the main

UN compound toward the end of the year many restaurant and bar profits plunged dramatically,

construction activity decreased, occupancy in many of Phnom Penh's 70 hotels and

guesthouses fell and so too did accommodation prices.

Secondly while such private activities as brick and ceramic tile production, sawmills,

food and drink processing and engineering repair shops have expanded rapidly they

nevertheless remain small and informal cottage industries.

To quote from the February UN report "Such investment is directed predominantly

to serving foreign enclave rather than domestic interests, and an important component

of that external demand will begin to disappear in the second half of 1993 as UNTAC

winds down its peacekeeping mandate." This cut-off point is currently set for

August-September 1993.

Industry in Decline

The unmistakable message is that investment in the manufacturing sector has been

negligible and while industry has increased its share of GDP from 5 percent in 1985

to approximately 16 percent in 1993 it is difficult to avoid the report's conclusion

that" ...(Cambodian industry) appears to be in terminal decline."

"Until private investment finances new manufacturing plant, in part geared to

local processing, industry will not be an important component of the Cambodian economy

and employment prospects will remain predominantly linked to agriculture."

Most Cambodia observers accept this investment scenario with its associated problems,

not least of which the fact that current private enterprise, albeit on a cottage

industry scale, remains concentrated in urban areas, notably Phnom Penh whereas over

80 percent of Cambodia is rural and 85 percent of the work force are involved in

agriculture. This in itself represents a major developmental problem as well as a

potentially explosive political issue in terms of the widening city/countryside wealth


Returning to specifics, private enterprises face a number of major constraints in

breaking out of the cottage-industry category and having the ability, let alone the

incentive, to become major investment players.

The major constants on private sector development in Cambodia remain political uncertainly,

poor infrastructure, an acute shortage of skilled labor, economic instability, the

absence of a functioning legal framework, an outdated accounting system tailored

to a planned economy and the absence of a rational banking system. Examination of

one such specific problem will serve to illustrate the extent of these constraints

and provide food for thought for businesses yet to take the plunge into Cambodia.

Answers as to what is the most common and frustrating infrastructure complaint in

Phnom Penh are likely to produce as many responses as persons interviewed. Nevertheless

one chronic problem which is increasingly becoming a major international rehabilitation

priority is the unreliable, increasingly interrupted and also comparatively expensive

($0.225 per kilowatt hour) power supply, the lack of which for most businesses has

necessitated the purchase of one or more private generators to compensate for the

frequent power blackouts.

Seventy-five percent of Cambodia's latent power utility of 85 megawatts (MW) is concentrated

in Phnom Penh. Despite this only 15-20 percent of the capital-mainly certain government

ministries-receive permanent and regular power. As much as 35 percent of the city

remains in darkness with occasional interruptions of power. A situation which has

led to great demand for diesel generators.

The problems with Phnom Penh's 4 power plants and the main reason why power plant

Number five is no long-er in operation is poor maintenance and lack of spare parts

for these greatly outdated power-generating machines, some of which were installed

in the 1920s. This problem largely arises from lack of skilled personnel to the extent

that less than half the pre-1975 Phnom Penh electricity department (EDP) engineers

survived the harsh 1975-1978 Khmer Rouge regime.

Added to this are the outdated and insecure distribution networks of power cables

and cabines from where electricity is 'bought'. According to the 1992 World Bank

rehabilitation agenda an estimated $1 million of electricity has been 'stolen' through

the use of private cables since July 1991, the date when the price per kilowatt/hour

(KW/H) was raised to 170 riels for Cambodians and $0.21 for foreigners.

Increased policing appears to have resulted in a drop in the illegal leakage of electricity

but the Phnom Penh electricity authority remains chronically short of money, so much

so that it has recently sold off 14 million riel of public real estate to buy oil

for the increasingly obsolete power generators.

But the man reason for the electricity authority's bankruptcy is the state itself

and its own cash crisis.

To quote from the World Bank agenda: "About half a year's worth of total sales

has not been paid by the state..." At the present moment while actual disbursed

rehabilitation aid to Cambodia is still only just over 10 percent ($95 million) of

the $880 million pledged in Tokyo's conference last June, payment of all or most

of these arrears appears unlikely, but even if the state did pay, the large exchange

fluctuations would mean the EDP would still incur huge losses.

Indeed the Phnom Penh power situation is so serious that over the period from 1993

to 1996 the 1992 World bank agenda recommends spending $77 million on power rehabilitation

just to cover the capital and surrounding area. The rehabilitation and renovation

of the existing machines and distribution network is the main priority in the short

term with a recommendation that $23 million be spent up to 1996.

In the medium term, rehabilitation of Cambodia's 1960's-built and long since abandoned

hydroelectric plants is seen as an effective way to reduce fuel expenditures which

currently represent 80 percent of power generating costs. Estimates for hydroelectric

rehabilitation are $37 million over the same period.

But for the moment the problems remain at a time when donor countries are dragging

their feet over the pledges that were made last June and Cambodian political instability

is once more to the fore.

Long-term Outlook

In conclusion how does this rather gloomy picture relate to business in Cambodia?

Firstly Cambodia is no klondyke. The initial wave of carpet-bagging companies coming

in on the shirt-tails of UNTAC appears to be over. The quick profits for would-be

restaurateurs and bar owners from the primarily foreign and primarily UNTAC cash

surplus have also largely disappeared. Apart from the continued, albeit illegal,

export of Cambodia's mineral and forestry assets the quick profits and minimal investment

approach for the time being at least, appears to be in decline.

"Cambodia is a long term proposition" commented an economic advisor at

America's diplomatic mission in Phnom Penh. This point is repeatedly made by foreign

businessmen working here: if a business is prepared to work at operating in Cambodia,

it will be in an advantageous position once increasing amounts of rehabilitation

money start flowing into the country after the forthcoming May 23-25 elections.

Apart from purely 'Cambodian' reasons foreign businesses have also been attracted

to Phnom Penh as a stepping-off point into neighboring Vietnam (just 55 minutes by

plane) and to a lesser extent Laos.

"Despite Cambodia's uncertainties, we take a long-term view, we feel confident

about Cambodia and that's why we're here" commented the American managing director

of a shipping line based in Phnom Penh since late 1991.

Changes toward a more legally-based business environment will take time. With the

albeit flawed moratorium on gem and log exports and the eager anticipation of the

massive international, bilateral and multilateral aid there is a slowly growing optimism

that ultimately Cambodia will obtain a more peaceful future which in turn will allow

business the opportunity to practise real as opposed to transient investment.

Borrowing the words of Winston Churchill: "It is not the end. It is not even

the beginning of the end. But it is perhaps the end of the beginning."


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