Concerns new China-backed global lender could be a hurdle to self-reliance

Prime Minister Hun Sen inaugurates a hydroelectric dam in Koh Kong province in January
Prime Minister Hun Sen inaugurates a hydroelectric dam in Koh Kong province in January. AFP

Concerns new China-backed global lender could be a hurdle to self-reliance

When the March 31 deadline for joining the China-backed Asian Infrastructure Investment Bank (AIIB) rolled around, Cambodia was already well entrenched, having signed on as a founding member at a ceremony in Beijing last October.

But while Cambodia has long struggled to attract foreign direct investment to pay for much-needed infrastructure, analysts say this new line of credit may further deter the Kingdom from pulling up its own economic boot straps.

The bank, first proposed by Chinese President Xi Jinping in October 2013, aims to finance projects like roads, airports and low-income housing, as well as build regional economic inter-connectivity, with a start-up war chest of $100 billion.

China will front half the initial stake, giving it considerable control of the bank, but more importantly, it will gain global geopolitical sway that has long been dominated by the US and its Western allies through international development institutions such as the World Bank, International Monetary Fund and Asian Development Bank.

At the last count, 46 nations had signed up, with a flurry of both Western and Asian countries getting on board before the end of March.

Cambodian Prime Minister Hun Sen has been a vocal supporter of the new institution, saying it is a “win-win situation” for all nations and that it will complement the work of the World Bank and the ADB.

“The lack of capital is a main obstacle for countries in the development of infrastructure, so China’s initiatives for the AIIB and the Silk Road Fund are very useful,” he said, while inaugurating a Chinese-backed hydropower dam in Koh Kong province in January. “I fully support these initiatives.”

The Cambodian government, in its National Strategic Development Plan 2014-2018, said it would need $1.6 billion during that period to meet its infrastructure needs, including urban water and sanitation projects. Of that, $1.3 billion will go towards the development of roads, railways, power and electricity, and postal and telecom services. Government policy is to fund many of these projects through private-public partnerships.

Japanese money poured into the Neak Leung bridge.
Japanese money poured into the Neak Leung bridge. Moeun Nhean

According to the Asian Development Bank’s estimates, Asia will need $750 billion in infrastructure investment annually between 2010 and 2020. Meanwhile, a joint statement released by the Japan International Cooperation Agency and International Monetary Fund in 2011, pegged Cambodia’s infrastructure requirements at $13 billion through 2020.

The US and Japan, although recently softening their stance, have raised concerns about whether the AIIB will adhere to the standards upheld by the World Bank and ABD, and put in place sound governance and debt mechanisms, as well as incorporate environmental sustainability in future projects. China has been criticised for neglecting these types of controls on its lending in the past.

Sophal Ear, author of the book Aid Dependence in Cambodia: How Foreign Assistance Undermines Democracy, said the AIIB gave Cambodia an added option to get funding, but at a cost.

“If compliance isn’t strict with the AIIB, as it is with the IMF, World Bank and ADB, then it could lead to projects that result in bad outcomes on the environment, more displaced persons,” Sophal said.

Sophal said that while he hoped a new financial institution wouldn’t perpetuate Cambodia’s reliance on donor money, given Cambodia’s track record, the establishment would be eagerly awaiting the new funding option.

“Money is money and the authorities will get their cut. Of course, they can also be seen as complements,” he added.

“Build a road, then have a casino down the road. Get 30 per cent ‘sweat’ equity in the casino for ensuring it gets done without headaches.”

Cambodia has seen a recent flow of funding from the Chinese and Japanese governments, directed towards the building of roads, bridges and hydropower projects.

Last month, Japan pledged $230 million in grant aid and loans to improve National Road 5, to develop small hydro power plants in Ratanakkiri province, as well as a traffic management system in Phnom Penh.

Hiroshi Suzuki, chief executive and chief economist at the Business Research Institute for Cambodia, said as Cambodia continues to develop its hard and soft infrastructure, reliance on “easy money” should not replace a push for increased foreign direct investment.

“I hope that the Cambodian government would continue its current effort to attract FDI through the prioritised improvement of investment environment and infrastructure, which are requested by foreign investors,” said Suzuki.

The World Bank and ADB were known to have overly cumbersome procedures and give “bitter advice” to receiving countries, said Suzuki, but these were necessary to protect people affected by these projects.

“If AIIB could provide an escape route from World Bank and ADB regulations, Cambodian people could face much more difficulties such as [those caused by the] Chinese project in Boeung Kak,” he added.

Srey Chanthy, an independent economist, said that with the World Bank scaling back loans after the controversy at Boeung Kak – which saw some 20,000 displaced in 2008 – the AIIB would be able to fill that funding void.

But a few hundred million dollars from China and Japan, Chanthy said, would not make up for the Cambodian government’s inability to generate revenue and attract FDI.

Nevertheless, given the government’s current fiscal performance, the Kingdom has no option but to be reliant on donor funds.

“I am afraid that the [Cambodian government] may be still dependent on donors several more years into the future unless it has a good strategy to attract more direct foreign investments into the sector,” he added.

In term of geopolitical realignment, Chanthy said the new bank will put China in the driver’s seat with regards to its influence over the region, and it will be up to the US to engage China “before it is too late”.

“In the long run, China will dominate the region if the West does not have a good engagement strategy,” he said.

“If China could get four countries of ASEAN – Cambodia, Vietnam, Myanmar and Laos – and other countries in Asia to borrow from AIIB for its Silk Road initiative, you can guess its geopolitical influence.”

Sophal said that in today’s world economy “there are no permanent friends or enemies, only permanent interests”, adding that the US and Japan would lose out by staying away from the AIIB.

“Unfortunately, they will be left to dance with each other if the AIIB takes off. This world is not exclusive,” he added.


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