Chinese Overseas Investment in Cambodia: Conflicts and Solutions

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Cao Ke and Wang Xiaojuan of the Heinrich Boll Foundation’s China office report on the environmental and social conflicts stemming from Chinese overseas investment and provide recommendations on how those conflicts can be ameliorated.

“Cambodia, long shunned by international big business, is keen to benefit from all these new-found opportunities. Contracts are being signed off like autographs and there are concerns for the long-term development of the country. The Chinese have come to the table to play for big stakes and pledged US$ 1.1 billion in assistance in late 2009, considerably more than all other donors put together, and with no burdensome strings attached to promote transparent, rational government management. Beijing preaches a different faith than that of Brussels.

– Lonely Planet Cambodia, 2011

The above text was quoted from p.2 of the Lonely Planet Cambodia guidebook section on “Cambodia’s Foreign Investment Situation”.  On that same page there is an even more observant passage: “Cambodia’s unspoiled nature attracts many tourists but many places are being destroyed by the commercial activities of mankind. Ancient forests are being razed to make way for plantations, rivers are being sized up for major hydroelectric power plants and the south coast is being explored by leading oil companies.” The travel guidebook is not the only observer paying attention to China’s role in foreign investment projects in Cambodia. Since 2008, the China offices of the Heinrich Boll Foundation (Heinrich Böll Stiftung) have carried out a series on China’s role in globalization, especially its investment in resource development  projects in Africa and countries in the Mekong River Basin.

From July 2011 to June 2012, as a consultant to the Böll Foundation China Office’s project on “China’s Role in Globalization,” one of the authors of this article, Ke Cao, visited Cambodia for a year of fieldwork. He was dedicated to reducing conflict, promoting mutual understanding, and encouraging constructive dialogue between Chinese overseas enterprises, local people, and local civil society organizations. At the invitation of China Development Brief, he wrote this article sharing his observations, thoughts, and experience over this past year in Cambodia.

Cambodia’s Recurring Foreign Investment Disputes

Cambodia in the second half of the 20th century experienced a long period of turmoil. In 1992, they achieved political reconciliation but not until the late 1990s did the political situation begin to stabilize. However, even today they are still affected by this historical legacy. For example, even around the capital of Phnom Penh, the work of confirming and issuing land deeds has not yet been completed. As one of the “least developed nations” designated by the United Nations Development Program (UNDP), the 2007 national statistics show that one-third of the Cambodian population lives below the national poverty line of U.S. $0.60 a day. Cambodia is heavily reliant on international aid. In 2010, donor countries pledged $1.1 billion, equal to half of all government expenditures that year. Due to the significant involvement and influence of the international community, a fairly large space is given to Cambodian non-governmental organizations, opposition parties, and the media. Although their real power is debatable, there are a large number of Cambodian NGOs and some of them participate in policy dialogues with the government. The Cambodian government sometimes consults these NGOs on policy formulation and on the execution of certain projects.

One major goal of the Cambodian government is to attract large amounts of foreign investment to spur economic development. They specifically emphasize industries related to resource exploitation such as the development of land for special purposes (such as agricultural plantations), real estate, utilities, mining, and oil and gas. However, most of these types of projects lead to disputes over issues such as the relocation of people, and protection and restoration of the environment. All are subject to disputes.

For local companies, the most common disputes are caused by real estate development and construction of plantations. For foreign companies, the situation they face is perhaps more complicated because laws and regulations are different from their home countries, not to mention the differences in culture, language and society.  Some projects by foreign companies might also involve issues such as geopolitical competition, ethnic strife, and trade protectionism.

In recent years, international organizations and MNCs with high social and environmental standards frequently were caught in a vortex. Even poverty alleviation-oriented, not-for-profit railway construction projects co-sponsored by the Asia Development Bank and the Australian Agency for Overseas Aid faced criticism by NGOs for serious problems in the resettlement process. They were criticized for failing to comply with their own policies while implementing the resettlement.  In 2008, international NGOs exposed a BHP Billiton prospecting project claiming that the project’s “community development fund” was in fact a “tea-drinking fee” given to government officials. This led Australia to carry out an official investigation. In the end, BHP Billiton withdrew from the project.

Chinese Enterprises in Cambodia

Official data from Cambodia shows that from 1994 to July 2011, Chinese investment in Cambodia reached $6.6 billion, while over the same period American investment was $280 million. There is no doubt that China has become Cambodia’s largest provider of bilateral aid for infrastructure projects as well as the largest investor in the country ((China’s investment in Cambodia reaches of 8.8 bln USD [EB / OL]. Under the BOT (Build-Operate-Transfer) model, China has invested $1.5 billion in five major hydropower stations that are currently under construction or already completed. The number of Chinese-funded hydropower projects may continue to grow. The Erdos Group (鄂尔多斯集团), a private company from Inner Mongolia, announced in 2009 it would invest $3 billion in Cambodia over the coming decades, including a real estate development (Wan Valley Lake), power plants and a bauxite project. In addition, the Union Group (优联集团), a private enterprise from Tianjin, has already received a 99-year special use license to develop 41,000 hectares of land in Kong Province, Cambodia for waterfront real estate projects. The Union Group announced that the total investment would be between $3.6 and $5 billion. China’s investments in vulnerable industries such as mining and large-scale agricultural plantations are also growing. Nonetheless, Cambodia’s 2010 gross national product stood at only $14 billion.

Chinese investments are attracting attention not only because of their size, but also because they’ve been implicated in social and environmental disputes.  Some of these projects have created serious social conflicts. As has always been the case both at home and abroad, there are problems with the track record of Chinese companies which have developed a poor reputation on social and environmental issues. Abroad, the words “Chinese enterprises” and “China” are easily linked. Just as the Lonely Planet’s Cambodia Guide says, there’s a general impression that Chinese aid comes with “no strings attached.” This further confounds the above issue. In fact, corporate investment from China has little to do with China’s foreign aid. Although the influence of foreign aid and corporate investment is growing and their channels are diversifying, due to poor communication, many foreigners and international media organizations and NGOs conflate “Chinese enterprises” (both private and state-owned) with the “Chinese government,” and the “Chinese people”.

Perhaps it is easy to see why the Cambodian government welcomes Chinese investment, while the media, local people, and NGOs are suspicious, disgruntled and even hostile.  However, most Chinese enterprises in Cambodia believe that while “[their] environmental impact isn’t the best, it’s certainly not the worst,” and that “foreign parties are paying particular attention to China”.  But from an objective perspective, it is only natural that the biggest kid on the block attracts more attention. Add to that  the past reputation of Chinese firms, and it is clear that the only solution to these problems is greater transparency and improved communication with the media and people.

The Crisis Caused by China’s Investments in Cambodia

The earliest Chinese investment project that concerned NGOs in Cambodia started construction in September 2007. The Kamchay Hydropower Station, a project invested by the  Sinohydro Group Ltd. (中国水利水电建设集团), was the first large-scale hydroelectric project in Cambodia. In 2008, local NGOs conducted a systematic research and advocacy project and afterwards reported the project’s negative environmental and social impacts to local and international media. They noted the environmental and social management measures were opaque, comprehensive environmental assessment reports were not submitted on a timely basis, and so on. Generally, you rarely heard the company issue a  direct response to criticisms voiced by the media and NGOs.

Despite this criticism, the Kamchay Hydropower Station was completed and began operation in December 2011. In contrast, the disturbances caused by the Wan Valley Lake real estate project taught Chinese companies a more profound lesson. In 2007, the Cambodian government signed an agreement with a local company with close government connections to develop 100 hectares in the Wan Valley Lake area into luxury communities. This required the demolition of more than 4,000 homes. Due to Cambodia’s complicated history, some residents had title deeds while others were merely long-term residents. Because of this, it was very difficult for developers and residents to reach an agreement on issues of compensation and resettlement. In one case, the government and developers tried to demolish the houses of a group that refused to relocate. However, this group petitioned, demonstrated, and used other methods to garner support.

In late 2010, the Hongjun (鸿骏公司) subsidiary of the Erdos Group became involved with the Wan Valley Lake real estate projects, and took responsibility for all construction costs in exchange for 50 percent of the shares. They, too, were drawn into this turbulent and difficult situation. Local residents began collectively petitioning the Chinese Embassy, sent an open letter to the Chinese company, and even called for a boycott of Chinese goods. During this period, the Chinese company remained silent. Not until the beginning of 2011 did the Chinese embassy make a statement: “The demolition issue is the sole responsibility of the Cambodian company. The Chinese company has no legal liability there. It is only responsible for the construction work after the demolition work is complete.”

Although the Chinese company tried to make a clear demarcation between its role and the demolition dispute, it is clear that the Chinese company did a poor job at judging the project’s risks and possibility for complications. This issue continued through August 2011, when the World Bank exerted pressure to freeze aid loans to Cambodia. Only then did the local company and government give in to the residents’ demands, and thereby resolved some of the problems.

The Union Group’s real estate tourism project is another project where disputes over resettlement arose, this time involving over 1,000 local residents.  The Tianjin Union Investment and Development Group Ltd (天津优联投资发展集团有限公司), a subsidiary of the Wanlong Group, planned to spend huge sums towards the construction of a tourist resort in Cambodia. However, starting in 2009, due to problems related to compensation and resettlement, residents began to complain, protest, and petition. Local NGOs joined together and carried out two large-scale investigations which the media tracked throughout.

For large-scale projects involving demolition, the following is typical government conduct: money is paid out by the company, and multiple government departments act together to resolve compensation and resettlement issues according to the Asian Development Bank’s specified standards. When the process is government-led and a relatively high amount of compensation is offered, the problems seem to be solved easily and residents are not too dissatisfied. Nevertheless, during the process of demolition and compensation many problems can occur. According to NGO and media reports, those initiating the demolition do not communicate enough with the residents and in fact have used force and intimidation against residents. There are disagreements over land type and compensation calculations. Even worse, the targeted resettlement locations frequently lack standard basic infrastructure and livelihood opportunities.

In this context, even when local governments do lead demolition projects, enterprises should also get involved to actively support the resettlement work and ensure it moves in the right direction.

How to Resolve the Problem?

Under growing encouragement by the Chinese government through the “going out” policy, more and more Chinese companies are investing abroad. From now on, overseas investment projects may have to deal with more non-economic factors. Below are some triggers of problems relating to social and environmental impact management.

First, investment decisions are made without a deep understanding of the local situation and decision-makers may be ignorant of or underestimate the social risks.

Second, often project staff are mostly technical or managerial staff that lack skills in corporate social responsibility. Staff may not care or be familiar with how to carry out compliant investigations of the social and environmental impacts of a project, and  management of the villagers’ livelihood and  environment.

Third, other than communicating with the local government bureaus, Chinese firms are either unfamiliar with or unwilling to communicate with other project stakeholders and in fact they tend to rely on local government departments to solve the problems. Chinese firms generally prefer a low-level of transparency.

Attaching greater emphasis to raising the management standards of social and environmental impact in the field is the only solution to these problems. Increasing transparency and constructive dialogue with villagers and NGOs, and even seeking cooperation with NGOs to reduce the negative impact of the project, are the only ways to carry out community development projects. Most NGOs aim to safeguard the interests of vulnerable groups, not necessarily to oppose investment projects or to intentionally bring trouble to enterprises.

In addition, enterprises should bring in environmental and social management, rural development, and ecological protection professionals to be responsible for this work and ensure compliance with international standards. Although the World Bank, the Asian Development Bank and other international institutions do not necessarily meet their own social and environmental safeguard policy standards, these standards can provide lessons for Chinese enterprises during their learning period.

What NGOs Should be Aware of During the Problem-solving Process.

At the moment, when resolving problems arising from “development projects,” Cambodian NGOs often rely on direct communication with Cambodian government departments and government mediation, or they go to the media to publicize problems with Chinese enterprises. In fact, the government of Cambodia is often criticized for being too cozy with developers and often finds itself embroiled in conflicts as a result.

NGO’s should also learn how to communicate with enterprises more effectively. The natural goal of a corporation is to seek profit and business people tend to be very pragmatic. “Responsibility,” “obligations,” “the rights of people,” and “image,” are abstract nouns that may be difficult to impress upon businesses. But guarding against environmental and social problems which create risks to the business is not. Therefore, a critical area for NGOs to concentrate on is to develop ways to effectively communicate to companies that popular demands are tied to business risks.

I have participated in the process with all the stakeholders, particularly exchanges on these issues between NGOs and media. To me, it was very obvious that discussions of Chinese enterprises were overly broad and filled with catchphrases such as “Chinese overseas enterprises plunder forest resources in Africa,” “China’s overseas environmental footprint is a serious problem, ” and “local people receive no benefit from these projects,” etc. In fact, each corporation and case differ in the way they deal with the specific issues and their implementation, and corporations themselves find it difficult to define the problems in simple binary “good or bad” terms.

The Essence of the Environmental Problem is the Social Problem

In conversations between the media and NGOs on China’s overseas investment, most concentrate on the “environmental footprint” and “overseas resources grab.” Even so, the environmental issues boil down to social problems. The more pressing and realistic initiatives are to promote the integration of Chinese enterprises with the well-being of local communities, rather than focus solely on figures and slogans.

Within the context of globalization, relying on the Chinese government to manage overseas Chinese enterprises is unrealistic. Also, the “legitimacy” of NGOs depends on whether they represent the public interest, which can be a major negotiating chip when they engage with enterprises. In some situations, when dealing with investment-caused environmental and social conflicts, domestic NGOs play a very positive role. But overall, they are still finding their way and most of the time they are in a weaker or “consultative” status vis-à-vis corporations.  The road to real public participation has yet to be opened.

In Brief

Cao Ke and Wang Xiaojuan of the Heinrich Boll Foundation’s China office report on the environmental and social conflicts stemming from Chinese overseas investment and provide recommendations on how those conflicts can be ameliorated.
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