Managing Expectations in Cambodia

Some people are playing down the potential oil and gas boom in Cambodia. The original hope of a possible $2 billion a year in additional revenue has been reduced to an initial $150 million and a possible $1 billion in several years. It is still significant for an $8 billion economy with a $1 billion annual government budget. Still, the government is trying to manage expectations.

As its violent history fades from memory, the government knows that its legitimacy will be increasingly tied to economic performance and better governance. So Cambodian leaders have an interest of not making a big deal about possible oil and gas windfalls. Some observers said that the bauxite deposits may be longer lasting as a source of growth. One Western diplomat speculated that hydroelectric may generate more revenues than oil and gas but the Mekong River area could be severely harmed from the dams.

Two types of risks emerge from the possible energy boom. The first type is the immediate effect from having a large amount of revenue injected into the economy. One effect could include the “Dutch Disease.” Although the Cambodian economy is largely dollarized, thus giving it a chance of avoiding the exchange rate effects of Dutch Disease, other problems could appear such as resources being diverted away from tradable to nontradable goods. The other related effect is the strong possibility that revenues will simply disappear into the pockets of corrupt leaders or “silly” projects, leaving the country with nothing.

The other type of risk includes the possible societal responses to poorly managed revenues. Several people I interviewed agreed that possible responses from most likely to least would be: Social unrest from failed expectations and poor management; political change or instability coming from the emergence of rival factions; and a military coup from a frustrated army.

Cambodia's Future: Norway or Nigeria?

I am in Cambodia this week researching the expected offshore oil and gas boom. The big question is: Will one of Asia’s poorest and most corrupt countries use its newfound wealth to invest in infrastructure and education or will it simply shore up its corrupt practices? Will Cambodia become a Norway or a Nigeria?

Yesterday I met a foreign energy businessman with years of experience in Cambodia. His prognosis for Cambodia’s future was optimistic. He sees Cambodia as becoming a hub for a rapidly growing region, potentially taking advantage of its central location. In terms of governance, he has witnessed several years of improvement and sees things as only getting better.

China’s recent mining disaster is clearly on the minds of businesspeople here. Not only is China's mining sector the world's most dangerous, it is also extremely corrupt. The businessman said many people, including Cambodians, are reluctant to make deals with Chinese investors and partners. He listed several risks: opacity of contracts; hidden stipulations in contracts; lack of employment opportunities for local workers (Chinese use their own contractors); corrupt practices; and outdated equipment. Although Chinese technology will improve within a decade or so, he wasn’t so sure about the other practices.

Corruption is a rotten disease that many businesses are trying to fight. This businessman’s company is partnered with an American company, meaning it must follow the Foreign Corrupt Practices Act. He said it is a lot of work to comply with these rigorous standards, but he sees corrupt practices as antithetical to profitable business for several reasons: first, it is a waste of money that is thrown away without accountability; second, bribes seem to compound and send signals that a company is willing to play a dirty game; finally, good practices are central to ethical business and a calm soul. “I am able to sleep at night,” he said.

Due to his company’s large profile in Cambodia, an international NGO recently investigated how it was able to secure large contracts. After its investigation, the NGO concluded that his company was clean. He wasn’t worried. I only wished that clean companies like that were showcased for their exemplary behavior. If businesspeople knew they had a choice to act ethically, I bet cleaner practices would catch on.