Sihanoukville Re-Engineered: The Way Forward

The Cambodian government’s online gaming ban, issued on August 19, which resulted in the exodus of thousands of Chinese from the country, has left Sihanoukville with numerous sub-par construction projects suspended amid inappropriate master planning worsened by inadequate government supervision and rampant urban development from Chinese mainland investment.

Prime Minister Hun Sen abruptly issued the August directive, with the government claiming that “foreign criminals have taken refuge in the form of this gambling to cheat and extort money from victims, domestic and abroad, which affect the security, public and social order.”

Past Chinese FDI inflated property and rental costs to stratospheric levels compared to the down-to-earth pricing of just half a decade ago. The gaming ban has worsened the predicament faced by already insufficient infrastructure only meant to cater to an initial 70,000 population. Nearly 80,000 Chinese flooded the city, accounting for 90 percent of its expatriate population. Crime, in the form of drunken violence and organized crime, increased to unacceptable levels.

By the time the call came to shut things down, 163 active casino licenses had been issued.

The environment, Sihanoukville’s natural advantage of beaches and islands that made it Cambodia’s premier seaside destination, was badly spoilt. The town now looks like a gigantic half-built construction site surrounded by muddy roads and monumental traffic congestion.

The Chinese government, apparently chastened by the extent of the debacle, is now seeking to exert some damage control over its reputation, particularly that of its flailing belt and road initiative, by enrolling the assistance of ASEAN countries and South Korea for a joint investment promotion tentatively scheduled for February 2020 to re-polish Sihanoukville’s tainted image.

Such an attempt can only be supported by the Cambodian government as a win-win.

The Chinese government has committed US$170 million to help to re-build Sihanoukville’s infrastructure in a bid to transform the entire area into a modern cosmopolitan area similar to Shenzhen, the powerhouse Guangdong city across the border from Hong Kong. Other Chinese authorities have committed to assist. The Royal Government of Cambodia is reviewing its strategy to seek to transform the entire town.

But is the government bold enough to implement such a vision?

China built its Shenzhen vision on a combination of special economic zones and free trade zones that over 30-odd years transformed a relatively sleepy agricultural area dotted by fishing villages into a modern metropolis almost indistinguishable from the far more famous Hong Kong.

Cambodia is seeking to emulate that model with over 30 Special Economic Zones registered throughout the country, but only 11 are operational and only a handful are considered successful. Therefore, the necessity to re-look and re-evaluate the SEZ model and the accompanying incentives.

Similarly, the government plans free trade zones, which allow people to come from anywhere in the world to sell their wares to whomever they want without restrictions on trade. There are no customs duties or taxes. Countries with no products to manufacture or commodities to produce allow Free Trade so that their citizens can gain employment.

But the free trade zones, which have the support of the central government, have taken considerable amounts of time to achieve clear, long-term results. Many foreign entities registered in the zones do not always experience clear effects and/or benefits. New regulations are under strict control. The government is looking carefully at the results and is slowly implementing new procedures and rules, both in the FTZs, as is Mainland China. We will see the real impact of these FTZ’s in the decades to come.

Redeeming Sihanoukville’s sullied image

The “Macau of Asia” vision that brought the online gaming disaster conjures bad memories for both ordinary Cambodians and foreign investors alike. It is important to first and foremost close the chapter on this undesirable tagline. The government should learn the lessons from the past and offer its citizens and foreign investors proper closure, along with assurances and an expectation of new business norms.

A series of adequate stakeholder consultations through townhalls and dialogue sessions is recommended to seek out people’s aspiration of Sihanoukville’s future. As not everyone’s aspirations can be met, what may be the ideas that are practical, feasible and aligned with the RGC Rectangular Strategy roadmap?

Preserving the badly deteriorated environment is key for the survival of the town. Turning to the Chinese, well known for their eradication of the environment with massive projects, may not be the right formula. It might be wiser to embrace the so-called Singaporean Brand’s mindset and discipline in urban and strategic economic planning. Above all, the government must avoid repeating the past mistake of allowing Chinese investment to dictate the narrative and the city master plan.

While we mistakenly thought that online gambling was the root cause for the mischief that wrecked Sihanoukville, that was a mere symptom. The real issues have been an acute lack of diversified investment, trade and better handling of international relations. Realistically, the root causes were an overindulgence in all things Chinese, a pandering to the BRI, with Sihanoukville regarded as one of the major cities in the Chinese initiative, as the panacea to Cambodia’s economic woes.

With the PRC offering assistance in modernizing the city’s decrepit hard infrastructure, the Cambodian government should focus on improving soft infrastructure, i.e. with bold incentives and trade facilitation regulations and identifying which industries need to be promoted within the Sihanoukville FTZ or even beyond.

Would the government, through the ministry of economy and finance, re-invent a fundamental economic strategy and build an adequate eco-system using Sihanoukville as a pilot or showcase by seeking to attract more high-value sectors to set up shop?

What industries can we build within a port city area, still relatively under-utilized and under-developed, as the main artery and economic lifeline of the country? How do we leverage and build on its natural strength or advantages?

Some proposals could include a modern Logistics and Supply Chain Regional Hub, a new Eco-Tourism & Entertainment sector to shift away from gambling by leveraging on the area’s attractive beaches and waterfronts. The pharmaceuticals sector has always been deemed as high value in any country. Light manufacturing as in simple electronic components assembly and local car assembly, which both provided the linchpin for Thailand as a regional hub. Food processing is a possibility for high-value finished products.

Finally, what is at stake is the necessity to fully re-engineer the Cambodian economy, but using Sihanoukville as a showcase versus merely re-developing it. Otherwise, the government may have won a battle but still lost a war on regional economic competition.

Should implementing an FTZ be too far a stretch considering current administrative and fiscal limitations or constraints, a boosted SEZ model with bolder tax incentives (rebates and tax holidays) might be a better option to address immediate needs.

A much bolder win-win approach would be ideal in ensuring a deliberate formula to attract and incentivize investments from other countries aside from merely the BRI. While major infrastructure like wastewater treatment, sewerage, etc. will likely be undertaken by the Chinese, the government should not foreclose the option of adopting a limited tender approach, including encouraging Chinese SOEs to partner with foreign companies.

The government could well ride on such opportunity to display its new “openness” approach to dispel the international perception that Sihanoukville is a satellite of China, and along with that, the negative assumption that Cambodia is but acting at China's behest.

The government must also use this opportunity to ensure higher local content for Cambodian or foreign companies, instead of the current 95-100 percent Chinese skilled labor, materials, etc. We can learn from Malaysia and Singapore how they were able to ensure higher local content and transfer of knowledge and skills while still embracing BRI projects and investments.

Past explanations that all-Chinese content was justifiable as it meant speed and lower cost have been debunked by the appalling outcome of Sihanoukville. The convoluted journey the city took has in fact set back its development and potential by at least 10 years, with the cost of irreparable damage to its image and the entrenchment of the vassal state label upon Cambodia.