CamKo Struggles to Move Beyond Crash

From the start, the project seemed impossibly ambitious: A $2-billion South Korean satellite city—complete with condominiums, office space, luxury villas, a shopping mall, health clinics, banks and an airport—on the outskirts of Phnom Penh.

Seven years since its inception, CamKo City consists of a few finished apartment buildings on one side of a plot of land in Russei Keo district and a wasteland on the other—a development project crippled by the collapse of a corruption-riddled South Korean bank. camko-graphic

But now, after years of little activity, the city’s developers, still struggling with the fallout from the bankruptcy of Busan Savings Bank, say work on the 126-hectare project is picking up again. The company’s demons, however, are not entirely gone, as ongoing legal battles could see portions of the site put up for auction this year.

It was in May 2007 when World City Co. Ltd. broke ground on the project to much fanfare. World City even produced a sleek, digitally rendered video showing a glimmering cluster of ultra-modern high-rises built around a canal lined with lush lawns and palm trees.

World City was positioned in an intricate business structure, with Busan at the helm, providing the funding for the city’s development to LandMark Worldwide Co. Ltd., a company based in Korea that had acquired 100 percent of World City.

Having secured capital, the project drew interest from a Korean financial services company, KTB Asset Management Co. Ltd., which had pooled funds from four investment institutions, including two subsidiaries of Busan, to purchase 386 condominiums in CamKo City.

To legally own the condominiums, KTB created a property holding company called World City Asset Management (WCAM), which was based in South Korea but—on paper—51 percent owned by World City, a Cambodian company.

“All the voting rights, all the dividend rights belonged to them: KTB,” said K.C. Whang, vice president of CamKo’s project planning division, who has been working on CamKo since the beginning.

“In the structure, World City was in the middle. [Busan] provided the loan to World City, World City [gives] the money to World City Asset Management, which is KTB’s company and [WCAM] pays back to KTB. This was the structure,” Mr. Whang explained.

KTB funneled its investment as a loan through WCAM, which then made the payment of about $74 million—$24 million coming from the two other investment firms—for the condominiums, to be built in the third stage of the first phase of development, Mr. Whang said.

But World City, the developer, never got that far.

In October 2010, the CamKo project ground to a halt following the global financial crisis, which decimated South Korea’s banking sector, he said.

“Like many others, CamKo purchased land when prices were soaring and got slammed by the 2008 Global Financial Crisis,” said Douglas Clayton, CEO of Leopard Capital, in an email.

“The scale of the project was ahead of its time; Phnom Penh is not Seoul and affordability here is limited,” he said.

When KTB purchased the CamKo condos, they requested that Busan be the financial guarantor of the loan and that Hanil Engineering and Construction Co. Ltd., the company contracted to build the condos, guarantee the construction.

However, in the financial crisis, Hanil went bust, as did Busan, which crumbled amid widespread fraud and heavy debt.

In 2011, Korea’s Yonhap News Agency reported that prosecutors and a South Korean lawmaker accused Busan of raising slush funds by offering illegal loans to various special-purpose companies investing in construction projects, including “a real-estate development project in Cambodia.”

Mr. Whang, of CamKo’s planning division, said that as part of the loan Busan gave to LandMark Worldwide, World City had to give 60 percent of its profits to the bank—a deal that was likely one of the illicit transactions mentioned in the Korean media reports.

The deal was “not proper,” said Mr. Whang. “It does not comply with Korean banking law and the court decided what [Busan] did was wrong.”

As investors around the world held on to their cash during the financial crisis, there was virtually no interest in injecting more capital in the CamKo City property, and World City could not proceed with the construction of the 386 condos due to contractual arrangements with Hanil.

The CamKo project was stuck.

Kim Yun, a South Korean-born teacher and mother of two, moved into an apartment in CamKo City five years ago after her husband got a job in the country working for a construction company.

Ms. Yun said World City’s problems were well known among residents—about 450 units are currently occupied out of 623 units built—and said fears over the future of the property were snowballing.

“There were rumors that apartments…had not been sold and the creditor was going to try and take money from World City,” she said. “So people were worried that the management fees would go up or the quality of the services would be worse because the company would have to pay money back. People were also scared of what might happen to their place.”

With the project on hold, KTB filed a complaint with the Korean Commercial Arbitration Board in 2012. Busan and Hanil were deemed exempt from the case due to their bankruptcies and the court ordered World City to either pay back the money KTB had invested or hand over 10 hectares of land mortgaged as part of the initial deal for the 386 condominiums.

In February, Cambodia’s Supreme Court recognized the decision made by the South Korean arbitration board and tasked the Phnom Penh Municipal Court to proceed with auctioning off the 10 hectares, according to Ros Monin, the lawyer representing KTB, who is also the president of Cambodia’s National Arbitration Center.

Claiming the land was not properly appraised, and that the decision made in South Korean courts was unfair, World City appealed for a retrial, which they lost last month, according to Mr. Monin. The case will go to the Supreme Court, though no date has been set for a hearing, he said.

Mr. Monin added that KTB wants an additional two hectares of the CamKo City land to be auctioned off to make up the decline in value of the original 10 hectares.

“The market price for the land is not so high so we think the collateral, which was negotiated with the creditor [KTB], cannot secure the debt,” Mr. Monin said.

Despite the continuing legal battles, World City says the project has been back on track since late last year, with revenue coming in through the sale of units.

Work has also begun in areas where it was previously prohibited, following a March ruling by the South Korean arbitration board that World City’s contract with Hanil be terminated, allowing the developer to proceed with construction.

As for the 386 condominiums in dispute, the legal battles between KTB and World City must be resolved before they can be completed and sold.

But Mr. Whang said much of the turbulence is over and that World City has a new construction firm and its own money, putting it in a more stable financial position. The firm has now subcontracted construction to local companies.

“We now have enough funds to support our projects. If we need cash to run the project, we can use our own money. We don’t need funds from other investors,” he said.

But despite Mr. Whang’s confidence in the project’s future, its murky past as a pawn in a corruption scandal and a casualty of the global economic meltdown has significantly pushed back CamKo’s completion date, initially estimated to be 2018.

Tracing his finger along a large poster of the city’s master plan, marveling at its ambition and grandeur, Lee Seung-hung, World City senior vice president, declined to give an exact date for when the project will be finished.

“Oh, I don’t know,” he said, chuckling.

“Maybe more than 10 years.”

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