Regional Bank, IMF Note Risks to Government’s Dam Guarantee

The government’s guaranteed bailout of major infrastructure projects, such as the future 400-megawatt hydropower dam in Stung Treng province, requires a thorough assessment of forecasted risks—a capability which the government currently does not possess, an Asian Development Bank (ADB) official said on Wednesday. 

Speaking on the sidelines of the 2013 Cambodia Outlook conference in Phnom Penh, Eric Sidg­wick, country director of ADB, de­clined to comment directly on the $781 million Lower Sesan 2 dam, but said that in regards to public-private partnership projects, he would advise for the government to start small in terms of projects and risks.

“A risk management unit is a fairly advanced unit that is staffed with people who know how to do that, and I don’t think [Cam­bo­dia] has that staff in the government yet,” Mr. Sidgwick said.

As for guaranteed payments on multimillion-dollar projects undertaken with private partners, the government must be able to forecast the future risks of a project, or its contingent liabilities, he said.

“Over time, it must not end up being a constraint for the government,” Mr. Sidgwick said.

“You need good information on what the contingent liabilities are and what the terms are so that the government can factor in over a long period of time what its financial position is in any point in time,” he said.

“If all these guarantees were recalled at the same time, what would be the implications? It’s unlikely to happen, but the government should know what would be the implication of that.”

Under the contract between the government and the two companies responsible for the Lower Sesan 2 dam, local businessman Kith Meng’s Royal Group and China’s Hydrolancang Interna­tional Energy Co. Ltd., Cambodia promises to provide a financial bailout in the event that the project should fail for “political” reasons, or if Electricite du Cambodge is unable to pay for the electricity the dam generates during the 45 years that the two companies will operate the facility. After 45 years, ownership of the dam reverts to state ownership.

CPP lawmaker Cheam Yeap vigorously defended the government’s guarantee, saying that it helps to build the confidence of investors and that it is typical in such a project.

Explaining the guarantee’s reference to “political force majeure,” Mr. Yeap said the term re­ferred to a future “political deadlock,” war, or “national chaos.” He also said the guarantee stipulated that future governments could not change the terms of the contract with Royal Group, a company with no experience in hydropower and which did not have to competitively bid for the contract, and China’s Hydrolancang.

“The government bodies from the top to the lower level have worked with all relevant ministries and the [Council for the Development of Cambodia] to review all impacts before handing the biggest energy project to Roy­al Group to do the construction,” Mr. Yeap added.

Mr. Meng was in attendance at Wednesday’s conference, which was co-sponsored by another of his partnerships, ANZ Royal Bank, but he declined to comment on the government’s dam guarantee.

Asked about the IMF’s position on the government’s guarantee, IMF Resident Representative Faisal Ahmed, a speaker at the conference, declined to comment and referred instead to a 2012 IMF report on Cambodia’s debt sustainability and economic performance.

In that report, the IMF singled out the government’s energy generation expansion as an area where liabilities are not being fully considered in light of the government’s rapid push for power and their “conservative forecasting scenarios” when providing “take-or-pay guarantees.”

“However, the sheer size of these projects, and the fact that risks for complex infrastructure projects are difficult to quantify [before the event] call for continuous and careful monitoring, as they could severely curtail the fiscal room for maneuver, in particular in the event of adverse economic shocks,” the IMF said.

Transparency in terms of liabilities, as well as a competitive bidding process for such projects, would help alleviate these risks to government, the IMF said.

 

© 2013, All rights reserved.