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Public-Private Partnerships in Cambodia

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Introduction and Background

Cambodia’s public-private partnership (“PPP”) projects have been implemented since the adoption of the Constitution in 1993, following the signing of the Comprehensive Cambodian Peace Agreement on 23 October 1991. The political stability after the democratic election in 1993 has attracted foreign investment to Cambodia. Reliable infrastructure, particularly in electricity and transportation infrastructure, is an opportunity for foreign direct investment and economic growth. The Royal Government of Cambodia (“RGC”) is working to attract investors in these segments, through policy reform to incentivize private sector involvement in infrastructure development.

Sub-Decree 11 on Build-Operate-Transfer (“BOT”) Contracts dated 13 February 1998 (“BOT Sub-Decree”) was the first regulatory framework regulating PPP projects in Cambodia. The BOT Sub-Decree sets out the types of eligible PPP investment projects, selection procedures, concession period, concessionaire responsibility, and the nominated RGC implementing agency. Prior to the adoption of the BOT Sub-Decree in 1998, PPP projects were implemented mostly in the energy sector in the form of BOT and Build-Own-Operate (“BOO”) contracts through case-by-case arrangements with the RGC and its line ministries. To develop the regulatory framework for implementing concession projects in Cambodia, the Concession Law was promulgated on 9 October 2007 (“Concession Law”). The Concession Law introduced various types of concession projects and specified the sectors that are eligible for receiving concessions from the RGC.

On 22 June 2016, the RGC issued the Policy Paper on Public-Private Partnerships for Public Investment Project Management 2016-2020 (“PPP Policy Paper”).

Furthering the goal of attracting private investors, the Public Private Partnership Law (“PPP Law”) was promulgated on 18 November 2021. The PPP Law was drafted since 2017 in accordance with the RGC’s Policy Paper on PPPs.

Regulatory Framework

The PPP Law defines a PPP as an agreement between the state and a private partner (“Private Partner”) whereby the Private Partner is allowed to perform the works of restoration, repair, expansion, construction, operation and/or maintenance of the public infrastructure or project assets or to provide public services over a fixed period of time. In this agreement, the Private Partner will invest, be partially responsible for risks and get benefits based on the performance in accordance with the terms and conditions set forth in the PPP contract.

The Ministry of Economy and Finance (“MEF”) acts as a single window service provider of the RGC in directing and managing PPP projects in Cambodia, including, but not limited to developing the PPP framework and policies for managing PPP projects; reviewing and approving qualified PPP projects; and reviewing and approving PPP contracts.

In addition to the MEF, the implementing agency (“Implementing Agency”), which can be a ministry or governmental agency, is responsible for implementing the PPP projects that fall within its responsible sectors. The Implementing Agency has the authority to manage the relevant PPP projects, which includes:

  • identification and prioritization of PPP projects, prior to submitting an approval request to the MEF;
  • selection and management of advisors for PPP project preparation and implementation;
  • propose feasibility study report review to the MEF;
  • lead, negotiate, and execute PPP contracts on behalf of the RGC; and
  • inspect and evaluate the PPP project implementation.

PPP contracts may take any of the following forms depending on the nature of the project:[1]

Annex 2 of the PPP Law

PPP form
Description
Example uses 2

Build Operate Transfer (“BOT”)

The concerned institution grants the Private Partner a right to design, finance, construct, operate, and maintain project assets and collect service fees, tariff and other fees from users of the infrastructure or users of the project’s services for an agreed period specified in the PPP contract. After the expiry of the contract period, the Private Partner shall transfer all rights and interests in the project and the project assets in accordance with the terms and conditions as stated in the PPP contract.

Build Lease and Transfer (“BLT”)

The Private Partner must design, finance, and build the project assets and then lease the project assets to the concerned institution for fees as specified in the PPP contract. This type of project adopts the other conditions of the BOT model.  

Build Transfer and Operate (“BTO”)

Upon completion of the project assets construction, the Private Partner must transfer the title to the Project assets to the concerned institution in advance. This type of project adopts the other conditions of the BOT model. 

Build Own Operate and Transfer (“BOOT”)

The Private Partner is permitted to design, finance, construct, operate and maintain project assets and collect service fees, using fees, rental fees, and other charges from infrastructure users or users of the project’s service within the period specified in the PPP contract. After the expiry of the contract term, the Private Partner must transfer the rights and benefits related to the project and the project assets to the concerned institution in accordance with the terms and conditions as stated in the PPP contract.  The BOOT model is distinct from the BOT model, where the Private

Partner owns the rights to the Project Asset(s) during the contract period.

Build Own and Operate (“BOO”)

The concerned institution grants the Private Partner a right to design, finance, construct, own, and operate a PPP project on a permanent basis or for an indefinite period in accordance with the terms of the PPP contract.  The Private Partner shall be entitled to make commercial use of the project assets and collect fees and income from users of the infrastructure or users of the project’s services. Types of PPP contracts with variants of the BOO include the following forms:

(a)           Rehabilitate Own and Operate: This type of project has the same conditions as those of the BOO type, but the Private Partner must have the right to take possession of the existing project assets in order to rehabilitate them. 

(b)           Modernize own and Operate: This type of project has the same conditions as those of the BOO type, but the Private Partner must have the right to take possession of the existing project assets in order to modernize them. 

Management Agreement, Agreement Concerning Operation and Maintenance

The Private Partner will provide services pertaining to the operation and maintenance of the existing project assets or other state properties in return for fees payable by the concerned institution or other parties in accordance with the terms and conditions set forth in the PPP contract. Generally, this type of contract does not require the Private Partner to spend its capital for the investment and does not grant ownership rights over the project assets or any state property to the Private Partner.  

Design Build Finance and Maintain

The concerned institution grants the Private Partner a right to design, build, finance, provide operation service and maintenance services for the Project assets in compliance with the terms and conditions set forth in the PPP contract. The Private Partner shall be entitled to collect revenues from the above services through payments from the concerned institution or other parties in accordance with the terms and conditions in the PPP contract.  After the expiry date of the contract term, the Private Partner must transfer the project assets to the concerned institution. 

Design Build Finance and Maintain

The concerned institution grants the Private Partner a right to design, build, finance, provide operation service and maintenance services for the Project assets in compliance with the terms and conditions set forth in the PPP contract. The Private Partner shall be entitled to collect revenues from the above services through payments from the concerned institution or other parties in accordance with the terms and conditions in the PPP contract.  After the expiry date of the contract term, the Private Partner must transfer the project assets to the concerned institution. 

Design Build and Lease

The Private Partner is granted a right to design, build and lease the project property from the concerned institution in order to operate and perform maintenance services in accordance with the terms and conditions as stated in the PPP contract.

Under the PPP Law, the PPP contract shall specify the period of the contract and the conditions for which the contract may be extended. The initial period of the PPP contract shall be determined based on the expected service life of the project asset(s) and the time needed by the Private Partner to amortize the investment cost. The initial period of the PPP contract shall not exceed 30 years from the date of signing of the PPP contract. Where necessary and according to the type of project, the RGC may establish/determine the initial term of the contract to exceed 30 years. 

The PPP Law identifies the following PPP project eligibility criteria:[2]

  • the development and implementation of the project shall fall within the responsibility and purview of the Implementing Agency;
  • the objective of the project is for the development of public infrastructure and/or provision of public services within an eligible sector as discussed in further detail below;
  • the project is capable of risk allocation between the State and Private Partner to ensure benefits based on the principle of Value for Money (VfM);
  • the project has the potential to attract resources from the private sector as the basis for the rationalization of the public expenditure for project development; and
  • the project shall have an operational period of at least five years and is capable of providing stable and sustainable services to users, for the entirety of its lifespan under the framework of the PPP contract.

The PPP Law details the specific sectors that are eligible to qualify as a PPP project, as follows:

  • public infrastructure and services serving transportation and logistics sectors, such as roads, bridges, railways, airports, ports, public parking and canals;
  • infrastructure related to telecommunications and information communication and technology (ICT) sectors;
  • production, transportation and distribution of electricity, gas distribution and public services in mining and energy sectors;
  • clean water supply infrastructure, sewage systems, water drainage, waste water treatment, waste management and other public services serving environmental protection;
  • infrastructure and public services related to healthcare, education, labor and vocational training sector, tourism, and culture and fine arts;
  • infrastructure related to industry, science, technology and innovation sectors;
  • infrastructure related to laboratory services supporting food processing and food preservation;
  • infrastructure and public services related to agriculture and irrigation system; and
  • other infrastructure and public services as permitted by laws.

PPP Project Registration

In addition to the New Investment Law dated 15 October 2021 (“Investment Law”), the PPP Law also contains a provision which also enables a Private Partner to register a PPP Project as a Qualified Investment Project (“QIP”) with the Council for the Development of Cambodia (“CDC”). Pursuant to Article 32 of the PPP Law, a Private Partner is also eligible to apply for investment incentives for PPP projects through registration of the PPP project as a QIP with the CDC in accordance with the provisions of the Investment Law.

The registration of an investment project as a QIP is a voluntary process. However, by registering a PPP project as a QIP, the Private Partner will qualify for certain investment incentives, such as tax holidays and import duty exemption for the import of production equipment and raw material.

Market Snapshot

Foreign direct investment in Cambodia is typically a straightforward, direct, and open process. The Cambodian market is considered open to foreign investment, with 100% foreign investment permitted in most sectors. Cambodia does not have any restrictions on profits or capital repatriation. There is no foreign exchange restriction in Cambodia, although the National Bank of Cambodia has the power to implement exchange controls in a foreign-exchange crisis.

According to World Bank’s PPP database for Cambodia[3], there were 34 PPP projects that reached financial close from 1990 to 2021 with a total investment value of USD 4.5 billion. The RGC has expressed its commitment to support private investments in the development of transport and telecommunications infrastructure systems, and the energy and electricity sectors through its Rectangular Strategy Phase IV. The sectors of the PPP projects that reached financial closure include electricity (23 projects), airports (four projects), ICT (four projects), railway (one project) and roads (two projects).

After steady economic growth of 7-8% every year from 1998-2019[4], the Cambodian economy has been affected by the global Covid pandemic for the last two years. World Bank projects Cambodia’s economic growth to be around 4.5% in 2022. According to the Economic and Financial Statistics Bulletin issued by the MEF in May 2022, in the first quarter of 2022, 47 investment projects were approved by the CDC, with a total investment amount of approximately USD 2.5 billion, an increase of 14.2% over the same period in 2021. According to the above report, USD 60.3 million was invested in agriculture, an increase of 107.9% compared to 2021, USD 389.4 million in the energy sector, an increase of 607.7%, USD 202.7 million in industries, down by 65.4% compared to 2021 and investments in the tourism sector reached USD 129 million.

In respect of the energy sector, Cambodia has substantial renewable energy sources such as hydro, solar, biomass and wind. The average solar radiation in Cambodia is around 5 kWh/day, with an average sunshine duration of 6–9 hours per day, or around 1,400–1,800 kWh/m2. The RGC has policies to promote the renewable energy sector in Cambodia. According to the Cambodia Basic Energy Plan issued by the Ministry of Mines and Energy in 2019, the possible energy mix in the year 2030 will comprise coal/gas at 35%, hydro at 55% and non-hydro renewable energy at 10% (biomass, solar PV, and wind) of the projected generating portfolio. Pursuant to the 2020 Report on Power Sector of Cambodia issued by the Electricity Authority Cambodia, among the total energy produced in 2020, renewable energy accounted for 49.2% with hydropower at 44.98%, biomass at 0.76% and solar at 3.38%. According to the same report, there were five solar PV projects which commenced their energy production in 2020 with a total capacity of 125 MW. Over the last few years, there has been an increase in PPP projects in the renewable energy sector.

Key Issues for International Investors

There are certain challenges in implementing PPP projects in Cambodia, including, but not limited to inadequate regulatory framework, lack of competition from private partners, and the ability to amend the project documents.

(a) Inadequate regulatory framework

Although the PPP Law is a major piece of legislation to regulate public infrastructure projects in Cambodia, there are a number of implementing regulations that need to be adopted by the RGC to provide clear guidelines for the effective implementation of the PPP Law. Many provisions of the PPP Law need to be elaborated in a Sub-Decree; however, such implementing regulations have, to date, not yet been issued. We understand that the MEF is currently drafting Standard Operating Procedures (“SOPs”) for PPP projects to provide detailed guidelines on initiating, preparing, implementing and monitoring PPP projects, which may also include the procurement manual for the selection of Private Partners. The consultation period regarding the draft SOPs has already completed and the draft SOPs are awaiting the review and approval by the RGC.

(b) Lack of competition from private partners

Although both the current and former legal frameworks allow PPP projects to be implemented either through public tender or direct negotiations, from a practical matter, most PPP projects in Cambodia were procured on a negotiated basis, rather than through competitive tendering. This negotiated basis for project procurement may not attract all potential investors, some of whom, due to the lack of transparency in the procurement process may not even be aware of some proposed projects or potential investment opportunities in Cambodia.

(c) Inability to amend project documents

Although the PPP Law allows the Private Partner to negotiate a PPP contract with the Implementing Agency, we understand that the Implementing Agency does not allow Private Partner to make material changes to the terms and conditions of its template PPP contract and other project documents.

The Way Forward

The PPP model in Cambodia is still undergoing a maturing process. A number of wrinkles and details in the PPP procurement process will hopefully be worked out in the near future with the issue of more detailed guidelines by the RGC.  Nonetheless, the recent promulgation of the PPP Law signals a positive step forward towards a more competitive and transparent environment for potential international investors looking into PPP projects in Cambodia.

Further Reading

 

This publication is intended to provide a high level overview of PPPs in Cambodia. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Cambodian law, and works closely with local lawyers to support our clients' needs in Cambodia. We are grateful to DFDL for their co-operation on this publication.

Article 9 of the PPP Law

https://ppi.worldbank.org/en/snapshots/country/cambodia

https://www.worldbank.org/en/country/cambodia/overview

Public-Private Partnerships in Asia

Reference

  • [1]

    Annex 2 of the PPP Law

  • [2]

    Article 9 of the PPP Law

  • [3]

    https://ppi.worldbank.org/en/snapshots/country/cambodia

  • [4]

    https://www.worldbank.org/en/country/cambodia/overview

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