OVERVIEW

The proposed Funan Techo canal, slated to connect Phnom Penh with Cambodian ports along the Gulf of Thailand, has ignited a complex geopolitical and environmental debate in Southeast Asia. Spearheaded by the government of Cambodian   Prime Minister Hun Manet and funded by China, the USD 1.7 billion project aims to reshape regional trade dynamics, potentially bypassing Vietnam’s traditional control over key waterways. With construction work on the canal touted to start later this year, the Cambodian government is seeking ways to finance the mega-engineering undertaking. It is unclear if Cambodia has access to the required capital, besides Chinese soft loans channeled through the Belt and Road Initiative (BRI). However, on April 29, Prime Minister Manet declared that his government would not seek public donations for the construction of the ambitious project. He stressed that the government has already set aside a budget for building the canal, guaranteeing that there was no requirement for extra funds from citizens, even in the event of failing to source the requisite foreign investment. Moreover, concerns have been raised over its impact on the Mekong Delta, as well as its implications for Cambodia’s relationship with Vietnam.

This report provides a comprehensive analysis of the proposed Funan Techo canal project in Cambodia, examining its geopolitical, environmental, and economic implications within the context of regional dynamics in Southeast Asia.

THE MEKONG DELTA

The Mekong River, flowing through six countries from the Tibetan Plateau to the South China Sea, stretches over 4,350 kms. It is the world’s twelfth-longest river and the third in Asia, traversing China, Myanmar, Laos, Thailand, Cambodia, and Vietnam. Its basin is a biodiversity hotspot, supporting over 1,200 fish species and providing crucial resources for agriculture, fisheries, and freshwater availability. The river irrigates vast rice fields, especially in the Lower Mekong Basin, making it a critical resource for sustainable development and cooperation among Southeast Asian nations.

The Funan Techo Canal project, undertaken with China Bridge and Road Corporation under a Build-Operate-Transfer model, represents a significant investment in Cambodia’s future. It aims to reduce transport costs significantly, benefiting businesses and consumers alike. Once completed, the canal will accommodate cargo ships up to 3,000 DWT, enhancing economic connectivity and reducing Cambodia’s reliance on Vietnamese ports for cargo transportation. This shift aligns with Cambodia’s vision of achieving upper-middle-income status by 2030 and becoming a high-income country by 2050. The Funan Techo Canal project aligns with Cambodia’s broader initiatives for waterway development, contributing to regional connectivity and economic growth along the Mekong River. Experts have claimed that the Mekong Delta will experience a deficit in freshwater upon the operationalization of the canal, thereby disrupting agricultural practices and endangering the local ecosystem. This has been contradicted by Prime Minister Hun Manet, who has stated that the canal would have no impact on the water flow in the Mekong River.

LOGISTICS AND TRANSPORT IN THE MEKONG SUBREGION

According to the World Bank, the Mekong Delta faces a significant demand for transporting imported and exported goods, estimated at approximately 18 million tons per year. With the annual value of import and export goods exceeding USD 31 billion, agricultural exports constitute 75%, with the remainder comprising various industrial products. The Mekong Delta lacks adequate logistics infrastructure, particularly in terms of seaports and specialized cold storage facilities. Most ports are small and ill-equipped to manage the volume of goods. This deficiency leads to a heavy reliance on road transportation. Only 20% of goods are transported through the region’s seaport system, while the remaining 80% rely on road transport, primarily to ports in Ho Chi Minh City and Ba Ria-Vung Tau in Vietnam. Logistics costs in the region are disproportionately high, accounting for a staggering 30% of overall product expenses.

CHINA – CAMBODIA RELATIONS

China has remained Cambodia’s largest trading partner, with bilateral trade reaching USD 13.42 billion as of November 2023. Chinese investment, particularly in infrastructure like airports and highways, significantly contributed to Cambodia’s economic growth. China’s BRI has fueled numerous projects in Cambodia, including the construction of a USD 60 million bridge in Phnom Penh. While these initiatives have brought economic benefits, they also contribute significantly to the country’s foreign debt, with 41% owed to China. Despite concerns about debt traps, some economists argue that the benefits outweigh the costs, citing   increased competitiveness and infrastructure development. Critics caution that the wealth generated from Chinese investments often remains within Cambodia’s Chinese community, failing to benefit the broader population. Cambodian leaders, including Prime Minister Hun Manet, have affirmed their commitment to China’s “One China” policy and noninterference stance. Nevertheless, there is growing awareness of the risks associated with overreliance on China, prompting calls for diversification of trade and investment partners.

Chinese dam-building efforts on the Mekong River are part of a broad strategy to secure water resources, generate renewable energy, and assert regional influence. It also serves as a tool for geopolitical leverage by controlling the flow of water downstream, affecting millions who rely on the Mekong for agriculture, fisheries, and freshwater. China has constructed at least 95 hydroelectric   dams   on   tributaries feeding into the Mekong, known as the Lancang in China. Since 1995, 11 dams have been erected on the main river within China, including five colossal structures exceeding 100 meters in height. Furthermore, China has contributed   to   the construction of two dams in Laos. These dams collectively contribute to   China’s energy security, electricity export revenues, and renewable energy targets. The dams have altered the natural flow of the Mekong River, affecting Myanmar, Laos, Thailand, Cambodia, and Vietnam by disrupting seasonal flood patterns essential for agriculture and fisheries.

To access the full report comprising detailed assessment and advice for businesses, please contact APAC Assistance Operations Director, Bhargav Reddy, or click here.