Is Cambodia's Funan Techo Canal The Economic Necessity Phnom Penh Says It Is?

If it cuts transport costs, then yes.

I’ve laid my cards on the table: In Radio Free Asia and an upcoming piece in the Diplomat, I’ve argued that the planned Funan Techo Canal, which will cut across southeastern Cambodia, connecting Phnom Penh to the Gulf of Thailand, isn’t a military risk.

In other words, I doubt that China wants to send its naval vessels up the relatively narrow channel, nor would it be much use if China wants to transport naval hardware all the way down the Mekong, along the canal and then to its ships moored off Cambodia’s Ream Naval Base.

In overly simplistic terms, if China wants to invade southern Vietnam from Cambodia, it would make more sense to zip its trucks along Cambodia’s (China-built) expressways into Vietnam or transport its hardware on Cambodia’s (China-built) railways. As for the non-sense that Beijing might think it’s worthwhile sending expensive and heavy naval hardware down half the Mekong River: that would take at least a week, involve all sorts of diplomatic chaos and probably won’t work since naval hardware would be too heavy for vessels that could navigate all of the Mekong. And if it’s non-naval hardware, why would China need the canal, since it’s not heading to the Gulf of Thailand and could more easily be moved by plane?

Source: Radio Free Asia

For me, the noise about the security implications of the Funan Techo Canal is merely paranoia. Whereas the concerns about China having special access to Cambodia’s Ream Naval Base (where it appears to have stationed some vessels for several months) are wholly justified - or, at the very least, prudent paranoia.

That said, as I noted in Radio Free Asia, Vietnam has reason for concern since the canal will do much to end Cambodia’s dependency on Vietnamese ports. Much of Cambodia’s trade is currently transported via Vietnamese ports (mainly Cai Mep). Phnom Penh reckons the canal will cut that dependency by 70 percent (I’m guessing it means by volume, not value). Cambodian Prime Minister Hun Manet has said the canal will mean Cambodia can “breathe through our own nose”.

A few more things to point out. First, there’s a port construction frenzy in Southeast Asia right now. Malaysia is expanding two of its main ports, including Klang, the largest. Thailand is trying to expand its ports as part of the South Corridor scheme. It’s also talking about a canal across the Kra Isthmus, although, if that ever happens, the Andaman Sea and the Gulf of Thailand will probably be connected by railways, not an actual canal.

Second, the Funan Techo Canal fits in with the increased determination of Southeast Asian states for self-sufficiency. Except for Indonesia and the Philippines, the rest of the region is highly dependent on free trade and globalization, yet they all know that peak globalization has passed and we’re now a de-globalising world. Whether that ends up with alter-globalization (the world carved up into free trading allies) or the return to something like a pre-WW2 empire system (the world carved up between free-trading metropoles and their client states) waits to be seen.

Either way, Southeast Asian governments are desperate to no longer be reliant on someone else. Clearly, then, it makes sense for Cambodia not to be reliant on Vietnam for access to its ports. Theoretically, and it did happen in the early 1990s, Vietnam could essentially blockage Cambodia’s trade by denying it access to its ports. Yes, Cambodia has given a Chinese state firm a 50-year license to run the Funan Techo Canal in return for building it, but Phnom Penh isn’t going to pony up $1.7 billion to build a canal when Chinese money is a short-term gamble.

All of which is a long way to getting to whether the Funan Techo Canal is economically what Phnom Penh has lauded it to be. Data is dribbled out in drabs, which isn’t unusual for Cambodia. First off, as stated, the money to build the canal is coming from China, so there are no financial liabilities for the Cambodian state. Second, the 180-kilometer canal will connect Phnom Penh Autonomous Port to the coastal province of Kep, thus to the planned deepwater port in Kep province and an already-built deep seaport in Sihanoukville province.

According to the government, it will shave off around a quarter of shipping costs: $170 for a 20-foot container and $223 for a 40-foot container. Ky Sereyvath, an economics researcher at the Royal Academy of Cambodia, reckons it will reduce transport costs by up to $300 per container, although the actual savings will probably be smaller.

I believe that these calculations do not factor in the expected savings that will be made once the new deepwater port in Kep is completed (in 2025) and after the expansion of the Sihanoukville Autonomous Port, which, by one estimate, will result in a shipping cost reduction from $400-500 per container to just $200. The Sihanoukville Autonomous Port handled 79,778 TEUs last year, up 8.5 percent from 2022.

Reducing transportation costs is key to Cambodia’s economic future. Per a recent World Bank report:

Cambodia’s export-driven growth relies on the continuous improvement of its transportation network and connectivity. National logistics costs in Cambodia are estimated at 26 percent of GDP (2020) which is higher than most countries under the Association of Southeast Asian Nations (ASEAN) including Thailand (14 percent) and Vietnam (20 percent). Transportation costs are particularly high, representing more than 40 percent of total logistics costs.

Indeed, at present around 90 percent of domestic passenger and freight demand is transported via road, and Cambodia has only recently gotten some driveable expressways.

According to another World Bank report from 2022:

With trade and, in particular, exports, being a crucial growth engine of the Cambodian economy, smart logistics solutions and efficient supply chain management are a precondition for ensuring the competitiveness of the Cambodian economy in the long term. By 2030, it is expected that Cambodian firms will move four times more goods through highways, ports, airports, and warehouses than currently. However, the country’s logistics costs per GDP is significantly higher than in comparable ASEAN countries and was estimated at 26.43 percent of GDP in 2020. In particular the total cost of holding inventory, referred to as inventory carrying cost is particularly high in Cambodia, with an estimated value equivalent to about 13 percent of GDP (2020), implying high uncertainty in the supply chain.

The same report went on:

Increasing supply chain reliability and service quality is key to improving Cambodia’s logistics performance, as predictability is not just a matter of time and cost but also a component of shipment quality. Several causes of delays or unreliability are amendable to interventions by the Cambodian government such as, for example, the quality of service or the cost and speed of clearance processes. But others, such as the dependence on indirect maritime shipping routes and transshipment ports in the region lie outside the domestic supply chain and are not under the country’s control. Increased reliability of supply chains increases Cambodia’s comparative advantage, and in particular in a time of increased uncertainty, many shippers are willing to pay a premium for predictable delivery of shipment.

So, if the Funan Techo Canal project does go ahead and is completed by 2028 (the government’s projection), shipping should become quicker and cheaper, so good news for importers and exporters. Saving a fifth from transport costs could mean Cambodia’s exports remain competitively cheap if the savings are put onto consumers.

This comes as Cambodian labor costs are now rising (especially against its peers, like fellow garment producer Bangladesh) and as Cambodia is trying to attract the lower-end tech investment that Vietnam is turning away. (Cambodia’s future is as a downstream part of Vietnam’s supply chains). Moreover, lower costs are important as Cambodia is set to lose its tariff-free access to European markets when it graduates from least developed country status, which Phnom Penh reckons will happen by 2026. (It could sign onto a GSP+ scheme like the Philippines but that will require the EU’s permission, one reason why Phnom Penh is now keen on rapprochement with Brussels).