Financing for the Green Economy REF#6357

Electricity is essential to Cambodia’s economic growth, but the high cost of electricity has been identified as a leading obstacle to improving the country’s competitiveness, particularly in moving up the manufacturing value chain to more energy-intensive processes. The Royal Government of Cambodia (RGC) has made admirable efforts to address this issue, including a 2019 subsidy package worth USD 50 million to reduce electricity tariffs. However, further investment in power generating infrastructure and efficiency improvements is required to meet its growth aspirations.

Moreover, Cambodia is highly vulnerable to the threat of climate change, with most sectors of the economy unprepared to effectively manage the impact of the increasing number of natural disasters occurring every year. However, encouragingly, investments in renewable energy generation have been growing in Cambodia. For example, the construction of a 100-megawatt (MW) solar power plant in Kandal – the largest solar power plant in Kandal – and the RGC installing solar panels on various government buildings.

However, Cambodia’s electricity supply network remains fragmented, with the national grid reaching only 71.5% of households. Although the RGC has committed to expanding grid access and has made great steps to connect all 24 provinces, these plans are made significantly more challenging as around 80% of the population live in rural areas.

This situation presents a clear opportunity for small and medium enterprises (SMEs) to lead the drive towards a low-carbon economy in both renewable energy and efficiency improvements. For example, in rural areas that are unconnected to the national grid, privately-run rural electricity enterprises (REEs) provide basic and relatively expensive diesel-generated electricity via mini-grids. This decentralised model could play a pivotal role in transitioning rural areas to renewable energy by replacing these existing diesel generators with solar systems managed by SMEs.

Despite these opportunities, many SMEs in Cambodia face obstacles in their attempts to implement or scale up low-carbon developments, with the primary barrier being limited access to finance, particularly in agriculture. Credit to agriculture and agribusinesses together accounted for only around 9% of formal finance in Cambodia in 2022, with more than half of the country’s farmers not having any access to financing options. Access to credit remains the major bottleneck for Cambodian farmers and agribusinesses.

To address these challenges, the RGC has established the SME Bank to enhance access to funding for local SMEs and created the Credit Guarantee Corporation of Cambodia (CGCC), which offers guarantee schemes for loans involving Cambodian SMEs as beneficiaries, helping absorb the risk. Since their creation, they have guaranteed a total of USD 106.5 million in loans. However, it is unclear to what extent their portfolio involves green credit compared to more traditional activities such as post-COVID-19 economic recovery.

Cambodia consistently ranks among the top ten countries most vulnerable to the effects of climate change, largely due to the Kingdom’s low capacity to adapt to the changing environment. The impact of climate change is already having serious implications for Cambodia’s agriculture sector and rural communities, as they struggle to mitigate the impact of natural disasters every year. Accordingly, adaptation measures are desperately needed to enhance Cambodia’s resilience to the adverse impacts of climate change.

However, improving energy efficiency and reducing the environmental impact of SMEs are unlikely to be primary concerns of many SMEs, as they are often unaware of the importance or benefits that investments in green technology can bring to their operations. The lack of affordable loan options for agricultural SMEs to invest in green technologies or nature-based solutions is impeding small- and medium-sized farmers from enhancing their productivity, expanding their business, and reducing their ability to adapt to climate change impacts. As financing from private sector institutions is limited or unavailable, action must be taken by the RGC to stimulate and incentivise investment in low-carbon developments; otherwise, SMEs will be excluded from leading the growth of the green economy.