November 7, 2017 12:20 pm JST
Yun Sun

China's latest Myanmar megaproject courts controversy

Critics portray ambitious Kyaukpyu port and industrial park plan as 'Trojan horse' for Beijing's interests

Nearly two years ago, Myanmar chose a Chinese consortium led by the state-run Citic to develop a $10 billion port and industrial park that could turn into the country's largest foreign investment.

With Beijing pledging to create 100,000 jobs and transform a poor region, the Kyaukpyu port plan potentially represents a huge win for Myanmar.

But long delays in bringing it to fruition suggest that the authorities are having doubts about the financial, political and security implications.

Before the project can move forward, more discussion is needed to prevent disputes like those that plagued China's long-suspended Myitsone Dam project in Myanmar's northeast.

Moreover, the two sides have to take account of Kyaukpyu's location on the west coast of Rakhine State, and the mass exodus of more than 700,000 Muslim Rohingya refugees from northern Rakhine State since October 2016. Although the troubled area is far north of Kyaukpyu, the refugee crisis and reports of military brutality have provoked international outcry.

It was only in early October, two years after announcing the original deal, that China and Myanmar reached agreement over ownership of the deep sea port, the project's key element. The long process and the lack of other concrete developments suggests underlying disagreements.

China has a clear interest in a new deep sea port that would be linked overland to its poor southwestern regions as well as giving it a strategic outpost on the Indian Ocean.

But observers in Myanmar are questioning the megaproject. Burmese concerns have focused on the security implications and the potential financial burden.

Kyaukpyu is one of three large special economic zones launched by the former Thein Sein government. Only one, Thilawa SEZ led by Japan, near Yangon, has been realized. Another long-planned SEZ led by Thailand, in the southern coastal area of Dawei, is moving at glacial pace.

At Kyaukpyu, Citic would follow a design, build, finance, operate and transfer business model. Under the original agreement the consortium would operate the scheme for 50 years, with a potential extension of another 25 years.

But the Kyaukpyu SEZ has been criticized as one of various last-minute deals that the Thein Sein government hastily concluded shortly before the end of its five-year term. Critics have asked whether the deal was approved in haste to appease China with little public debate. It is clear from local media reports that concerns persist over Kyaukpyu among the National League for Democracy government, which succeeded Thein Sein, the military and the public. For example, Oo Maung, vice chair of the government-led committee on the scheme, expressed disagreement over the proposed funding split between China and Myanmar.

Debt trap?

Another key issue is whether the Kyaukpyu SEZ will deepen Myanmar's growing public debt. If Myanmar is unable to provide the financing, as many fear, it will most likely seek Chinese loans.

The Chinese government and companies have established a pattern of providing concessional credits to foreign countries to pay for their stakes in Chinese-led infrastructure projects, including those under Beijing's Belt and Road Initiative. For example, Laos has borrowed $2.1 billion loan from the Chinese Export-Import Bank to finance a 30% stake in the Sino-Laos railway. The startup capital of $630 million that Laos borrowed from China amounted to 5% of the country's annual gross domestic product in 2015.

The total investment required for the Kyaukpyu deep sea port component is reportedly estimated at $7.3 billion. After much negotiation, Citic has settled for a 70% stake in the port, This would entail a $2.2 billion contribution from Myanmar for its 30% share. Assuming that Myanmar and China are pursuing a 50/50 joint venture in the $2.7 billion industrial park at the site, the total amount of investment Myanmar needs for its stakes in the port and the park would be around $3.5 billion, or 5% of GDP.

Whether this represents a prohibitively high debt for Myanmar is a key question for Naypyitaw. But the bigger issue is whether the project should be downsized to meet the needs of Myanmar rather than those of China. The heart of the matter lies in the gap between China's overwhelming ambition and vast scale, and Myanmar's more moderate aspirations and limited capacity.

It also seems reasonable for the Myanmar side to ask why the country should be borrowing money from Beijing to support an ambitious Chinese project that is designed primarily to serve China.

The Chinese would argue that they are merely following a legal agreement reached with the previous Myanmar government. But the delay in finalizing details suggests serious concerns among the Myanmar authorities.

National security concerns

If China is indeed set to acquire a 70% stake in the Kyaukpyu deep sea port while providing loans to Myanmar to finance its share, the arrangement could ring alarm bells with critics worried about the security implications. They are concerned China could turn Kyaukpyu into a naval facility or a dual-use facility on the Bay of Bengal, as part of its expanding Indian Ocean strategy.

Myanmar's military is hyper-sensitive about security. The 2008 constitution bans the deployment of "foreign troops ... in the territory of the Union."

China's track record in the Indian Ocean on dual-use ports is hardly exemplary. Regional security experts widely believe that the port of Gwadar in Pakistan, developed with Chinese support, has already offered military services to the China's People's Liberation Army. In Sri Lanka, China has been banned from using for military purposes the Hambantota port, in which Beijing owns a 70% stake.

Who benefits?

It is no secret that Beijing sees Kyaukpyu as transport route, with potential strategic benefits for China's Indian Ocean strategy. It could also stimulate the growth of China's underdeveloped interior provinces, including Yunnan, Guangxi and Guizhou, and generate business opportunities for Chinese companies including, of course, Citic.

China paints a glorious future for Kyaukpyu that will provide key benefits to Myanmar including jobs, transport improvements, trade, tax revenues, and local education programs. China promises more than 100,000 jobs when the SEZ begins operation, with 90% of management posts going to locals within the first 10 years.

But without creating industrial capacity, Kyaukpyu could be merely a trans-shipment port for Chinese goods rather than a real regional growth center.

Despite such concerns, Kyaukpyu could represent a good economic opportunity for Myanmar. The fact that China's investments are invariably based on its own national interests, does not mean that Myanmar should inevitably lose out. But winning requires sophisticated political and economic thinking.

The long delay over the start of actual development suggests that Myanmar has some doubts. It is its right to hesitate. Both China and Myanmar would benefit from open and honest discussion of the concerns involved and their timely resolution.

Yun Sun is a senior associate at the Washington-based Stimson Center and a nonresident fellow at the Brookings Institution. This article is based on a paper on mega-Chinese infrastructure projects in Southeast Asia, published by the Asan Forum.

Asia300

CITIC Ltd.

Hong Kong

Market(Ticker): HKG(267)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 41,331.71M
Shares: 29,090.26M

Get Insights on Asia In Your Inbox

To read the full story, Subscribe or Log in

Get your first month for $0.99

Redeemable only through the Subscribe button below

Once subscribed, you can…

  • Read all stories with unlimited access
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

Resubscribe now to continue reading.
BEST OFFER:
Only US$ 9.99 per month for a full-year subscription

To read the full story, Subscribe or Log in

Once subscribed, you can…

  • Read all stories with unlimited access
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.