Friday, November 9, 2018

Kyaukphyu: Chinese Deep Sea Port In Indian Ocean

Kyaukphyu Port will be owned by China for next 75 years.
China, Myanmar sign port deal after years of negotiations: China and Myanmar signed an agreement on Thursday to move forward a multi-billion dollar deep sea port project in Kyaukphyu, a strategic town along the coast of the Bay of Bengal, after negotiations dragged for years due to financing and other issues.

At a ceremony in the Myanmar capital of Nay Pyi Taw, the Chinese consortium led by State-owned conglomerate Citic Group signed the framework agreement with the Kyaukphyu Special Economic Zone Management Committee on the development of the deep-sea port.

Under the framework agreement, China will fund 70 percent of the investment for the project and Myanmar will pitch in the remaining 30 percent. The initial phase of the project will include two berths with a total investment of $1.3 billion, according to the agreement. A joint venture will be set up to construct and operate the port.

The signing of the framework agreement marks a significant step for the port project, which has been stalled since 2015, and for the continued implementation of the China-proposed Belt and Road initiative (BRI), which has come under increased scrutiny because of cases such as the Kyaukphyu port project.

The Chinese consortium first won the bid to construct the port in December 2015 with an estimated investment of $7 billion but further development was halted due to disagreement between the two sides over details of the project's funding.

Initially, the project was to be 85 percent funded by the Chinese consortium but, after an election, the new Myanmar government asked for a reduction in the Chinese companies' stake in the project to 70 percent.

Prolonged negotiations fueled criticism of the BRI, which some foreign critics said could add to local debts and even threaten other countries' sovereignty. But the Chinese government has maintained that the BRI is an open platform to facilitate regional and global economic integration and to help countries along the routes with economic growth and job creation.

The Kyaukphyu project is estimated to bring 100,000 jobs to the local community and will contribute as much as $15 billion in tax revenue to Myanmar. Once completed, the port will have an annual gross output of $3.2 billion.

The town of Kyaukphyu, nestled around a small fishing port on the Bay of Bengal, has the air of a place expecting to get rich soon.

In the seaside market, stalls of seafood unloaded from wooden fishing boats floating in the rubbish-strewn harbor have been joined by stacks of Chinese-made toys and smartphones. Nearby, cattle graze between building sites as high-rise offices and hotels replace weather-stained bungalows. Fine-dining rooftop restaurants and a golf course underline the sense of transition.

Much of the development, and a jump in land prices, are anticipating a gigantic prize for this remote Myanmar town of 50,000 people: $10 billion to build a deep-sea port and industrial zone, financed by China. The investment plan -- seven times the cost of Chinese-built ports in Sri lanka and Cameroon -- has put Kyaukphyu at the center of a debate in Myanmar and across Asia as to who really benefits from China’s grand Belt and Road strategy.

“The real danger of the port is that its extreme expense could lead the Myanmar government to take out an unsustainable level of debt,” said Greg Poling, director of the Asia Maritime Transparency Initiative, at the Center for Strategic and International Studies in Washington. “That, in combination with other current and future projects in Myanmar, could in the coming years lead to a debt trap.”

Those concerns have stalled development since the previous military government chose China’s CITIC Group to build the port three years ago. CITIC, China’s first state-owned investment corporation, has proposed taking a 70 percent stake in the project, with the remainder split between the Myanmar government and a consortium of local firms. The Chinese company would run the zone for up to 75 years and would finance Myanmar’s stake.

“We keep hearing it will be built since 2015, but nothing has happened so far,” said Shwe Shwe Maung, 34, the head of KaBalan, a village of 460 households in the area marked for the economic zone. “We don’t know exactly what the impact will be, but we’re all hoping that it will bring jobs.”
Some senior government officials are concerned that a nation with a smaller economy than the Dominican Republic may struggle to service and repay the billions of dollars Myanmar would need to borrow for the project.

“The amount of interest is quite substantial, and not like the loans we got from the Japanese government -- the loans from China are much more expensive,” said Soe Win, a member of the ruling National League for Democracy’s central economic committee and a candidate to become Myanmar’s next central bank governor. He declined to give details of the proposed loan.

The Japan International Cooperation Agency is helping finance a $3.28 billion economic zone at Thilawa port, south of Yangon. The Thilawa development has raised further questions about Myanmar’s need for such a large facility in Kyaukphyu (pronounced CHOW-pew) or whether it would simply be a conduit for China, run by Chinese companies.

“Is this deep-sea port being made to benefit Myanmar?” said Ken Tun, founder and chief executive of Myanmar’s Parami Energy, the only local firm to be shortlisted for the development. “If we have a deep sea port, but it’s not controlled by Myanmar, that’s a problem.”

One major concern for some members of the government is what happened in Sri Lanka. In 2008, a joint venture with China began building a deep-water port at Hambantota. When Sri Lanka couldn’t repay the loan for the project, it ended up ceding the port to China for 99 years last year in exchange for debt relief.

“China is trying to influence political events in Myanmar in many ways,” Soe Win said in an interview. “But what we are afraid of is that we will end up like Sri Lanka.”

Toe Aung Myint, permanent secretary of the Myanmar Ministry of Commerce, which oversees the project management committee, rejects the suggestion that the port would entail too much debt, saying construction would happen in stages. “Myanmar and Sri Lanka are not the same,” Aung Myint said in an interview. “Only based on the success of the first phase, we will do another phase.”

CITIC directed questions regarding the port to the Myanmar government. “We are unable to disclose information regarding the negotiation to the public,” Zhang Yue, the head of CITIC Myanmar, said in an email.

Soe Win isn’t the only one worried about the long-term plans for Kyaukphyu. Located on the eastern edge of the Bay of Bengal, the town is almost directly opposite INS Varsha, where the Indian navy will base its new fleet of nuclear submarines.

A Myanmar government official familiar with China’s plans for Kyaukphyu said military attaches from the U.S., Australia and countries in Southeast Asia have all expressed concern that China wants to build a port that has strategic as well as economic advantages.

“China needs some sort of access or staging facilities in several different places in the Indian Ocean,” said David Brewster, a senior fellow at Australia’s National Security College and an expert on India-China maritime security. “Myanmar would be a good place to have a naval base.”

Myanmar’s government may have little alternative to a Chinese loan if it wants to build the port. The political outrage sparked in the U.S. and Europe over the treatment of the Rohingya minority has left it with few allies among developed nations.

Kyaukphyu, 400 kilometers (250 miles) north-west of the capital, Yangon, is in Rakhine state, where more than 600,000 Rohingya have been driven from their homes into neighboring Bangladesh since last August, in what the United Nations’ top human rights official has called “ethnic cleansing.” While most of the clashes happened further north, the conflict rattled investors, prompting China to send a group of diplomats to Rakhine in December.

“They wanted to learn more about the security of their investments,”said Aung Dung, 71, chairman of the Kyaukphyu branch of the NLD, who met the delegation. “The Chinese have quite a lot going on down here.”

Paik-seik the Muslim ward in Kyaukphyu was completely burnt down and all Muslims driven out in 2012.
Pipeline Links

The town already has oil and gas loading terminals, built since 2013, that feed pipelines transporting the fuel directly to Yunnan province in Western China. A rail link is planned to connect the container port.

“Kyaukphyu is definitely growing,” Yan Myo Aung, 54, chairman of Kyaukphyu branch of the Arakan National Party, whose family operates a number of local retail businesses. “We hope that the Special Economic Zone will add to that.”

Shop owner Saw Maung Nu is one of many local residents who are anticipating a windfall. “I built this house and shop here two years ago because of the development,” said Saw, 58, a father of eight, in Thaing Shaung, a smattering of houses outside Kyaukphyu in the center of the proposed industrial zone. “I thought all the people coming to work here might need to buy things.”

He said land prices have risen from $20,000 an acre to $50,000 an acre and he’s hoping the government will pay the market rate to buy him out. Even without the potential military benefits of Kyaukphyu, the port’s commercial advantages make it a key part of China’s maritime Belt and Road strategy.

CITIC says the terminal would have an annual capacity for 4.9 million containers, more than the current throughput of Brazil’s biggest container terminal, as well as loading oil for the pipeline. With the rail link, it would give exporters in Yunnan a short-cut to the Indian Ocean, bypassing the disputed waters in the South China Sea and the congested Straits of Malacca.

“Yunnan is very important for them, it’s landlocked,” said Soe Win. “We will be happy if they use their Kyaukphyu port as a commercial port. But if they would like to turn it into a kind of military base, then we’ll be very, very sad.”

Chinese state-owned firms have reached agreements with Myanmar to construct a $7.3 billion deep-water port and $2.7 billion industrial area in a special economic zone at Kyaukphyu along the coast of the Bay of Bengal. The strategic town is the terminus of a $1.5 billion oil pipeline and parallel natural gas pipeline running to Kunming in China’s Yunnan Province.

Despite fears that the project could eventually be used for Chinese military access, political and legal restrictions in Myanmar make this unlikely. The project is aimed mainly at helping China avoid the vulnerable Strait of Malacca and aid the development of its southwestern hinterland.

Like many major projects under the Belt and Road Initiative, there are well-founded fears that the project could grant China a dangerous level of economic leverage over Myanmar, especially if the government in Naypyidaw is forced to turn to Chinese loans to fund its share of the port and SEZ, which combined could amount to 5 percent of national GDP.

Kyaukphyu is a coastal town along the Bay of Bengal in Myanmar’s western-most state of Rakhine. In 2016, subsidiaries of China’s CITIC Group Corporation, including China Harbor Engineering Company, won contracts for two major projects in the town—the dredging of a deep-sea port and the creation of an industrial area in an accompanying special economic zone (SEZ).

The port project is valued at $7.3 billion and the SEZ at $2.7 billion. Under the terms of the deal, CITIC will build and then run the project for 50 years with a potential extension of another 25 years.

Negotiations on Kyaukphyu predate the Belt and Road Initiative—CITIC signed initial memorandums of understanding (MOUs) for the harbor project and a railway connecting the SEZ to southern China in 2009. However, they languished amid political sensitivities in Myanmar surrounding Chinese investments following the 2011 suspension of the Myitsone dam project and violent protests starting in 2012 over the Letpadaung copper mine.

The railway MOU was canceled in 2014 while the port and SEZ industrial area projects are moving forward, but slowly and with considerable pushback within Myanmar. Only in October 2017 did the two sides reach an agreement on ownership of the port project after CITIC agreed to drop its stake from 85 percent to 70 percent. Ownership stakes in the SEZ have yet to be finalized.

By pumping crude oil through trans-Burma oil pipeline China has avoided the
US-Navy-controlled Malacca Strait and achieved greater energy security. 
The Strategic and Economic Rationale

China has remained committed to the Kyaukphyu projects primarily because the town is the terminus of a $1.5 billion oil pipeline and a parallel natural gas pipeline running to Kunming, capital of southwestern China’s Yunnan Province. Unlike the other projects related to Kyaukphyu, construction on the pipelines moved forward despite significant local opposition.

They were constructed between 2010 and early 2015 by China National Petroleum Corporation and Myanmar Oil and Gas Enterprise—both state-owned firms—with the former the majority stakeholder. The gas pipeline entered operation in 2013 and can send 12 billion cubic meters of gas to China annually.

After a two-year delay, the oil pipeline finally entered operations in April 2017. It can reportedly carry 22 million barrels of oil per year, which amounts to about 6 percent of China’s 2016 oil imports. The pipeline project is part of a strategic effort by Beijing to reduce its reliance on oil and gas imports through the Strait of Malacca, thereby avoiding the possibility that an adversary like the United States could close the strait to threaten China’s energy supply.

Building a deep-sea port at Kyaukphyu makes considerable economic and strategic sense for China in its drive to develop its inland provinces. Shipping goods from Europe, the Middle East, Africa, and India to Kyaukphyu and then overland to Yunnan could save thousands of miles.

It would be far more efficient than sailing all the way through the Strait of Malacca and the South China Sea to ports along China’s southern and eastern coasts, and then traveling overland to China’s western provinces. Unsurprisingly, in December 2017 State Councilor Aung San Suu Kyi and President Xi Jinping agreed during a meeting in Beijing to establish a new China-Myanmar Economic Corridor connecting Kyaukphyu and Kunming.

No details were released, but the project would likely include construction of a road and perhaps the restart of the suspended rail project. Mandalay, Myanmar’s second-largest city and the traditional hub for trade with southern China, would serve as a waypoint along this new economic corridor. Ultimately it seems Chinese planners envision the Kyaukphyu to Kunming oil and gas pipelines as just the first step in a new trade route that could change the economics of China’s hinterland.

While the establishment of a deep-sea port at Kyaukphyu makes sense for China, its benefits for Myanmar will depend in large part on the success of the accompanying SEZ. Without successful industrial projects in the SEZ, Kyaukphyu could become little more than a waystation for goods headed to Yunnan.

The former government of Myanmar under Thein Sein promoted three large SEZ projects to boost the country’s economy. Of these, the Japanese-led Thilawa SEZ just outside Yangon is the only one already up and running. Another, the joint Thai-Japanese Dawei project along the southern coast, has faced constant financial troubles but continues to move forward slowly.

That puts Kyaukphyu third in a three-way race, and it is unclear whether the zone, with its late start and distance from Myanmar’s commercial and economic heart of Yangon, will be able to lure sufficient investment.

Dangers Both Real and Imagined

There are concerns among some in India and the West, as well as within Myanmar itself, that China could leverage the port at Kyaukphyu for military purposes, but such worries are premature at best. Myanmar’s leaders, both military and civilian, are famously jealous of the nation’s sovereignty and will not accept a permanent foreign military presence, whether from China or anywhere else.

In fact, the country’s 2008 constitution expressly forbids the deployment of foreign troops on its soil. That means that commercial investment in the port at Kyaukphyu is not likely to lead to a permanent Chinese presence such as in Djibouti or, reportedly, Gwadar, Pakistan. Chinese naval assets could certainly pay calls to the port from time to time, as they do at Colombo in Sri Lanka, which is also majority-owned by a Chinese company. But such port calls should not by themselves be cause for concern.

A more realistic, and worrying, possibility is that China could gain a dangerous level of economic leverage over Myanmar due to the accumulation of too much Chinese-funded debt. Chinese loans and large-scale investments have proven highly controversial in other regional states, such as the Maldives, where Beijing has been accused of using them to leverage the recipient nation into making political and economic concessions against its national interest.

Such fears are not unfounded. The Myanmar government’s 30 percent stake in the Kyaukphyu port amounts to $2.2 billion. If it takes a 50 percent stake in the SEZ, that would bring its total responsibility for the projects to $3.5 billion, or about 5 percent of GDP. As Yun Sun at the Stimson Center has pointed out, if the Myanmar government cannot handle that level of financing, it will likely turn to Chinese loans.

Concerns about Chinese economic leverage are not new to Myanmar, and help explain the continued local opposition to Kyaukphyu (and hence the glacial pace of its implementation). One of the driving factors behind Myanmar’s decision to move toward civilian government in 2010–2011 was a worry about overreliance on China amid continued Japanese and Western sanctions.

For the time being, China remains a major but not overwhelming economic presence in the country. China has a major footprint in Myanmar, both in trade and investment, but so do other partners like Japan that provide Myanmar with a significant degree of maneuverability. That is not likely to change in the short term, though the potential debt burden from Kyaukphyu bears watching.

Kyaukphyu is of considerable strategic and economic value for China as it seeks to speed development of Yunnan and its other inland provinces. That value is centered on the development of a deep-water port and the construction of accompanying road and rail links to supplement the pipelines already running to Kunming.

Whether the project also boosts Myanmar’s economic growth will depend on the success of the accompanying SEZ, and the terms under which it takes shape.

All roads will eventually lead to Beijing.
Related posts at following links:
Violence Forces All Muslims Out Of Kyaukphyu.
Kyaukphyu Muslim Ward Burning.