Myanmar's changing ties with China

Myanmar scales back China-funded Kyauk Pyu port project in Rakhine state due to debt concerns

The Kyauk Pyu port is a key part of Beijing’s ambitious Belt and Road Initiative, aimed at expanding trade links across the world, but many in Myanmar are also wary of becoming too dependent on China

PUBLISHED : Thursday, 02 August, 2018, 5:44pm
UPDATED : Thursday, 02 August, 2018, 10:11pm

Myanmar has scaled back plans for a Chinese-backed port on its western coast, sharply reducing the cost of the project after concerns it could leave the Southeast Asian nation heavily indebted, according to a top government official and an adviser.

The initial US$7.3 billion price tag on the Kyauk Pyu deep water port, on the western tip of Myanmar’s conflict-torn Rakhine state, set off alarm bells due to reports of troubled Chinese-backed projects in Sri Lanka and Pakistan, the official and the adviser said.

Deputy Finance Minister Set Aung, who was appointed to lead project negotiations in May, said the “project size has been tremendously scaled down”.

The revised cost would be “around US$1.3 billion, something that’s much more plausible for Myanmar’s use”, said Sean Turnell, economic adviser to Myanmar’s civilian leader, Aung San Suu Kyi.

China’s state-run Citic Group, the main developer of the project, said negotiations were ongoing and that the US$1.3 billion was to be spent on the “initial phase” of the port, adding the project was divided into four phases. It did not elaborate on plans for subsequent stages.

A Chinese foreign ministry spokesman, Geng Shuang, said on Monday that “according to what I understand, at present both sides are having commercial negotiations” on the Kyauk Pyu project.

“The talks are progressing,” Geng said at a foreign ministry briefing in Beijing. He referred further questions to the companies involved.

There is a strong current of opinion that is nervous about becoming overreliant on China
Richard Horsey, former U.N. diplomat

The original plan was to develop about 10 berths at the 25-metre deep seaport to accommodate bigger oil tankers, but the size will now be revised to only two berths, Set Aung said in an interview. He declined to elaborate on other specifications, citing ongoing technical discussions.

The Kyauk Pyu port is a key part of China’s ambitious Belt and Road Initiative, aimed at expanding trade links across the world. While Beijing says Belt and Road is mutually beneficial for it and its partners, questions have been raised about countries taking on excessive debt to build projects.

In Myanmar, the government faces a delicate balancing act in renegotiating the project with China, analysts say.

The country is increasingly reliant on diplomatic support from Beijing as it faces Western criticism over its treatment of the Rohingya Muslim minority in Rakhine state, and needs Beijing’s help to end ethnic conflicts on its borders. But many in Myanmar are also wary of becoming too dependent on China.

“There is a strong current of opinion that is nervous about becoming overreliant on China,” said Richard Horsey, a former UN diplomat and a Yangon-based political analyst. “That debate is playing out within the government.”

Last week, the country’s union minister and security adviser told the South China Morning Post he was eager for work to begin and dismissed concerns about a “debt trap”.

“We would like to see this project get off the ground,” said Thaung Tun, who is also chairman of the Myanmar Investment Commission. “I would say we [China and Myanmar] are negotiating, the process is moving ahead and a decision is imminent.”

China agrees to lower stake in Myanmar port scheme

Beijing has pushed for strategic opportunities in Myanmar, including preferential access to the Kyauk Pyu port, after being driven to all but abandon a hydroelectric project in the country amid widespread local opposition last year.

Kyauk Pyu is an entry point for a 770km pipeline delivering oil and natural gas to China’s Yunnan province. That gives China an alternative route for energy imports from the Middle East that avoids the strategic choke point of the Malacca Strait.

Under the original plan, Kyauk Pyu would have had a container capacity to rival that of ports such as Manila or Valencia in Spain.

Construction on the port, and an accompanying special economic zone, which together were supposed to cost up to US$10 billion, was expected to start in 2018. A 4,200-acre industrial estate worth US$2.3 billion was planned to attract textile and oil refining industries.

But Myanmar officials said the experience of Sri Lanka, where this year the government signed over to China the lease on a strategic port to pay off Chinese-backed loans used to finance it, had raised concerns the country could be walking into a debt trap.

This really could become a constructive model for countries that don’t have much leverage over a giant like China
Sean Turnell, economic adviser

The new deal “reduces the financial risk dramatically” and shows that “concerns about indebtedness and sovereignty have been and can be addressed”, said Turnell, an Australian economist. “This really could become a constructive model for countries that don’t have much leverage over a giant like China.”

Set Aung, the deputy finance minister, said Myanmar would give no sovereign guarantees for any loans financing the project. He added that the project’s timeline was likely to be delayed several months as Myanmar was looking to hire an international consulting firm to review costs.

“The new deal ensures that any loans financing this project will not lead back to the Myanmar government but rather they will all be private,” he said. “At the moment, my priority is to ensure there is no debt burden for the Myanmar government and these concerns are now quite limited.”

Citic said the two sides had not discussed hiring a third party company to audit the project.

Myanmar government officials said their Chinese counterparts had been “amenable” to renegotiating and had agreed in principle to the new deal, but had yet to sign off.

Citic won a tender in 2015 to develop the project from the previous military-backed government. Set Aung, the deputy finance minister, said disagreements emerged over terms and conditions after the initial tender had been awarded.

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“The previous government wanted to go big, whereas we want to start small and expand only if there is demand for it,” he said.

When asked about the accompanying special economic zone, both Turnell and Set Aung said any expansion plans would depend on the port’s viability.

“Each stage has to demonstrate feasibility before the next phase can be rolled out,” Turnell said.