Why The Kyaukphyu Port Project Could Land Myanmar In China’s Debt Trap

Nitin A. Gokhale New Delhi 14 January 2019

In November 2018, Myanmar and China’s state-owned China International Trust Investment Corporation or CITIC Group Corporation Ltd, signed a framework agreement for the Kyaukphyu deep-water port project in Rakhine State following lengthy and difficult negotiations between the two sides going back to 2014.

Kyaukphyu is at one end of what is called the China-Myanmar Y-shaped corridor. It will begin at Kunming in Yunnan and then head to Mandalay in northern Myanmar before branching out in the east to Yangon New City and in the west to Kyaukphyu. Like most other Belt and Road Initiative (BRI) projects, the Y-shaped corridor was clearly conceived in Beijing in keeping with the needs of Chinese priorities and vision, with little consultation with the government in Naypyidaw. The Kyaukphyu project was seen as a follow up to the 2008 decision by the Myanmarese government to allow China to buy oil and gas from Shwe offshore gas project. Two pipelines, built and controlled by China’s national oil company CNPC, carry 22 million tonnes of crude oil and 12 billion cubic metres of natural gas annually into China’s landlocked Yunnan province.

Originally, the Kyaukphyu SEZ project was estimated to be worth over US $7.5 billion. However, according to the agreement signed in November 2018, the first phase of the project will be to the tune of US $1.3 billion with the CITIC group retaining a 70 per cent stake and the rest 30 per cent to be paid by Kyaukphyu Special Economic Zone Management Committee (KPSEZ MC).

Despite the revised terms, Myanmar, like other nations in Asia, is in danger of walking into a debt trap under China’s ambitious multi-trillion-dollar BRI that spans several continents. In 2016, Myanmar had offered the SEZ as a 50:50 venture, but the CITIC group rejected the proposal. That time, China, angered by the Thein Sein government’s decision to abandon the controversial Myitsone dam in 2011, wanted to penalise Myanmar unless it gave concessions in the SEZ project. So, in 2016, CITIC group proposed 85 per cent stake before settling at 70 per cent in 2017. Even at 70 per cent, the stake would make the SEZ Kyaukphyu the most foreign of all SEZs operating in Myanmar. In the Thilawa SEZ, Japan holds 49 per cent stake; in Dawei SEZ, Thailand has 35 per cent stake along with Japan and South Korea. China however wants exclusive control of the port and the industrial park. This pursuit of exclusivity is what makes China’s motivations suspect.

The proposed China-Myanmar Economic Corridor

Myanmar officials are convinced that the projects as they have been planned will deepen Kyaukphyu’s character as a Chinese enclave, building on its current status as the terminal of two pipelines currently linking it with Yunnan province of China. The port concession lies with China for 50 years, considered too long for the kind of exclusivity China has sought. In fact, the terms of the contract apparently give the Chinese a right to automatically extend the lease at their sole discretion, 25 years at a time. Sources say China is not only asking for exclusive rights to operate the port but also urging Myanmar to deny any other competitor the usage of certain area even beyond their boundary. Myanmar will not be entitled to any corresponding compensation for foregoing its sovereign rights.

This is not all. In order to retain or even enhance its stranglehold over the project, China is scaling up the scope of the two projects far beyond the capacity of Myanmar to jointly finance it. After the initial infusion of US $300 million as capital, the CITIC group will provide a multibillion dollar shareholders’ loan to the company, on which it will be entitled to a 1.5 per cent interest. In case Myanmar is unable to finance its corresponding portion of the shareholders’ loans, the Chinese partner could provide bridging loans at a higher interest rate and enjoy a right to convert the amount into equity, exactly as the Chinese did with the Hambantota port project in Sri Lanka. Thus, in all likelihood, over a period of time, Myanmar’s ownership of the project will go down further. More significantly, for making all of these changes, the Chinese company has no obligation to take the Myanmar government’s permission.

And what does Myanmar get in real terms? It will receive no other payment except in the form of shares worth US $300 million for land lease and concession but with the 70:30 split of equity, Myanmar will effectively only receive US $210 million as the rest will be taken as Myanmar’s contribution in the company. Only about US $5 million will be given to Myanmar upfront while the rest will be conditional on Myanmar performing several tasks in a short period to the satisfaction of the Chinese needs.

Myanmar is therefore squeezed not just in terms of time but also out of their money. For instance, in large-scale projects like the one at Kyaukphyu, the standard practice is the cost of feasibility study and environmental and social impact studies are sponsored by the foreign investor through a grant, a practice that China has also followed in some countries. But for Kyaukphyu, this cost is to be reimbursed by the newly formed joint company even though the projects are conceived by the Chinese to primarily serve their interests. More significantly, the Chinese want the Myanmarese government—and not the company—to pay compensation to 20,000 people who will be displaced and have to be resettled.

Myanmar, increasingly under pressure from the international community over its handling of the Rohingya crisis, is seen to be yielding to Chinese demands not only on the Kyaukphyu project but also many other small and big projects across the country, a situation most countries that are keen on becoming part of BRI projects, will face in coming years.

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