China's Belt and Road Initiative is coming under unprecedented pressure as citizens in its neighbouring countries question the cost of massive infrastructure projects and whether the host country or China will truly be the beneficiary.
Last month's political earthquake in Malaysia was a stark example of how a government getting cosy with Beijing can cost it political capital at home. Although concern over China-backed railway lines clearly was not the only concern voters had with the government of ousted leader Najib Razak, cancelling rail projects did offer a quick way for the new administration to differentiate itself.
In Vietnam, meanwhile, riots broke out at the weekend amid rising concern over propsed special economic zones that protestors believe will be dominated by Chinese investors. In Sri Lanka, the government ended up handing over 80% of the Hambantota port project to its Chinese backers after struggling to repay a $1.2 billion loan from the Export-Import Bank of China.
With all of these problems in mind, investors looking for Belt and Road opportunities need to be conscious of which projects have the potential to become flashpoints. A look at the trends that led to problems in Malaysia, Vietnam and Sri Lanka points to one possible battleground: Myanmar, and specifically its plans for a deep sea port accompanied by a special economic zone.
The theory behind the port plan seems sound enough — the country needs to open up to international trade, and a $10 billion plan for a deep sea port and special economic zone in Kyaukpyu, on Myanmar's western coastline.
A consortium led by China's state-owned Citic Group is set to build the $7.3 billion port and operate it for 50 years, with potential for the agreement to be extended for a further 25 years. It will also be responsible for the adjacent SEZ — the $2.7 billion project was awarded to Citic in 2015.
To be sure, the Myanmar government has pushed back and won agreement from Citic to reduce the latter's ownership share of the $7.3 billion project from 85% to 70%. And it is still negotiating over a profit-sharing agreement for the port.
But two factors are prompting domestic and international concern about the port: cost and its likely benefits.
Myanmar is set to borrow some $2 billion from Citic to finance its share of the port development — according to International Monetary Fund projections from 2016, that's equivalent to more than 2% of GDP in 2017.
In an echo of the situation in Sri Lanka, this could “grant China a dangerous level of economic leverage over Myanmar” wrote Gregory Poling, director of the Asia Maritime Transparency Initiative, in an April report.
The other question is whether businesses operating in Myanmar will actually make use of the port.
Located in remote Rakhine state — more often in the news because of the refugee crisis involving its Rohingya minority population — is far from the centres of economic activity in the country. Even U Zaw Aye Maung, the minister for ethnic affairs who represents the state in the national government, said some 95% of the import and export trade goes through two older, inner-city ports in Yangon.
Elsewhere in the region, “older, inner city terminals have been surprisingly resilient” in the face of expensive new port projects, according to Jonathan Beard, head of transportation and logistics Asia for Arcadis, a global design and engineering management comnsultancy. He cited examples from Thailand and Vietnam, where new port projects had failed to displace traffic from older ports closer to centres of economic activity.
So if Myanmar's companies won't use Kyaukpyu, what do Citic and China see in it? The clue comes in the form of new $1.5 billion oil and natural gas pipelines running to Kunming, the capital of China’s Yunnan province. Both pipelines were fully operational by April last year.
Developing a corridor through Myanmar linking Kyaukpyu to Kunming via Mandalay, will significantly shorten transport times and also allow Beijing to reduce its reliance on oil and gas imports via the chokepoint of the Strait of Malacca.
But an economic corridor running from Kyaukpyu to Kunming omits Yangon, traditionally Myanmar’s commercial and economic heart.
“Its benefits for Myanmar will depend in large part on the success of accompanying SEZ”, Poling said.
There is a danger that without successful industrial projects in the SEZ, “Kyaukpyu could become little more than a waystation for goods headed to Yunnan” Poling added.
Which brings us back to the matter of cost, and value.
Negotiations over the profit-sharing agreement for the SEZ have not been concluded, and if the project is to boost the country’s economic growth these negotiations could prove crucial.
To be sure, whilst the government and Citic are still negotiating the profit share for the projects the financial implications for Myanmar are not certain.
But the debt burden is significant enough to look back on recent events in Malaysia and Sri Lanka with a sense of foreboding.
