Kyaukphyu SEZ: Economic Reality or Pipedream?

By William Boot 10 November 2014

The development of a special economic zone (SEZ) around Kyaukphyu in Myanmar’s Rakhine State could move closer to reality before the end of the year with the naming of tender winners for the development of factories, new housing and infrastructure.

Twelve foreign and domestic firms have been shortlisted by the SEZ development committee, which failed to name any of them in a supposedly open process, but which sources said include Chinese, Singaporean and Indian businesses.

China continues to be seen as pivotal to the successful development of the Kyaukphyu SEZ, despite cooling business relations between Naypyitaw and Beijing.

First, President U Thein Sein’s suspension of the massive Myitsone dam on the Ayeyarwady River upset China and, more recently, negotiations have broken down over the construction of a railway line from Kunming in southwest China’s Yunnan Province across Myanmar to Kyaukphyu.

China and Singapore were the target of recent roadshows seeking to attract investment in the Kyaukphyu SEZ. The promotion included a six-minute video extolling the virtues of Kyaukphyu, currently an undeveloped backwater where promises by China National Petroleum Corporation (CNPC) to provide 24-hour electricity supply to the local population remain unfulfilled, said the Rakhine Social Network Information Center, a local NGO.

CNPC has built crude oil and gas pipelines running from Kyaukphyu through Magway Region, Mandalay Region and Shan State to China, as well as an oil transhipment terminal for tankers docking with oil from Middle East and African suppliers.

Arakan Oil Watch, an NGO which monitors developments around Ramree Island where the terminal is sited, believes Kyaukphyu could become a base for a marine services sub-industry to provide engineering, supplies and maintenance support for the numerous offshore oil and gas exploration blocks recently awarded to a clutch of international companies.

The SEZ promotional video said that the Kyaukphyu SEZ will provide an important Indian Ocean link for China, northeast India and some countries of the Association of Southeast Asian Nations (ASEAN).

“Kyaukphyu is uniquely positioned to serve as a trade corridor connecting these three economies with a combined population of 3 billion people,” the video said. “It will play a vital role in unlocking the potential of the [Myanmar] hinterland.”

A Chinese state-owned firm heads a partnership appointed in March to promote, advise and coordinate the Kyaukphyu SEZ. Naypyitaw named a group led by CPG Corporation of Singapore, however, this firm was bought in 2012 by China Architecture Design and Research Group, China’s largest state-owned engineering design and services company.

Kyaukphyu is seen by China’s strategic planners as a key element of the so-called BCIM Corridor, for Bangladesh-China-India-Myanmar. The BCIM is a pet project of Beijing’s and was promoted by China’s President Xi Jinping on a state visit to India in September.

A pivotal place in the BCIM corridor would be Mandalay, linking Kunming in Yunnan Province with northeast India and on into Bangladesh. But observers also see the BCIM idea as instrumental in facilitating Chinese access to the Indian Ocean.

The BCIM is a grand plan for China to “gain access to multiple coastal zones that are considered crucial for the next-generation Chinese economy,” commented India’s Telegraph business newspaper.

Economists and foreign policy analysts are divided over whether a Kyaukphyu SEZ is viable in the near term. Meanwhile, work progresses on the country’s first SEZ, with Japanese investment, at Thilawa adjacent to Yangon.

An SEZ around Kyaukphyu would need considerable investment in basic infrastructure such as electricity and new road, rail and port communications.

One Western economist who knows Myanmar well told The Irrawaddy, on condition of anonymity, that a Kyaukphyu SEZ might be plausible in the long term but foreign investment should be focused on Thilawa until it is completed and operational.

Yun Sun, a China foreign policy analyst with the Washington-based non-profit think tank the Stimson Center, believes the SEZ and a new railway linked to China’s Yunnan Province could go ahead with reduced Chinese involvement.

She argues that a Yunnan-Kyaukphyu railway remains of strategic importance to China as a key component of China’s trans-Asia railway network and in “developing a southwest strategic corridor to the Indian Ocean, a route for crucial imports that bypass the congested Malacca Strait and hotly contested South China Sea.”

“However, China is not the only investor available in the case of Kyaukphyu,” Yun Sun told The Irrawaddy. “I expect investment from Southeast Asia to play a big role in many of the related fields. [Myanmar] remains a key link in China’s BCIM, South Asia and Southeast Asia strategies. I doubt that China will completely abandon its strategic plan. The Chinese will be involved in the Kyaukphyu SEZ.”

The development of Kyaukphyu would be divided into three sections, a deep-water port, an industrial estate, and a housing district. The planners are targeting textiles, construction materials, food processing and general manufacturing for the industrial estate. Myanmar’s Ministry of Electric Power is planning to award a contract to build a 50 megawatt gas-fuelled power station at Kyaukphyu, although power industry analysts say this would be inadequate to supply sufficient electricity to fuel the envisaged SEZ.

Another Western economist who has been an active, long-time observer of Myanmar thinks a Kyaukphyu SEZ is a non-starter for the foreseeable future. “I continue to believe this project is not going anywhere, despite some movement in establishing a management company, as well as the power [plant] proposal,” Sean Turnell, a professor at Macquarie University in Australia, told The Irrawaddy.

“Neither the politics nor the economics of the Kyaukphyu SEZ are plausible as yet,” added Mr. Turnell, who is also co-editor of Burma Economic Watch.

Whichever companies win contracts to develop the SEZ, they may have to contend with a hazard that was not mentioned in the promotional video: mud volcanoes. The area around Kyaukphyu is noted for this natural, destructive phenomenon, also known as mud pots, in which warm mud and methane gas spew to the surface from subterranean fault lines. One such incident occurred at the end of August near the village of Shauk-Chaung on the edge of the SEZ and engulfed about 100 acres of land, said the Rakhine Social Network Information Center.

On that occasion no one was hurt and only rice paddy was destroyed. But next time, perhaps, it could be factories and other expensively installed infrastructure.

This story first appeared in the November 2014 print issue of The Irrawaddy magazine.