Kyaukphyu SEZ ‘Key’ to China Business Corridor, But Doubts Remain

By William Boot 19 September 2014

Kyaukphyu port on Burma’s western coast could play a key role in a Beijing-led economic corridor plan linking neighbors India, Bangladesh and China.

But economists and foreign policy analysts are divided over whether the Naypyidaw government’s ambitions for a special economic zone (SEZ) around Kyaukphyu in Arakan State are viable.

The so-called BCIM Corridor, for Bangladesh-China-India-Myanmar, was a key issue of discussion by China’s President Xi Jinping this week on a rare visit to India by a Chinese head of state.

A pivotal spot along the corridor would be Mandalay, linking China’s Yunnan province capital Kunming with northeast India and on into Bangladesh. But observers see the BCIM proposal as also instrumental in giving China access to the Indian Ocean.

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

Within Burma this points to Kyaukphyu for the Chinese, who have already built a crude oil transshipment terminal there as well as controversial oil and gas pipelines that start at Kyaukphyu and run the length of Burma into Yunnan.

However, Chinese plans for a railway linking Yunnan with Kyaukphyu have soured amid a cooling relationship between Naypyidaw and Beijing.

An SEZ around Kyaukphyu would need considerable investment in basic infrastructure such as electricity, modern road links and port communications, at a time when major Japanese companies have already made commitments to developing Burma’s first SEZ, at Thilawa on the outskirts of Rangoon.

Economists and analysts are divided over the viability of a Kyaukphyu SEZ, in the near to medium term at least.

One foreign economist who knows Burma well told The Irrawaddy, on condition of anonymity, that a Kyaukphyu SEZ might be plausible in the long term but development should wait at least until the Thilawa project is completed and operational.

Thilawa has been subject to long delays over land access and infrastructure problems, but the project is now moving forward.

Plans for Kyaukphyu suffered a setback with the apparent abandonment of an agreement between Naypyidaw and the China Railway Engineering Corporation to build a multi-billion dollar railway through Burma to the port.

However, Yun Sun, a China foreign policy analyst with the Washington-based Stimson Center think tank, believes the SEZ and a railway could still go ahead with reduced Chinese involvement plus other foreign investors.

Yun Sun said 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 bypassed the congested Malacca Strait and hotly contested South China Sea.”

“The Chinese do not want to risk any speedy rush into the SEZ only to reinforce the anti-China sentiment associated with Chinese projects,” Yun Sun told The Irrawaddy. “However, China is not the only investor available in the case of Kyaukphyu. I expect investment from Southeast Asia to play a big role in many of the related fields.”

Foreign and Burmese firms are being invited this month to bid for one of three construction contracts to develop a Kyaukphyu SEZ, which has been estimated by the government’s Kyaukphyu economic zone management committee to initially cost US$200 million.

The committee envisages that the development will 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.

There are also plans by Burma’s Ministry of Electric Power to award a contract to build a 50 megawatt gas-fueled power station at Kyaukphyu, though observers say this would be inadequate to supply sufficient electricity for the planned SEZ.

Despite all this, a Western economist who has been an active observer of Burma since the days of the former military regime 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 Turnell, who is co-editor of Macquarie University’s Burma Economic Watch website.

In India, the charm offensive by President Xi may fail to allay traditional Indian suspicions of China.

The previous Indian government paid lip service to a so-called “Look East” policy opening up a business corridor into Burma and Southeast Asia, but put forward little in the way of practical measures to promote such an idea, the Telegraph said. Now there are concerns in Delhi that a BCIM corridor “will end up as a Chinese highway for dumping its products,” the paper said ahead of Xi’s three-day visit this week.

But India’s new Prime Minister Narendra Modi is more business friendly than his predecessor and seemingly more determined to shake up his country’s stumbling economy through closer relations with neighbors to the east.

“[Burma] remains a key link in China’s BCIM, South Asia and Southeast Asia strategies,” Yun Sun told The Irrawaddy.

“I doubt that China will completely abandon its strategic plan. The Chinese will be involved in the Kyaukphyu SEZ. The level of involvement may be below people’s wishes, but people should not have expected that everything will be smooth in the reform and opening up process anyway. Policies always involve trade-offs,” she said.