Myanmar weighs infrastructure, strategic ties to China

Financial Times, May 31, 2017
Two big decisions will sway Yangon’s strategic posture with neighbour to the north

Xi Jinping, China’s president, staged an impressive show for Asean leaders attending his summit in Beijing this month. The assembled politicians received the intended message loud and clear — that their countries stand to benefit from the One Belt One Road initiative every bit as much as China.
Surprisingly, the state within the 10member Association of Southeast Asian Nations that until recently had an ill-defined role in the One Belt script is Myanmar. Yet this is the country that could make some of the greatest gains from the infrastructure connectivity promised by the latterday Silk Road. With its return to democracy, Myanmar is no longer isolated by politics and economic sanctions. But it remains semidetached in a critical respect: decades of underinvestment in infrastructure has ensured that it is has not properly benefited from its location between the trading opportunities of India and China.

Might One Road join those vital dots?
Two key decisions in the coming weeks and months will probably determine how China and Myanmar cooperate. The first decision concerns the ownership of the $7.3bn deep water port of Kyaukphyu on Myanmar’s seaboard. It is the port from which gas and oil are pumped from the Bay of Bengal in parallel pipelines for 770km across Myanmar to China. These pipelines make China far less dependent on tankers sailing the long voyage from the Middle East and Africa through the Strait of Malacca. The resulting savings come in time, money and added security.

China’s interest in Kyaukphyu is thus strategic, and a consortium led by Citic Group, the state owned conglomerate, is reportedly considering whether to press for a controlling stake in the port. For the Myanmar government, permitting such a foreign investment will be contentious but also very tempting — especially if it entices wider Chinese investment to connect the country with its neighbouring markets.
Paradoxically, this advance might come at a cost. For the second big decision facing Aung San Suu Kyi, de facto leader of Myanmar, is what to do about a series of Chinesebacked
hydropower projects in her country that vocal protest campaigns want scrapped.
The largest of these is the Mong Ton dam, on the Salween River, where Three Gorges and Sinohydro (alongside Egat International Thailand) are the lead investors. Sinohydro and Egat are again involved in the smaller Hatgyi dam. Meanwhile, State Power Investment Corporation is the main investor in the Myitsone dam in the north of Myanmar, which has been suspended by presidential decree since 2011.

Speculation has it that Myanmar will concede Chinese control of the Kyaukphyu port in return for cancelling some of the contentious hydropower projects. Doubtless this quid pro quo would suit Citic, but not the affected Chinese energy corporations that took out commercial loans to pay for hydro projects predicated on an eventual return on investment. The compensation bill exceeds Myanmar’s will or capacity to pay.

Hard to find is the Myanmar man or woman who lies awake at night worrying about the hit Chinese energy companies might take if these projects are cancelled. But with 70 per cent of Myanmar’s population still not connected to grid electricity and even big cities such as Yangon (Rangoon) continuing to suffer almost daily outages, is spurning such massive investment in the country’s abundant hydropower potential really in Myanmar’s interests?
The country necessarily exports much of its oil and gas so that it can earn foreign currency. Without these fuel exports, Myanmar’s trade deficit would become serious. It is a trade balance that would also be worsened by importing coal — to say nothing of the environmental objections.
What Myanmar does have in plentiful supply is an effectively limitless natural supply of hydropower. Only 3 per cent of the country’s hydroelectric potential has thus far been tapped).
When the contentious dams were first proposed, it was in the expectation that most of the electricity generated would go to satiate the energy thirsty Yunnan province which borders Myanmar. Myanmar would get what was left over.

But the energy shortages anticipated for Yunnan have not materialised. By contrast, Myanmar suffers an acute energy shortage. As to the future, current projects under way do not look geared towards meeting the 15 per cent a year increase in Myanmar’s energy requirement needed to meet its economic growth projections. Either this problem is solved or Myanmar’s prospects will ultimately disappoint.

Rather than cancel the big dams in return for agreeing to Chinese majority control of the port of Kyaukphyu, Myanmar could insist upon a reassessment of existing agreements to put Myanmar’s energy requirements first.

This will require setting rigorous environmental standards. Local communities that are most inconvenienced by construction must be sent to the front of the queue for the benefits that come with it. With supporting development of the grid, the dams should prioritise powering Myanmar, with the surplus going to its neighbours rather than the other way around.

A decision on Kyaukphyu need not be at the cost of Myanmar’s ability to keep its lights on. Far from being antagonistic, the electrification of Myanmar and its integration in a wider One Belt network of trade and development should be complementary objectives.

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