August 2, 2018 / 8:19 AM / 4 months ago

Exclusive: Myanmar scales back Chinese-backed port project due to debt fears - official

NAYPYITAW (Reuters) - Myanmar has scaled back plans for a Chinese-backed port on its western coast, sharply reducing the cost of the project after concerns it could leave the Southeast Asian nation heavily indebted, a top government official and an advisor told Reuters.

The initial $7.3 billion price tag on the Kyauk Pyu deepwater port, on the western tip of Myanmar’s conflict-torn Rakhine state, set off alarm bells due to reports of troubled Chinese-backed projects in Sri Lanka and Pakistan, the official and the advisor said.

Deputy Finance Minister Set Aung, who was appointed to lead project negotiations in May, told Reuters the “project size has been tremendously scaled down”.

The revised cost would be “around $1.3 billion, something that’s much more plausible for Myanmar’s use”, said Sean Turnell, economic advisor to Myanmar’s civilian leader, Aung San Suu Kyi.

China’s state-run CITIC Group [CITIC.UL], the main developer of the project, said negotiations were ongoing and that the $1.3 billion was to be spent on the “initial phase” of the port, adding the project was divided into four phases. It did not elaborate on plans for subsequent stages.

A Chinese foreign ministry spokesman, Geng Shuang, said Monday that “according to what I understand, at present both sides are having commercial negotiations” on the Kyauk Pyu project.

“The talks are progressing,” Geng said at a foreign ministry briefing in Beijing. He referred further questions to the companies involved.

The original plan was to develop around 10 berths at the 25-metre deep sea port to accommodate bigger oil tankers, but the size will now be revised to only two berths, Set Aung said in an interview.

He declined to elaborate on other specifications, citing ongoing technical discussions.

The Kyauk Pyu port is a key part of China’s ambitious Belt and Road initiative, aimed at expanding trade links across the world. While Beijing says Belt and Road is mutually beneficial for it and its partners, questions have been raised about countries taking on excessive debt to build projects.

In Myanmar, the government faces a delicate balancing act in renegotiating the project with China, analysts say.

The country is increasingly reliant on diplomatic support from Beijing as it faces Western criticism over its treatment of the Rohingya Muslim minority in Rakhine state, and needs Beijing’s help to end ethnic conflicts on its borders. But many in Myanmar are also wary of becoming too dependent on China.

“There is a strong current of opinion that is nervous about becoming overreliant on China,” said Richard Horsey, a former U.N. diplomat and a Yangon-based political analyst. “That debate is playing out within the government.”

DEBT FEARS

Beijing has pushed for strategic opportunities in Myanmar, including preferential access to the Kyauk Pyu port, after being driven to all but abandon a hydroelectric project in the country amid widespread local opposition last year.

Kyauk Pyu is an entry point for a 770-kilometre (480-mile) pipeline delivering oil and natural gas to China’s Yunnan province. That gives China an alternative route for energy imports from the Middle East that avoids the strategic chokepoint of the Malacca Strait.

Under the original plan, Kyauk Pyu would have had a container capacity to rival that of ports such as Manila or Valencia in Spain.

Construction on the port, and an accompanying special economic zone, which together were supposed to cost up to $10 billion, was expected to start in 2018. A 4,200-acre industrial park worth $2.3 billion was planned to attract textile and oil refining industries.

But Myanmar officials said the experience of Sri Lanka, where this year the government signed over to China the lease on a strategic port to pay off Chinese-backed loans used to finance it, had raised concerns the country could be walking into a debt trap.

The new deal “reduces the financial risk dramatically” and shows that “concerns about indebtedness and sovereignty have been and can be addressed”, said Turnell, an Australian economist. “This really could become a constructive model for countries that don’t have much leverage over a giant like China.”

Set Aung, the deputy finance minister, said Myanmar would give no sovereign guarantees for any loans financing the project.

He added that the project’s timeline was likely to be delayed several months as Myanmar was looking to hire an international consulting firm to review costs.

“The new deal ensures that any loans financing this project will not lead back to the Myanmar government but rather they will all be private,” he said. “At the moment, my priority is to ensure there is no debt burden for the Myanmar government and these concerns are now quite limited.”

CITIC said the two sides had not discussed hiring a third party company to audit the project.

“START SMALL”

Myanmar government officials said their Chinese counterparts had been “amenable” to renegotiating and had agreed in principle to the new deal, but had yet to sign off.

CITIC won a tender in 2015 to develop the project from the previous military-backed government. Set Aung, the deputy finance minister, said disagreements emerged over terms and conditions after the initial tender had been awarded.

“The previous government wanted to go big, whereas we want to start small and expand only if there is demand for it,” he said.

When asked about the accompanying special economic zone, both Turnell and Set Aung said any expansion plans would depend on the port’s viability.

“Each stage has to demonstrate feasibility before the next phase can be rolled out,” Turnell said.

Additional reporting by Julie Zhu in Hong Kong; Editing by Alex Richardson and Philip McClellan

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