Kyaukphyu: The next big step for Myanmar

Flying in and out of Nay Pyi Taw, one frequently hears talk about tender exercises in several strategic sectors that will shape the economy of Myanmar in the next decade. The largest and latest one is the international invitation to develop the Kyaukphyu Special Economic Zone (SEZ) in Rakhine state.

Kyaukphyu is one of three designated SEZs intended to provide investors with access to abundant resources, generous tax breaks, and potential markets. What differentiates Kyaukphyu SEZ from its peers are its closer proximity to India and China, shorter distance to hinterland Myanmar, and the country’s only natural deep-sea port thus far.

Key challenges are international financing commitments for greenfield development and the fact that road infrastructure to link with the hinterland is still on the drawing board. The tender, launched a few weeks ago and to scheduled be completed by early next year, will be a key litmus test for risk appetite for Myanmar by international investors.

What is Kyaukphyu?

The Kyaukphyu SEZ is located in the western region of the country in Rakhine state, with the first phase calling for the development of 1,000 hectares of industrial park, a deep-sea port with a container handling capacity of 8,000 twenty-foot equivalent units (TEU) and a 16-metre depth, and 500 hectares of integrated residential area.

In the initial phase, the logistics infrastructure will be port-based while the road infrastructure will be developed at a later stage and is still subject to uncertainty. Targeted industries for the initial phase are light industries, namely textiles, construction materials, food processing, and general manufacturing. More complex petrochemical and refinery industries will be added at a later stage.

Why Kyaukphyu?

Compared with the Thilawa and Dawei SEZs, Kyaukphyu is located closer to India, China, and the Myanmar hinterland and features a natural deep-sea port. The Thilawa SEZ is located closer to Yangon, which is and will be the most affluent consumer market for Myanmar, while Dawei to the west will be linked with Thailand.

Arguably, more than half of Myanmar’s offshore oil and gas blocks are located nearer to the Kyaukphyu area than to other SEZs. The very first phase of the Thilawa SEZ, with its more manageable area of 400 hectares, is targeted to be completed by 2016, while the completion phase for Kyaukphyu remains to be determined.

Geopolitics plays a role in SEZ development. The development model for Kyaukphyu has been quietly shifted from a Chinese government-led project to international private sector participation. The ongoing invitation for international bidding was launched shortly after the memorandum of understanding with the Chinese government to build an 800-kilometre rail linking the Kyaukphyu SEZ with China’s Yunnan province was officially cancelled by Myanmar authorities in July.

Unlike the Thilawa SEZ, whose consultants and international promoters consist almost entirely of Japanese businesses, a Singapore-based consultant has been appointed to develop the master plan of the first phase of the Kyaukphyu SEZ as well as the invitation for tender.

Benefits and risk

Investors in Kyaukphyu will enjoy policy benefits as set out in the recently announced SEZ Law, such as full foreign ownership, generous tax breaks, asset protection, and so forth. However, surrounding support infrastructure such as energy, telecoms, water, and road upgrades will be developed by the government, and to a large degree these are still on the drawing board. The geopolitical shift away from China mentioned earlier may also raise challenges to secure financing for a project of such scale.

Should Thai investors bother?

The Kyaukphyu SEZ offers an alternative to Thai investors as developers, infrastructure providers and industrial participants. The shift in the development model should mean more openness to all international investors without government-to-government consideration.

Investors who are looking for opportunity in the Myanmar hinterland market with better links to southwestern China and eastern India in the long term should seriously consider putting Kyaukphyu on their radar screens.

It remains to be seen, however, whether those in international investment community will really put their money where their mouths are. We will get a glimpse of international risk appetite early next year with the tender results for the first phase of the Kyaukphyu SEZ. For now, a trip to the region and a visit to Nay Pyi Taw would be a good starting point.

Source: Bangkok Post

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