Frustration mounts as Kyaukphyu port negotiations stall

Kyaukphyu’s Chinese investors have hit back at criticisms over their majority stake in a proposed deep-sea port in Rakhine. They emphasised that it was the Myanmar government who drew up the shareholder structure and that the ball is in Nay Pyi Taw’s court to break the inertia and move the negotiations forward.

Kyaukphyu is the location for a proposed Special Economic Zone (SEZ) which consists of an industrial park and a deep-sea port in Rakhine State. This mega project was dubbed as the “mini Singapore” by the Financial Times. In 2015, a consortium led by CITIC the won bid to develop both the port and the park.

The consortium includes China Harbor Engineering, China Merchants, TEDA Investment, Yunnan Construction Engineering Group and Thailand’s Charoen Pokphand Group. Consulted by Singapore Jurong and PwC, the consortium took part in the bidding and won the tender.

Under the shareholder structure permitted by the government under U Thein Sein, China is to have an 85 percent stake in the deep-sea port, with Myanmar holding the remaining 15pc.

There seems to be a misconception that we, CITIC, are being greedy to ask for 85pc, but it was originally, clearly written.- Warren Hua, CITIC

The Chinese consortium, led by Chinese state-owned CITIC Group, is currently in negotiations with Nay Pyi Taw on the framework agreements of both components of the SEZ – the industrial park and the deep-sea port.

In an exclusive interview on October 12, Yuan Shaobin, executive president of CITIC Myanmar, expressed frustration over the negotiations, telling The Myanmar Times that talks have been ongoing for two years with little progress. “The agreement for the framework is nearly ready, it just needs some progress to be approved,” he said.

But Mr Yuan stressed that the framework agreement merely serves as a small step forward and is not the target. The ultimate aim is to sign all the transaction documents which will enable work at the SEZ to commence. The industrial park involves three agreements: a investment agreement, a shareholder agreement, and a land lease agreement, while the port requires the same agreements together with an additional concession agreement.

“We need some more time for more details to be discussed and negotiated. And now this hasn’t yet started. We don’t know when we can start negotiating these kinds of agreement. We have prepared all the drafts of the agreements according to the world’s best practices, but we still need feedback [from Myanmar] to revise and modify the agreement clause by clause. This is the current situation,” he said.

Warren Hua, legal advisor to CITIC Construction added that, on top of those deals, ancillary documents and financing documents will need to be ironed out as well.

Delay after delay

In August, Dr Oo Maung, vice-chair of Kyaukphyu SEZ Management Committee, told The Myanmar Times that the equity shares and details between CITIC consortium and Myanmar Kyaukphyu SEZ Holding Company (MKSHC consortium) was being negotiated and he expected an agreement to be signed within that month.

It is now October and negotiations have come to naught. “The negotiations and all the relevant works are going forward so slowly,” Mr Yuan said.

He added that even if the transaction documents are signed now, the investors cannot commence the project immediately because it would take at least 1.5 years to complete the Environmental Impact Assessment (EIA) process and for the EIA to be approved.

Mr Yuan now estimates that the project could only start after two years following the ratification of transaction agreements. “We are ready to sign. Anytime Myanmar is ready, we are ready,” he said, making clear their frustration over the lack of progress and indicated that the ball is in the government’s court to end the inertia and get on with the work.

New demands

So what is causing the delays? The disagreement between the two sides concerns the Myanmar consortium’s new demands to raise its stake to 30pc as well as receive dividends but to not shoulder financing responsibility.

The request for proposal (RFP) for the SEZ was first drafted in 2014, when the former government instructed that “the bidder shall hold a stake of not more than 85pc, while the Myanmar government and government designated entity shall hold a stake of not less than 15pc.”

“The Myanmar consortium just wants more shares but they don’t want to take more financing responsibility,” Mr Yuan noted, adding that negotiations on resolving this issue is taking time.

He stressed that the CITIC consortium has already paid a very attractive price for participation in the Kyaukphyu SEZ. “We gave a very, very high price for the land and concession rights. The Myanmar side just needs to pay the equity – 15pc of the first phase of the deep-sea port – and does not need to consider further financing responsibilities [in the next three phases],” Mr Yuan said. The next three phases will be funded by the revenue generated by the first phase and loans from CITIC with an interest rate of 1.5 percent per annum.

CITIC emphasised that the total investment cost of the port project, covering all four phases, would amount to US$7.2 billion, whereas the Myanmar side will only need to contribute $74 million.

“The Myanmar side would also have 15pc of the dividends,” Mr Hua added.

Mr Yuan said that the Myanmar government thinks the offer from CITIC is good and “they want to get more shares but they don’t want to [make any financing responsibilities]. If they want more shares, CITIC cannot take on all the financing responsibilities. It should be shifted proportionately.”

“We have agreed that Myanmar’s side can have 30pc shares. But the additional shares – the shift from 15pc – means that they should take on some of the financing responsibilities from CITIC proportionately.”

The way he sees it, “Myanmar should take the same risk as us. We should have Myanmar partners who would be willing to take on the same risk with us. It’s business.”

“There seems to be a misconception that we, CITIC, are being greedy to ask for 85pc, but it was originally and clearly written that Myanmar’s side only required. We have been fully responding to the requirements and conditions. It is not us who wanted to have more shares than we are allowed to have! So, this should be clearly clarified,” Mr Hua highlighted.

“Typically, for a project finance deal like this, 30pc will be consisting of equity and 70pc will be debt. So, we are actually bearing the largest chunk of the financing responsibility,” he explained.

Justifying the stake

But how is it politically justifiable for a foreign state-owned company to own a majority stake in a deep-sea port in another country?

We had no intention to have the majority share in the beginning. It had been requested by the Myanmar government because it is not only just about the shares, it is [about] the investment. – Yuan Shaobin, CITIC

“Of course, we know that Myanmar – at its current stage and compared to its surrounding countries – has the potential for development. That is why we committed an investment during that period.

“Another point to make is considering China’s Belt and Road Initiative. Myanmar is a critical point. If we invest here, we could request more support from the government to do more business,” Mr Yuan said, adding that the project is helpful for developing Myanmar’s economy.

But since the transfer of political leadership and change in government, “nobody [from the Myanmar government] cared about this [Kyaukphyu project], thought about this or about how to deal with this,” according to CITIC.

The Chinese state-owned bank said that they are unclear when an agreement will be reached and inked.

Source: Myanmar Times

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