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Belt tightening


China's Belt and Road programme offers to fill missing railway links across the region, but do the plans make economic sense and can countries afford them?

30 Jul 2018

The dream of a pan-Asian railway network has been around for decades but the story so far has been mostly one of false starts and missing links.

Now, however, proponents of fast and seamless rail transport have a new spring in their step, thanks to the vision of the Belt and Road Initiative (BRI) pushed by Chinese President Xi Jinping.

The Belt and Road envisions a series of new overland trade and communication routes, complemented by a "maritime Silk Road" served by strategically located ports. Both the land and sea components hold great promise for Southeast Asia, but challenges remain.

The Kunming-Singapore rail network, for instance, still has numerous chokepoints. They include stretches from Vientiane in Laos to Nakhon Ratchasima in Thailand, and from Kuala Lumpur to Singapore.

In the case of the former, Thailand has been resisting heavy pressure from China for more financial, commercial and operational control. In the case of the latter, new Malaysian Prime Minister Mahathir Mohamad thinks his scandal-plagued predecessor made a terrible financial deal with China.

No one disputes that Asean nations need better infrastructure, and the prospect of US$1 trillion in BRI-linked investments in railways, roads, ports and other projects is dazzling. But concerns ranging from a lack of participation by local workers to heavy public debt loads are rising. Critics warn of a "debt trap" and point to Sri Lanka and Laos, which have taken on more financial obligations than they can comfortably manage.

KUNMING-VIENTIANE-BANGKOK
The Belt and Road consists of six major corridors spanning various parts of the Asian continent and beyond. The China-Indochina Peninsula Economic Corridor (CICPEC) consists of three proposed high-speed rail routes: the Central Route linking Kunming in Yunnan province with Vientiane, Bangkok, Kuala Lumpur and Singapore; the Eastern Route from Kunming via Hanoi, Phnom Penh, Bangkok and Kuala Lumpur to Singapore; and the Western Route from Kunming via Yangon, Bangkok and Kuala Lumpur to Singapore.

The goal is to link China's underdeveloped southwestern region, including Yunnan and Guangxi provinces, with markets in Southeast Asia including Singapore as a financial hub.

Yunnan's gross domestic product (GDP) was 1.5 trillion yuan ($221 billion) in 2016. That compares with $68 billion in Myanmar, $16 billion in Laos and $203 billion in Vietnam. However, the province's GDP per capita was only $5,500, compared with average of $9,800 for all Chinese provinces, and $20,000 in Beijing.

This massive disparity between China's rich eastern cities and the rest of the mainland prompted the central government to initiate a high-speed railway network worth $112 billion in January this year. The plan is to add 30,000 kilometres of new high-speed lines by 2020, linking most big cities.

Yunnan's growth prospects, along with the existing rail and road links between Kunming and major Chinese cities including Beijing, Shanghai and Guangzhou have made the province an attractive investment destination. According to the Yunnan Statistical Yearbook, foreign direct investment there rose from $777 million in 2008 to $3 billion in 2015.

Meanwhile, bilateral trade between Asean and China hit a record $514.8 billion in 2017, up 13.8% year-on-year, the fastest growth between China and any of its major trading partners. A direct connection between Yunnan and Asean would clearly help Southeast Asia trade even more efficiently with the mainland.

But travel will not necessarily be as fast as many people believe, cautions the Asian Infrastructure Investment Bank (AIIB).

"First of all, many governments are calling (Kunming-Vientiane) a high-speed train but I wouldn't call it high-speed," Supee Teravaninthorn, director-general of the Investment Operations Department at the AIIB, told Asia Focus ahead of the bank's annual meeting in Mumbai last month.

"In technical terms, we call it medium-speed. The real high speed is from KL to Singapore as it has a top speed of around 320 to 350 kilometres an hour."

Any train with a top speed of less than 300km/h is not considered high-speed. Various reports say that the China-Laos railway, with bridges and tunnels making up 63% of its total length of 414km, is only designed for an operating speed of 160km/h for passengers and 120km/h for freight.

Construction began in 2015 with an investment of $5.8 billion, 70% from China and the rest from the Laos. The first leg is being built through mountainous, mostly unpopulated terrain. Now 25% done, it should be finished by December 2021, according to Dr Supee. Laos was the first in Asean country to sign on for a BRI project.

"I am sure that the Lao people will be able to see this railway before the Thai people even make a decision (on the line) from Nong Khai to Nakhon Ratchasima," she said.

However, with a project cost of nearly one-third of the country's $16-billion GDP, there are concerns that the debt burden on Laos will outweigh the benefits. Public debt reached 68% of GDP in 2016 (it is less than 50% in Thailand), raising the debt distress level from "moderate" to "high" in the recent World Bank/IMF Debt Sustainability Analysis.

Laos is now leading Asean in terms of external debt to gross national income at 93.1% compared with the regional average of 26% for all developing countries, according to FT Confidential Research, a unit of The Financial Times. Malaysia, Cambodia, Vietnam and Indonesia then have the next highest debt ratios in Asean, respectively.

The BRI does, however, fit with the goal to transform the country from "landlocked to land-linked", as Lao policymakers like to say. The railway will cut travel time from the Mohan-Boten border to Vientiane to below three hours, even at a medium speed.

China promised that the railway would provide 5,000 job opportunities for local people along with new roads, but Lao media have been focusing more on the plight of 4,400 families displaced because of the project. They have yet to receive the compensation promised by the government.

"Laos is not ready to turn itself from landlocked to land-linked, at least not with this project," a source in the Lao Ministry of Foreign Affairs told the Bangkok Post last month.

His main concern is that the amount of debt taken on and the unbalanced agreements mean that China will ultimately be the only beneficiary of the project. He said the Vientiane government would not be able to solve problems caused by the project, especially compensation and relocation promised to affected residents.

The Vientiane Times last month reported that Bounchanh Sinthavong, the Minister of Public Works and Transport, said payments would begin by the end of June. He said the loss of all property, including land, buildings, fences, crops and trees would be compensated but nothing has happened so far. The total compensation cost, which will be the responsibility of the Ministry of Finance, has been estimated at $297.7 million.

"No official from any department has come to talk to us," one affected resident told Radio Free Asia. It reported that 12 households in Muang Xay in Oudomxay province were told recently that their compensation payment would be delayed "indefinitely".

PAIN AT THE PORT
Those who worry that Laos has dug itself into a deep hole point to the unhappy experience of Sri Lanka and Pakistan with BRI megaprojects. Gwadar port in Pakistan on the Arabian Sea is an ideal location for a deepwater port and now the centrepiece of the China-Pakistan Economic Corridor (CPEC).

About 1,000 people, half of them Chinese, are now working at a recently completed container terminal. China will now be able to link its landlocked western region with the port at Gwadar, allowing ships carrying oil and other goods from the Persian Gulf to avoid the chokepoint in the Strait of Malacca. China has also pledged to spend $63 billion on power plants, ports, airports, expressways and other supporting infrastructure in Pakistan.

But Pakistan's trade deficit with China has been rising from all the Chinese-linked projects and there are concerns now about the implications if the country is unable to repay the debt.

The China-Pakistan corridor "will no doubt be a game changer for Pakistan, but we need to be careful", Ehsan Malik, chief executive of the Pakistan Business Council, told Nikkei Asian Review in March. "Ten-year tax concessions, 90-year leases for Chinese companies and cheap imports will affect the competitiveness of existing domestic industries."

According to the Belgium-based Committee for the Abolition of illegitimate Debt, an international network of activists, Pakistan will have to pay back around $100 billion to China by 2024 from the total investment of $18.5 billion. Beijing has become Pakistan's biggest lender, surpassing Japan's $19 billion. The CPEC loans will add $14 billion to Pakistan's total public debts of $90 billion by June 2019.

"One day, China will turn Pakistan into its own semi-colony as it did recently with Sri Lanka," wrote Panos Mourdoukoutas, an economist at LIU Post, a private institution of higher education in New York, in Forbes last April.

Indeed, China's takeover of the Hambantota deep-sea port in Sri Lanka has raised sovereignty concerns. Under the $1.12-billion deal, state-owned China Merchants Port (CM Port) will run the $1.5-billion Chinese-built facility on a 99-year lease and the payment will be used to cut the Sri Lankan government's debt to China.

The first phase of the project, which ended in 2010, cost $361 million with the Export-Import Bank of China financing 85%. Lack of commercial activity meant that the Sri Lankan government found itself struggling as external debt reached $48.3 billion in 2017.

Meanwhile, its annual external financing needs have reached $11 billion which is roughly the same as its annual tax revenue. Sri Lanka's debt to China now totals $8 billion and is said to carry an interest rate of 6%.

A plan to give the Chinese firm an 80% stake triggered protests by Sri Lankan trade unions and opposition groups, forcing the government to limit China's role to running commercial operations. But the Chinese firm still hold a 70% stake in a joint venture with the Sri Lanka Ports Authority.

The joint venture is part of a plan to convert China's $6 billion loans to Sri Lanka into equity. The Colombo government also said CM Port would invest an additional $600 million to make Hambantota operational.

Other problems linked to BRI projects include delays, increasing deficits in some partner countries, and rising sovereignty concerns, according to a study by the Japanese publication The Banker, and the Center for Strategic and International Studies' Reconnecting Asia Project.

In Indonesia, construction of the country's first high-speed railway through a tea plantation outside Bandung, with an estimated value of $6 billion, is now experiencing delays. The 142km line between Jakarta and Bandung was launched in January 2016 but as of February 2018, only one-tenth of the work was completed while its cost is escalating.

"Since the project launch, there has been almost no activity besides the cleared land," a local villager was quoted as saying by The Banker. "No rail tracks. Nothing. Work only restarted about three months ago, for the underground tunnel."

According to the publication, only half of the total land needed for the railway has been acquired. The delay, coupled with increasing land prices, is also contributing to the rising price tag from $5.5 billion when it was launched two years ago to the current $6 billion.

The China Development Bank, which agreed to cover 75% of the project cost with loans, has also repeatedly delayed disbursement since it signed the loan agreement in May 2017 and this is slowing progress further.

Similar delays have been seen in BRI projects in Kazakhstan and Bangladesh, while concerns about increasing external deficits have also been raised in Sri Lanka, Pakistan and the Maldives.

STUCK AT THE STATION
In Thailand, a 250km railway worth $5.2 billion in the first phase is expected to link Nakhon Ratchasima to Bangkok. It has been under construction, barely, since December 2017 and is expected to be operational in 2021.

The full line is expected to stretch 873km, linking Thailand and Laos at Nong Khai. Construction of a token 3.5-kilometre line in Nakhon Ratchasima was started in December, mainly as a face-saving gesture by both sides, which have been sparring over financing, commercial and operational matters for three years. The link connecting Nakhon Ratchasima and Nong Khai, meanwhile, is only at the blueprint phase.

"The 3.5km is still far, far away from what is expected," Dr Supee said.

One leader who has been heeding the various BRI warning signals is Dr Mahathir. Last month he ordered a review of all BRI projects in Malaysia, including the KL-Singapore high-speed line. However, the AIIB remains optimistic about the outcome.

"Dr Mahathir said it will be delayed for a few years and that's okay," Dr Supee said. "We heard of the delay … as they the body in charge of the investment, MYHSR (Malaysia High Speed Rail Co), is about to be scrapped. But that is not a source of concern as the deal has already been done by the two countries."

She also noted that the AIIB, which is one the main Chinese bodies tasked with financing a large part of the BRI, has yet to disburse even one baht for the construction of proposed railways through Southeast Asia.

"The AIIB was not involved with the BRI funding in Laos because the Lao government already had its financial plan worked out including loans from China's Exim Bank and Chinese government investment," she said.

"For the KL-Singapore side, we think we will take part from KL to Johor Bahru but that is not happening with the new government, while Thailand never wanted to borrow money from anyone as it wants to mobilise the funding domestically."

https://www.bangkokpost.com/business/news/1512518/belt-tightening

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