(From Nikkei Asian Review)

After initially dragging its feet, the Japanese government has agreed to take part in a massive industrial development project in Myanmar. The decision was clearly influenced by China’s active involvement in infrastructure development in the Mekong region, which also includes Thailand, Vietnam, Cambodia and Laos.

The $50 billion agreement on Dawei special economic zone will put Southeast Asia on the path of fast growth
The $50 billion agreement on Dawei special economic zone will  deeply impact trade and investment in Southeast Asia

The Japanese government on Saturday signed a memorandum of intent in Tokyo on participating in the project with Myanmar and Thailand.

“[The governments of Japan, Myanmar and Thailand recognize] the importance of the three countries in the comprehensive development of Dawei Special Economic Zone project to promote integrated economic development and enhance connectivity in and around Mekong subregion,” says the memorandum.

The agreement was signed by Kazuyuki Nakane, parliamentary vice-minister for foreign affairs, but the ceremony at the state guesthouse in central Tokyo was also attended by Japanese Prime Minister Shinzo Abe, as well as Myanmar President Thein Sein and Thai Prime Minister Prayuth Chan-ocha. The two Southeast Asian countries had been calling for Japan to join the Dawei special economic zone project since 2012.

Tokyo has agreed to invest in a special-purpose vehicle that Thailand and Myanmar created last autumn for the project. Japan will also help create a development blueprint by sending experts from the Japan International Cooperation Agency and other agencies to work on the project.

 Open gateway

At the Seventh Mekong-Japan Summit, held in Tokyo prior to the signing, the Japanese government promised to provide 750 billion yen ($6.07 billion) in economic assistance to the region over the next three years. But the decision to join the Dawei project may be more important than the aid money.

“The project will greatly help the Association of Southeast Asian Nations propel its economic integration forward by promoting a division of labor in industrial production in the broader Mekong region,” said a Japanese official involved in the negotiations with Thailand and Myanmar.

The Southeast Asian neighbors began talks on developing the Dawei region in 2008. As it stands now, the project calls for construction of an industrial park with a deep-water port, blast furnaces, oil refineries and liquefied natural gas storage facilities on a site of about 20,000 hectares. It is one of the biggest development projects on the horizon in Southeast Asia and could take half a century to complete.

Dawei, on the Andaman Sea coast, could serve as a gateway to the Indian Ocean. Plans call for the city to be linked with the Southern Economic Corridor, the Mekong region’s main economic artery, which runs across Indochina from Ho Chi Minh City to Bangkok. By making it possible for goods to flow across Indochina, instead of taking the traditional route around the Malay Peninsula by sea, it will be easier for countries in the region to export to India and Europe. It will also improve their access to energy supplies in the Middle East.

Big deal, big budget

Despite Dawei’s potential, the project has not progressed smoothly. The Myanmar and Thai governments, in the spring of 2013, awarded a contract to Italian-Thai Development, Thailand’s largest general contractor. But the company was unable to raise funds for the project, which is estimated to cost about $8.3 billion.

In November 2013, the two governments stripped Italian-Thai of the development rights and decided to make it a government initiative. But the cost of the undertaking led them to seek help from Tokyo.

There is little doubt Japanese companies stand to benefit. Roughly 1,600 of them operate in Thailand today. Many are looking to move production to neighboring countries because a severe shortage of workers in Thailand, particularly in manufacturing, has pushed labor costs up. Cambodia and Laos have been major targets of this “Thailand-plus one” business development strategy, but Myanmar, with its larger population and lower labor costs, offers more potential.

Decades of stagnation under military rule have left Myanmar’s infrastructure decrepit. But Dawei, which is just 300km from Bangkok, would be an ideal location for Japanese companies to relocate if a modern industrial park is built in the city.

But the huge development costs gave Japan pause. The government considered announcing it would join the project when Abe visited Myanmar in May 2013, and again in December of that year at a Japan-ASEAN summit. But a project to build an industrial park in the Thilawa special economic zone in Myanmar had just been launched, with three Japanese trading houses and JICA taking part. “It was too much of a burden for us to get involved in the Dawei project on top of [Thilawa],” a diplomatic official said.

China’s long shadow

But the Japanese government’s attitude shifted when Thailand’s military junta, which came to power in a coup in May 2014, began cosying up to China.

As criticism over the coup was heaped on the junta by the U.S. and European governments, the Pryayut administration sent a high-ranking official to Beijing in July. Soon after, the junta approved a high-speed rail project linking Thailand’s industrial east coast with Laos. If this rail line is linked with another high-speed railway the Chinese government plans to build from Kunming, China, to the Laotian capital, Vientiane, Thailand could be pulled into China’s sphere of influence. This set off alarm bells in Tokyo.

Suddenly, Japan was wooing Thailand. In September 2014, Daishiro Yamagiwa, state minister for economy, trade and industry, visited Thailand, the first ministerial level official from a major country to do so after the coup. In October, Minoru Kiuchi, state minister for foreign affairs, met with interim Prime Minister Prayuth in Bangkok.

On both occasions, Japan offered to help with the Dawei project. The government announced it would lay the groundwork for investment in the Dawei SPV when Prayuth visited Japan in February. It took only a matter of months to sign the memorandum of understanding. “Japan’s participation in the Dawei development project, which will link with the Southern Economic Corridor, is intended as an east-west levee against China’s southward advancement through railway development and other means,” said a Japanese official.

The memorandum also includes Japanese assistance in building a road network between Myanmar and Thailand to connect Dawei with the Southern Economic Corridor.

Japan’s participation is a major step forward for the Dawei project, but there is a long way to go. The memorandum does not cover the most important issue: how to raise money for the project and how the costs should be divided among the three participating countries. “Whether going for a yen loan or a loan from the Japan Bank for International Cooperation, drawing up a development plan led by JICA must come first,” said a Japanese official. “This will take two to three years.”

However, Japan may not have that much time. China has been acting swiftly to expand its influence on its neighbors through infrastructure development. The Asian Infrastructure Investment Bank, Beijing’s newest tool for exerting such leverage, will be open for business later this year.

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