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One Belt One Road: Opportunities And Risks For Singapore (Part 2)

09.10.2017 Raymon Krishnan and Bhargav Sriganesh
One Belt One Road: Opportunities And Risks For Singapore (Part 2)

This is part 2 of a two-part blog post on the One Belt, One Road or Belt and Road Initiative and the opportunities and risk this poses for Singapore as a regional HUB for the region. Part 1 looked at Malaysian port developments and potential threats from across the Causeway.

 

China's “One Belt One Road Initiative” (OBOR) is one of the key geopolitical and strategic developments shaping the world today. Touted as the 21st century Maritime Silk Road, OBOR aims to connect the eastern part of China’s coastal cities with Europe via the Indian Ocean and South China Sea.

OBOR, officially announced by China in 2013, stretches through 65 countries that collectively have 60% of the world’s population. These 65 countries also produce around 33% of global GDP.

Some commentators have misguidedly added to the hype by including infrastructure projects that are not part of the OBOR initiative in their analyses. Still, regardless of the monetary figures and actual number of official projects, this trading network will deepen and broaden the country’s strategic engagement with Southeast Asia, Central Asia and Europe.

Competition from Regional Maritime Developments

As the earlier post noted, even if Singapore staves off competition from Malaysian ports, regional developments could adversely affect Singapore’s pole position.

First, the proposed Kra Canal in Thailand has often and repeatedly been labelled as a potential competitor to the Singapore port. As demonstrated in Figure 3, the Kra Canal, if it is ever built, would cut through the Southern Isthmus of Thailand, connecting the Gulf of Thailand with the Andaman Sea.

It would provide an alternative to transiting through the Straits of Malacca, thus shortening transit distance for shipments of oil to East Asian countries by 1,200 km. This can save time and cost. Previously, China has referred to this project as part of its plans for OBOR.


Nevertheless, the commercial considerations for the construction of the Kra canal do not look promising. First, constructing canals like the Suez and Panama were more feasible. They were surrounded by waterbodies that could be connected to form larger canals. Conversely, constructing the Kra canal is significantly more cumbersome and costly since builders have to hew solid rock and mud.

 

Additionally, the benefits accrued are rather marginal. While the Suez and Panama canals cut travel distances by 8,000km and 5,000km respectively, the distance saved by the construction of a Kra Canal is only slightly more than 1,000km. Therefore, considering that that the benefits due to the construction of the canal are marginal, it remains to be seen if this project will genuinely pose a threat to Singapore’s maritime hub status.

Some commentators have argued that the Sri Lankan port in Hambantota, once fully developed, could also pose a challenge to Singapore’s port. Hambantota’s port will be an excellent transshipment waypoint across the Indian Ocean, stretching to the Far East and Europe. The pendulum of trade could, in theory, swing from Africa and South Asia through Sri Lanka into the west coast of Malaysia and up into the hinterland of Southeast East Asia.

Paired with the construction of the Kra canal, the two could also expedite the movement of goods into the hinterland. Either way, with or without the canal, a change in trading routes could result in ships bypassing Singapore altogether.

In July 2017, a deal was signed between two state firms – the Sri Lanka Ports Authority (SLPA) and China Merchants Port Holdings – to handle the commercial operations of the loss making Hambantota port, located approximately 240km from the South of Colombo.

On top of the sale price, the Chinese firm will also invest another $600 million to develop Hambantota port and a 15,000 acre industrial zone. (This is a similar modus operandi, albeit on a reduced scale, to what China has done to Piraeus port in Greece, where as much as 60% of China’s exports are shipped through to the rest of Europe.) Hambantota could potentially become the gateway to expanding economies in South Asia and Africa.

Hambantota could be blighted by the same issues that might affect the Malaccan port. The rationale for the involvement of China in the construction and operation of the port in Hambantota is primarily strategic: to counter-balance India’s maritime strength in the South Asian region. Furthermore, the operation of the port is also in the hands of China Merchant Ports Holdings.

Since Colombo was not able to repay the loans of around $1.6 billion to China Merchants Ports Holdings, the Hambantota port operators were forced to sell a 70% stake to their counterpart. Therefore, it is unclear if regional developments – construction of Kra Canal and Hambantota port – can dislodge Singapore, considering the thorny issues that have to be overcome. Meanwhile, Singapore enjoys a healthy head start over its competitors and is poised to capitalize on this.

Conclusions

To conclude, one should be mindful that physical infrastructure alone will not be enough to displace Singapore from its prime position. Recently, Singapore’s Minister for Home Affairs and Law, Mr K Shanmugam said that the Chinese understand infrastructure. Yes, this is true. However, operating a port and making it a success is not just about cranes, gantries and dockyards. This is the “hard” infrastructure. The more challenging part is to replicate the “soft” infrastructure.

In Singapore, investing in infrastructure has been combined with creating a supply chain ecosystem that develops technological, financial, legal, banking and a myriad of other supporting mechanisms. These capabilities are overlaid with a stable, corruption-free government and competent workforce. These capacities are interlocking and complement each other effectively. When working in tandem, it might be hard for OBOR projects to displace this “soft” infrastructure.

Reinventing and adapting to changing circumstances is a ceaseless strategic imperative for Singapore. It is notable that the decline of a port in most major cities has often precipitated their fall from grace. In fact, some of the commercial capitals that flourished during the ancient Silk Road period have lost their lustre today. This is a salutary warning that Singapore’s maritime dominance can never be taken for granted.

***This Talking Trade blog post was written by Raymon Krishnan, Head of Corporate Advisory Services at Asian Trade Centre, and Bhargav Sriganesh, Research Assistant at ATC in Singapore***
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