11 September 2013 | Vol. 4, № 33.

From the Editor’s Desk

Dear FDI supporters, Welcome to the Strategic Weekly

Analysis. This week, we begin in

Indonesia, with an analysis of plans to

relax a number of mining restrictions that

have made the country one of the world’s

least attractive destinations for foreign

miners.

Heading to Africa, we report on the

moves in Nairobi to withdraw from the

International Criminal Court, just ahead of

the trial of Deputy President William Ruto.

We continue our look at the Mozambique

resources boom with a follow-up article,

after a call from President Armando

Guebuza for increased foreign investment

in his country’s resources sector to

generate higher living standards.

This week we have part three of our five-

part series of case studies on the role of

subsidies in the global food system and

their impact on food security. This article

looks at the implications of the food

subsidies used in the states of the Gulf

Co-operation Council.

Next, in India, we analyse the effects of

the arrest of a key terrorist, Yasin Bhatkal,

the chief and co-founder of the Indian

Mujahedeen movement. We also

investigate the implications of a successful

India-Bangladesh Land Boundary

Agreement. Our final report for this

region is on the difficulties being

encountered in striking a balance

between efforts to tackle corruption and

maintaining an adequate supply of Barak-I

missiles for the Indian Navy.

This week’s edition concludes with an

examination of the complications involved

in restarting construction of the Myitsone

dam in Burma/Myanmar.

I trust that you will enjoy this edition of

the Strategic Weekly Analysis.

Major General John Hartley AO (Retd) Institute Director and CEO Future Directions International

*****

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Indonesia Relaxes Mining Restrictions in Bid to Ease Investor

Concerns

Indonesia has said it plans to relax a number of mining restrictions that have scared off

foreign investors and hampered the mining industry. Though details so far are vague, a

relaxation of these rules could ease investor concerns and boost the country’s mining

sector.

Background

Indonesia says that it plans to relax a number of mining restrictions, which have made it one

of the world’s least attractive destinations for foreign miners. Nationalist policies, including a

rule forcing foreign companies to divest the majority of their shares to local entities, have

scared off investors and hampered the mining industry. Indonesia has rich oil and mineral

reserves, but multinationals are wary of discriminatory laws and endemic corruption. The

decision to ease mining restrictions, therefore, should come as welcome news to many

foreign companies and may help to ease investor concerns.

Comment

On 5 September, a spokesman at the Energy and Mineral Resources Ministry told Reuters

that Indonesia plans to relax a rule forcing foreign miners to divest most of their stake in

Indonesian projects. The rule, enacted in February 2012, requires that foreign-owned mining

companies in Indonesia sell a majority share of the company to an “Indonesian participant”

after ten years of production. Jakarta said it was part of a push to increase local government

profits and expand its influence in commodity markets, but the rule drew strong criticism

from investors and economists, many of whom said it was just one example of Indonesia’s

rising economic nationalism.

Details of the proposed changes are unknown for now, though Jakarta indicated that there

would soon be a revision to the current government regulation. Notably, there was no

timeframe given for change. New rules and regulations can often get delayed, especially in

Indonesia’s straggling legislature system. But the announcement should still come as

welcome news to foreign mining companies, even if the details remain hazy.

A significant relaxation of the divestment rule, were it to happen, could well lead to greater

profits for many firms. Mining leaders have long argued that ten years is simply not enough

time to make an adequate return on their investment, especially given the time and effort

required to start a mining venture. Consequently, many new companies have overlooked

Indonesia in favour of other emerging markets. A relaxation of the rule, however, may make

Indonesia a more attractive option in the future. It may also generate greater profits for

foreign companies already mining there, especially if they can maintain a majority holding.

There has also been talk about a relaxation of a controversial ban on the exportation of

unprocessed ore. The ban, which is due to come into force in 2014, forces companies to

process minerals in Indonesia. The problem, though, is that to process raw commodities,

they must build a smelter. Constructing a smelter is costly and time consuming; some

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sources say it can take as long as eight years and cost upwards of US$1 billion. Many

multinationals have been unwilling to expend that sort of capital only to divest their holdings

a few years later. According to Norton Rose and Fullbright, a global legal practice, market

commentators have said that Indonesia will face a significant lack of processing capacity

once the ban comes into force next year.

Perhaps unsurprisingly then, the country’s Industry Minister, Muhammad Sulaeman Hiday,

recently said that Indonesia proposes to make several amendments to the controversial ban.

Under the proposed revision, mining companies with smelters under construction will be

allowed to export unprocessed minerals, although they will be charged a progressive tariff

on the shipments, depending on how close to completion the projects are. Those companies

that have not begun building a smelter, will not be allowed to export raw ore.

More broadly, it remains to be seen what the relaxation of mining policies will have on

Indonesia’s mining sector, which accounts for 12 per cent of the country’s GDP. Indonesia

has enormous potential, but mining restrictions, endemic corruption and poor infrastructure

have led foreign miners to consider it a poor destination. A recent survey of mining

executives by Canadian think-tank, the Fraser Institute, found that they rated Indonesia as

the worst country in the world in which to expand a mining business.

Since 2012, economic nationalism has been in vogue, especially as Indonesia grows in

confidence. Recent slumps in the rupiah and investor confidence, however, may force the

government to amend its mining policies, especially after the election next year. The

proposed revisions would be a start, but the country will also need to address widespread

corruption and improve its infrastructure. Should this happen, Indonesia may be able to live

up to its mining potential.

Andrew Manners Research Analyst Indian Ocean Research Programme amanners@futuredirections.org.au

*****

Kenya Plans to Withdraw from ICC

Kenya’s proposed legislation to withdraw from the International Criminal Court sends a

signal that the Court’s authority may be about to weaken across Africa.

Background

On 5 September, the Kenyan Parliament passed a motion urging Kenya to withdraw from the

International Criminal Court (ICC). The motion was passed less than a week before the

country’s deputy president, William Ruto, was scheduled to go to trial. Ruto and Kenyan

President Uhuru Kenyatta, who is scheduled for trial in November, are accused of organising

the violent attacks following the disputed 2007 elections. More than 1,000 people were

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killed and 600,000 forced from their homes in these incidents. Both men assert their

innocence and deny the charges.

Comment

The National Assembly’s recommendation to leave the international court is the first step

towards Kenya becoming the first of 122 adhering countries to leave. The ICC was

established to help bring to justice the offenders in the most serious crimes: genocide,

crimes against humanity and war crimes. It is a “court of last resort”, intervening only when

national authorities fail to prosecute an alleged injustice. Since its formation, the court has

been a controversial addition to the international justice system. Several countries have

refused to join the ICC: the United States, China, Pakistan, India, Indonesia and Turkey.

Others – Egypt, Iran, Israel and Russia – have signed the treaty, but have not ratified it.

Currently, 34 African countries adhere to the court, but many have been critical of the it,

describing it as a neo-colonialist institution that targets only African countries. All eight of its

current cases are in Africa, provoking African leaders to condemn it as biased. In response,

ICC Chief Prosecutor, Fatou Bensouda, has repeatedly pointed out the impartiality of the

international court. In the current cases from Mali, Central African Republic, Uganda and the

Democratic Republic of Congo, the governments themselves asked the court to open

investigations. The cases from Libya and Sudan were referred to the ICC by the United

Nations Security Council. Only in the case from Kenya, did the ICC step in independently. The

ICC maintains that its intention in all of these cases is to fight for the rights of victims of

atrocities.

The Kenyan Government has adopted a nationalistic position against the ICC, portraying it as

foreign interference in domestic affairs. The Kenyan leaders will be the first democratically-

elected leaders to be tried in a foreign country. The government argues that this makes it a

matter of preserving Kenya’s sovereignty. If it emboldens other states to follow suit, a

Kenyan withdrawal may further weaken support for the ICC in Africa. In fact, it appears that

a domino effect has already begun.

In May, the African Union (AU) President, Hailemariam Desalegn, who is also the Ethiopian

Prime Minister, passed a resolution accusing the ICC of “hunting” Africans because of their

race. It is the first time a pan-African body has formally moved against the international

court. The AU has demanded that the ICC end its proceedings against the Kenyan leaders.

Also at the Summit, despite an ICC-issued arrest warrant for genocide over the conflict in

Darfur, Sudanese President Omar al-Bashir accused the court of being a tool of Western

power. Additionally, President of the Council of African Political Parties (CAPP), Wynter

Kabimba – also Zambia’s Minister of Justice – has urged other African countries to follow

Kenya in pulling out of the ICC. The government of Uganda has also publicly supported

Kenya’s decision.

Kenya’s move could set a dangerous precedent in Africa, making it is possible to commit

crimes with impunity and then to withdraw from the governing treaty when accused by the

court. Respect for other international institutions may also wane. Although it is unlikely,

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some opponents of the resolution fear that Kenya will become a Sudan: an isolated pariah

state.

As the prosecution progresses, it could complicate Western relationships with Kenya,

particularly if the leaders fail to co-operate in the trial. The European Union and the United

States have already stated that they will have “essential only” contact with the Kenyan

leaders.

Many fear that the court proceedings will expose old wounds. Despite this year’s peaceful

election victory under the Jubilee Alliance, divisions remain between Kenyatta’s Kikuyu and

Ruto’s Kalenjin clans, which clashed after the disputed 2007 poll when the two backed rival

campaigns. The trials could stir up rifts between those communities, which have long fought

over land.

It is important to note that despite Kenya’s proposal to formally withdraw from the ICC, the

cases against Kenyatta and Ruto will continue. While the two leaders have agreed to fully

participate in the hearings thus far, the motion has called for the suspension of any co-

operation and assistance to the court. The vote sends a powerful message of defiance to the

ICC – a sentiment that may become increasingly popular across Africa.

Kaelin Lutz Research Assistant Indian Ocean Research Programme

*****

President Wants More Foreign Investment but Many

Challenges in Mozambique Resources Boom

The resources boom in Mozambique has the potential to provide mutually beneficial

outcomes for both foreign investors and the people of Mozambique. Although President

Armando Guebuza has called for greater foreign investment in the country’s resources

sector, there are immense challenges that must be met if living standards are to be raised

across the board.

Background

Mozambique President Armando Guebuza is eager to attract greater foreign investment to

maximise the benefits of the country’s resources boom and improve the standard of living

across the country. President Guebuza made the call at a public event on 30 August. For

Australian mining companies interested in investing in the region, Mozambique offers

significant financial benefits. However, the challenges that stem from infrastructure

shortages, an unskilled workforce and widespread poverty are equally as great.

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Comment

In 2012, a record high of 4.9 million tonnes of coal were produced in Mozambique and the

government predicts the annual rate of coal production to increase to 50 million tonnes by

2029. In addition, Mozambique’s prospects have been improved by the discovery of ‘as

much as 100 trillion cubic feet of natural gas off Mozambique’s coast. This could mean

potential export revenues of US$300 billion,’ according to S. Vijay Iyer, Director of the World

Bank’s Sustainable Energy and Extractive Industries Department. The country also harbours

a range of other minerals and metals such as beryl, ilmenite, tantalum and zircon.

A number of Australian companies have already invested in Mozambique. On 20 August,

Brisbane- based mining company Cokal announced plans to explore and mine for coal in

Mozambique as part of a joint venture with Mozambique government-owned corporation

Empresa Moçambicana de Exploração Mineira (EMEM: Mozambique Mining Exploration

Company). On the same day, Perth-based Baobab Resources and Auroch Minerals

announced a partnership to explore for gold in the Manica Greenstone belt near the

Zimbabwe border.

Yet, while foreign mining companies can gain considerable financial benefits from their

investments in Mozambique, those benefits need to be weighed against the challenges

which stem from infrastructure shortages, a lack of skilled labour and widespread poverty.

A lack of transport infrastructure, in particular, can often be problematic. The lack of rail and

port capacity has become a significant impediment to Rio Tinto’s operations in Mozambique,

restricting its exports to two million tonnes annually. The company had planned to increase

its exports to 12 million tonnes by barging coal down the Zambezi River, but that proposal

was rejected by the government. After recording a US$3 million write down on its coal

assets in Mozambique, Rio Tinto is now considering a whole or partial sale of its coal mine.

Even if Mozambique’s transport problems are resolved, foreign investors face additional

challenges that come with working in such a poor country. According to the United Nations,

59.6 per cent of the population continue to live on less than US$1.25 per day and, despite

substantial economic growth, the country still only ranks third-last on the UN Human

Development Index.

If the wealth generated from the resources boom fails to trickle down this could prompt

social unrest. The boom has created high expectations for wealth and prosperity but as

these expectations fail to be met, dissatisfaction is growing. Brazilian mining group Vale,

which owns the Moatize coal mine in Tete province, has already become the source of

resentment. The company has been blamed for not providing sufficient training and

employment opportunities for local people and for driving up the cost of living due to the

influx of people coming to work on the mines. Like many mining companies in Mozambique,

Vale experienced difficulties finding skilled local labour, despite their shared Portuguese

language, and so instead sought to import labour. This is a key challenge faced by mining

companies in Mozambique.

There is also concern that the resources boom could cause an increase in the rate of HIV

infection. As people from neighbouring countries have migrated to Mozambique in the hope

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of benefiting from the mining boom, many have been unable to find employment and have

become involved in prostitution or criminality. This could have damaging ramifications for

the health and wellbeing of local communities.

So, while the resources boom has the potential to generate mutually beneficial outcomes for

foreign investors and the people of Mozambique, this will be difficult to achieve. Achieving

this goal will require significant investment in training and infrastructure by foreign

investors.

Lia Collinson Research Assistant Indian Ocean Research Programme

*****

Subsidies in the Global Food System III: Food Handouts a

Political “Quick Fix” in the GCC

GCC countries introduced reactionary food consumption subsidies following the 2008

global price spike, but these handouts are only a temporary fix to the serious risk of long

term food insecurity in the region.

Background

Food handouts and consumption subsidies are popular methods of providing a social safety

net and combating food insecurity in countries that are vulnerable to volatile food prices.

The Middle East is, arguably, the region of the world most vulnerable to future food

insecurity, owing to its water shortages and extremely low food self-sufficiency capability.

The extent of the region’s food insecurity risk was highlighted by the global food price spikes

of 2007-08 and 2011, when the GCC countries imported high levels of food price inflation

because of their dependence on global markets for their food supplies. In response to the

dramatic rates of inflation, subsidies for basic food goods were implemented or extended in

all six member states.

Comment

The GCC member states rely on imports for between 60 and 90 per cent of their food

supplies. Conseuqently, when global agricultural commodity prices rose, on average, by 60

per cent during 2007-08, then spiked again in 2011, the countries imported high levels of

inflation. These events had strong policy reverberations, as skyrocketing food prices caused

riots in Middle Eastern neighbours Egypt, Yemen and Jordan in 2008 and were identified as

one of the instrumental motivators of the Arab Spring in 2011. Affordable food prices are

seen as a prerequisite to political stability and price volatility as a threat to the autocratic

political systems of the region.

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The overwhelming response to the situation throughout the GCC, was to implement or

extend subsidies on basic foodstuffs to the population. In all the GCC countries the subsidies

targeted staple foods, such as rice, sugar, wheat, milk and cooking oil, providing these goods

either free or at heavily discounted prices; however, some states, including Kuwait and the

UAE, extended their programmes to include other goods, such as red meat, chicken, dates

and cardamom. While the subsidies have since been scaled back in some states, they have

mainly been extended, with Kuwait extending its existing subsidies to distribute free food to

its citizens until the middle of 2014. Bahrain has also decided to continue its subsidy system

into 2014, at a cost of over US$180 million.

Owing to their constrained agricultural sectors and consequent dependence on food

imports, the GCC states are unusually susceptible to food price inflation. Furthermore, the

oil wealth of many – but not all – of the states, enables their governments to protect their

citizens against these price spikes and bear the cost of price increases on the global market.

Despite their political expediency (along with public sector wage hikes and fuel subsidies,

the food handouts maintained relative stability in the GCC during the Arab Spring), the food

subsidy systems provide only a temporary political fix to a serious long-term problem.

The food subsidies are costly to support and have led to considerable wastage and a

burgeoning black market in surplus handouts. Because the subsidies are only provided to

citizens and not to migrant labourers, in most states they fail to target the neediest and

exacerbate existing inequality. While the subsidies were an acceptable temporary response

during a time of crisis, their continuation is a political gambit, rather than a sustainable

response to the threat of food insecurity in the GCC. While some member states have

launched ambitious food security plans in the wake of the global food price spikes, others

have failed to address the long-term food needs of their populations.

The cost of consumption support programmes are also starting to weigh heavily on the

public finances of even the wealthiest member states. In Kuwait, extension of the food

subsidy system is eating into its fiscal surplus and causing a rapid deterioration in public

finances. The IMF has warned Kuwait that it risks running out of oil revenues by 2017, if it

continues its current spending policy. High spending on subsidies is also pushing budget

deficits in the UAE to record highs. For these reasons, the food subsidies in the GCC states

are an unsustainable long term option. They must look beyond short-term political goals, to

address the serious threat of future food insecurity faced by their citizens.

Lauren Power Manager Global Food and Water Crises Research Programme lpower@futuredirections.org.au

*****

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Arrest of Indian Mujahedeen Leader a Crushing Blow to Terror

Organisation

The arrest of Yasin Bhatkal, chief and co-founder of the notorious Indian Mujahedeen (IM),

is a significant blow to Indian domestic terrorism, but it may lead to such groups basing

themselves in neighbouring countries, where the Indian authorities have no jurisdiction.

Background

The mastermind of the 2008 Mumbai bombings, Yasin Bhatkal, was arrested at the India-

Nepal border in a joint operation by intelligence agencies and Indian police. Bhatkal, the

leader of the Indian Mujahedeen terror group, was wanted for over 15 attacks. They include

the 2011 Delhi High Court bombings, in which 12 people were killed, and the 2010 Pune

German bakery bombing that killed 17. Bhatkal, a 30 year old engineering graduate from a

middle class family, took control of IM after his cousins Riyaz and Iqbal fled to Pakistan in

2008. Indian authorities placed a 3.5 million rupee ($57,800) bounty on his head for a string

of bombings across India since 2008. Bhatkal’s arrest further highlights the spate of recent

successes in India in capturing terror operatives, such as the Lashkar e Tayibba (LeT) bomb-

maker Abdul Karim Tunda in August. A major blow to the group, the arrest of Bhatkal could

have a profound impact on the future of IM and other groups in India.

Comment

Having the mastermind behind the IM attacks now in custody, is a serious setback for the

terror group. As the engineer and architect behind the string of attacks unleashed around

India, Bhatkal’s capture will seriously undermine the operational capabilities of the group.

Recent reports, however, have indicated that Bhatkal confirmed during interrogation that IM

has split. This has raised fears that Indian authorities are now facing two IM cells in India,

one operating in the north and the other in the south. Bhatkal’s interrogation has reportedly

also provided the Indian authorities with the names of other IM operatives.

Bhatkal’s arrest has come after the successful capture of Tunda, the notorious LeT bomb

maker, in mid-August. Home-grown extremism is a relatively new menace in India, which

has traditionally been targeted by externally-based groups, such as the LeT. Home-grown

extremists are recruited to fight for economically disadvantaged Muslims; paradoxically,

many recruits are themselves well-off. The arrests that have taken place in the last few

months highlight India’s success and resolve in combating the home-grown threat of

extremism.

The future for other terror elements in India is now looking less certain and they are

increasingly seeking refuge in neighbouring countries, such as Pakistan and Nepal. In the

future, domestic Indian terror groups may opt to sneak into India from either Nepal or

Pakistan to launch attacks, rather than risk being caught by remaining in India for extended

periods of time. That would be a negative development for the Indian authorities, who do

not have the jurisdiction to operate or capture suspects across either Nepal’s porous border,

or the tension-filled Pakistani border.

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In any event, however, the capture of the chief, and co-founder, of India’s largest domestic

terror group is a victory for India, and a serious defeat for IM and other extremist elements.

India accuses Pakistan of harbouring wanted terror fugitives, but it must also recognise that

Pakistan is embroiled in its own anti-terror campaign against the Taliban and other elements

linked to al-Qaida. Choosing to fight the common enemy together would be one way to

significantly improve the level of trust between the two countries.

Mo Hineidi Research Assistant Indian Ocean Research Programme

*****

The Benefits of an India-Bangladesh Land Boundary

Agreement

The proposed India-Bangladesh Land Boundary Agreement has the potential to not only

improve India’s image regionally, but to increase its economic power there and improve

the living standards of close to 150,000 stateless people in the disputed areas.

Background

Ever since Bangladesh came into being in 1971, there has been a struggle over the land that

borders India and Bangladesh. As a result, around 200 enclaves have developed, essentially

islands within the boundaries of another country. The people of these areas struggle for

identity and, due to a lack of citizenship, are often victimised. India has the power to alter

this situation, but needs to ask what it will gain by a proposed Land Boundary Agreement

with Bangladesh.

Comment

India is often perceived as a neighbourhood bully due to its size, growing economy, military

might and, arguably most importantly, its foreign policy. With its continued economic

success, many see India as a potential superpower, and this has put its neighbouring

countries on the defensive. Opinion about India’s foreign policy on regional events is

divided. Its assistance during the 2005 Pakistan earthquake has been seen as both friendly

assistance and a mission to gain intelligence on Pakistan, vis-à-vis Kashmir. India also played

a major role in bringing about the birth of Bangladesh, but over time there has been a strain

on their relationship.

A major issue that has caused tension is the enclaves along the northern border between

India and Bangladesh. These enclaves are populated by around 150,000 people, who live

with limited infrastructure. There are also problems relating to education, water and

electricity. People in the area are waiting for a resolution, which, until recently, has seemed

an unlikely occurrence. The proposal to resolve this issue appears to be quite simple: an

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exchange of territory. The Indian Government is attempting to introduce a Bill into

parliament to amend the Constitution, which would see India give 111 of its enclaves to

Bangladesh in exchange for 51 enclaves within India that are currently held by Bangladesh.

The exchange would see thousands of people given the opportunity to become citizens of

one of the two countries, while giving them a far greater opportunity to gain access to

higher quality public services.

With India holding a little over 10,000 acres more than Bangladesh within these enclaves,

the question of what India has to gain by the exchange must be addressed. First, there is no

doubt that India sees the Agreement as an opportunity to improve its regional image. It

would be seen as a gesture of goodwill and would both improve the relationship between

India and Bangladesh and promote stability. The Agreement also has the potential to create

economic opportunities for India. In the past, due to suspicion about India’s foreign policy,

many countries in the area have turned to China for trade. Gaining trust from surrounding

countries and changing its diplomatic methods, would see India in a position to challenge

China for influence and to recover markets it has lost due to its image.

With the prospect of a positive outcome for India, helping both its regional image and its

economic prospects, plus the opportunity to enhance the living conditions of people in the

region, the land exchange would seem the natural course to take. But it has been met with

opposition by the Asom Gana Parishad (Assam People’s Association, or AGP), which, three

weeks ago, prevented the government introducing the Bill. The AGP claims that Indian land

must not be lost at any cost. It will continue to oppose any agreement that results in that

outcome, so as to safeguard the integrity of the country, according to an AGP Member of

Parliament.

Even though the enclave swap has not been approved by the AGP and other groups, it does

have the potential to have a great impact on the region. In 2011, India committed itself to

invest US$1 billion on building infrastructure in Bangladesh. If the enclave agreement can be

finalised, it has the potential to be just the beginning of a more fruitful economic

relationship between the two countries.

David Martin Research Assistant Indian Ocean Research Programme

*****

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The Strange Case of India’s Depleted Anti-Missile Munitions

India needs to find a way for its Defence Ministry to eliminate corruption, to ensure the

continuation of its supply of vital munitions that are required to make its military a

credible fighting force.

Background

It was revealed on 9 September, that the stock of missiles for Indian Navy’s shipborne anti-

missile system, the Israeli Barak-I, is rapidly becoming depleted. Purchase of a further 262

Barak-Is was suspended in August 2012, pending a corruption investigation of the initial

procurement by the Central Bureau of Investigation. Although this compelled the Navy to

curtail the missile’s use in testing and training exercises, the initial stock has been

significantly eroded. Currently India’s Ministry of Defence (MoD) claims that it has legal

advice that further missiles cannot be purchased until the investigation has been completed,

despite lobbying from the Navy, and the Attorney-General declaring that the investigation

does not impede any fresh procurement.

Comment

The case of India’s diminishing stocks of Barak-Is is strange indeed. By all accounts, the Navy

has been highly impressed with the initial purchase of thirteen systems and 200 missiles and

has been keen to get more. The system is relatively small and lightweight, comprising a

1,700 kilogram eight-tube launching system and a 1,300kg fire control system. The missiles

themselves weigh only 120kg (including the warhead). This makes the entire system easy for

the Indian navy to install on small ships and retrofit to older vessels.

As an accurate short-to-medium-range missile, with an effective range of between ten

kilometres and 500 metres, the Barak-I is able to protect not just an individual ship but also

protect others in the fleet. Given that potentially hostile states, such as Pakistan and China,

have a variety of anti-ship missiles that can be deployed at different ranges, having a robust

missile defence is essential if India’s Navy is to remain a capable fighting force in its region.

The key reason behind the MoD’s reluctance to purchase more Barak-I missiles has more to

do with the desire to avoid any domestic political scandals close to India’s elections next

May, rather than any dissatisfaction with the missile system. The current government has

already been affected by several corruption scandals involving military purchases. One

example is a recent scandal over the procurement of the new VVIP helicopter, in which

several public servants have been accused of accepting kickbacks and changing the rules to

favour their preferred company.

Although the MoD is aware of the Navy’s need for these missiles, it has become extremely

cautious over further procurement of an acquisition that is already under investigation, on

the grounds that it could be cited as evidence by opposition parties of continuing corrupt

practices. As the investigation appears to have stalled owing to the difficulty of acquiring the

necessary documents from other countries, it appears unlikely that any move to acquire

more Barak-I missiles will occur until after the election.

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What makes the suspension of Barak-I purchases particularly odd is that, unlike previous

corruption cases, the Israeli manufacturers, Israeli Aerospace Industries and Rafael, were not

added to blacklisted companies. Indeed, India has continued joint development with Israel

to create the Barak-8 anti-missile system, a heavier and longer range evolution of the Barak-

I. It was successfully tested in 2009 and is due to enter service on Indian ships by 2015. This

is a contradiction in India’s policies. It has suspended the purchase of more Barak-I missiles,

while still maintaining strong defence development ties with Israel involving similar missiles.

This unusual occurrence probably reflects India’s conflicting requirements; to simultaneously

try to stamp out corruption, especially in the awarding of defence contracts, while

maintaining what clearly is a highly useful defence partnership.

Yet, if India does not want a chink in its naval armour, it needs the Barak-I or a similar

system. Owing to the failure of India’s defence industry to develop a domestic anti-missile

system, India must rely on purchasing them from overseas, at least until it is able to

manufacture its own.

Although there are several alternatives to the Barak-I, the only feasible ones for India would

be to acquire the Russian S-300FM, or the S-400F that is in development. India is wary of

purchasing Russian missiles, however, as most of its military equipment is already built or

supplied by Russia. As India has recognised the need to diversify the sources of its military

purchases, it is unlikely to want to change suppliers and is wise to stick with Israel. Israeli

companies are renowned for producing reliable and effective missiles. The question

remains, therefore, when will India resume buying Barak-I anti-missiles, to provide its fleet

with the short-range defence system that they need?

Stephen Westcott Research Assistant Indian Ocean Research Programme

*****

Restarting Construction of Myitsone Dam Not an Easy

Proposition

Recent activity in the vicinity of the Myitsone dam has led to speculation that work on it

will soon re-start, but it is difficult to see this happening anytime soon.

Background

The construction of the controversial Myitsone dam in Burma/Myanmar was halted last year

by President Thein Sein, giving rise to speculation that the government was growing

increasingly aware of, and paying heed to, public opinion. Thein Sein subsequently declared

that the dam would not be constructed during his tenure in office. The Chinese financial

backer of the project, the China Power Investment Corporation (CPI), however, has recently

Page 14 of 16

stated that more than sixty per cent of the total US$3.6 billion required to construct the dam

has already been paid. It is prepared to invest a further US$1 billion if construction is

restarted. In its apparent efforts to cater to every requirement, CPI worked with Burma’s

Ministry of Electric Power and Steven Law, son of the late drug kingpin Lo Hsing Han,

through his company, Asia World Co.

Comment

It is probable that President Thein Sein halted construction on the unpopular Myitsone dam

for two reasons: first he was growing increasingly worried about China’s influence in Burma

and second, by halting construction of the dam he could allege that his government was

paying attention to the voices of dissent within Burma, thus underscoring his claims of

Burma’s move to democracy. In all likelihood, however, he halted construction of the dam

(and its hydro-electricity-generating

extension) mainly to reduce China’s

influence in Burma. He then declared

construction of the project would not

restart under his tenure in office, which is

expected to run to 2015.

Recently, however, the Director of the

CPI, Wang Qiyue, alleged during an

energy investment summit in Rangoon,

that sixty per cent of the funding required

to construct the project had already been

paid and that a further US$1billion could

be made available if construction

restarted. When asked to elaborate on

who the money had been given to, Mr

Wang claimed that the Government of

Burma and the Burmese people were

indivisible, in effect stating that he would

not disclose specific names. The funds

were also to be used to construct five

other dams on the May Kha River and two

on the May Li Kha River.

In an interview last month, China’s Ambassador to Burma, Yang Houlan, touched on Burma’s

need to restart construction of the hydro-electric project, stating that if Burma wanted to

industrialise, it needed power. Implicit in this was the statement that Burma needed the

Myitsone dam as much as China did. It appears that the irony of this statement passed

unnoticed. According to the terms of the agreement drawn up between the two countries,

eighty per cent of the expected 4,600 megawatts generated by the Myitsone project was to

have been transmitted to China’s Yunnan province, which borders Burma, leaving

approximately 920 megawatts for local consumption.

Page 15 of 16

The perceived lack of the trickle-down effect from the funds paid by CPI towards the cost of

the project, coupled with the perceived lack of equal sharing of the generated power, led to

the protests that eventually forced President Thein Sein to halt the construction of the

project. This time, however, the local people who were displaced by the construction of the

dam have added their dissatisfaction with their current situation to those issues. These

people were re-located to higher ground and provided with new houses by the funding for

the project. As one farmer remarked, however, while they may now have better houses than

before, their livelihoods were taken from them. They were also given smaller plots of land to

farm than they previously held, resulting in lower incomes for their families. Added to this

list of issues, conservationists have claimed that rare flora and fauna are also at risk from the

project.

Wang Qiyue, however, denies that there is any activity at the construction site, but remains

hopeful for a restart in 2015. He states that CPI will not re-negotiate the terms of the

agreement, as the Chinese backers of the equally controversial Letpadaung copper mine

recently did, to permit the Burma/Myanmar Government to retain a larger share of the

profits accrued. Wang says any comparisons between the two projects are illogical, as no

country will invest the sums of money China did in the Myitsone project for small profits. On

the other hand, he claims once the local people see how they will benefit fully from the

project’s construction, they will agree to it, despite minor niggles. To do this, he said, CPI

must make its message to the people clearer.

Going by the current situation, however, it is difficult to see how the project may be

re-started except by the use of at least some degree of force, whether now or at a later

date.

Lindsay Hughes Research Analyst Indian Ocean Research Programme lhughes@futuredirections.org.au

*****

Page 16 of 16

Any opinions or views expressed in this paper are those of the individual authors, unless stated to be those of Future Directions International. Published by Future Directions International Pty Ltd. 80 Birdwood Parade, Dalkeith, WA 6009 Tel: +61 8 9389 9831 Fax: +61 8 9389 8803 E-mail: lluke@futuredirections.org.au Web: www.futuredirections.org.au

What’s Next?

On 12 September, miners at the Marikana plant in South Africa will demonstrate to demand pay for those killed during protests at the mine in August and October last year.

Indian External Affairs Minister Salman Khurshid and Pakistani Foreign Minister Sartaj Aziz will meet in Kyrgyzstan on 13 September to plan a possible meeting between Indian Prime Minister Manmohan Singh and Pakistani Prime Minister Nawaz Sharif in New York on 29 September.

US Assistant Secretary of State for East Asian and Pacific Affairs, Daniel Russel, will visit China from 13-14 September.

The thirteenth Shanghai Co-operation Organisation summit will be held in Bishkek, Kyrgyzstan, on 13-14 September. Attending will be SCO members China, Russia, Kazakhstan, Tajikistan, Kyrgyzstan and Uzbekistan. An observer from Iran will also be present.

The third meeting of the India-Qatar Joint Committee on Defence Co-operation (JCDC) will be held in the Qatari capital, Doha, on 15-16 September. Two ships from the Indian Navy’s Western Fleet, INS Tabar and INS Aditya, arrived in Doha on 10 September for a four-day goodwill visit ahead of the JCDC.