Foreign Investment Surge in Doubt

Myanmar's first civilian-backed government in more than 50 years is pledging an open economy and has a raft of new business friendly laws on its side. But it remains unclear whether this will lead to an immediate surge in the volume of foreign investment that the economy desperately needs.

A shop assistant reaches for a product in a drug store. Photo: Kaung Htet / The Myanmar Times
 

The country represents an almost unrivalled investment opportunity for firms across the globe. The Asian Development Bank said this month that it expects real GDP to have increased 7.2 percent in the 2015-16 fiscal year, and projects 8.4pc for 2016-17. Across a host of sectors the scope for growth is immense.

“Pharmaceuticals, health, agriculture, real estate, infrastructure – they are all going to be massive,” said Edwin Vanderbruggen, a partner at law firm VDB Loi in Yangon. “It’s one of the only spots in the world where in certain sectors growth will jump by double digits every year.”

The DICA numbers do not represent actual investment, but they remain a key benchmark for measuring foreign interest. After a strong finish to 2015-16, Myanmar has entered the new fiscal year boasting a – so far – smooth democratic transition, and has passed a series of new laws favourable to foreign investment.

An amended mining law that could change the economics of that sector for foreign investors was passed in December. An Arbitration Law was enacted in January, meaning Myanmar’s courts now recognise arbitration decisions made in other countries. That same month the government passed a Condominium Law that allows foreigners to own up to 40pc of residential units in a block.

A revised foreign investment law that would potentially reduce restrictions on foreign investments across many sectors will go before parliament this year, as will a new Companies Act.

Officials at the Myanmar Investment Commission, of which DICA acts as secretary, think approved investments are most likely to increase in manufacturing, infrastructure, real estate, transportation and telecoms.

But MIC secretary U Aung Naing Oo also projects annual investment approvals of around $6 billion a year until 2020. That suggests only a modest potential increase, not a sudden surge. People in the international business community are cautious about expecting a sharp rise in investment.

Many foreign companies were undertaking projects in Myanmar – whether exploring opportunities or actual investment – well before the elections, said Martin Jancik, Myanmar country manager for Tractus Asia.

A significant increase in foreign investment will rely on the new government focusing on attracting investment into specific sectors like infrastructure and agriculture, and will not happen overnight simply as a result of the transition, said Mr Jancik.

“It’s more a function of business fundamentals,” he said. “The change in power is positive, but the previous government had already taken steps in laying groundwork for attracting foreign investors, for example, by passing investment friendly laws.

Issuing new laws is less important than applying them in a transparent and predictable way, said Mr Vanderbruggen of VDB Loi, adding that no investor ever set up a car factory because of a new Companies Act.

“People come here for the market [opportunities] not because there are good laws,” he said.

Some of the new laws are steps in the right direction, but do not solve inherent issues. The Condominium Law, for example, allows foreign investors to buy units but it does not solve the issue that foreigners are prohibited from owning land.

This has not stopped joint-venture residential projects aimed at overseas buyers, but will remain a source of uncertainty for foreign investors.

The amended mining law lays the ground for equity and profit sharing agreements between foreign firms and the government.

But even if the details – yet to be announced – of these agreements make new projects viable, it still takes foreign companies years not months to get permits, according to officials at foreign mining firms.

The revised Myanmar Investment Law, which would combine the Foreign Investment Law and the Myanmar Citizens Investment Law into a single piece of legislation, is another step in the right direction.

That would, in theory, allow any investor – foreign or domestic – to invest in “any enterprise in any sector” with the exception of just a few sensitive sectors, according to law firm Allen & Overy.

But until that law and its accompanying regulations are passed, existing and more stringent regulations will remain in place. Investment in many activities still requires a joint-venture with a local firm, and others require both a joint venture and approval from the relevant ministry.

Foreign firms and joint-ventures also face trading restrictions, although there have been signs of a change. Late last year the Ministry of Commerce allowed joint ventures to import chemical fertilisers, seeds, insecticides and hospital equipment.

But this web of restrictions means that liberalisation in one area may have little material impact.

An earlier removal of retail activities from a list of activities prohibited or restricted under the Foreign Investment Law did not bring an influx of investors – despite great interest – because separate import and trading restrictions still applied, said Chris Burkett, senior associate at Allen & Overy.

In areas where foreign investment does not face additional restrictions, there remain a host of difficulties including sourcing adequate facilities, human resources, logistics, corruption and uncertainty over how projects will be taxed.

For US firms, the Specially Designated Nationals list, which contains 38 individuals and 77 entities subject to US sanctions, also creates headaches.

US companies have to undertake considerable due diligence to make sure they are not doing business with people or entities on the list.

But there are other trends that bode well for outside investment. One is the extent to which the government has improved the way it tenders projects across infrastructure – where there is huge scope for foreign firms to get involved.

“The government is at the origination of many projects across mining, infrastructure, oil and gas,” said Mr Vanderbruggen, who has run several tenders for the government.

But the tenders are often structured in such a way – lacking a clear business case for example – that international firms do not bid, he said.

Some come with a very short deadline, which means that international firms are passed over because they request time to run a feasibility study, he added.

But international investors want to bid for transparent international standard tenders, and on transparency at least the previous government made progress, said Mr Vanderbruggen.

Andrew Lee, Myanmar country head for General Electric, is “cautiously optimistic” on the outlook for foreign investment.

“We’ve submitted bids in tender processes for healthcare and power generation projects through our channel partner and developers or contractors – these tenders were very transparent,” he said.

One example is the $300 million Myingyan power plant – set to be one of the largest gas-fired independent power plants in Myanmar – which used an international-standard bidding process under International Finance Corporation guidelines. The tender process took some time to work through, but Mr Lee hopes that tenders will become similar across many sectors, and increasingly in accordance with international standards.

“The country needs billions [of US dollars] to be spent on power plants, transmissions, substations, distribution,” he said. “That’s going to attract a lot of foreign investors, but the Myanmar government is also seeking to work with more international firms that follow these best practices.”

Mr Wicklein of the ADB noted that concessions for operating toll roads are also being competitively tendered.

If the government was able to devote funds to hiring experts to help it build business cases and create a visible pipeline of projects across different sectors this would also raise foreign firms’ incentive to bid for tenders, added Mr Vanderbruggen.

The prospect of 15 toll road projects is much more attractive to foreign firms than a stand-alone tender, he added. At the other end of the spectrum foreign investment can also take the form of foreign firms making equity investments in individual Myanmar firms.

Institutional investors – large entities like pension funds or investment banks – are more eager than in the past to put money to work in Myanmar, said Daw Thiri Thant Mon, managing director at Sandanila, a Yangon-based investment advisory firm.

But those investors also want to see companies that are sufficiently corporatised, she added.

This means companies that hire professional managers and chief executives, have boards, publish results and are essentially run to the same standard as a public company. And until recently Myanmar’s firms have had no incentive to take such steps.

“They didn’t have access to international investors anyway,” she said. “And local investors were groups of people they knew.”

She has found that many firms understand the need to change, although that change will still take time.

“I don’t expect anything in this country to go quickly,” she said. “But then sometimes I’m surprised by how fast things can move.”

Credit:MMTIMES