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Myanmar Foreign Investment. The Reality On The Ground.

Posted in China Business

By: Steve Dickinson

As I mentioned, my first post on Myanmar, “Myanmar Foreign Investment. Initial Impressions Are That It Is China’s Opposite.” was heavily theoretical. Dan and I did have a chance to travel and to meet with local lawyers and business people. This gave us the chance to find a little of the reality behind the statements of aspiration expressed by government officials at the Summit. I will provide my observations below, organized in accord with the three stages of development described in my first post.

1.   Political reform.

 I saw a remarkable change in the openness of the society. Some of the changes are quite striking. Some of these changes are:

  • The Internet seems to be completely open, at least for English language web sources. All news sites that I accessed were unblocked. There was no attempt to filter news from unblocked sites. Information on the situation in Rohinga and on Aung San Suu Kyi were all available. Karen and Kachin separatist sites were accessible. Facebook, YouTube and Twitter were all available. Internet cafes were open and were well attended. No one blocked my access to the Internet at such locations. This is a complete change from even one year ago when the entire Internet was blocked.
  • Cell phones are generally available and the people have taken to using cell phones actively. One lawyer told us that right now less than 5% of the people in Myanmar have cell phones but that more than 50% will have them within two years. Right or wrong, this shows the kind of optimism we were hearing.
  • Newspapers and magazines are generally available. The situation in Rohinga was openly discussed. Aung Sang Su Kyi was widely quoted. Criticism of government corruption and bureaucratic incompetence was widely published.
  • Book publishing activity is exploding and I found a large number of well-stocked bookstores throughout the downtown area. Though technical books prevailed in numbers, there seemed to be no real restriction on book topics.

Though all of these are just surface observations, they do show a remarkable opening up of civil society when compared to the closed system that prevailed only a year ago. The contrast with China is striking. After I left Yangon I went to Beijing where even at our five star hotel, Google news and Bloomberg news were not accessible. Facebook, YouTube and Twitter also were not available. Foreign news magazines were not available on the street and book topics were highly restricted.  The contrast was dramatic and telling.

 2.   Banking and Foreign Exchange.

In the old Myanmar, the visitor noticed three things about money. First, much of the economy ran on U.S. dollars or the Euro and many services simply were not available in local currency. Second, there was a big difference between the official exchange rate and the unofficial or black market exchange rate. The first task for every traveler was to find a black market money-changer to obtain a reasonable rate of exchange. Third, the banks were primitive and positively hostile to foreigners.

On this trip, all this had changed. Everywhere I went accepted payment in local currency (kyat). Though many prices were quoted in dollars, no one insisted on payment in dollars. The new, unified official exchange rate was working, and most people I met were exchanging their currency at the local banks rather than with the black market moneychangers. The moneychangers offered a rate that was only slightly better than the banks, so most tourists (and us) did not want to take the risk. Finally, banks were open, efficient and quite friendly in their money changing operations.

Though these small changes in the treatment of visitors mean little regarding the overall modernization of the banking system, the contrast from the former system was a great surprise to me. In fact, the impact of the changes extends to larger issues. With a stable exchange rate system that seems to be accepted by the business sector, the purchasing of import goods can now be conducted with efficiency in Myanmar. This will have a major impact as Myanmar opens to economic contact with the outside world.

3. Foreign Investment.

As I mentioned in my earlier post, the commitment of the Myanmar government towards foreign investment seems half-hearted at best.  Many obstacles to foreign investment remain:

  • The sudden opening of the economy has lead to a sharp increase in land prices in Yangon. Rumors at the Summit were that 30-year lease rights for prime land in central Yangon had risen to $1000 per square foot. If true, this would make the price of land in Yangon the highest in Asia. There is a general lack of good existing real estate in Yangon: hotels, office space and condominiums are all in short supply. This means that in the near future, the cost of all real estate will rise dramatically, making Yangon and the rest of Myanmar extremely expensive. In terms of land prices, the government seems unwilling to allow for any price reduction that would make investment more attractive to foreign interests. In fact, government officials made it clear at the Summit that they intend to exercise the right to approve all land prices for foreign investment projects. Their goal is to prevent local governments or private persons from offering low land prices as an inducement to foreign investment. This situation makes foreign investment in hotel and office real estate difficult at best. It also makes investment difficult for manufacturers, since the cost of building and renting factory space is prohibitively high. We were in Yangon working with a large manufacturer and when we left, they were still looking for appropriate space.
  • Electricity is extremely expensive and in short supply. Blackouts and brownouts are common. Virtually every major project is required to include a back-up generator as part of the project design. Diesel and electric fuel is also expensive, so operating generators can be a significant cost.
  • The road system is not developed and overland transport remains difficult and expensive. As a result, export oriented manufacturing must be located close to the major ports. For now, this means primarily in the Yangon area. Concentration in Yangon will then further exacerbate the high land prices and energy shortage issues.
  • At the Summit, Myanmar government officials acknowledged these three obstacles, but offered no plan for dealing with them. This then reflects two larger, more fundamental problems with the foreign investment program. First, there is a general lack of planning for the development of the economy and there is therefore no real plan at all for the role of foreign investment in that development. Second, Myanmar government officials know little or nothing about private business. They are therefore unable to design programs that are actually attractive to foreign investors. Government officials actually seemed hostile to the concept of foreign investors actually earning a profit in Myanmar. These officials seemed to equate foreign profits with exploitation of the Myanmar people. Thus, rather than encourage profit, they seem to want to discourage it.  A Myanmar businessperson made clear to us that the government officials have a long way to go before they can be viewed as on the side of foreign investment.
  • Government officials feel that they need to protect the Myanmar people from exploitation by foreigners. They therefore require that all foreign investment decisions be approved by the central government. They are not willing to delegate to local officials or to private individuals. This involvement in every decision by government officials who have no understanding of business is a serious obstacle to foreign investment. For example, government officials proudly stated at the Summit that they will approve projects within two weeks. However, local lawyers informed us that the actual approval time is six months or more. As interest in Myanmar grows, delays are expected to grow worse rather than better.
  • To date, foreign investment in Myanmar has centered on oil and gas, minerals, timber (teak) and power generation (dams and coal fired power plants). The government wants to shift this focus to manufacturing, services and agriculture. However, at the Summit, light manufacturing and services were not even discussed, and the discussion of agriculture merely highlighted how unattractive the investments would be. Myanmar is not going to develop a strong economy by relying exclusively on extraction of its non-renewable natural resources. Though the government officials indicate that they understand this, no programs are yet in place to make investment outside of the traditional areas attractive. In fact, the only discussion was about new measures in oil and gas and minerals that will make future investment in those areas less attractive than they are now. As a result, even the traditional sources of foreign investment may decline rather than increase if the new foreign investment policies are implemented. When confronted with these issues, government officials expressed indifference. Their attitude was essentially that if you do not like our policies, go home.
  • Local lawyers and business people are aware of the obstacles to foreign investment that I note above and they are already working aggressively to design legal structures that will avoid the obvious defects of official government policy. Let me give one example. Under the official policy, a foreign owned company cannot lease a building for longer than one year. For major projects, the foreign owned company is expected to lease raw land and then build the factory, warehouse, hotel or office building at its own expense. To make the situation worse, land cannot be owned but only leased. To obtain the lease, the foreign company has to pay an initial lease fee and then pay annual rent. The lease fee is set at the discretion of the government. To top it all off, the government reserves the right to adjust the rent every five years. To say that these terms are unattractive is an understatement.

Locals understand this. Their solution is to build the factory or warehouse and then rent it to the foreign company on a monthly rental basis. They then roll the rental every month with no set term. The idea is that they will roll in perpetuity. This approach avoids the problems with the government approach. The building can be rented, no premium needs to be paid, and the government does not raise the rent every five years. The problem is that the foreign investor has absolutely no certainty with respect to the lease, since the lease is on a monthly rental basis. The locals’ response to the concerns of such an arrangement are to say, “Of course we would not take advantage of the foreigner by raising rent or by offering the building to a party who is willing to pay more.” Thus, even though local Myanmar business people are working on ways to avoid the worst of the government policies, these ad hoc methods are not likely to be attractive to most larger and more sophisticated foreign investors.

To summarize, my response to the situation in Myanmar is mixed. The political and financial system changes are encouraging. Will the changes continue? Is the government sincere? Who knows? These are all concerns about the future that do not recognize the remarkable changes that have already occurred. I encourage the skeptics to go take a look for themselves. On the other hand, there seems to be little real effort being made towards making foreign investment in Myanmar attractive. Many of our clients are looking to Myanmar as a new base for their export oriented manufacturing operations, but I would expect most of them will be taking their time to go in. The company we went to Myanmar with is in a special situation as it is more focused on being in a large number of countries than it is on low costs.

My view at this time is that Myanmar is only suited to well capitalized investors with a capacity to deal with uncertainty and risk. For those brave souls who do go to Myanmar, a permanent and substantial commitment to personnel on the ground in Myanmar will be required. No Myanmar operation will run itself; substantial supervision by the foreign investor is required. Most important is that the costs of operating in Myanmar must be carefully assessed. Low wages are countered by high land and energy costs.

Though the obstacles to investment in Myanmar are currently high, there is also the prospect of rapid improvement. In this area, the encouraging point is that the local private business people fully understand the need to change and the need to work around governmental dictates. Given the rapid changes taking place in Myanmar, it is entirely possible that the locals will develop attractive alternatives to the current policies. The real question is whether the government will be willing to get out of the way and let business people make their own decisions. We will continue to follow developments in that direction.

Dan’s Addendum: I hate to get all corny here, but Steve has failed to talk about Myanmar as a place to go and so I am going to step in and do a bit of that. This was my first time in Myanmar and I found it absolutely fascinating. There were cool looking religious buildings (mosques, churches, Buddhist temples, Hindi temples, even a synagogue), everywhere).  There is a China-town and an India-town and the people on the street are about as diverse as anywhere.  Yangon is full of big and beautiful (and mostly decrepit) buildings and big and Soviet style (and mostly decrepit) buildings as well.  Though hotter than hell and subject to random torrential downpours (with massive winds at any time), Yangon is a great walking city.  Nobody bothers you on the street and the cars don’t seem to be out to run anyone over.  The food is also really good and varied.  They even have half-way decent domestic beer and wine.  And the Shwedagon Pagoda is downright incredible.  Go there (as a tourist) if you can.

Update: Just read an article reflecting yet another difficult in doing business in Myanmar: the rents. There is such a dearth of office space in Yangon, rates are higher there than in New York.

  • Tony Picon

    Very good article stating  a balance of the appeal of the country and the challenges ahead regarding government capacity.

  • Guest

    Hi Dan, 

    I assume your addendum refers to going to Myanmar as a tourist rather than an investor. Am I correct?

  • MikeFuller

    I think you just visited Yangon right? The Internet and mobile phones may work there but connection elsewhere is practically non-existent, and you didn’t mention the capital Naypidaw which is where you need to go to deal with the government. You reads a bit like a semi-tourist blog of Shanghai in the 1970s and assuming the whole country is the same.

  • Arjushi

    I really admire during short visit you can learn alot about Myanmar.

  • MHB

    Just had a look at Transparency International’s corruption perception index for 2011. Myanmar is the third from bottom, after North Korea and Somalia.

    Can a US (FCPA) or UK (Bribery Act) business realistically protect itself in Myanmar? How big a risk is this?

  • Dan (another Dan)

    It’s not important, but I just want to say that Burmese food is not bad, it’s unique. 

  • Andrew Crawford

    Thanks Dan…great article

  • William_cwchan05

    I just search from internet, that is another conference regarding Myanmar private sector investment will be held on 1 and 2 November in Yangon also. I wish to join the conference…. Anyone will attend this conference/??

  • http://twitter.com/Stephen64875743 Stephen

    The changes at this stage in Myanmmar/Burma are only superficial. Yes, technological changes have occurred where one can quite easily contact the outside world be it through email or skype with little obvious interference at any rate. Yes, there are mobile phone shops and also plenty of gold shops and bill boards signalling the arrival of foreign investors.

    However, the poverty in areas outside of Yangon is even more marked than that in Yangon. If one further contrasts this with the new capital of Naypidaw then you start to see the stark reality of how meagre the rewards for the people have been. Naypidaw is a country within a country.

    In a recent interview with Perry Walsh in Jan 2013 – U Tin Oo the former commander and chief of the tatmadaw (Burmese military) and now Vice chairman and President he agreed that the contrast between Naypidaw (built in five years) was ‘very big contrast – very big contrast’ between it and the rest of Burma. He went on to say that ‘most of the construction is given to the people’s republic of China’. In addition obscene amounts of Burma’s resources are exploited by China. As U Tin Oo laments the Burmese junta did not convey this to the Chinese govt ‘very courageously before’ – but now ‘it was a problem’.

    Indeed this was collaborated by an assistant for the General for roads who also mentioned that many of the houses paid for by the Chinese are empty. When asked why this was so – he explained it was to make it look like people were living there – after all the SEA (South East Asian Games) would be held there. There were many hotels and signs that encouraged a ‘ clean and green city’. This city was built for ministers and generals and in just five years – yet infrastructure remains in tatters in the rest of the country.

    If you ask people on the street be they taxi drivers – villagers – shop assitants they will tell you almost anywhere in Yangon for instance, or for that matter other townships that they don’t like to go to Naypidaw and give it the gestural thumbs down – a grimace and nod of the head from side to side and an utterances something like ‘Naypidaw no good’ –

    Ask most people why the road to Naypidaw out of Yangon has little traffic congestion you are given various accounts – people are not allowed to travel on them the General’s assistant murmurred to Perry Walsh. When this was conveyed to U Tin Oo he added that they could use the road – it was just that they did not want to.

    Of course if we consider the ‘reality on the ground’ there is a new class of working poor emerging in what is a trickle down economy – long hours and little money for the workers. Even so, now that the military have seemingly gone back to the barracks although loom omniously in the background – the tanacious Burmese who have suffered so much fight to rebuild their lives with no help from Naypidaw or foreign investment.

    The message for foreigners is as U Tin Oo states is to work with the United Nations – to manage foreign investment carefully and thoughtfully. There is a long way to go before we can signal any real improvements in the country. So far from ‘getting out of the way’ foreign investment needs to be conducted in a manner that makes sure the people are not exploited are given real jobs with real wages – and are consulted respectfully before any business ventures are undertaken.

    To quote from another article: ‘Suu kyi urged corporate executives to avoid
    “reckless optimism” and warned investors that “even the best investment laws
    would be of no use whatsoever if there are no courts that are clean enough and
    independent enough to be able to administer those laws justly”.
    So, lets help rebuild the country within a country so that everyone can participate and have access to opportunity, access to an education, access to meaningful employment – access to the law – access to health before we start talklng about opportunities for foreign investors with their own agenda.