Robert Walsh, sometime Seattle resident and long-time friend of our law firm, has been spending the last few years in Myanmar, where he has opened up a business consultancy. Robert is fluent in Chinese and Korean and, amazingly enough, Burmese, having learned Burmese while working in the U.S. Embassy in Yangon many years ago.
Robert has been sending us email updates from Myanmar for some time and we posted one of his earlier ones here about a year ago. We recently got a new one from Robert and are running it below.
Two years after Burma’s “summer of love”, the bloom is pretty much off the rose here, as what few western companies who came in are settling down to the grim realities of trying to get things done here.
The Telecoms Debacle
Last winter Telenor and Ooredoo were given their licenses to operate and start building out the expansion and upgrade of the mobile phone network here. I think their win of the tender included several performance milestones that they must meet or be subject to penalties. As all of this is opaque and not subject to a great deal of public comment, I can only guess what the milestones are. One must be the offer to the public of new low-cost SIM cards. There is huge pent-up demand for SIM cards, and these that are in circulation sell for up to $300 apiece.
So I think both Telenor and Ooredoo have announced they’ll be selling SIM cards. The problem is that from all we’re hearing, the network in place may not be in any way, shape, or form ready to handle a huge number of new subscribers. The build-out of the new network, involving erection of as many as 3500 towers from one end of Myanmar to the other, seems to have hit a solid wall, as terrain and distance make the telecoms companies come to grips with the fact that this is a big country with pretty poor roads. When the monsoon sets in with a vengeance in a few weeks work will pretty much stop unless it’s being done right on paved major highways.
One problem that both Telenor and Ooredoo were hoping the government would fix was the problem of land use permits for the 1000’s of sites it plans to build towers on … nope, each and every site is the subject of lengthy negotiations with owners, followed by tough-to-get changes to land use permits. As many of the tower locations require building access roads on lands owned by others, you can imagine just what a headache this is turning into.
Another problem is that both companies thought that they could safely and reliably subcontract out each and every facet of the build-out, and everything would happen just like magic. Not here, because magic, or some sort of miracle is required if each and every task is not closely supervised. And of course Myanmar contractors have sub’ed every task down 7 layers deep, until the guys with picks and shovels haven’t the slightest idea what was intended in the first place.
Add to this the fact that the Myanmar government has inked some sort of deal with a Japanese consortium called KDDI. I think they will set up a competing telecoms service that can only undermine whatever Telenor and Ooredoo hope to achieve commercially. Perhaps to strengthen its position vis ã vis the Myanmar government, Telenor just brought in one of its former ambassadors to Myanmar, a tribute to the revolving door between big business and the governments who regulate them.
We are reliably informed that an additional difficulty factor for the “winners” of the telecoms tender is that state and division-level licenses will be awarded to local players, which of course will do nothing for Telenor and Ooredoo’s bottom line.
And then there is Hanthawaddy Airport...
Back in the fall the tender for building the new international airport at Hanthawaddy, about 100km north of Yangon, was awarded to Kumho/Incheon Airport. We had expected to see a flurry of activity, followed by a snowfall of contracts to locals and expat companies. But alas, this did not happen, and recently it was announced that Kumho/incheon have walked away from the project, and that it will come up for re-bid. We have heard from multiple sources that talks between the Koreans and the Myanmar government went pretty much nowhere, due probably to all sorts of demands from the government side for things that were never discussed in the original terms of reference.
Prices for real estate leases are still astronomical, with no signs of leveling out yet. Rents for places to live are still well north of what one would pay for a similar apartment in Shanghai or Beijing. UNICEF was recently dinged here when it was revealed by Irrawaddy News that the organization was paying a retired crony general’s family $87,000/month for a house in Golden Valley it is using for their Myanmar HQ.
A member of our Seattle Burmese clique recently rented out his place, a very ordinary residence, to a Japanese company for $9000/month, which was paid 3 years in advance in one handsome lump sum.
Still, new building is going on all over the city, and just down the street the Vietnamese HAGL Group is doing a massive development for condos, services apartments, a mall — you get the picture. Where the market will head once all of this new inventory is on the market is anybody’s guess. At least one factor in the bubble continuing to inflate is that the government has not sold very much of its very considerable land holdings here in Yangon and elsewhere. If they were to do so, I’m pretty sure the bottom would fall out, and senior government officials, military people, and the cronies who love them would end up holding the bag.
But what real estate prices are doing is acting as a very real brake on industrial development and inbound FDI. The price of a 30-year lease on industrial land right now is such that a low-margin business like garments cannot think of setting up here.
Electricity and the lack thereof acts as the other brake on FDI for manufacturing. The electricity supply is perceptibly better this spring dry season than it was last year. The government electricity people signed a first-ever power purchase agreement with a private producer. But as people in Yangon are paying less for electricity than it costs to produce, I am wondering if the private producer is getting paid on time, or paid at all.
The US Trade Development Agency’s big push here is to get American equipment sold, and American companies actively involved in building out the infrastructure for transmission. This is hampered by the fact that the Myanmar government either cannot or will not issue sovereign debt to pay for any big-ticket projects. Instead it expects everything to be put in place for what in the end will be free money; that’s the thumbnail version that saves long explanations of every financing option in the works.
People and Education
As months go by we become more and more convinced that the biggest harm the military did to the society, the offense that will take the longest to remedy, was the wholesale destruction of the secondary education system that began in earnest in the mid-1990’s. Foreign companies coming into Myanmar are exasperated by the aggregately low levels of skill found in recent college graduates. The short term solution is to work with who you can get, and train the hell out of them, and hope to retain them. Myanmar labor law does have provision for writing in retention clauses in exchange for company-provided training. The long term solution is going to be generational in nature, and there is no way to speed up the effect of the “tincture of time.”
Politics and Strife
President Obama has kept sanctions in place on Myanmar for another year, even though they are suspended at the moment. This has its damping effect on US business coming in. Other than Chevron (just here for the oil & gas), GE (selling as many gas turbines as the market will bear), and Coca-Cola, no other large US business has much of a profile here. Chevrolet and Ford have dealers, but these are fronted respectively by a pharmacy chain and an American company out of Thailand. We have not figured out a good way to get money directly from an American bank to a Myanmar counterpart.
And looming behind this are the proverbial elephants in the room. The Buddhist-on-Muslim violence in Rakhine state won’t be getting sorted out anytime soon. The Kachin state still simmers while the Kachin Independence Army and its associated groups haggle over the most they can get in a ceasefire agreement. And for all intents and purposes, eastern Shan state is a de facto Chinese satellite, by virtue of China’s backing of the United Wa State Army drug trafficking group.
Myanmar is hosting the ASEAN chairmanship this year in Nay Pyi Daw. I hope it all goes well. One piece of good news for foreign investors is that the Myanmar Directorate of Investment and Company Administration (DICA) is moving back down to Yangon with a “one-stop shopping” approach to processing FDI apps. Supposedly the office will have reps from each of the relevant ministries regulating different industries. We will be giving this a shot as we register a JV for a series of tree plantations.
Otherwise, we wait for the monsoon, and this year’s is supposed to be a real “beaut,” if the Farmer’s Almanac is to be trusted. Maybe even a cyclone for good measure.