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Burma: Open for Business?

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Burma: Open for Business?

Burma is opening its economy to the outside world for the first time in decades. While many see sizable profits, there are still hurdles that investors must consider.

There have been significant political changes in Burma over the past year and a half. Aung San Suu Kyi is a member of parliament, protests and unions have become legal and press freedoms have substantially increased. Following the partial lifting of sanctions, investors are ready to engage. However, while the investment environment outlook is risk positive for sectors such as oil and gas, there are still hurdles that investors will have to navigate.

Infrastructure

Given Burma’s significant need to develop almost every kind of infrastructure, opportunities in this sector are significant. Japan’s write-off of $3.7 billion of debt was in part an effort to increase its access to infrastructure projects – the write off was accompanied by an increase in Japanese companies bidding for contracts with “favored” status. More basic infrastructure projects with shorter timeframes are likely to face lower regulatory and contract risks, as they will have less exposure to changing regulations, generally have less environmental impact, and are typically perceived as benefiting local communities. Such projects include road construction, river dredging, and the building of river shipping facilities.

Rail, port and dam projects are likely to face more significant regulatory and contract risks due to their longer exposure to the shifting regulatory environment, greater likelihood of attracting environmental protests, and the fact that most such projects to date have not been seen as in the interests of Burma.

Telecommunications

The Ministry of Communications, Post and Telegraph’s grand plans for greater telecommunications access, such as a 2011 pledge to add 30 million mobile connections within five years, is hampered by lack of public funds and poor infrastructure. Foreign investment in the telecommunications sector has been relatively small, and to date largely restricted to infrastructure joint ventures between Chinese or Thai companies and state-owned firms. Myanmar Post and Telecommunication, the state-run company that has a dominant role in the sector, lacks the technology to harmonize conflicting GSM, CDMA and WCDMA mobile networks, and the funds to build sufficient mobile phone towers and Internet servers to meet demand projections.

Despite these issues, the government is set on maintaining state control of much of the sector, but is likely to partially-privatize the services side. Some privatization of Internet and mobile services has already occurred, but is largely controlled by vested interests in the form of businessmen close to the former ruling junta, as contracts have been offered on non-transparent terms. For instance, the Internet service provider, Redlink, is owned by the son of Thura Shwe Man. Htoo Trading, owned by prominent business tycoon Tay Za, has developed a near monopoly in many parts of the telecommunications market through a number of subsidiary companies such as E-Lite and Information Technology Central Services.

Beyond the almost certain continuation of regulations protecting state-owned firms and the entrenched presence of vested interests in the sector, foreign investors will have to contend with the lack of an updated telecommunications law and data privacy regulations. While regulatory reforms are likely in the next one to two years, opportunities for foreign investors are likely to remain limited, with the exception of infrastructure and services, where the need for technology transfers is significant.

Mining

The Ministry of Mines has little professional or technical expertise. Foreign companies have only been allowed to invest in mining since 1994. They are currently not allowed to own mining companies and must invest in a local one which, as previously stated, gives them few legal rights.

Violent Risks

Ethnic rebel groups have been waging insurgencies, consisting of sporadic attacks against security forces and government infrastructure, in the Shan, Kachin and Kayin, (Karen) states for decades. In November 2011, the government began the process of initiating peace talks with each of these groups, and by January 2012, ceasefire agreements had been signed with the Chin, Kayin, New Mon State, Kachin and Shan state militants. However, there have subsequently been some violations of the Shan state ceasefire, and several in the Kachin state.

Oil and gas

Burma’s oil and gas sector has progressed from blocks being given to the children of powerful junta officials before being auctioned off to one of the country’s better regulated and lower risk sectors. All on and offshore blocks are now auctioned by the state through an open bidding process. The state has the sole right to explore and extract oil and gas, but the government has the right to allow foreign investment through joint ventures, generally production sharing contracts with state-owned Myanmar Oil and Gas Enterprise (MOGE). MOGE and the Ministry of Energy are among the more professional and capable government entities for investors to work with. Aung San Suu Kyi has said that MOGE lacks transparency, and wants all oil and gas contracts to be made publically available. Given that Western governments share her concerns, the government is likely to allow new contracts to be published as reform progresses.

There are foreign investment opportunities in on and offshore projects, as well as refineries. For companies operating offshore, political risks are likely to be a bigger concern when they transfer their product onshore. Vested interests control many of the ports, and an ongoing scramble for stakes in port ownership is likely to see non-transparent ownership structure develop.  This will make it difficult to identify counterparties and could result in future ownership disputes. There are also likely to be issues with states governments, all of which charge different tariffs on oil and gas transported through their territories. These rates are likely to rise as the state look for more gain as foreign investment rises.

Rachel Shoemaker is Regional Manager Asia Pacific at Exclusive Analysis, based in Singapore. She specializes in business risks in China, infrastructure in Southeast Asia, regional trade and project finance, and energy frontier markets, in particular Myanmar, Mongolia, and Papua New Guinea.