With recent liberalisation and reforms Myanmar has become the hotspot for investors, especially those keen to take a “first mover advantage”. But with “first mover advantage” comes “first mover risk”. Some have likened it to the 1800s Gold-rush in Australia, a time of political uncertainty, wealth and gold fever.
In this briefing we comment on recent developments and key issues to be considered by all investors.
Due Diligence – Due Diligence – Due Diligence
It cannot be overstated, due diligence is an essential part of any investment. Investment in Myanmar is no different, however there a few challenges that need to be considered by foreign investors and treated with a degree of caution:
Sanctions – Myanmar was one of the most heavily sanction countries in South-east Asia, however that changed a year ago. Sanctions still need to be taken into account when considering Myanmar particularly as the US and EU have only suspended sanctions rather than lift them. For any prospective market this adds a degree of uncertainty around making any form of investment. The suspension period is due to be reviewed in April 2013 but it is not clear whether the sanctions will continue to remain suspended or they will be lifted or worse case reimposed. If they are reimposed then there is some uncertainty around grandfathering provisions for investments already made into Myanmar. US and EU legislation remain relevant to those multi-national companies with a nexus to the US or EU.
In Australia the sanctions were lifted on 3rd July 2012, however there are still certain some restrictions around certain sectors eg military related trade. That said the Australian Government has recently announced that it is re-establishing military ties with Myanmar by posting a military attaché’ to the embassy in Yangon.
Human rights – branding is one of the most important assets a corporation will possess. The inherent risk of reputational damage and potential liability associated with allegations of human rights infringement should not be underestimated. This should be considered in light of the recent sectarian violence.
Transparency and Corruption – Transparency International ranked Myanmar as 172 out of 174 countries. Corruption can pose a serious risk to compliance especially where you intend to or are required by local law to take on a local partner.
Foreign Investment Laws – until recently the laws relating to foreign investment were out-dated and did not offer International standard protection for foreign investors. The Foreign Investment Law was amended last year and implementing rules issues early this year, but in some investors eyes they are not prescriptive enough. Knowing the extent of the obligations and rights under this legislation is an important factor for any investor.
A country undergoing change
Myanmar is a country undergoing significant change in many areas such as politics, human rights and the law. There are many ambitious reforms that have been proposed, but do Myanmar’s leaders and bureaucracies have the capacity or means to deliver so much reform in such a short space of time? Only time will tell.
Framework for Foreign Investment
Myanmar’s legal system continues to present significant and varied challenges to investors. Even with the advent of the New Foreign Investment Law on 2 November 2012 and the recent introduction of the Foreign Investment Rules on 31st January 2013, there are still considerable challenges and uncertainties that face foreign investors.
New Foreign Investment Law
The introduction of the new Foreign Investment Law has afforded many welcomed benefits to foreign investors, such as:
Greater flexibility in corporate structuring – for instance 100% foreign owned enterprises are allowed (in certain sectors).
Improved protection for investors – such as guaranteed repatriation of profits and guarantees against expropriation
Better tax and investment incentives – such as increased tax holidays and custom duty exemptions.
However with it there are some provisions that are less than beneficial and add a degree of uncertainty to investing, such as:
Restricted sectors – there are still restricted sectors that require approval and often joint ventures with local authorities or local enterprises eg. oil and gas industry.
Nationalisation – there is a continued (and understandable) drive towards protecting national interests by placing limitations on the number of foreign workers that can be employed in an enterprise, for instance after 75% of the workforce must be Myanmar nationals after a 6 year period. Although there is an exemption for “special expertise” but this phrase remains defined.
Capital requirements – minimum capital requirements are not quantified and left open to determination by the Myanmar Investment Commission (MIC).
Foreign Investment Rules
It was hoped that the Foreign Investment Rules would bring clarity to the manner in which the law is applied. However it appears that the level of oversight and approvals needed has increased. The power of the MIC to control foreign investment appears to have increased. MIC approval will be required for things such as subleasing or mortgaging leases and the transfer of shares in a company to foreign investors. There is however more clarity around the nature of restricted sectors. Some of the more challenging provisions in the Rules include: Ministry of Labour sign-off for local staff contracts, fire/marine/injury/natural disasters/life insurance must be purchased from a locally registered company and any disputes that arise must be settled according to Myanmar arbitration law.
Myanmar has come a long way in such a short time in trying to reform politically and economically. The Government appears to be trying to address key issues that would deter foreign investors such as transparency (eg. by seeking to comply with standards such as Extractive Industries Transparency Initiative). It is also actively opening up sectors that have for a long time been closed to any form of foreign investment such as the telecom sector and the banking & finance sector.
What impact recent incidents in the country will have on that process and the appetite for foreign investment will remain to be seen.