Myanmar’s future economic growth will largely depend on the ability of its Government and power infrastructure to keep pace with its plans for rapid economic development. However, the harsh reality is that about 94% of Myanmar’s rural population does not have access to electricity and a substantial level of foreign investment is required to upgrade the nation’s existing power infrastructure. As the Government’s finances are overstretched, international project finance will play a vital role as a source of funding for the power sector.
What many people do not know is that there are already success stories in Myanmar. For example, Toyo Thai Power Corporation’s 121MW Ahlone gas-fired power project, which is already operating at 80MW and getting dispatched (and paid). We have been advising on this project since 2012 and it demonstrates what dedicated sponsors can achieve. In addition, the Government made a significant step with the tender process for the Myingyan 225MW gas-fired power project ultimately won by Sembcorp, and in which we are advising the lenders (including the Asian Development Bank and the International Finance Corporation). These are encouraging developments for the nation and the international project finance community.
However, it is fair to say that project finance in Myanmar is still at an early stage and potential investors face a number of significant challenges.
Myanmar’s current legal framework remains a challenge for foreign investment. An extensive upgrade of Myanmar’s legal system and legislation is required to strengthen investor confidence and attract significant foreign funds. The legal framework is based on a combination of laws from different periods of its history (including many colonial-era laws held over from British rule) which exist alongside a common-law style judicial system. Many laws are outdated or untested.
However, the Government has shown a willingness for reform. The Foreign Investment Law in November 2012 introduced a number of welcome changes including preserving the right of foreigners to wholly own investment vehicles, relaxing rules around joint ventures with local partners, extending the tax holiday for foreign investors and allowing foreigners to lease land for 50 years plus two extensions of 10 years. However, the Myanmar Investment Law (currently in draft form) will, when in force, combine and replace the 2012 Foreign Investment Law and the 2013 Myanmar Citizens Investment Law. The new law seeks to attract more foreign investment into Myanmar by reducing restrictions on foreign investments and aligning the requirements for local and foreign investors and investments.
For the power sector, the Myanmar Electricity Law of 2014 (2014 Electricity Law) now forms the basis of the legislative framework, replacing the Electricity Law of 1984 which did not provide for power generation by independent producers. The 2014 Electricity Law established the Electricity Regulatory Commission (which has limited powers to regulate the electricity sector) and also empowers the Ministry of Electricity and Energy, state and regional governments and governing bodies of self administered zones and self-administered divisions to grant permits to entities that wish to engage in the generation, transmission and distribution of electric power.
Myanmar’s financial system is one of the least developed in the world, with less than 10% of the population holding a bank account. This is inevitably a concern for international investors and lenders.
The Government has identified the development of the financial system as one of its key priorities and has sought advice from the World Bank. The granting of independence to the Myanmar Central Bank in July 2013, the World Bank’s active involvement and the grant of limited operating licenses to a number of foreign banks are all positive signs likely to increase international transparency and improve investor outlook.
A further challenge is the lack of precedent transactions in Myanmar. With no significant track record of power purchase agreements (PPAs) and no standard build-operate transfer (BOT) contract, investors in the power sector have so far been negotiating projects on an ad hoc, bilateral basis.
However, there are independent power projects in Myanmar with signed PPAs. Each of the Ahlone and Myingyan power projects mentioned above has a signed PPA with the state-owned power utility, Myanmar Electric Power Enterprise (MEPE), (which has now been succeeded by the newly formed Electric Power Generation Enterprise (EPGE)), which should help to establish a standard PPA for future projects.
Another issue is the apparent unwillingness by the Government to provide sovereign guarantees on power projects which are commonplace in other Asian jurisdictions such as Vietnam and Bangladesh.
Unusual features for power projects in Myanmar include the “free power” and “free equity” requirements. The Government had previously announced that independent power producers would be required to grant up to 15% of free equity in the project and up to 15% of free power to MEPE. This was also reflected in the tender documents in the first round of Myingyan. However, these requirements would artificially inflate the tariff for the remaining power generated, and the variability would make project comparisons more difficult. Fortunately, these requirements were not a part of the final Myingyan tender, and it can be noted that they do not feature in every negotiated power project.
Security of Off-Take
Investors and lenders in emerging markets often take comfort from the track record of previous projects. Unfortunately, MEPE (now EPGE) as off-taker has not had the opportunity to demonstrate a reliable track-record of off-take payments, which investors or their lenders can take comfort from (unlike, for example, EGAT in Thailand). Furthermore, EPGE is highly dependent on a government subsidy as its payments for power generation are greater than its selling price for that power to its end-consumers. A subsidised power utility is not unusual in the Asian region, but structuring projects to provide comfort to lenders on EPGE credit risk through extended political risk insurance will be a key requirement for commercial lender participation in the sector.
In an encouraging move, Myanmar officially became a member of the Multilateral Investment Guarantee Agency (MIGA) on 17 December 2013, which means that foreign direct investment into Myanmar’s power sector will be eligible for MIGA’s political risk guarantees and support (which can include MIGA coverage for breach of contract by EPGE).
Many international lenders will be reluctant to lend to projects in countries where lender-security is difficult to enforce.
A lack of market-tested collateral packages for international lenders is a key concern on current power projects in Myanmar. Although existing legislation provides for a range of lender-security interests, there are limited examples of these being used in practice. Importantly, Myanmar law does not allow foreign lenders to take security over immoveable property. As a result, experienced international and local counsel are essential to provide combined advice on a robust lender-security structure for the benefit of international lenders. The role of international institutions such as the World Bank in advising the Government will be vital to ensure the transition of the power sector to a model which is bankable.
Outside of the renewables sector, any successful power project will of course require a reliable source of fuel.
Myanmar enjoys significant gas reserves, but most of the country’s gas has already been committed to China and Thailand under long-term sales contracts. This shortage of gas will remain a significant issue until new gas fields come on-stream (estimated to be 2018 at the earliest).
Whilst Myanmar also has substantial coal reserves, these are primarily located in remote areas and are generally less suitable for power generation given their grades and calorific values. However, the Government is prepared to allow importation of coal to satisfy domestic needs. This will be accompanied by public environmental concerns, but modern coal-fired technology and imported coal are likely to be the key to meeting the power demand in Myanmar.
Myanmar is pivotal to the Belt and Road initiative particularly as part of the Bangladesh-China-India-Myanmar economic corridor which aims to increase economic trade between the four countries and will include a link from Kunming, China to Kolkata in India, passing through Mandalay in Myanmar and Dhaka in Bangladesh.
Myanmar and the investors looking to develop power generation in Myanmar face some undeniable challenges, and a degree of initial market “froth” is being replaced with an increasingly realistic view. However, this is positive as investors and their lenders begin to develop serious market entry strategies and sponsors such as China Three Gorges Corporation, through the Chaungtha wind power project, have demonstrated a commitment to developing independent power projects in this growing market. With continued and strong international support, we believe the outlook for the power sector in Myanmar remains positive.
Written in collaboration with Jingtian & Gongcheng.