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KWR Special Report

MYANMAR'S SEARCH FOR FOREIGN DIRECT INVESTMENT:
Interview with U Aung Naing Oo, Director General, Directorate of Investment and Company Administration (DICA) and General Secretary, Myanmar Investment Commission (MIC)

Interview by Keith W. Rabin

Hello Director General U Aung Naing Oo, it is good to see you again. Before we begin, can you tell us about your background and how you came to serve at DICA and MIC?

After attending Mandalay University I joined the military in 1981. I served for 19 years before joining the civil service and Ministry of Commerce in 2000. At the Ministry I came to serve as Deputy Director General and was there for 11 years. In 2011 I transferred to the Ministry of National Planning in 2011 after formation of the last government to handle investment and to lead economic reforms in this area. Then in May 2012 I was appointed as Director General of DICA and have been here for four years. At the same time I serve as secretary of MIC.

Source: DICA

Myanmar has been attracting a lot of attention from international investors due to its geostrategic location, its large base of resources, and the fact it has so much potential growth ahead of it. For those unfamiliar with Myanmar, how would you describe its attractions and the opportunities it offers?

Myanmar is a newly democratic nation of just over 50 million people in a country about the size of Texas. We are blessed with abundant human, physical and natural resources. Moreover, we are strategically located between China and India, the two most heavily populated countries in the world. We are also located within ASEAN and the newly formed ASEAN Economic Community (AEC), which is comprised of ten Southeast Asian nations covering more than 1.7 million square miles -- with a population of 626 million and an economy valued at $2.4 trillion.

Given historical circumstances, Myanmar lagged our neighbors in economic performance - but we have begun to address our deficiencies and the IMF recently forecast that Myanmar will be the fasted growing economy in the world during 2016 - achieving an annual growth rate of 8.6%. This is at least partially due to our starting from a much lower base. For example, we presently have only about 10% of the electrical capacity of neighboring Thailand and per capita income averages about 1/3 of other ASEAN members and only about 1/5 of Thailand.

Further, Myanmar had an estimated 4.4 million mobile telephone users in March 2013. With reform and the introduction of new telecom licenses from Telenor and Ooredoo, the number of users more than doubled in 2014 to an estimated18.1 million active users by the end of March 2015. Penetration, however, still remains far lower than neighboring countries and additional growth is expected moving forward.

Other sectors offer similar potential and a wide range of opportunities as we catch up and infrastructure, capacity, and industry develops, and consumption and other indicators rise, to a level in accordance with our underlying fundamentals. In short, we are a newly emerging market, with a young population - seventy percent of which are within the work force. Most importantly our country is changing from a centralized to a more open market economy and there is substantial growth ahead for decades to come.

Source: DICA

DICA/MIC is the primary interface for foreign companies and investors seeking to establish a presence in Myanmar. Can you tell us about these institutions and how they operate?

Our office is directly concerned with foreign investment as well as company registration and administration. On the investment side we are the secretariat of MIC, which oversees foreign investment and we are also the investment promotion agency of Myanmar. We manage foreign company registrations and facilitate the entry of foreign companies, so in a sense we are the window for business entry.

Foreign companies seeking to invest in Myanmar basically have three options. The first is to submit a proposal to MIC in accordance with the Investment Law that is overseen by our agency. Once a company is approved they can access a number of special tax and non-tax incentives as well as protections. These include a five-year tax holiday and an ability to obtain property leases for up to fifty years with two consecutive ten-year extensions.

The second is for a company to base itself within a Special Economic Zone (SEZ). We have a special SEZ law and if you make an investment inside these SEZ's you deal directly with the management committee of the SEZ. In that case the company does not deal with MIC, but rather the SEZ itself.

Right now we have one SEZ, Thilawa, located right near Yangon. It is already operational and has many foreign tenants. The SEZ is managed by a Myanmar-Japan consortium. 51% is held by the Myanmar government and local business interests and 49% by Sumitomo, Mitsubishi and Marubeni. Steady progress has been seen and this company is expected to be one of the next companies listed on the newly launched Yangon Stock Exchange.

Two other SEZ's, both of which promise to provide deep-water ports, are now in development. One is in Dawei in southern Myanmar, which will offer road and freight access to Thailand. The other is in Kyauphyu, located on the Indian Ocean. It will be developed by CITIC and offers enhanced connection with China.

The third option is to register directly with DICA. Once a company is approved they can start business. This is an easier process though does not allow the enhanced benefits of applying through MIC or from within one of the planned SEZ's.

DICA meeting with Asian Development Bank - Source: DICA

The search for foreign direct investment (FDI) and presence of a wide range of foreign companies is new for Myanmar. How is it going? What problems have you faced and what progress have you achieved over the past few years?

When I was appointed Deputy Director General in 2011 there were many restrictions and bottlenecks. Until that time FDI policy was limited to very few areas and not really encouraged. Investment was only permitted in a few sectors, such as manufacturing and tourism. All others that were not specifically indicated were not allowed. At the time you needed to invest US$500,000 in a manufacturing operation, otherwise it was not allowed. The procedures were also very complicated and not clearly defined.

As now, MIC was the primary interface, but we were not able to take action on new investments without approval from a state-appointed Trade Council and the Cabinet. Without their approval new investments were not permitted. This was quite cumbersome and even investments that were allowed took about a year or more for permit approvals.

In 2012, however, we passed a new law. Rather than prohibiting investment in all sectors that were not indicated as allowable, we opened our economy, permitting investment in all sectors other than a few that were specifically restricted or made subject to special conditions.

We also abolished other restrictions and moved to streamline and simplify procedures and the overall FDI process. The Trade Council was abolished and MIC empowered so it is now able to make decisions without the need for additional approvals. This made everything much easier and we can now work far more simply with investors and companies seeking to enter Myanmar. Over time we are continually seeking ways to make it easier for foreign companies to enter Myanmar.

There were also two major bottlenecks that were removed. Under the old law if a foreign investor wanted to lease land, it could only do so from the government - no leasing of private land was allowed. This was a major problem. Aside from limiting the ability of investors to choose optimal locations, almost all land in industrial zones is privately owned. This made locating in these facilities very difficult. In 2011 this restriction was eliminated.

Second, under the 1988 law all foreign exchange brought into Myanmar had to be calculated at the official exchange rate. Officially this was about 6 kyats to US$1 and in the unofficial market it was up to 700+. In 2011 the official fixed rate was removed for investors and in 2012 for everyone. There is now only one rate, which floats under conditions managed by our Central Bank.

The results speak for themselves. In FY2011 total FDI was about US$300 million, aside from one additional large US$4.3 billion investment in the Chibwe Hydropower Project from China. Investment was mostly in the manufacturing sector. After the changes were made in FY2012, FDI amounted to US$1.4 billion. In FY2013 we saw an addition US$4.107 of inflows. This almost doubled again to US$8.01 billion in FY 2014 and in FY2015 US$9.4 billion was permitted.

Yangon street market and Junction Square Shopping Center
Source: KWR International

Our firm has worked for many Asian government and corporate clients and it is difficult to attract interest from investors who have a whole world to choose from. Myanmar, however, has been attracting substantial interest, though it has proven difficult for foreign companies to finalize transactions and to establish a presence. What are the main obstacles? What can be done to support the efforts of those seeking to enter this market?

Labor costs in Myanmar are low compared to our neighbors, but our infrastructure is not well developed. Since we do not have adequate port facilities, electric power and roads, we cannot make the guarantees needed to provide foreign investors with necessary access. This creates obstacles and is a real challenge.

Skilled labor is also a problem. We have many workers. They are eager and have a high aptitude, but lack necessary skills and you need to train them. Even in areas where there are workers with necessary skills, our ability to provide some of the certifications needed by companies and developers is limited. There is also weakness in our legal framework. This is improving rapidly but it will take time, both to draft necessary laws and guidelines, and to see how these new laws and regulations will be enacted and enforced over time.

That said, there are many initiatives now in process, which will improve Myanmar's business environment and the ease of market entry and operating here. Several good-sized electrification projects backed by foreign investment and developers have now been approved, with power purchase agreements (PPA) negotiated and finalized. This was a major barrier in the past. These projects offer models for future public-private partnership and the improved power access that will allow greater residential, commercial and industrial connectivity moving forward.

There are also initiatives to develop two deep-sea ports in Dawei and Kyauphyu. Presently freight is shipped into Yangon, which is a river port. This facility is now being expanded and we will have to rely on this until these deep-sea ports become operational. That will reduce transit times and logistical costs. This will take time, but as seen in the steady growth of FDI inflows over the past few years, we are making continual progress. With the successful transfer of power to a new government, there is every reason to believe we will see even more rapid improvement moving forward.

Opening of DICA Regional Office in Dawei near SEZ - Source: DICA

Myanmar ranks low on many international listings including those that pertain to "difficulties of doing business". Many talk of corruption, though in my view the problem is more one of inexperience in international business practices and what is needed to create and finance bankable projects. There is also a need to move beyond the family business structure that exists even in many large Myanmar companies to one in which the rights of shareholders, management and other stakeholders are better differentiated. What are your thoughts and what needs to be done in this regard?

Myanmar ranked 181 of 189 in the 2014 WB annual report on "Ease of Doing Business" and now two years later in 2016 we are ranked 167. We still have a long way to go - but there clearly has been major improvement over the last three years.

That said, there are many things we need to improve further. It is true most businesses in Myanmar, even larger, leading companies are family businesses and corporate governance is not well established in terms of international standards. Our Companies Act was enacted in 1914 and some of the provisions are obviously outdated. They must be revised to reflect developments over the last hundred years. Extensive changes and revisions have been included a new draft law that is now being reviewed. It will hopefully be approved at the same time as the Investment Law.

We were also quite isolated for many decades and did not have much contact with the outside world. The doors are now open and while many of our businesses are eager to engage with international companies and investors, they are not adequately prepared or sufficiently knowledgeable about how to pursue this activity. Compounded with constraints in the Company Act, this is creating obstacles that restrict our ability to realize some of the interest we are seeing from foreign companies and investors.

For example, right now companies owned by Myanmar citizens are treated differently than those owned by foreigners. Even if one share of a company is owned by a foreigner it is treated as a foreign enterprise according to the existing Myanmar Companies Act. Therefore, even companies that want to enter into equity agreements with foreigners are reluctant to do so as they do not wish to lose their status as Myanmar-owned enterprises. For this reason we are revising the Companies Law. If approved, foreigners will be allowed to own up to 35% of a company and it will still be treated as a Myanmar enterprise.

Construction project in Myanmar - Source: DICA

When the last government came to power there was a desire to shift from oil/gas and mining which enriched a few, toward agriculture, manufacturing and other industries that could better serve as drivers of employment and broader income distribution. They quickly found this was difficult given lack of adequate electricity and infrastructure and the reluctance of outside investors to allocate the capital and resources required. For this reason they found themselves still dependent on companies in extractive industries. What lessons can be learned from this experience, particularly as the NLD is also seeking to focus on agriculture and other employment-intensive industries?

Yes, you are right - we tried our best to move beyond extractive industries in our efforts. In some ways it went well - before 2011 hydropower was the top foreign investment, followed by oil/gas and mining. In 2015 oil/gas was still ranked first, followed by hydropower, though now manufacturing is three, telecom four, real estate five and mining six. This shows there was progress but it is not enough.

In 2012 MIC was asked to promote manufacturing, particularly in labor-intensive industries. This included apparel; electronics, shoes, infrastructure and agriculture, and this became our emphasis. We tried and had some success in telecom, electric power and ports and roads. Agriculture, however, proved a challenge. What we learned in terms of agriculture is that we must first adopt a good land policy. Otherwise it will be difficult to address the needs of those operating in the agriculture/agribusiness sector. If this can be resolved, it will pave the way for increased entry of agricultural investors in, and outside, Myanmar.

Second, we must reduce the requirements for approvals from Ministries. Given overlapping jurisdictions, many projects require approvals from more than one Ministry. This can be extremely cumbersome. We must consider allowing easier access for foreigners so that they can plan and make investments. Right now, foreigners are not allowed to lease land for more than one year without MIC approval. If they must come to us each time, it takes time and resources. If there are clearer guidelines, then more activities can be done without the need for approval of each and every case on an individual basis.

PPP Task Force at Coordination Ministry of Economic Affairs, Ministry of Finance & Investment Coordination Board (BKPM) in Indonesia
Source: DICA

Developing large-scale infrastructure, Special Economic Zones, Industrial Parks and even smaller facilities requires large inflows of capital and establishment of PPP, PPA and other vehicles that allow cooperation between the public and private sectors. That has been a problem in Myanmar where projects tend to be more public or private and rarely converge. What are the obstacles to developing closer public-private cooperation and how can we resolve this moving forward?

As I mentioned, in Myanmar right now, each and every proposal must be screened individually by MIC, DICA or an SEZ and negotiations for PPP's and other investments are all customized and different. There is no standardized framework. Even in the same Ministries negotiations can differ dramatically between different projects. That is our experience over the past five years. We now understand we need a clearer framework and standardized guidelines so each discussion is not unique.

To help us develop good policies and a more efficient framework, we formed a taskforce with support from JICA, which I chair. It includes 18 officials from 14 ministries relevant to PPP development. The objective has been to formulate an operating framework and we are now at the final stage of the drafting process. Hopefully within one or two months we can submit our recommendations to the government. If it is acceptable this can then move forward.

Members of the taskforce include representatives of the Ministries of Construction, Transportation and Communication, Energy and Electric Power and Planning and Finance, as well as other important agencies important to PPP formation. If our framework is accepted, we will coordinate with these Ministries and other important entities to create a better environment for PPP development in Myanmar.

Opening of DICA Regional Office in Sagaing - Source: DICA

Most foreign companies and investors visit Yangon and Naypyitaw and in some cases Mandalay and Bagan and Inle if they are interested in a tourist experience. Myanmar, however, is a large country. Where should investors focus their attention outside Yangon and Mandalay what opportunities do you see on a local level

Myanmar is a large country and yes, there are many exciting opportunities within our States and Divisions and other areas of Myanmar outside Yangon and Mandalay.

Bago is adjacent to Yangon and has significant potential. A new airport is planned as well as many other projects. Shan State also has many opportunities given its abundant natural and physical resources, including strong potential for agribusiness, hydropower and tourism. This state also shares borders with China, Laos and Thailand and cross-border trade and other commercial activity will expand over time. Income in these areas is already higher than in other parts of Myanmar given its close proximity to these more affluent markets.

Ayeyerwady in Myanmar's delta region offers substantial land resources and is one of the best areas for agriculture. It has Myanmar's second largest population, access to the sea, a large workforce, as well as proximity to, and lower costs than, Yangon. Tanintharyi in the south is closely linked to Thailand and is the site of the planned Dawei SEZ. In addition to planned industrial expansion there is abundant tourism potential. The Kyauphyu area in Myanmar's west is the site of another planned SEZ as well as the existing oil/gas pipeline to China.

There are many additional opportunities in other regions as well. While infrastructure in some of these areas is a problem, there is also less competition. Additionally, depending on the size and scale of the investment, it may be possible to gain necessary approvals on the local level.

Korea-Myanmar Business Networking Meeting in Yangon - Source: DICA

We speak to many analysts and investors from the US, Europe, Japan, Korea, Thailand, China, Singapore, Australia and other markets about opportunities in Myanmar and almost all think they are behind the others. You probably speak to more investors with an interest in Myanmar than anyone else. What observations can you make on the range of investors who visit DICA and MIC and what lessons can be drawn?

There is a lot of interest coming from within East Asia compared to other regions, which continues to expand over time. This includes inquiries from Japan, Korea and China. We have also been receiving increased interest from Europe. Over the past five years, however, there has been less interest from western countries than we anticipated and we hope this will improve over time.

Much of the increased interest from Europe is based on political improvements within our country and we are now negotiating a bilateral investment protection agreement with the EU. My feeling is Europeans are not yet sufficiently confident and need this protection to build their confidence. This agreement will also provide benefits to us and increase our ability to trade and do business with this important market. The process is going well and once that agreement is completed, we believe we will see an increase in trade and investment between Europe and Myanmar.

Until now, there has been less interest from the US, though we believe once sanctions are full lifted we will also see an increase there as well. For now, however, most interest continues to come from ASEAN and other nations in East Asia.

One of the policies of our previous government, however, was to diversify our economic partners and investors involved here. I believe our new government will continue on that path and seek increased investment from Europe and the U.S. as well as other markets outside of Asia itself.

ASEAN Member Map Source: asean-community.au.edu

A new government has just assumed power in Myanmar and everyone is wondering how things will change. Many foreign analysts and investors are waiting until the situation evolves before moving forward with, or taking time to formulate or reformulate, their plans. Do you think this makes sense or do you think there is room for what we call "constructive engagement" at this time? What changes do you see as the transition takes place and what will they mean for foreign companies and investors?

I view the changing government as a very positive tool for the promotion of investment. It shows Myanmar is on the right track and that its political and economic transformation is progressing in a smooth and stable manner. It means our future will be brighter and my dream is that we will again become a leading country in ASEAN as we were in the 1950s and 1960s and we are trying to reposition ourselves in this way. I am truly optimistic and believe the recent election and transfer of power sends a clear signal to investors that they should have full confidence in our commitment to building a stable and open economy. This is true both in Myanmar as well as the emerging ASEAN Economic Community (AEC).

While every investor is different and must plan according to their own objectives and requirements, I would urge them to begin examining the changing conditions in Myanmar so they can benefit from the opportunities that are emerging, not only in our country, but within the wider ASEAN region as well.

Myanmar's effort to develop a clearer and enhanced legal framework, which guarantees investors better treatment, is well underway. We are also moving to negotiate relevant investment agreements and entering a new era with the advent of the AEC this year. This is a major opportunity for investors to enter the region and to utilize Myanmar's strategic location, lower cost structure, potential for growth, multiple borders and proximity to other nations within ASEAN as well as China and India. These factors offer compelling reasons to be here - and the stable transfer of power has begun to erode some of the political concerns that constrained companies in the past. We also have three SEZ's under development, which will be fully operational in a few years. Finally, we hope and expect to have better relations with the U.S. as the issue of sanctions is resolved and more U.S. firms and investors take a closer and more serious look at our market.

The US has a new Ambassador and we are seeing many investors beginning to take a new look at Myanmar and opportunities there. Do you have any thoughts or suggestions to US firms considering entry into Myanmar?

Seeing is believing - I urge U.S. companies and investors to come and talk and explore. Two years ago I came to the U.S. and most of the people I spoke to viewed our situation quite unattractively. They did not understand how our country is changing and the many trade and investment opportunities that are emerging.

We welcome U.S. interest and look forward to establishing deeper ties and a deeper "normalized" relationship with the United States, as outstanding issues such as sanctions are resolved. While these have constrained the ability of US firms and investors to take advantage of both our welcoming environment as well as the many opportunities that Myanmar offers, we believe this will change in coming years.

Director General Aung Naing Oo meeting with Keith Rabin of KWR International - Source: DICA

Thank you Director General Aung Naing Oo. As always it is a pleasure to talk and to hear your views. Look forward to meeting again soon.

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This interview is part of an ongoing series highlighting Asia-related business, trade and investment opportunities and issues.

Keith Rabin serves as President at New York-based KWR International, Inc. and Singapore-based KWR International (Asia) Pte Ltd, a business development and consulting firm specializing in the delivery of Asia-focused trade, business and investment development, research and public relations/public affairs and market entry services for a wide range of corporate and government clients.

For more information, please visit http://www.kwrintl.com

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KWR International Advisor

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Publisher: Keith W. Rabin, President

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