Buyer Beware: Burma's Investor Graveyard

Resource-rich Burma is looming as one of the world’s final investment frontiers for Western companies battling a prolonged downturn in the EU and feeble growth in the US.

Subject to Western sanctions for decades but possessing a population of nearly 60 million, as well as abundant reserves of natural gas and other natural resources, Burma, also represents one of Asia’s last untapped paradises for potential investors. It can also represent one of Asia's biggest traps.

Visit the sleepy Myanmar International Terminal Thilawa (MITT) complex in Kyauktan township outside Yangon and you might just find a cement bagging factory bearing the logo of French company LaFarge. Opened in 1997 by then-Prime Minister Khin Nyunt -- who was released from house arrest only last week after falling out with other members of the junta -- the plant never filled a single bag of cement. Today the gate is locked and overgrown with weeds and the guard’s hut has been vacant for a long time.

Malaysian billionaire Robert Kwok likewise invested heavily in the 1990s through his Shangri-La group. The company’s Traders Hotel has benefited from the recent influx of business and leisure travellers but other ventures, such as the seemingly abandoned condominium towers at the edge of Kandawgyi Lake and his port at MITT, have not fared so well.

More recently, Burma’s newly installed, notionally democratic government led by President Thein Sein has exhibited a populist streak absent under the former military leaders, and axing unpopular projects regardless of their size or cost.

In September last year Thein Sein suspended the widely unpopular Myitsone dam project in Kachin State, which had an estimated price tag above US$20 billion and was being developed by China Yunnan Power Investment to ship 80 percent of the power to China.

Then, just a fortnight ago the government announced that Italian-Thai Development, which is building a $58 billion deep-sea port, special economic zone and 4000-megawatt powerplant in Myanmar’s southeastern town of Dawei in Tanintharyi Region, via the media, that it could no longer use coal to fuel the power plant.

U Khin Maung Soe, Minister of Electric Power 2, told journalists on Jan. 9 at the Yangon Electricity Supply Board headquarters in Ahlone township that the ministries of energy, industry and electric power 1 and 2 had decided to stop the plant going ahead.

He cited “fear of the adverse effects on the environment” as the reason for the cancellation.

Ital-Thai is cooperating with Ratchaburi Electricity Generating Holdings to develop the plant and Ratchaburi president Noppol Milinthanggoon told Bangkok Post on Jan. 11 that his company had not received an official notice from the government.

"It needs to be verified thoroughly before making any comment," he said, adding that it would be better to let Italian-Thai Development speak because that company holds 25 percent of the proposed power project.

But Somchet Thinaphong, the managing director of Dawei Development Co, the company established by Ital-Thai to oversee the Dawei project, said: “If they don't want coal-fired power plants, we have to look for other fuel sources. It could be natural gas, and we'd need to discuss how to supply that."

The highly publicized case of Australian newspaper publisher Ross Dunkley, spectacularly captured in the documentary movie “Dancing With Dictators,” ought to make any foreign investor pause and reconsider.

Dunkley was arrested and jailed on charges stemming from an alleged incident with a prostitute, who claimed the colourful Australian had beaten her, fed her illicit drugs and detained her against her will.

Despite her later efforts to have the charges withdrawn, Dunkley spent 47 days in jail.

Just months before the incident Dunkley received a letter from Minister for Information Kyaw Hsan demanding that he hand over control of the Myanmar Times newspaper to his Burmese partner, Dr Tin Tun Oo, who holds 51 percent of Myanmar Consolidated Media, publisher of The Myanmar Times.

Despite those cases, as Asia Sentinel detailed in a Jan. 10 article, over recent weeks a stampede of prospective investors has expressed interest in the country, including a Japanese delegation, the Templeton Emerging Market Group, Colliers International Thailand and others.

Myanmar "represents not only an export manufacturing base but a significant future domestic market as well," said associate director Antony Picon of Colliers. "This is a key component for even export-led manufacturers. It also ticks all the right boxes in tourism such as beaches, culture, temples and an aesthetic commercial centre in Yangon.

“Companies from all fields such as hospitality, manufacturing, medical services, banks and fund management are all interested. Myanmar will not be a niche market but a fully-fledged economy,” he added.

Dr Nicholas Farrelly, an Australian National University academic and moderator of the New Mandala website, said the damage to company image from investing in Burma was fading but hasn't disappeared.

“Boycott campaigns get less traction than ever before but there is still a sense in Australia, as elsewhere, that regressive moves by the government could still occur. That's the risk for Australian businesses. They don't want to get caught if the wind changes direction,” he said.

“Western democracies and their business elites want to see Myanmar move so far ahead that it can never go back,” he added.

But Myanmar has a rich history of backtracking on reforms and potential investors would do well to consider both recent events and those that occurred as the Asian Financial Crisis swept the region in 1997.

Since it opened up to foreign investment in 1988 following Ne Win’s disastrous socialist economic policy, known as the Burmese Way to Socialism, Burma has been a graveyard for many an unwary foreign investor.

That said, removal of sanctions obviously opens the field for investment dramatically, and importantly it changes their nature. Previously, it was necessary to do business with members of the junta on a large-ticket basis. As in Indonesia and China, to name two, it is necessary to take a local partner, preferably one with guanxi. It is difficult to say who the new parties will be, although many of the groups that have been at the trough through the decades are a potential serious liability to foreign partners, because any investigation of previous recent deals won't be pretty.

Investors should be looking for new "cleaner" players. Steven Law, the old buddy of Asia World fame and others are seen by some influential new groups and by new blood in the cabinet as having done quite well enough in the past and it's time to lessen government reliance on them.

It will remain very difficult to do business, however. The entire economy and governance need to be rebooted, which will take time although removal of the sanctions broadens everyone's opportunity and is a critical first step in the process. It must be noted that, importantly press freedom is evolving quite rapidly as is internet access and usage, which can be expected to raise the level of scrutiny on every major project and deal, which should represent a new playing field.

Potential investors are clearly aware of the risks of doing business. Douglas Clayton, chief executive of Leopard Capital, a private equity investor in frontier markets, told the BBC on January 5 that the greatest fear for investors is that the recent political reforms could be reversed.

“Perhaps the most feared risk is a rollback of the entire liberalisation agenda, should impatient democracy advocates or separatist insurgents provoke globally-unacceptable military crackdowns," Clayton said. “It is easy to imagine that hardliners lurk within Burma's military who would like to derail the ambitious democratization and economic liberalisation process.”

And those who expect US sanctions to be removed in the short term are likely to be disappointed.

James M Roberts, lead expert in economic freedom and growth at the Heritage Foundation, a conservative US think tank, said: “Lifting the sanctions is a long, very involved political process here, closely tied to meaningful systemic political reform in Burma.”