Foreign Investors Face Myanmar Gamble

Over the past 12 months Myanmar has received over US$3.6 billion of foreign direct investment, an increase of nearly 300 percent, according to government figures released in February. Despite this encouraging news, enormous barriers to future investment remain, and if reforms are not quickly enacted, foreign capital may take flight as quickly as it has arrived.

After decades of isolation and under-investment, new FDI flows from across the globe are nurturing industrial modernization in Myanmar. Of the US$3.6 billion invested last year, around 50 percent was directed into manufacturing enterprises such as garment making, automobile assembly and food processing factories. These investments in manufacturing are particularly welcome because they offer numerous employment opportunities, have high export potential and create positive spillovers into other sectors of the economy.

While China and Thailand remain the dominant sources of foreign investment, new contributions from Qatar, South Korea, Norway and many other countries have driven the recent growth.

The sustainability of such high rates of foreign investment, however, is far from assured. A large component of last year’s FDI resulted from the belated arrival of global brands such as Unilever, Coca Cola and Visa, amongst many others, and the front-loaded investment of Telenor and Ooredoo in the recently liberalized telecommunications sector. These streams can be expected to fall away quickly in the next two to three years and a second wave of FDI will need to follow.

Based upon anecdotal reports coming out of Yangon, this may take some serious salesmanship. New entrants are encountering unexpected hurdles in many aspects of their business operations, tempering the appetite for future expansion and sending mixed messages to potential investors back home.

So what are the major impediments to doing business in Myanmar?

Unsurprisingly, weak infrastructure is the problem most commonly cited by foreign managers. The crumbling highway network, inefficient rail connections and poorly maintained port facilities are causing lengthy delays and inflating transport costs. Limited phone coverage, painfully slow internet and inner-city congestion complicates communication and plant monitoring.

The electrical grid, after decades of neglect and under-investment, is unable to handle growing demand. Not only is 70 per cent of the population without power, but those with access face the perennial threat of blackouts. For foreign investors, particularly those involved in manufacturing, nothing is more essential than a cheap and reliable electricity supply.

The second major issue is corruption, which not only pervades the upper echelons of government but is also ubiquitous at the township level. Basic administrative tasks such as negotiating rental leases, registering vehicles and many other low-level interactions with the bureaucracy require considerable sums of ‘tea money’ (otherwise known as bribes). Such practices inflate costs and reduce opportunities for foreign firms, and remain an insurmountable barrier for more scrupulous corporations who resist the use of bribery in their day-to-day operations.

A less-reported issue is the severe shortage of skilled labor. Myanmar’s poorly performing education system has failed to produce the number of engineers, welders, carpenters and other tradespeople required by foreign firms. The skills shortage is particularly acute in the oil and gas industry, where English proficiency is often required. In many instances skilled workers have been brought in from host countries, sourced from neighboring provinces or headhunted from rival firms, all of which are costly and inconvenient.

The final barrier to foreign investment is Myanmar’s ineffective system of dispute resolution. Although the 2012 Foreign Investment Law addressed a great number of legal uncertainties, the process of contract enforcement and dispute resolution needs urgent reform. According to the World Bank, legal disputes take an average of 1160 days to resolve — in this respect, Myanmar ranks 188th out of 189 countries — and require 50 percent more administrative procedures than the OECD average.

While legal systems in the developing world are generally more complicated than those of advanced countries, in comparison to economies of similar sophistication, contractual agreements in Myanmar are harder to enforce and intellectual property enjoys less protection.

Myanmar’s huge investment potential has many costly caveats. If the current rates of FDI are to be maintained, business needs will require more careful consideration from policymakers when setting their reform priorities. And if these issues remain unaddressed, Myanmar could once again be left with only Chinese investors for company.

Josh Wood was a Visiting Research Fellow at the Myanmar Development Research Institute’s Centre for Economic and Social Development (MDRI-CESD) and is a postgraduate student at the ANU.This is reprinted from the East Asia Forum.