It is conventional wisdom that there might be a lot of value in teaming up with a local partner in an emerging market. That is true for Myanmar as well. Foreign enterprises are lining up to talk to the more established local enterprises in a variety of sectors, often even when partnerships with local companies are not legally required. Of course, not all joint venture (JV) negotiations result in success. Based on personal but extensive experience on the ground, here are six of the more common reasons why these deals might not work out. Obviously, as a law and tax advisory firm, we pay attention to the legal and tax reasons, but we also have an eye on the commercial circumstances that might derail a deal.
The Local Partners have Many Options
Everyone will, at some stage, need to enter the Myanmar market in one way or another. From nearly every perspective, the potential market is too important to ignore. There is little debate about that. Today, even with a very large section of the foreign community still believing it is too early, the ones that do proceed far outnumber those larger local players who would make good prospective partners in any given industry sector. If you seek a local partner for a telecom consortium, for example, there are just a handful of experienced local companies. This was well demonstrated when the list of prequalified bidders was published on 11 April 2013.
On top of that, as OFAC’s list of Specially Designated Nationals (SDN) still lingers (for the moment), the pool of potential JV partners becomes even smaller. Not every foreign company actually falls within the purview of the remaining US sanctions, of course, but in our experience, there are few large investors willing to ignore the potential or perceived reputational risk anyway.
So, there is a funnel effect. The “prettiest girls at the prom” get more attention than they can handle. The completion time and the completion risk of a JV deal increases. For some local partners with small management teams and a single decision maker – which certainly does not apply to everyone – just finding the time to attend meetings and prepare documents is a challenge. More importantly, perhaps, local partners are more likely to keep playing the field, always keeping options open, reluctant to “go hard”.
Do We Even Need a Joint Venture?
Unless you do not have a choice, there will very often be a debate as to whether or not to go with a local partner. This is not an easy call. The implications are so wide-reaching that it is hardly possible to factor everything in. And advice to the company will be conflicting.
Let us take the telecom tender as a case in point. Throughout 2012, foreign telecoms were wondering whether it would be obligatory to have a local partner to carry out telecommunications services in Myanmar, and thus to get shortlisted. The Foreign Investment Law released in November 2012 did not give a clue. The highly anticipated Notification 1 of the Myanmar Investment Commission (MIC), released at the end of January 2013 did not place telecommunications on the list of restricted activities. Nevertheless, Yangon was abuzz with rumors and assertions that a local partner is not only recommended, but – as was advised by some lawyers, to our surprise – also legally required. When the Tender Rules were released on 21 February 2013, and again no mention was made of any requirement for a local partner, the idea that there was such a legal requirement slowly started to fade. Of course, by this time many of the consortia had already been formed, often in a cloud of legal uncertainty.
Having a local partner can of course be extremely helpful or even crucial to the success of a project. The point is that when parties are not sure about the legal context, JV deals become more difficult to close.
The Chicken and the Egg Syndrome
In the present stage of Myanmar’s regulatory framework there will be issues that will have to be resolved as you go along. Needless to say, such uncertainty puts pressure on a JV deal, particularly for a JV partner that is unfamiliar with how things work in Myanmar.
Some of the legislation is a bit outdated and it is too soon to find an established interpretation or practice in relation to many of the new laws. On top of that, some transactions, such as franchising, e-commerce or convertible loans, are relatively new here. Nevertheless, a great deal of the perceived uncertainty dissolves if you know the practices of the Ministries and the details of previous deals that have already been approved.
When the JV partners look at a proposed investment project in Myanmar, there are no public or easy answers to a lot of the questions involved, even though some of the questions are really fundamental. Until recently, for example, no one knew whether the government would license a foreign-invested JV to do distribution. Nor was there certainty whether full investment incentives in the MIC Permit for a services company would be given, or how many shares a local partner in onshore oil and gas exploration should minimally hold. None of these answers were found in the regulations or publications. We found out by trying.
But not everyone is fine with just going and trying. For the most part, investors want to know almost exactly what they will get before they ask for something. That is not how Myanmar works right now. Going to ask questions of the authorities is interesting, and the officials are always very helpful. But the answer to a general question by a foreign company that is, at best, on the fence as to whether or not to invest is almost always different from an actual investor with a proposal in hand creating jobs and bringing in capital.
So, there you have the chicken and the egg problem. The investor says “give me certainty and I will put in a proposal to invest”. The government, swamped by visits from would-be investors and determined to prioritize those who are the most serious, says “put in your proposal and I will resolve your issues”.
Breakneck Pace to Implement the Project?
Understandably, the government wants to see investment projects implemented sooner rather than later. As a result, one constant that we see over a wide range of sectors is the emphasis the government puts on speed of implementation. When applying for a license to generate power, the government will set strict deadlines for the start of operations. If you lease land to construct hotels, the government will make an ambitious start date of the works a key condition for the lease. There are examples of this in investment projects from telecommunications to construction of new airports. Even the Foreign Investment Rules provide tough consequences if the development phase of a project falls behind schedule for more than 50% of the planned time.
Foreign investors are faced with these tough deadlines, which may or may not be extended by the Government when it comes down to it, when the JV is being drafted. They realize that they might have to capitalize the project while there is a grave uncertainty whether those deadlines can be met. It is a tall order for most companies to sign a commitment that may trigger liabilities while knowing the implementation schedule is too ambitious.
Juggling too Many Balls in the Air
The completion risk of a JV deal increases considerably when the structure tries to take into account too many variables. Parties build in requirements from many different angles. Granted, there is a lot to navigate: foreign ownership restrictions, licensing requirements, and tax efficiency; prequalification requirements and expectations of the authorities; local partner sensitivities, capitalization and financing issues; perceptions of third party lenders and corporate governance; and the possibility of the re-introduction of sanctions and changes to the SDN list.
A common fundamental issue is whether to use a Myanmar entity as the JV company or to set up an offshore JV company, which will hold 100% of the Myanmar company that will undertake the business. There are pros and cons to each structure. For example, an offshore JV company can be set up quicker in a more legally developed jurisdiction, which is thus easier and more predictable. It is in that case also more logical that disputes are settled in a foreign (arbitration) forum. On the other hand, such structure might be more burdensome for a local partner from a foreign exchange regulation point of view. Plus, many issues will have to be subject to Myanmar law and regulators anyway. Finally, it might be politically more astute (or legally required for restricted sectors) to have a directly visible local partner.
One can have lengthy debates on these and other issues, and all this time there is still no deal.
Whose Project is This Anyway?
It is not uncommon in Myanmar that the business people of the parties end up quite a bit ahead of the legal team. This may be true for any red-hot emerging market. A foreign or a local party may represent that “we have this project” but upon closer investigation, the title may not be that secure. For example, instead of holding an actual interest in an oil and gas block, properly signed off by the Ministry of Energy, the party you are dealing with may just have a term sheet with the person that actually does hold that block right now. Or, a party you are talking to has indeed tentatively won a tender for government land but did not come up with the required land use fee, often a very high lump-sum amount.
There is nothing wrong with trying to make a deal out of either situation. But when a party feels that they have not been given the facts from the outset, the relationship will suffer.