Quarterly Business Magazine

Bridging the Divide: Foreign Investment in Myanmar Companies

Posted :
Monday, February 8, 2016

The latest figures out of DICA indicate that the first three months of FY2015 have yielded over $2 billion in FDI, setting a pace that if maintained will result in a matching of last year’s record-setting FDI of over $8 billion. While most observers agree that last year’s total will ultimately be difficult to match due to general slowdowns stemming from the upcoming elections and last year’s anomalous ‘bump’ due to the approval of a raft of oil and gas projects, it can still be said that despite continuing political, economic and regulatory uncertainties, foreign invested projects will continue across the country.


Either by law or by mutual agreement, many of those projects will be implemented by companies with some mixture of local and foreign ownership. Such joint-Ventures, in theory, have the potential to be of great benefit to multiple stakeholders: local firms hungry for capital and expertise, foreign firms wishing to enter the market by leveraging local knowledge and connections, governments looking to spur both economic development and tax revenues, and consumers looking to purchase higher quality products. However at this point, three years after the passage of the landmark foreign Investment Law of 2012, it is time to focus on the challenges these companies have faced, and assess whether the hopes for these partnerships have been realized.


Joint-Ventures (“JVs”) are of course not the only way for a foreign entity to invest in a Myanmar company. Depending on how we choose to define a ‘Myanmar company’, a foreign firm can set up a branch or representative office, open a 100% foreign-owned Myanmar company, or acquire shares in a Myanmar company. However, Branch offices and 100% foreign-owned companies are not the focus of this article. The focus is on local and foreign firms partnering with each other, agreeing on various aspects of how the business will be structured and conducted, deciding what they will each contribute, and setting out their respective rights and obligations.


The number of acquisitions of shares in existing local companies by foreign investors are rather limited in number because of the complexity of such transactions, and the sever lack of public information on Myanmar company management, ownership, control, liabilities, and meaningful financial data needed for adequate due diligence. Mergers are as yet unheard of. There are an increasing number of private equity firms actively looking for dynamic, up and coming Myanmar companies in which to invest, though most of their actual investments at this time are in foreign firms operating here.


Regulatory Framework: The 2012 Foreign Investment Law

The Main driver of the formation of JVs is the 2012 Myanmar Foreign Investment Law, which stipulates four classes of economic activities which can only be conducted with MIC approval, on terms and conditions of approval which differ for each class. There are prohibited activities which are reserved only for Myanmar citizens, with no foreign participation at all permitted. At the other end of the spectrum are economic activities which allow 100% foreign investment. In between these two categories are activities, which are allowed in the form of Joint Venture between foreign, and Myanmar citizens, and activities which are only allowed in specific circumstances such as with a State-Owned Economic Enterprise. Specific economic activities falling under each category are spelled out in MIC Notification 49 (MIC49). MIC 49 is a ‘negative list’. That is, if a specific activity is not listed in MIC 49 as requiring approval, then in theory it is allowed, unless covered by a special law-such as a financial institution requiring special approval under the Financial Institutions Law. The development of this kind of regulation is widely viewed as a major milestone on Myanmar’s path to economic reform in general.


The International Finance Corporation, in cooperation with the Myanmar Government, has drafted a proposed new Investment Law that will seek to amalgamate the 2012 Foreign Investment Law and the Myanmar Citizens Investment Law. The public consultation period for the draft legislation was recently extended to encourage and accommodate more input from the Myanmar business community. However, given the rapidly dwindling time period before general elections in November, it is very unlikely that passage and enactment of the legislation by Parliament will take place before well into 2016, though to be sure, Myanmar is full of surprises. It is encouraging, however, that MIC officials have remarked in various fora that changes to MIC 49 regulation may be on the horizon, which would loosen restrictions on foreign investments in agriculture and pharmaceuticals, between which the latter seems less likely. For the time being, however, MIC 49 will remain the first point reference for foreign investors seeking to enter into Joint Ventures with Myanmar companies.


Are Myanmar and Foreign Companies Voluntarily Seeking Foreign Partners?

Numerous local sources insist that there is no shortage of Myanmar companies looking to partner with foreign firms, especially as concerns mount within Myanmar business circles over the coming ASEAN Economic Community (“AEC”). Myanmar firms are hungry for capital, and with credit still difficult to obtain and stock market’s arrival still in question, forming a JV with a foreign firm seems to be a common sense way to obtain such capital. In addition, there is a desire for foreign organizational and technological know-how that Myanmar firms believe will better enable them to compete with the expected influx of AAEC competition perhaps beginning as early as next year. At the same time, however, there is also widespread lack of understanding as to how foreign companies operate, and of what they will require of their potential local partners.


On the other hand, there are a number of foreign companies who are of the view that, even if the law does not require it, a local partner will allow them to leverage into local knowledge and networks. The letter may be even more important when it comes to obtaining concessions, licenses, and/or other government permissions. There can be distinct advantages to be gleaned as a locally-owned and appropriate ‘face’ to the company. So even if a Myanmar firm is working in a sector that is open to foreign competition, there is still significant potential for JV partnerships with foreign firms. But even given these opportunities, many insist that the number of such companies has been limited.


Choosing Your JV Partner – The Fundamental Element of Success or Failure

As a general matter, businessmen choose not to joint venture with existing businesses in their own countries, except in the case of a consortium for a specific project for a limited period of time, which requires a combination of diverse and very high level components. However, when they wish to enter and carry out business in another country they are often forced or find that they need to have a local firm as a joint venture party. In some cases, the choice of JV partner is dictated by the host country, and oftentimes that will be the Government or a State Owned Enterprise (“SOE”). Otherwise, the joint venture parties are both marking a major decision in their choice of partner.


The choice of a partner first requires consideration as to what the partner is expected to bring to the venture. Often this is not thought out thoroughly and the venture proceeds on bad assumptions and unrealistic expectations. The expectations need to be defined very clearly since the earliest possible stage of the process, and investigations need to be conducted in order to determine whether the other party is, in fact, capable of delivering what it promises. Sun Tzu, in The Art of War says “know your enemy” but it is more important to know your prospective partner and what your expectations are of each other in order to minimize the chances of your partner becoming your enemy.


For the Myanmar partner, how can they find out about the potential foreign partner? The best way is to use a qualified and reputable advisor who can procure that data outside of Myanmar, review all public information available on that party and conduct local investigations in the countries, in which they do business to get to know their reputation and behavior. Have they done any joint ventures with other people in other countries? Whom do they do business with? Speak to the other joint venture parties and people who do or did business with them and visit any joint venture facilities they may have. This is very important for Myanmar companies, especially those who do not have prior JV experience. It can be costly, but it is often better to do this and make an informed decision not to proceed with a JV, than to go ahead with the wrong foreign JV partner. The scope of due diligence available will depend upon the countries of activity of the foreign partner. In some of those countries there are strict laws that are enforced relating to registrations, licensing, financial conduct, compliance, and other reports that are freely available as public information. As a general matter, more developed and democratically governed countries are the most likely to provide required information for effective due diligence.


The same approach has to be taken by the foreign investor in seeking a partner in Myanmar. However, the ability to find a Myanmar partner’s relevant background information is very limited. The basic culture of business in Myanmar has historically been that of a family business run by the senior member of the family using the company as an extension of that person, doing what needs to be done to get government approvals and contracts, while seeking to minimize taxation and other forms of government levies. The audited accounts of such companies provide very little by way of assurance as to their real financial position. There is no significant public information available, and what is available cannot be relied upon as being current or accurate. This situation creates a tremendous challenge for a reputable and responsible foreign investor, who has to comply with the rules and regulations of the country in which it is regulated, to proceed with a mandated joint venture investment in Myanmar. Given that situation and the need to navigate the local environment, some foreign companies still seek to find a local partner. While this behavior still makes some sense, it does create another area of risk, as such a partner may not be controllable or capable of working within the required and agreed parameters. In some cases their very effectiveness in working the local system can, in turn, become a real problem for the foreign partner if they have an internal dispute – a veritable double-edged sword.


The moral of the story for each party to a joint venture discussion is that one should take one’s time, get to know one’s potential partner, their business, and their attitudes by extended discussion of the detailed terms upon which to proceed. They should both carry out the best due diligence they can, thoroughly analyze the risks, and based on their risk thresholds, proceed with maximum safeguards or withdraw from the discussion.


Obstacles and Challenges

Obstacles and challenges are many and extensively articulated in many other places, so we do not intend to get into detail in this area. However, everything has to be viewed in context. Myanmar is a country coming out of 50 or more years of isolation from the modern business world. It is starting from ground zero, as is confirmed by its extremely low ranking in the World Bank’s Ease of Doing Business Index. But given that start, the progress made by the country in such a period of time, is nothing less than remarkable. There is a real drive to catch up, and there are very capable, albeit small, group of dedicated people who are pushing this along on several fronts – political, economic, and social. But they are definitely overloaded and encumbered in several respects, including laws and the legal system, operation of the bureaucracy, human resources, land usage rights, financing, infrastructure, logistics, etc.


Mind-sets and ways of doing things in the old environment are firmly entrenched and will take a long time to develop. At the same time, Myanmar is getting advice and pressure left right and center from well-intended and well-funded governmental, semi-governmental, international, regional, and specially focused organizations, not to mention a plethora of NGOs-all with their own agendas and in too many cases, expecting an early Cinderella like transformation of Myanmar into an international ‘model country’ operating at the highest global standard. At the same time, local businesses and the larger population are naturally seeking to take full advantage of the early opportunities that abound and to get established as a bulwark against concerns of foreign domination. However, there is a growing new breed of local entrepreneurs who are quickly adapting to modern business and often having the same frustration with the systems as foreign investors-but with a better background to manage dealing with the system in the “local” manner.


Myanmar officials are trying to make a difference know all of this. They battle on at a furious pace 24 hours a day to deal with the thousand and one new daily issues which arise and need solutions, patiently listening to advice and direction from the international community as to what they should be doing.


Speaking in more specific terms, Myanmar’s commercial regulatory framework can be challenging, both with respect to foreign investment in general and the formation of quality Joint Ventures in particular. It is overly burdensome, unclear, inconsistent, and complex. What type of investment is allowed, what needs approval, and on what terms is often very nuclear and confusing, and what rules exist are not applied with consistency. It is hard to get consistent guidance and direction from officials as to what can or cannot be done, and what processes and supporting documents are required. Laws and regulations issued under those laws are obsolete, inadequate, and unclear; and there is no system for getting written clarification or rulings. There are un-written policies and practices, which by their very nature are applied inconsistently. There is no administrative recourse or appeal against civil servants not being responsive or misapplying whatever is in place.


Where it comes to the interpretation of the law, there is broadly expressed lack of confidence by Myanmar nationals in their ability to seek recourse through the courts, and if the local people have that view then the foreign investor should take note. As an alternative, international arbitration is often recommended as an alternative way of dispute resolution, but at this point in time that does not provide a real alternative as the procedures have to follow the local Arbitration Act which inextricably links them to the local court system. False comfort is taken by some foreign investors in the accession of Myanmar to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides for enforcement by Myanmar courts of foreign arbitral awards-for example, and award made in Singapore), but to date no Myanmar legislation has been passed to bind the Myanmar courts to implement such awards through the Myanmar judicial system.


Making the Connection

Besides self-education, both local and foreign firms need to access networks wherein they may connect with each other. The most obvious places to start for Myanmar firms are bodies such as the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), the Myanmar Young Entrepreneurs Association and the Myanmar Women Entrepreneurs Association. IN addition, various National Chambers of Commerce and business associations are increasingly active in Myanmar and are looking to develop their local networks sharing of practical experience and knowledge. Several organizations, both local and foreign, regularly host events geared toward SMEs at which many of the above topics are covered in more detail. As Myanmar’s economy continues to open, the number of such fora are likely to increase.


In closing, we would be remiss if we did not take highlight the fact that foreign firms stand to benefit from deeper understandings of how Myanmar as a country and Myanmar businesses operate. In fact, such a receptive attitude will, in many cases, be necessary for a foreign firm to survive and thrive in Myanmar. Foreign investors who have been here awhile commonly say that in Myanmar, it is all about relationships – and they take time and effort to develop. That is, in contrast to business partnerships in other contexts, those in Myanmar are never strictly utilitarian. What this means in practical terms in that a potential foreign investor can benefit substantially by having someone continuously on the ground who can provide and nurture such interactions and always be looking out for their interests. The challenge, of course, is that such considerations do not easily figure on an investors “balance sheet”, and while Myanmar may not be unique in this regard, it is fair to say that it is needed more here than most other places. In short, Myanmar is challenging, not only for one’s business acumen, but for one’s patience and persistence as well. However, facing up to just that challenge is, hopefully, among the investor’s motivations.

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