BMI View: Although Myanmar has enjoyed unprecedented interest from overseas investors since early 2011, greenfield opportunities remain considerable for investors across the entire transport infrastructure spectrum. However, we believe that investors looking to realise the rewards offered by Myanmar's transport infrastructure sector are unlikely to have it plain sailing as pitfalls in the country's business environment could come home to roost. The clearest example of this has been the difficulties faced by the Dawei port and special economic zone (SEZ) project, one of the country's flagship infrastructure projects.
The liberalisation of Myanmar's political system in March 2011 has ignited investor interest in the country to heights not seen in decades. According to data from the UNCTAB, foreign direct investment (FDI) into Myanmar hit an all-time high of US$2.2bn in 2012, with most of the investment channelled into fixed assets such as power generation, oil and gas, and manufacturing (i.e. industrial buildings).
|Surging Capital Investment|
|Myanmar - Yearly FDI Inflows, US$mn|
Considerable Opportunities Abound
Even though FDI into Myanmar was a record-high in 2012, this level of FDI is still relatively modest by global standards and the country continues to present considerable greenfield opportunities, particularly in the area of transport infrastructure. According to the World Bank Logistics Performance index, the quality of Myanmar's trade and transport related infrastructure remains one of the poorest in Asia despite improvements in recent years. Indeed, progress to improve transport infrastructure in the country has been mixed since 2011. While we have seen a number of cross-border road projects start construction works, projects in other transport infrastructure sectors have yet to start construction (i.e. ports and airports) or have been few and far between (i.e. railways).
|Still Much To Improve|
|Asia - Logistics Performance Index, Infrastructure Indicator, Scores out of Five|
We continue to believe that some of the most financially viable transport projects in Myanmar are those aimed at improving the country's links with its chief trading partners - i.e. China, India, Thailand . This is because they are most likely to benefit from a boom in Myanmar's economy - we are forecasting real GDP growth in Myanmar to average 7.2% per annum until the end of this decade. Apart from cross-border links, transport projects to key resource nodes could also be financially viable over the near term. The country's large endowments of mineral deposits are still largely untapped and cost inflation in traditional mining markets is increasing the appeal of frontier mining markets ( see 'Promising Play For Miners Despite Pitfalls', July 10 2013 ).
|Trade With Neighbours Dominates|
|Myanmar - Export (LHS) and Import (RHS), % of Total, 2011|
Transport infrastructure projects that cater to the tourism sector could also be financially viable over the near term. The Myanmar government appears to be focusing on the tourism sector as a key driver of economic development. This is evidenced by the recent creation of a comprehensive plan for tourism with the Asian Development Bank, the launch of the PPP contract for the Han thawaddy International Airport ( the largest infrastructure project to be awarded in two years ) , and the country's target of reaching 7.5mn tourist arrivals by 2020 (a 700% increase from current levels ). Indeed, Myanmar's tourism sector is already experiencing a boom as it benefits from the rise in purchasing power among Asian consumers. According to Myanmar's Ministry of Hotels & Tourism, tourist arrivals into Myanmar grew by 30% to reach a record-high of 1mn tourists in 2012 and are expected to reach 1.8mn by the end of 2013.
|Creating Transport Opportunities|
|Myammar - Tourist Arrivals, By Type|
Dawei Highlighting Pitfalls
However, we believe that investors looking to realise the rewards offered by Myanmar's transport infrastructure sector are unlikely to have it plain sailing as pitfalls in the country's business environment could come home to roost. The clearest example of this has been the Dawei port and special economic zone (SEZ) project, once seen as the poster child project of Myanmar's infrastructure sector.
Awarded to Thailand construction major Italian Thai Development (ITD) in November 2010 under a public-private partnership (PPP) framework, the project was one of the first large-scale infrastructure projects announced in Myanmar, with its first phase initially valued at US$8.5bn. The Dawei project was meant to be a heavy-industry hub that would serve as an alternative gateway for nearby regions to transport their goods to the West, allowing them to bypass the congested Malacca Straits completely.
|Initial Projects Planned For Dawei||Value, US$bn||Status|
|Source: BMI Key Projects Database, Dawei Development, Bangkok Post, National Economic and Social Development Board|
|Deep-sea port (southern part)||1.5||At planning stage|
|Four-lane road link (Dawei-Ban Phu Nam Ron border checkpoint)||1.2||Under construction|
|Telecommunications network||0.2||At planning stage|
|Reservoirs||0.5||At planning stage|
|Industrial estates||0.7||At planning stage|
|Gas-fired power plants (include an initial 33MW plant and a 180MW cogeneration plant)||1.1||At planning stage|
|Motorway (Bang Yai district-Kanchanaburi province)||1.5||At planning stage|
|Motorway (Kanchanaburi-Ban Phu Nam Ron border checkpoint)||0.3||At planning stage|
|Double-track railway link (Dawei-Ban Phu Nam Ron border checkpoint-Map Ta Phut)||2.9||At planning stage|
|280MW LNG terminal||na||At planning stage|
This has not transpired as the project has suffered numerous setbacks with only the road link to the Thai border at an advanced stage of construction. In our opinion, investors could learn a lot from the Dawei project as the project illustrated two of the pitfalls highlighted in our previous special report on Myanmar ( see 'Myanmar Awakens: Unearthing Asia's Hidden Gem', March 19 2012 ).
Burden Of Risks Fully On Investors
We had cautioned that the Myanmar government lacks the funds to finance its infrastructure needs - we estimate that Myanmar's foreign reserves in 2012 were about 8% of GDP for the year. As such, most of the infrastructure projects on offer would be financed by official development assistance (ODA) loans or awarded under a PPP model. This means that companies awarded PPP projects in Myanmar would have to bear all of the risks.
The impact of this threat is very apparent in the Dawei project. Not only did ITD fail to secure almost all of the financing for the first phase of the project, the company also did not receive direct support from the Thai government for the project until around mid-2012. Although the Thai government has since signed an agreement with the Myanmar government to drive the Dawei project, the question of financing remains unresolved as the fiscally-tight Thai government remains hesitant in committing funds to the project.
As we expect Myanmar to remain one of the countries in South East Asia least able to finance its infrastructure plans at the end of this decade, we believe that the Myanmar government will have to remain reliant on overseas financing to develop its infrastructure. In addition, even though the government had initiated major reform steps in the banking system in April 2012, Myanmar's banking sector remains highly undeveloped, making it difficult to unlock private sector financing for infrast ructure development.
Given this investment climate, companies which are able to provide expertise and financing from their domestic governments and banks will be in pole position to secure infrastructure contracts in Myanmar. Chinese companies in the past have been highly successfully in using this approach to snap up infrastructure contracts in Myanmar and we expect other companies, particularly from Japan, to follow suit. Since 2012, the Japanese government has been taking steps to reestablish relationships with Myanmar, forgoing previous unpaid debts and offering new loans for new projects such as the Thilawa port and SEZ project.
|Dawei Yet To Take Off|
|Myanmar - Location Of Key Maritime Hub Projects|
Highly Centralised Government
The second challenge w e had highlighted was that Myanmar's system of governance remains highly authoritative despite a move to a civilian government, with the reins of power mainly held by the 11-member National Defence and Security Council (NDSC), led by President Thein Sein. The NDSC takes a hands-on approach in awarding and reviewing infrastructure projects, which is an upside and downside risk for investors. While robust government support could lead to a swift resolution in critical milestones for an infrastructure project (e.g. land acquisition, environmental and regulatory clearances), there is almost little or no legal recourse for companies should the government choose to remove its support and stonewall the project
This threat was also evident in the Dawei project. While we saw ITD make significant progress with the project in 2011, the project begun to stall after the Myanmar government decided to make changes to the project. These changes included arbitrarily suspending the coal-fired power project at the SEZ without consulting the private companies involved and suggesting a reduction in the land area of the SEZ. Progress for the Dawei project also stalled after the Myanmar government started to show greater interest in developing the Thilawa project - which has strong Japanese support and is located much closer to the Myanmar heartland - than the Dawei project.
We believe that the Myanmar government will continue to be the main factor in the success of any infrastructure project over the coming years. Even though the country launched a new Foreign Investment Law (FIL) in November 2012, the final consent to approve or deny any new investment continues to be held by the government. Under the FIL, foreign ownership caps as well as investment minimums are now decided between business partners, but investment approval will be the domain of the Myanmar Investment Commission, a relatively opaque committee of 16 gov ernment appointed individuals.
Given that the life-cycle of a typical PPP project spans decades, this reliance on the government for approval will be a major downside risk to project viability as a change in political leadership could lead to drastic change in policy towards infrastructure development. We highlight that fault lines between factions within the ruling Union Solidarity and Development Party are emerging and a substantial falling out between these separate factions could pose a threat to Myanmar's political stability. In addition, the outcome of the general elections in 2015 is cloudy as it remains to be seen whether these are conducted in a free and fair manner ( see 'Three Risks That Could Derail Political Reforms', July 16 2013 ).
Institutions And Planning
There are also other deficiencies in Myanmar's business environment that are still unaddressed by the FIL. Institutional capacity (i.e. legal framework, administrative resources) within the country remains very low, resulting in project delays and lengthy disputes. This is because without sufficient institutional capacity, the bureaucracy would not be able to carry out pre-construction activities (e.g. documentation, spatial planning, feasibility studies, public consultation, permit issuance, land acquisition) in a timely manner or to a level of detail desired by all of the project stakeholders (i.e. local residents, project developers and financers).
|Lacking In Institutions|
|Myanmar - BMI Business Environment Rankings, Institutions Indicator, Scores Out Of 100|
The lack of institutional capacity also means that legal protection for foreign companies and investors is almost non-existent as regulatory standards are not established or in a state of flux. For example, Myanmar is set to launch new environmental standards in 2013, with these new environmental controls set to retroactively affect all past projects, incurring additional costs for their concessionaires. There were previously no concrete environmental controls, and companies conducted environmental impact assessments for projects in Myanmar in accordance with requirements from their home country which may not conform to the new standards set by Myanmar.
The Myanmar government is also missing a clear strategy for infrastructure development. Other than a master plan for tourism-related infrastructure, we have yet to see a well-defined strategy for infrastructure development across the entire country and across all sectors. This is a pertinent risk to project execution as a lack of proper planning often leads to a lack of coordination amongst government agencies, ministries, and sub-sovereign governments. In such an environment, companies would typically face significant red tape as they would need to secure a multitude of permits and approvals from different administrative bodies for a single project, substantially increasing the time and costs taken for infrastructure projects to be completed.
|Myanmar: Infrastructure Targets Under Tourism Master Plan 2013-2020|
|Source: Ministry of Hotels & Tourism, Asian Development Bank, BMI|
|Expanding airports in Mandalay and Nay Pyi Taw|
|Improve feeder roads to key locations such as Bagan, Inle, Kyaington and Ngapali|
|Expansion of MICE (meetings, incentives, conferences, exhibitions) facilities in Yangon, Mandalay, Bagan and Inle Lake|
|Bagan River Pier Improvements for locally operated cruise boats|
|Inle Lake sanitation improvements|
|Kyaikhto environmental improvements, including latrines, washrooms, small wastewater treatment facility|
|Ngapali Beach access improvements, including new road to Lontha Village and a rehabilitation of a road connecting Thandwe Airport and Ngapali Village.|
|Improved links between Pathein, Chaungtha and Ngwesaung with Yangon|
Not All Negative
We do highlight that one aspect of Myanmar's business environment has improved, and that is with regards to land rights. The FIL provides clarity on the leasing of land owned by qualified private owners, a subject that was not explicitly detailed in the 1988 law. Under the auspices of the new FIL, foreign investors may lease land from the government or authorised private owners for up to 50 years (up from 30 years previously), with two 10 year extensions also available. Although the state remains the ultimate owner of all land, there is now a legal basi s to secure land for projects.
Having said that, the widespread lack of proper ownership documents could still make it challenging for foreign companies to safely acquire land and for local owners to secure their rights. Indeed, we highlight that land disputes, especially in rural areas, have intensified in the past couple of years as many state authorities are in legal battles with local landowners over the utilisation of land for new investment.
Domestic Partnerships The Best Way Forward
We have long advocated for foreign investors to form domestic partnerships as a means of mitigating the deficiencies in Myanmar's business environment. Since 2010, the Myanmar government has been privatising state companies and divesting state infrastructure assets such as ports and airports to domestic private companies. Most of these companies and assets have ended up in the hands of businessmen with close ties to the regime, and they could have sufficient influence to navigate potential bureaucratic bottlenecks and resolve potential disputes with the government. The inclusion of a domestic partner could also reduce the potential for nationalistic threats against the project awardees, a common occurrence in South East Asian markets. At present, we have already seen some foreign companies take heed of this advice, as evidenced by the number of domestic partners within the consortiums prequalified to bid for airport concessions in Myanmar.
|Prequalified Consortiums For Hanthawaddy International Airport Project||Myanmar Partner|
|NA = Not Available. Source: BMI, Department of Civil Aviation, Ministry of Transport|
|Gamuda-China Railway Group JV||NA|
|Bouygues Batiment International||First Myanmar Investment|
|Incheon Airport Consortium||NA|
|Prequalified Consortiums For Mandalay International Airport Project|
|Mitsubishi-Jalux in association with SPA||SPA Project Management|
|Munich Urban Forntier Aung Myanmar Essar||Aung Myanmar Technology Company|
|ITNL International||Htoo Construction Group|
|China Harbour Engineering||Asia World|
|AVIC International Holdings Corporation||Shwe Than Lwin|
|VINCI Airport||Shwe Taung Development|
|Bouygues Batiment International||First Myanmar Investment|
|Prequalified Consortiums For Yangon International Airport Project|
|Invest Import AD||Shwe Taung Development|
|Toyota Tsusho Corporation||Aung Thaung|
|Vinci Airport||Shwe Taung Development|
|ITNL International||Htoo Construction Development Group|
|ACO Investment Group||Myint Mo Oo General Services|
|Incheon Airport Consortium||AI Construction|
|Okkar Thiri||Okkar Thiri|
|Pioneer Aerodrome Services||Pioneer Aerodrome Services|
|Sojitz Corporation||Five Oceans Company|
|Bouygues Batiment-First Pacific-Yoma-FMI||First Myanmar Investment|
|Yongnam-CAPE-JGC Consortium||Pac Link Trading|