September 15, 2012
By Mark Wallace
As we were charging down the road to Nay Pyi Taw, Myanmar’s administrative capital in our imported luxury coach, wrapped curiously with Manchester United’s logo and team colors (odd…as foot ball is not a major sport in Myanmar), our very engaging host got on the crackly microphone to tell us a bit about Myanmar.
He rattled off a few basic facts about Yangon as we were sitting in traffic on our way out of that city, and then proceeded to tell us that he had only been to Nay Pyi Taw a few times, and did not have much to share about our ultimate destination. His exact words were, “I have no idea what I am telling you.”
This proved to be the overall theme of the conference we attended this week, where over 800 people gathered in Myanmar’s administrative capital to listen to experts, including our highly-competent and dialed-in friends from Leopard Capital, discuss the reasons why they should invest in the country now.
In a nutshell, we really have no more clarity than we did before we arrived. Contradiction and uncertainty seemed to plague the event, and the confused looks and snickers from many in the audience were a clear indication that there needs to be a LOT more transparency as to how Myanmar is going to treat foreign investors.
The investor/presenters painted a much different picture of Myanmar – reality versus conjecture – than the ministers and officials. It’s not that we don’t believe what the government is saying, on the contrary, there are very clear indications that things are moving in a more positive direction. The challenge now is to balance the needs of foreign investors, the State and the local businessmen and citizens of the country.
To summarize what has been said in the media, and what I mentioned in my last post,Welcome to the Golden Land:
As of September 7th, Myanmar’s Parliament has passed amendments to the foreign investment law.
The $5M minimum capital requirement for foreign joint ventures was repealed.
Foreign ownership in 13 ‘restricted’ sectors was upped to 50%.
Removal of a clause allowing Myanmar citizens the right to ‘buy out’ their foreign partner at any time if they had the financial means to do so.
This is all fine and good, however it has yet to be ratified by President U Thein Sein, and many feel that further changes or modifications will be made.
The reality is that the law is still somewhat protectionist. For guys like us, who are interested in private equity, the ability to invest in small and medium size enterprises (SME’s) is limited. Investment in forestry and agriculture is limited as well, which are two sectors with some of the brightest prospects!
Furthermore, the 50/50 equity split is a bone of contention. We agree with many of the conference presenters and attendees, who feel that if a foreigner is bringing in the capital, the technology and the business expertise, while relying on the local partner only as a passive investor or advisor, how is that ownership structure fair?
Equal ownership also creates potential gridlock. With neither side having a majority, how are disputes going to be resolved?
We heard several speakers in a row get up and directly contradict what the previous speaker had just said. The government ministers insist that the law is flexible, it will be accommodating to foreign investors, and that we should all just have a bit of faith that Myanmar will welcome foreign capital and treat it fairly.
But, if we look closely at the law as it is written, we can see that foreign investors will NOT be treated equally. Chapter 13 of the Law contains a section that states the government “guarantees not to nationalise the businesses formed with permission…unless compensation is paid at the market price in the interests of the people.”
Furthermore, rules applying to businesses involved in cross-border transactions, and businesses located within 10 miles of the international border are a bit troubling. These enterprises will either need government approval or be dis-allowed altogether.
So, with a lack of clarity on issues like ownership percentage, what constitutes a ‘restricted’ sector, an inability to locate strategically or freely engage in cross-border transactions, combined wth the lack of a strong legal framework for enforcing contracts and resolving disputes, we feel that foreign capital will be sitting on the sidelines a while longer.
Speculation and further challenges will also hinder growth prospects.
Myanmar is in its economic infancy. The common challenges and impediments to its growth exist just as they do in all Frontier Markets. These include:
Unreliable grid power
Corruption and bureaucracy
Cash-based local banking system with little credit available
No trade financing
Strike customs and import/export rules
Rampant property speculation
Mr. Serge Pun, the Executive Chairman of Yoma Strategic Holdings (listed in Singapore – and an excellent way to participate passively in Myanmar) was by far the most engaging and dialed-in of all the speakers. His conclusion was that the country needs 1 million jobs and that the path to get there is simple…1,000 factories x 1,000 workers in each.
His estimation is that each of these jobs will impact at least 5 people, meaning a tangible benefit to 5 million of Myanmar’s 60 million citizens.
For those that think this is a large number, think about Myanmar’s northern neighbour, China. Southern China has literally tens of thousands of factories, all employing thousands of workers each. 1,000 x 1,000 is realistic.
It’s easy enough on paper Mr. Pun said, but in reality it’s extremely difficult because of the massive speculation and price increases that have already occurred in Myanmar’s property market. Land that was selling for 3 million Kyat per acre a few years ago is now selling for 450 million Kyat, which makes it virtually impossible for a business to buy land and build.
So, what’s our conclusion?
After spending yesterday evening commiserating with some new friends in a seedy, smoky KTV bar reminiscent of something out of…I don’t know what, we all agreed that Myanmar, despite the very obvious challenges, is STILL intriguing to us. The fact that it is very early days here was not lost on any of us, but we also recognized that we are all here for the same reason – we’re speculators and pioneers.
Chris has scoured through various opportunities here over the past few years. After marrying that research with the information we’ve gleaned at this conference, what is relatively clear to us is that one needs to be highly selective. When it comes to whom to listen to and sorting the wheat from the chafe, it’s often much more easily done by walking the streets, speaking with local entrepreneurs on the ground and actually kicking the tires as opposed to pontificating on “theory”.
Competing with hundreds of other investors lining up to throw large amounts of capital at manufacturing and extractive industries does not strike us as particularly appealing right now. That’s a bit of a bigger pond than we care to fish in.
Chris and I believe that due to the present uncertain legislative environment, skills shortage and the amount of capital chasing the opportunities I just described, smaller private equity-focused investors would be better served looking at the service industries, including: healthcare, education, travel and tourism.
In short, we can’t wait to get back to Yangon to take a closer look at some of the opportunities we’ve been made privy to, and in the interim we’re going to keep digging and creating the on-the-ground network that we’ll need to invest properly.
Have a great weekend!
“The only real prison is fear, and the only real freedom is freedom from fear.” – Aung San Suu Kyi
Photo Credit: Google Images