Investment, discretion and Burma’s future economic development

Investment, discretion and Burma’s future economic development

On 2 November, Thein Sein approved Burma’s new Foreign Investment Law (FIL), which was passed a day earlier by Parliament after nearly a year of debate and revision. The law is seen as one of the most important pieces of economic legislation passed since Parliament’s founding last year. Many leaders and the law’s drafters themselves hope the FIL will play a central role in development and employment creation by bringing a wave of foreign investment to Burma.

In order to do this, the new FIL contains a wide range of incentives, especially in the area of tax relief. The law extends the blanket tax holiday, a signature concession, from three years to five. It gives a range of other tax concessions including income tax relief on profits reinvested within one year, accelerated depreciation rights for capital and income and commercial tax reliefs for exported goods.

The FIL also provides a number of enhanced rights for foreign investors. It provides longer land leases – 50 years, with two possible extensions of ten years each. It allows foreign investors to control up to 100 percent of investments for activities approved by the Myanmar Investment Commission (MIC). And it gives them more freedom in areas like determining ownership shares and specifying a mechanism for dispute resolution. The latter can be settled “according to the terms of the contract,” opening the door for international arbitration, which should be appealing for foreign investors.

The FIL also had some drawbacks, however these rarely take the form of outright restrictions on, or arbitrary barriers to economic activity – a stark contrast with earlier versions of the law. The most restrictive draft, from the August session of Parliament, included a US$5 million minimum on foreign capital and a 49 percent limit on ownership in restricted sectors. These requirements were met with fierce criticism from some domestic and most international stakeholders, and were removed from later versions.

However, the FIL’s greatest drawback is not the restrictions, but the lack of clarity on many important issues, which are either left to the discretion of the MIC or the rules and regulations of the ministries. One of the key discretionary responsibilities of the MIC relates to restricted sectors.

The FIL contains a poorly defined list of restricted economic activities, which includes manufacturing and service sector activities which are allowed for Burmese citizens, as well as agricultural, livestock and fishing activities which can be done by citizens. The MIC is charged with deciding which foreign investors can invest in restricted sectors, and setting allowable ownership shares in these restricted sectors. Yet no clarity is given about exactly what types of manufacturing, services, agricultural, livestock and fishing activities the restriction applies to, nor what criteria the MIC will use to evaluate investment applications in these areas.

[pullquote] “The downside of discretion is that it creates broader corruption potential” [/pullquote]

The final version of the FIL also introduced two more additional and very consequential discretionary powers. The first, about tax incentives, gives the commission the duty to “prescribe investment activities which are not required for tax exemption and relief.” As these exemptions are some of the most important incentives in the law, a provision giving the MIC power to withhold these benefits from certain investors is immensely important. If properly executed, select exemptions are preferable to blanket tax holidays.

Craig Taylor, from Baker Tilly Myanmar, notes that blanket holidays have the potential to starve Burma’s government of tax revenue, which is desperately needed to fund improvements in public goods and services. These should – in the long run – bring down the costs of doing business and improve Burma’s competitiveness. But the challenge is implementation – the MIC needs to construct a transparent process to determine which businesses are eligible for tax incentives. As a general rule, tax incentives should be used only to attract investments that would otherwise not come to Burma. There is no reason to give tax holidays to companies who would otherwise be willing to invest and pay tax.

The other new discretionary power allows the MIC to extend the rigid schedule for hiring local skilled labourers for “complex projects.” The schedule mandates that local workers occupy 25 percent of skilled positions after two years, 50 percent after four years and 75 percent after six years. Much like the discretionary clause on tax incentives, the effectiveness of this provision depends on its implementation.

The creation of skilled jobs is one of the key goals of the FIL and integral to Burma’s development. Yet skilled labour is already in high demand and administratively mandated local hiring requirements could increase this, rapidly escalating wages for skilled labour. This could be counterproductive for overall job creation if skilled labour wages increase the costs of doing business significantly and deter investment. For example export oriented investors may locate in other countries if, despite low costs for unskilled labour, managerial and skilled labour wages make Burma internationally uncompetitive. The MIC must find a balance with growth in wages and employment opportunities, both skilled and unskilled, and do so in a transparent and predictable way.

The law also gives the MIC a wide range of other tasks, with few guidelines on implementation. These tasks include scrutinizing and approving investments, ensuring investors comply with relevant laws (and taking action against those who do not), awarding longer leases to firms investing in remote and underdeveloped areas, determining minimum foreign capital requirements for select economic activities, and setting the allowable ownership shares in restricted and prohibited sectors. Investors must also seek approval from the MIC to transfer some or all of their shares in an investment in Burma.

The newfound discretion of the MIC has caught the attention of foreign investors, according to Romain Caillaud, who works with Vriens and Partners in Rangoon. He says that while foreign companies “are relieved that a final version of the new foreign investment law has been agreed upon and promulgated, they will be closely watching the decisions made by the MIC, now that this entity has increased discretionary powers.”

Yet the discretion is far from a fatal flaw. The key to success is implementation. The downside of discretion is that it creates broader corruption potential, but it can be useful when exercised by competent and experienced decision makers in a transparent process. Here there is some reason for optimism, as U Soe Thane, one of Burma’s leading reformers, currently heads the MIC. He has already moved to reduce the time needed for investment approvals during his time as chairman, and further changes are possible.

There is no guarantee that the law in its current form will achieve its stated objective – to encourage the development of Burma and the creation of economic opportunities for the country’s people. It simply lacks the specificity to single out the labour intensive export industries needed. However it can and should play a foundational role in development and job creation.

The MIC and the ministries have an opportunity to develop and significantly improve the investment regime, with the new FIL as a starting point. Long-term success, characterized by development and employment creation, will require the institutionalisation of a transparent, predictable, and consultative process about how and why the MIC uses its discretionary authority.

It will also require the integration of the country’s foreign investment strategy into a broader, well-informed development agenda. Much remains to be done to ensure that the new FIL – and Burma’s engagement with the international economy more generally – fosters development and broad-based economic opportunities.

Jared Bissinger is a Ph.D. candidate at Macquarie University in Sydney and research director at the SUN Institute in Rangoon

Editors Note: this analysis is based on unofficial translations of the law

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