Investment law offers limited reform

Investment law offers limited reform

Burma’s new investment law offers few changes to the country’s economic framework and risks solidifying crony control over key sectors, leading experts have warned.

Bad governance and corruption, a weak regulatory framework as well as poor infrastructure, limited human capacity and electricity shortages present significant obstacles to sustainable growth.

“In and of itself [the law] is not enough to bring business and economic development [to Burma],” Sumana Rajarethnam from the Economist Intelligence Unit told DVB. “The investment law has to work in an overall business environment. If there isn’t political stability and changes to other investment laws then [it] will not make a big difference.”

Described by Reuters as “a sign of remarkable economic liberalisation”, the new law, which is yet to be finalised, allows foreign investors to set up business ventures without local partners, provides them with five years of tax relief and the right to lease land for up to 30 years from private owners.

But according to Rajarethnam the state still rules with a tight grip. “The fact of the matter is that the way the economy is structured in Myanmar [Burma] at the moment, [the Union Solidarity and Development Party, USDP] are very much in control.”

Significant regulatory reform is needed to make the economy more sustainable, including to Burma’s weak banking and financial sectors, he says.

“There’s currently no law with respect to mergers and acquisitions, so one potential scenario is that foreign companies could come in and buy up many small and medium sized enterprises, which might not necessarily be such a good thing for the country.”

Professor Sean Turnell from Burma Economic Watch at Macquarie University, Australia, agrees.

“If the government is serious about reform, much more needs to be done, including liberalising measures like removing tight licensing systems for import/export businesses. The most lucrative are held by those close to the government, the old cronies,” said Turnell.

“If the FDI [foreign direct investment] law is just there in an unreformed economy with all the rules, regulations and favours to the cronies, then the overall effect is probably just to entrench their dominance.”

In late 2009, the junta initiated a privatisation program that transferred key economic assets to a select number of military-linked cronies, including Tay Za, Zaw Zaw, Nay Aung and Chit Khaing. They now dominate most crucial sectors, including tourism, construction, aviation and telecom.

“It is unfortunate that these are the biggest businessmen and companies in the country right now that have the resources and connections to take advantage of the opening up of any sector,” says Rajarethnam.

The natural resource sector is particularly prone to corruption and exploitation by the ruling elite, and it is also excluded from the new investment law. This industry, along with banking, insurance and forestry among others, are covered by the State-owned Economic Enterprises Law (SEE).

“The SEE Law states that the Government has the sole right to carry out the exploration, extraction and sale of petroleum and natural gas and production of products of the same,” explains a briefing paper by investment firm Myanmar Legal Services.

“However, the Government may, in the interest of the State, permit such activities to be carried out jointly between the government and any other organisations.”

This means that firms can enter into production-sharing contracts with the state-owned Myanmar Oil and Gas Enterprise on a case-by-case basis, but the Ministry of Energy retains absolute control of licensing. In 2009, Htoo Trading – run by Tay Za – became the first private Burmese company to be awarded contracts in the hydropower sector.

“The resource sector was always a problem and it’s still a problem,” says Turnell. “You really need a good set of institutions in place to make natural resources work for a country.”

Up to 100 petroleum blocks are set to be auctioned off by the Burmese government this year in a move that is widely anticipated by the global investment community.

But the European Burma Network warned investors this week “not to view Burma simply as a country where they can exploit cheap labour and access natural resources cheaply.” They highlighted the UN Special Reporters warning of a shift towards different types of human rights abuses in Burma’s changing economy.

“Burma lacks laws to regulate companies, to protect workers, and protect the environment. It also lacks an independent judiciary and the rule of law which could enforce such regulations,” the group said in a statement.

A recent report by the Economist Intelligence Unit (EIU) predicted that Burma will press ahead with reforms but implement “limited real structural change”. The core scenario presented was one where the USDP “remains firmly in control, but sanctions are still lifted.”

“We don’t see the development of a truly vibrant multi-party democracy,” said Rajarethnam, lead editor of the report. “There will be improvements in terms of electoral politics in 2015, but I don’t think that opposition parties will be permitted to operate on a level playing field with the USDP.”

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