The Opening Up of Burma: Burma’s Foreign Investment Law

By Andrew Goodman, PhD

Burma has instituted a new Foreign Investment Law (2012) as part of its efforts to update and modernize the business climate within the country.  Burma has been in the news frequently lately; with the theme of opening up to the outside world, improvements in living conditions, and Aung San Suu Kyi’s receipt of the Nobel Prize and her recent interactions with world leaders. The release of the democracy icon, the lightening of restrictions on the media, the end of censorship and release of most political prisoners, taken together, are seen as a watershed on the country’s march toward community with the nations of the world.  This is particularly relevant for ASEAN and for Thailand, given the close interaction in business and social terms.

FIL: A Move Toward Liberalization

According to news reports (1), the new law does not change ownership restriction for foreigners, which, under the old law of 1988, was set at and remains at 100%. However, there may be restrictions in certain areas.  For example, the government deems agriculture a sensitive area, and may restrict up to 50% of foreign ownership for ventures in this sector. Different drafts of the law had included tighter restrictions, but as presently constituted, it does not.  These restrictions may be brought in later as amendments to the basic law and are yet to be determined.

Some of the provisions remain quite vague. For example, there will be sections of the economy labeled “restricted sectors.” These “restricted sectors” are reviewed by the Myanmar Investment Commission, the government body charged with reviewing investments for compliance with law and the national interest. The Commission then will determine the level of foreign ownership permitted, in accordance with what they see as the interests of the country and its people.

Further, the law went through an earlier draft where businesses were to require a local partner with a minimum 50% stake — similar to Thai law — but this has been dropped in the final draft. Now, foreigners can own 100% of businesses.  Any startup using foreign funds is required to have a 35% foreign component. So in effect, the law also sets a baseline for foreign ownership.  This possibly is to avoid the problem of “fly by night” operators, who are not seriously committed to the development of their projects or to Burma, but are just looking for a quick profit in the region.

With land leases, the new provisions are somewhat less restrictive, allowing a foreign lease to run for up to fifty years with two, 10-year renewals possible.  The previous 1988 Law allowed a maximum of 30 years with two, five-year renewals.

With taxation, the 2012 Law specifies a five-year tax holiday, whereas the 1988 Law allowed for three years.  A tax holiday is a period of time in which a government will allow for a new venture to operate either at a radically reduced rate of tax, or, in certain cases, no tax at all.  This represents recognition of the fact that startup ventures, due to the need to invest in new capital, train local workforces, and/or establish new or updated procedures relevant to a different national setting, need breathing room to have a realistic chance at creating a successful venture that is profitable over the longer term. The tax holiday is set up to provide this room.

There are some uncertainties with respect to the tax holiday in the case of the Burma Foreign Investment Law of 2012. There is the provision that relief may be available if the investment is deemed in the national interest. At this time, it is not evident how national interest will be defined, creating a potential sticking point.

Profits made on imports that are reinvested within one year in the business are eligible for up to 50% tax relief. This is a very attractive potential area for profitability, and is likely an acknowledgement by the government that the need for development in Burma is clearly a priority at this time. Hence, working the tax system in a way that encourages investment and growth is obviously viewed in a positive light.

FIL’s Legislative History

It is useful to revisit the recent past to see just how much ground has been covered in such a short time.  The United States, in 1997 (2), instituted an investment ban that has been reconsidered only very recently.  Provisions of the ban included:  all economic development in Burma; guaranteeing the performance of a local person or party in Burma; purchasing shares or deriving profit from any entity in Burma; and any form of participation in an entity deriving profits, earnings or royalties in Burma. The only exemptions noted were education, health or humanitarian initiatives on a strictly not-for-profit basis.

The US partially lifted these sanctions in early May of 2012 (3).  President Barack Obama noted when lifting the sanctions, “We continue to have concerns, including remaining political prisoners, ongoing conflict, and serious human rights abuses in ethnic areas.” The lifting of the ban is a welcome development not only for Burmese citizens hoping to see their daily lives improved, but also for those seeking to invest in the country. However, there are a number of areas which will not be immediately affected. The primary restriction that remains in place involves any entity connected to the military, which, for practical purposes, still includes a great deal of the Burmese business and investment sector.

The European Union has moved quicker than the US, announcing the lifting of all sanctions on a one-year trial basis in early April (4). 150 million Euros of investment aid is also guaranteed over the course of the next two years, in sharp contrast to the only 200 million Euros of combined aid received since sanctions were launched in 1996. The EU’s position on sanctions and change in Burma is basically that, while there is a lot to be optimistic about and much in the ongoing changes in the country to be supportive of, the situation is in flux and a reversion back to the ‘old Burma’ is not beyond consideration, especially given the military’s extensive and continuing influence.  Thus, the EU is looking at the move to lift sanctions in conjunction with monitoring the situation in Burma.

Ongoing Refugee Crisis

The situation remains tentative at best for a number of minority groups in Burma, and for refugees living in third countries, such as Thailand, with the safety of a return to Burma still very much uncertain.  In her visit to Thailand in June of 2012 (5), Aung San Suu Kyi acknowledged refugees’ legitimate concerns of going home before the situation is fully settled.  There has been some progress in peace efforts and numerous temporary ceasefires have been put together. Yet, there are still a number of issues for many ethnic minorities, such as violence and animosity.  Further, recent turmoil in Rakhine State with the Rohingya Muslim people has sharpened concerns about the possibility of further military crackdowns.

Investment Potential

Taking a look at the present climate and the new 2012 Law in terms of investment potential is clearly not a straightforward affair.  What is clear is the movement towards greater liberation, the opening of markets, and integration of Burmese capital and investment into the global economic system.  However, looking at the magnitude of impact of these changes, implications and possibilities for the longer term, and their degree of certainty and sustainability, the waters become a great deal murkier.

Markets love certainty, or at least a degree of assurance regarding present and possible future direction. There is little of that in Burma, even with the present changes. Though President Thein Sein seems dedicated to the process of liberalization, it is important to remember that less than 10% of the present parliament was elected by a legitimate voting process.  The recent by-elections resulted in Suu Kyi’s party, the National League For Democracy. The party swept more than forty seats up for election, yet this is just a minute part of the parliament: the balance of seats are mostly retained by the military.  So in a very real sense, the army is still the rule-making body.  Though legitimate elections have been promised by 2015, to date it is just that, a promise.

That said, it seems that the magnitude of change makes reversing the process of liberalization increasingly difficult. After a certain period of time changes take on a momentum of their own; taking away freedoms granted becomes difficult. The populace grows accustomed to new freedoms and becomes less and less tolerant of a return to old and authoritative modes of living and ruling. Basic freedoms — freedom of the press, freedom to assemble, freedom to operate and own one’s own business, freedom of speech — all of which recently have been granted to Burmese in at least partial measure, become difficult to take away once they have been granted and enjoyed by the populace for a certain time. Though there is still a significant conservative element that would gladly see a return to the old Burma — and also a substantial business elite that benefits from the restrictions and protections that help ensconce their power — the potency of these voices is being eclipsed by the momentum of events.

It’s clear that the investment potential is there, as witness conferences (like the one held in July at the Orchard Hotel in Singapore(6)), give us an indication of the degree of earnestness toward further opening up Burma by the present government and its citizens.  Those looking for a detailed review of the investment climate in Burma in light of the new law would be well served by examining Kyaw Zaw Maung’s detailed report on the issue (7).

Working Towards an Investment Strategy

When considering an investment strategy for Burma, an approach that is guardedly optimistic in nature would seem appropriate — “optimistic” meaning one should look for opportunity if one is interested in investing in the region. One then should not be overly discouraged by the inevitable bumps in the road that opening up of markets in a region closed for decades will inevitably entail.  “Guarded” here meaning that there is still some possibility of a reversion to the ‘old Burma,’ though this becomes more and more remote as times passes.  Hence, it would seem prudent to have an exit strategy that allows the investor to pull out without catastrophic losses.

Taking a measured approach to investment along these lines, it may be intelligent to phase investment in over a period of years, perhaps starting with one small factory or outlet and expanding as conditions and profit margins allow.  This keeps exposure to a minimum and allows a less painful exit if needed.

Given sufficient caution and care, Burma looks to be a positive opportunity for investors over the next several years.

 

Flickr photo courtesy of eGuide Travel

Reference notes:

1. Key facts for this section are as reported in Reuters article November 12, 2012
2. 1997 US investment in Burma ban is outlined at US Embassy Rangoon/Burma, http://burma.usembassy.gov/investment_ban.html
3. Implications of the lifting of the US ban are discussed in a Financial Times article, May 18, 2012, http://www.ft.com/cms/s/0/6d4e0b2e-a06e-11e1-88e6-00144feabdc0.html#axzz2DxAeHSD8
4. Lifting of EU sanctions is reported in the Mail online, 23 April 2012, http://www.dailymail.co.uk/news/article-2133990/EU-lifts-sanctions-Burma-12-months-recognition-moves-democracy.html
5. Aung San Suu Kyi’s visit is discussed in the Economist, June 5^th, 2012, http://www.economist.com/blogs/banyan/2012/06/aung-san-suu-kyi?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e
6. Flyer inviting investors to attend the conference on Burma investment in the Orchard Hotel, Singapore http://www.frc.com.sg/6conference.pdf
7. A detailed review of the Investment Climate in Myanmar as conducted by Kywa Zaw Maung