Sherpa Hossainy's Blog

Foreign investment rules in practice in Myanmar (Part 2)

Posted in Energy and power, Investment, Legal, Myanmar, Telecommunications, Yangon by Sherpa Hossainy on July 27, 2013

Part 2: Oil and gas, telecom, energy

Published in Myanmar Business Today (Vol 1, Issue 17) on May 30, 2013
Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. This is the second part of Myanmar Business Today’s series of sector-wise analysis based on the briefing. This week’s topic is onshore and offshore oil and gas, telecommunications and electricity generation.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Onshore and offshore oil and gas

Oil and gas exploration, development and production are allowed for foreign oil companies under a Production Sharing Contract (PSC) with the Myanmar Oil and Gas Enterprise (MOGE).

Blocks are awarded through an open and competitive bidding process where technical experience and financial capability weigh heavily, both factors usually being in favour of foreign enterprises.

Upon being awarded a block, operators are required to set up a Myanmar company or to register a Myanmar branch of a foreign company. Once a commercial discovery has been made a new agreement is concluded within the framework of the PSC, for example a gas sale agreement.

“Notification 1/2013 only states that a JV is required for oil drilling using traditional methods with a maximum depth of 10,000 feet, but in practice, investors are required to have a local partner for exploration and production of all onshore blocks,” Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices all over Southeast Asia, told Myanmar Business Today.

However, the percentages of ownership of the local and foreign partner are left to the agreement between the parties, he added.

“Processing and construction of petrochemical facilities requires prior government approval, which will only be granted upon advice by the Ministry of Energy (MOE),” Edwin explained.

The importation, transportation, storage, sale and distribution of petroleum/petroleum products and natural gas, also requires prior approval by the MOE, according to the new rules.

Telecommunications

The Government is expected to award two nationwide mobile telecommunications licences by the middle of 2013 through a competitive bidding process administered by the Ministry of Communications and Information Technology (MCIT).

According to the prequalification rules issued by the MCIT and based on Notification 1/2013, there is no formal requirement for a local partner. The prequalification rules are geared towards international mobile operators, but the possibility is created for these operators to conclude a consortium (and, upon awarding the license, a JV) with local or foreign partners.

Vendors of network equipment and service suppliers can, as a rule, be 100 percent foreign-owned in Myanmar. “Depending on the situation, it may be possible to obtain an MIC Permit for investments by network suppliers. The provision of domestic/international mail services and network support services are subject to prior approval by the MCIT,” Edwin said.

Electricity generation

Gas-fired power plants are usually structured as a build-operate-transfer (BOT) in Myanmar, where a foreign investor can own 100 percent of the Myanmar entity that concludes the BOT with the government. The government will normally supply gas to the developer on a pass-through basis, and purchase the electricity at a pre-agreed and indexed tariff. \

“In practice, the government harmonises the tariff cautiously, but there may be differences in various economic terms anyway through negotiation,” Edwin explained.

“Power projects are privately awarded or, more recently, through an open and competitive bidding process. The first step is usually for the developer to conclude a non-binding MOU with the Ministry of Electric Power (MOEP), and to submit a feasibility study. If the feasibility study is approved, which is usually the case, a memorandum of agreement is negotiated, which is essentially a BOT contract. Within the framework of that BOT contract, a Power Purchase Agreement, a Gas Sale Agreement and a Land Lease Agreement are concluded in due course. More or less in parallel, the project company is established and the investment licence (MIC Permit) is issued.”

The production or sale of hydropower electricity or coal-powered electricity requires the foreign owners to enter into a JV or BOT with the government. Under the agreement with the government, a royalty or a production share will usually be payable in the form of free electricity supply up to a certain threshold, Edwin said.

In virtually all cases, the investor must prepare an Environmental Impact Assessment for approval by the Ministry of Environmental Conservation and Forestry.

A gas-fired power plant with a capacity of 10 megawatts or less is not permitted to be wholly foreign-owned. The trading of electricity is prohibited to foreign investors, according to the rules.

Foreign investment rules in practice in Myanmar (Part 1)

Posted in Investment, Legal, Myanmar, Real estate and property, Yangon by Sherpa Hossainy on July 27, 2013

Part 1: Real estate and property

Published in Myanmar Business Today (Vol 1, Issue 24) on May 9, 2013

 

Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. Myanmar Business Today will publish a sector wise analysis based on the briefing, starting with real estate and property.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Notification 1/2013 sets out the permitted activities for foreign investors and the activities which require a joint venture (JV), and notification 11/2013 introduces various regulations on applying for an investment licence or MIC Permit, the use of land, transfer of shares, remittance of foreign exchange and the taking of security on land and buildings.

By and large, investment with 100 percent foreign ownership is permitted for the vast majority of business activities, including telecommunications, power generation, services, infrastructure projects, agriculture, hospitality and non-food manufacturing.

Retail and wholesale activities have been opened to foreign investment as well, subject to certain conditions. A relatively limited number of activities require a local partner, such as food production, beverage production, plastics and certain chemical industries, mining and real estate development. However, even for those restricted sectors, foreign investors may hold up to 80 percent of the shares.

Notification 11/2013 strengthens the land use rights by foreign-invested companies, including the possibility to lease land from anyone, and to take security on land and buildings. It also, in conjunction with other measures in Myanmar and abroad (such as the general licence issued by the US Treasury easing sanctions with respect to four Myanmar banks), made it easier to remit foreign currency overseas.

“Myanmar is a country where there are often significant differences between the theory and the practice. In our overview of how foreign invested projects work in Myanmar, we base ourselves not just on the laws and the new regulations, but on our on-the-ground experience with getting projects from inception to completion,” said Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices all over Southeast Asia.

Calling upon on-the-ground experience with ongoing investment projects and financing transactions, we tried to clarify how power projects are licensed, which approvals are granted in practice to distribution and retail, and how the authorities allow foreign investment in real estate, Edwin said. Joint venture requirement for foods manufacturing, beverages and mining and the new possibilities for taking security on land and buildings were also elaborated in the report.

Real estate development

“In practice, the ownership structure of a foreign-invested property project will very much depend on the land rights for the project in question,” Edwin said.

In Myanmar, freehold, granted land and government leased land are in practice the most relevant types of land when it comes to foreign investment.

For land that is privately owned, which has been granted to a local partner, or where the local partner holds a government lease, a JV is required for development of most types of property, including buildings, condominiums, apartments, offices, commercial space, houses in industrial zones and low-cost housing, the briefing note said.

In this case, the local partner will receive shares in the JV in return for transferring the land rights to the company, it added.

The report said a JV is also required for the construction and development of new townships, golf courses, recreational areas, factories and mills, bridges, highways, underground railroads and construction related to transportation.

“If the land is directly leased by the government to the project company, such projects are usually conducted under build, operate, transfer (BOT) basis and foreign investors may hold 100 percent of the project company,” Edwin said.

If a legacy building is involved, then a conservation management plan is also required. Large scale property projects require an Environmental Impact Assessment (EIA), the report said.

The provision of architecture services, construction consultancy services, production of construction materials supporting the urban housing sector, prefabrication of construction materials, construction of disaster-proof buildings, and the fixing and commissioning of machines and their parts are subject to a Mutual Recognition Arrangement (MRA) and must follow the Myanmar National Building Code’s rules and regulations, the note added.

Use of land by foreign investors

Foreign investors cannot actually purchase land, according to Transfer of Immoveable Property Restriction Act of 1987, but they can lease land from the government or from private parties (since this year) with the permission of the MIC.

“In practice, when the project involves the use of land, foreign investors need to agree to a draft lease agreement with the (public or private) land owner before submitting their investment proposal to the MIC,” Edwin explained.

The government can lease land directly to the foreign-invested company (often in the context of a BOT agreement), but it is more common that a local partner who has already obtained the government lease contributes the land rights to a JV company in return for shares, he added.

Taking security

Until recently, there was largely no regulation in Myanmar on taking security over land and buildings. Notification 11/2013 now specifically allows creditors to take security over land and buildings.

“The taking of security on bank accounts, receivables and movable goods is in theory possible, but it remains virtually untested and very uncommon in practice,” Edwin explained.

Every type of security, mortgage or charge taken by a company in Myanmar must be registered with the Deed Registration Office within 21 days of creation.

Foreign investment rules in practice in Myanmar (Part 4)

Posted in Agriculture, Investment, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Part 4: Manufacturing of foods and beverages; non-food manufacturing; agriculture, forestry, livestock and fisheries

Published in Myanmar Business Today (Vol 1, Issue 22) on July 4, 2013

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Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. This is the fourth and final part of Myanmar Business Today’s series of sector-wise analysis based on the briefing. This week’s topics are manufacturing of foods and beverages; non-food manufacturing; agriculture, forestry, livestock and fisheries.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Manufacturing of beverages

A joint venture (JV) is in principle required for the “production, blending, distilling, bottling, and distribution of beverages,” according to the rules. A JV is also required for barley fermentation and the production and distribution of products made from barley fermentation. In addition, a JV is required for all “purified water enterprises”.

“In practice, the commercial tax, a combination of an excise duty and a turnover tax, dictates how a producer of beer or spirits should be structured in Myanmar. The commercial tax weighs heaviest on the importation phase and the manufacturing phase of the supply chain, and investors may need to carefully devise a supply chain over different entities in Myanmar, keeping in mind unnecessary tax imposts and licensing restraints,” Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices across Southeast Asia, told Myanmar Business Today.

The rules say for the production, distribution and sale of soft drinks and other beverages, the investor must use at least 20 percent local raw materials for the first three years of production. Afterwards, the investor must use at least 60 percent local agricultural raw materials.

Manufacturing of foods

A JV is as a rule required for the “production, canning and distribution of foodstuffs except dairy products”, according to the rules. However, the foreign investor may hold up to 80 pecent in the JV as per current regulations.

“In reality a foreign investor would not purchase shares from an existing Myanmar shareholder in a local company, or subscribe for shares issued by such existing Myanmar company. In other words, the JV company would not be the existing company of the local partner. Instead, a new JV company is established under the FIL. Licences, assets and land leases are transferred from the local partner company to the new JV company through a contribution in capital. The transfer is done based on the terms agreed between the parties, subject to MIC approval,” Edwin said.

For the production, distribution and sale of vegetable and animal oils, at least 80 percent local raw materials must be used, while for production of Monosodium Glutamate (MSG), local raw materials must be used for the first three years of production.

Non-food manufacturing

Generally, there is no requirement for a local partner when manufacturing non-foods. A JV is required only for a few selected sectors including the production, distribution and sale of cotton threads, various types of paper, rubber, plastic and leather.

“Notification 1/2013 does not set out a lot of local content requirements in non-food, cosmetics and cigarettes being the main exceptions, but in our experience the Ministry of Industry may request the use of a certain amount of local raw materials,” Edwin explained. The Ministry of Industry provides recommendations to the MIC about the feasibility of proposed manufacturing investment projects.

Land used for manufacturing that is leased from the government or private parties must be obtained with the permission of the MIC. “Generally a minimum capital amount of $500,000 is required for manufacturing companies with an investment permit,” Edwin said.

Agriculture, forestry, livestock and fisheries

“Currently, we mostly see interest in palm oil, sugar, rubber, rice and livestock. Although some agricultural and livestock activities feature on the list of activities that require a JV, it is our view that the government may in practice decide to allow large investment projects in this field that are considered particularly beneficial to the country on a fully foreign-owned basis,” Edwin said.

In most cases, the government can offer land to the investor that is suitable for the project, either through the Ministry of Environmental Conservation and Forestry or the Ministry of Agriculture and Irrigation. Different lease prices and maximum sizes of plots apply depending on the authority and the status of the land.

Forests are normally not available for investment projects, but degraded forests may be leased for various projects, including wood-based industries and reforestation. Although the union government in theory has final say, the local authorities also need to cooperate with the allocation of land for a project. If the land is already in use by local farmers or residents, the resettlement and compensation may be particularly challenging and at times a major risk to the completion of the project.

A JV is required for small-scale agricultural businesses, as well as for agricultural businesses that do not use modern machinery. A JV is also required for the “growing and planting of traditional medicinal herbs (plantations),” as well as the “production and distribution of hybrid seeds”, the rules say.

A foreign investor involved in the development of modern farm land, production and distribution of seeds, fertiliser, pesticides, mechanised farm tools and machinery or crops must obtain a confirmation from the Union Government Board and comply with the guidance of the Ministry of Agriculture and Irrigation.

For livestock and fishery activities, a JV is required for small-scale livestock businesses, livestock businesses that do not use modern machinery and fishing in lakes, inland waters and from shores. Investors wishing to fish offshore in Myanmar territorial waters for saltwater fish, shrimp and other marine animals must operate through a JV and obtain the prior permission of the government.

According to the rules, investors involved in fresh or saltwater fish breeding may not breed such fish as would affect Myanmar’s biodiversity. The production of bee products must be conducted in accordance with Good Manufacturing Practice (GMP) technology. Investors involved in lab testing of marine products must perform such tests in accordance with ISO 17025, the rules say.

Thai firm moves to Myanmar following Laos success

Posted in ASEAN, Finance, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Offers help to Myanmar government, state enterprises and corporations to raise capital from Thai bond market

Published in Myanmar Business Today (Vol 1, Issue 21) on June 27, 2013

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Thailand-based advisory firm Twin Pine Consulting will help Myanmar corporations to raise much-needed capital from the Thai bond market after it successfully manoeuvred the Laos government to raise 1.5 billion baht ($50 million) from the coveted regional bond market, its top executives said.

The Laotian government in May issued three-year baht bonds in Thailand worth THB1.5 billion with an interest rate of 4.5 percent per annum through private placement. Twin Pine acted as the Laos government’s financial adviser. The transaction was the first unrated sovereign or quasi-sovereign credit to be issued in the baht-denominated bond market and established Thailand’s image as a viable regional debt capital hub.

“We want to help at least a couple of Myanmar companies, its government or state enterprises to raise capital from the Thai bond market. We will act as a matchmaker as we help them launch in the market. We can also get the rating agencies to come and rate them, for example the Thai Rating and Information Services (TRIS),” Adisorn V Singhsacha, managing director and partner of Twin Pine, who also has over 15 years of international banking experience, told Myanmar Business Today. The whole idea is about increasing the level of professionalism and the outreach of local companies and also Myanmar as a country, he added.

“We still haven’t identified who is going to be the underwriter for the bond, but it could be either a Thai bank or a foreign bank. For the Laos project we worked with Thai Military Bank (TMB) who worked as the underwriter,” Adisorn said.

Adisorn V Singhsacha, managing director and partner of Twin Pine.

Earlier this year, Thailand’s Ministry of Finance granted Laos approval to issue baht bonds as a contribution to the Asian Bond Markets Initiative and the ASEAN Economic Community blueprint that aims at improving economic relations in the region. In an effort to promote the Laos deal, the Thai government removed a number of barriers, including the waiver for a required rating. The Laos deal demonstrated that there is institutional appetite for a high-yielding name, and is expected to set a template for other regional sovereigns such as Cambodia, Myanmar and Vietnam.

The Securities and Exchange Commission (SEC) of Thailand cleared one barrier for the bond in June last year, when it approved the sale of unrated paper. The last hurdle was removed when the Thai Ministry of Finance relaxed a rating requirement specifically for foreign governments or issues with a foreign government guarantee. Previously, only foreign issuers with an investment-grade rating could apply for the approval.

Twin Pine was appointed as the advisor for the Laos Ministry of Finance and its legal partner LS Horizon played a major role in getting the state-owned Electricite Du Laos (EDL) listed in the newly-formed Laos Stock Exchange.

LS Horizon Ltd is a regional law firm which has offices in Laos, Singapore and Myanmar, and has plans to expand into Indonesia and Cambodia. “We’ve been helping our Thai clients through our Myanmar office to set up businesses, giving legal advice on investment. Our clients range from mining giant Bangpu, Ital-Thai Development Plc to Siam Cement and some Thai banks,” Chiridacha Phungsunthorn, a partner at LS Horizon and also partner and director at Twin Pine, told Myanmar Business Today.

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Chiridacha Phungsunthorn, a partner at LS Horizon and also partner and director at Twin Pine.

“We have the same aspiration and the same philosophy. Twin Pine is a boutique firm and it operates in a flexible and dynamic manner with a focus on Greater Mekong – Myanmar, Laos, Cambodia and Thailand, and LS Horizon also shares the same focus,” Adisorn said.

The Laotian government used to raise funds from various sources such as borrowing from overseas banks or international organisations and issuing kip-denominated bonds. Twin Pine analysed Laos’ borrowing capabilities and found that Laos could diversify its borrowing to keep financing costs low and less dependent on traditional sources.

“We advised the Laos government to step forward from government to government (G2G) lending, and help took them to the international level by putting them in a cross-border capital market in Thailand, which has plenty of resources and funds. We said why not raise the capital in the Thai market, which would also alleviate Laos’ level and integrate it into the ASEAN community,” he said.

Many factors helped the launch of the Laos bond, Adisorn said. Part of the Laos government revenue is in baht as it sells electricity to Thailand. With a matching debt and income, eliminating currency risk from fluctuating exchange rates became easier.

Adisorn said Twin Pine’s philosophy is to meet the top level executives of an organisation including chief executives, directors, chief financial officers, owners and chief investment officers. “These are the people who make decisions. Sometimes these companies see that the resource in the organisation is not ready to response to a specific need. We act as a bridge to help generate ideas and execute top management’s wishes when gaps exist in expertise or readiness and resources. We say, ‘We are here and we can get it done,’”

The advisory firm is also currently raising funds for a real estate project in Yangon. “We have been in talks with land owners in Yangon to build a hospitality and serviced-apartment project. We will help them raise over $20 million from outside Myanmar. This won’t be a listing, only a private placement with high-networth individuals.”

Despite some obstacles like proper land valuation, Adisorn thinks Twin Pine would be able to raise the funds pretty soon. “The prospect is very good and we have to highlight this to the investors. I think we can do it for them by the end of this year; if I’m optimistic then I’d say in three months, Adisorn said. Twin Pine has already studied the foreign investment law in Myanmar and LS horizon will assist in forming an ‘Investment Vehicle’, he added.

“The ROI could be about four and a half years after construction period and now we are looking for some investors who will just put in $20 million. It’s all about finding the people who has the appetite for this kind of market.”

Adisorn believes there’s a big opportunity for Myanmar conglomerates to reach out to international investors and raise funds. “Myanmar is now the darling for new investments. We have already identified a few large corporations and we aim to work with those to raise funds in a similar fashion [like Laos] in the Thai capital market. These customers range from state enterprises, banks, large holdings companies to airlines.

“Our next step is to work with a rating agency in Thailand to do the rating for our clients. If we can get large Myanmar corporations, we can approach the rating agency in Thailand to do the rating and the pricing can be done according to the market demand and supply.”

Starting the discussion is the first step but making it happen is not easy, Adisorn said, adding that the Laos deal took two years to realise. “Now I can say that we have been successful in a virgin market and we are ready to move on to the next level. We are looking at more deals in Laos, new deals in Myanmar and Cambodia. We are likely to see some deals in those countries by the end of this year.”9

However, there’s no surefire way to raise capital, Chiridacha said. “It’s about strategy and how you want to perform according to the market. However, by listing you give away your share of the company. But through bonds you can just raise the capital.”

Adisorn added: “You have everybody believing in Myanmar, so why give away your equity and ownership if there is no synergy. I think you can get cheaper finance through bonds.

“Equity is expensive, unless there is a strategic value. If you know your company is growing and in three years time it’s going to be double or triple in value, why would you give that away? You should keep that as long as you can and if you can find someone to lend your money you should rather borrow the money. Myanmar companies have very strong growth prospects and Myanmar is just starting. So, to sell off equity, without real added value would not be advisable now”

The veteran financial advisor said there are no hidden dangers for Myanmar companies while raising capital from bond markets. “The only danger is for the ones who will buy the bonds if the Myanmar companies don’t perform. So, it’s completely safe,” he said.

From its experience in greenfield markets in Southeast Asia Twin Pine sees Myanmar companies have huge potential to raise capitals from the Thai bond market. “Myanmar is like a rough diamond now. We can see potential companies and we just have to market them.”

Adisorn thinks Myanmar companies should aim to raise capital from Thailand as there are shared values and greater understanding between the two countries.

“Myanmar companies shouldn’t go to New York or London first, because they are not as recognised there. We also don’t think we need to wait for outsiders to come in. We are capable enough and we have regional knowledge plus the cultural background. It’s not a disadvantage for us to be a regional firm, it’s an advantage. We can tell from our experience, ‘In 15 years I know where you [Myanmar] will be.’”

He added: “We go to places in Myanmar and we explain financial instruments like bond or stocks to top officials because they haven’t been exposed to it yet. But people from leading Investment Bank, for example, may not do this for you. At the end of the day, some of these Western establishments will have to learn from us.”

Adisorn claimed what Twin Pine is doing hasn’t been done before. “We matchmake, we give simple and interesting advice. If we present a scenario to someone they would say, ‘I know what you are talking about.’”

“We would like to establish a circle of trust here. We believe in our nations, be it Laos or Myanmar or any nation in Southeast Asia. If we help each other grow, we will see exponential benefits.”

Foreign investment rules in practice in Myanmar – Part 3

Posted in Business, Investment, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Part 3: Mining; distribution, wholesale and trading; retail, supermarkets and hypermarkets; hospitality and foreign currency remittances

Published in Myanmar Business Today (Vol 1, Issue 21) on June 27, 2013

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Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. This is the third part of Myanmar Business Today’s series of sector-wise analysis based on the briefing. This week’s topic is mining; distribution, wholesale and trading; retail, supermarkets and hypermarkets; hospitality and foreign currency remittances.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Mining

“Most large-scale mining projects are subject to the requirement of having a local partner, although there have been exceptions to this in the past,” Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices across Southeast Asia, told Myanmar Business Today.

Mining concessions take the form of a Production Sharing Contract (PSC), where the government’s take comprises royalties, production sharing and income taxes, he said. According to the report, under the current rules, foreign investors may hold up to 80 percent of the capital in a large scale mining enterprise.

However, mining of minerals from riverbeds or near rivers, the surveying and production of jade and other gems, and all small- and medium-sized mineral production enterprises are prohibited for foreign participants, the report said.

“A joint venture (JV) is required for small- and medium-scale mining extraction, the exploration and testing of industrial raw materials related to mining, and the large-scale mining of minerals,” Edwin said. A JV with the government is required for the production and sale of rare earths, strategic minerals, radioactive minerals and gems and investors involved in exporting raw minerals such as granite, stone or coal must first obtain approval from the government.

For investors involved in large-scale mining, the production period may not exceed 15 years, but it is extendable four times for periods of five years each with six months’ advance notice, and for investors involved in the production of pearls, the limit is 15 years, but it may be extended twice for up to five years each, with one year’s advance notice, according to the new rules.

The time limit for investors involved in carrying out mining feasibility studies is two years, while for prospecting and exploration the limits are two and three years respectively.

Distribution, wholesale and trading

The distribution of goods manufactured by investors themselves in Myanmar was already allowed under the previous regulation. “There are no limitations on who investors can sell to. A foreign invested manufacturing company can sell its products directly to retailers, for example,” Edwin said.

Previously, “trading” was considered a prohibited activity for all foreign-invested companies, even JV companies. In the wake of the new FIL, this policy is evolving, according to the report.

“The limit on what the government is prepared to allow in terms of distributing goods without manufacturing is not yet entirely clear,” Edwin said.

Wholesaling is also allowed for foreign investment, but is subject to the receipt of an opinion by the Ministry of Commerce beforehand. In addition, a JV is required for all “packaging enterprises.”

Retail, supermarkets and hypermarkets

“The government’s policy is aimed at facilitating foreign investment for large modern trade,” Edwin said regarding foreign investments in the retail sector. Foreign investors are permitted to own and operate “supermarkets” so long as the store surface is between 12,000 and 20,000 square feet, and they may own and operate “hypermarkets” so long as the store is at least 50,000 square feet. For smaller surface areas, retail shops are not allowed to be located in close proximity to local businesses and they must sell mainly local products, according to the new rules. If a retail shop is operated through a JV agreement, the local partner must have at least a 40 percent shareholding.

Retail enterprises other than those mentioned above are expected to be permitted as of late 2015 (except car and motorbike retailers), but will require a minimum capital investment of $3 million. Such enterprises will be given no tax exemptions, and special rules apply for the retail of alcohol or tobacco products.

Hospitality

For hotels classified as three-star or above, 100 percent foreign ownership is permissible, while lower ratings will require a JV. Hotels constructed on government land are usually organised through a build-operate-transfer structure. “In this structure, the investor has the ownership and management of the hotel for a period of 15 to 30 years, after which the buildings are transferred to the government,” Edwin explained.

The government, often through the Ministry of Hotels and Tourism, receives an annual lease fee which is either a certain amount per square metre, or a percentage of the hotel’s revenue. A substantial payment to the government may also be due at the outset of the agreement for obtaining the land right.

Myanmar is also preparing for the licensing casino enterprises. Casinos will require government permission, must follow the rules and regulations of the Ministry of Hotel and Tourism and the Ministry of the Interior and must be located in restricted areas of hotels. They can only be accessed by foreign nationals. Wellness or spa enterprises must be located in 3-star or above hotels or boutique hotels, the new rules say.

Foreign currency remittances

The new FIL allows for the remittance of foreign currency through banks authorised to make such transactions at prescribed rates of exchange. According to the Foreign Exchange Management Law foreign-invested companies have the right to hold foreign currency and a foreign currency bank account and there are no limitations on inward/outward remittances from a current account.

The rules also say foreign currency may be retransferred overseas after examination and approval from the MIC or from the Central Bank.

“In practice, a foreign-invested enterprise is required to open a capital remittance account in Myanmar for the inward remittance of the capital and monies raised through loans. In terms of outward remittances, the company is allowed to open any bank account with a licensed Myanmar bank in a foreign currency and in kyat,” Edwin said.

Payment of dividend, interest and repayment of capital on loans by a foreign invested enterprise with an MIC Permit must be approved by the MIC before the bank is allowed to execute the outward remittance, according to the rules.

A shift of power within MIC

Posted in Business, Investment, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Published in Myanmar Business Today (Vol 1, Issue 20) on June 20, 2013

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The balance of power within Myanmar Investment Commission has noticeably shifted towards the Ministry of Finance and Revenue in a bid to pick projects that are financially and socially favourable for Myanmar, experts said.

The structure of Myanmar Investment Commission (MIC) saw a massive shakeup last month as new chair and members were appointed, according to a notification from the President’s Office.

The position of MIC chair changed from Minister for the President’s Office and former Minister for Industry U Soe Thein to U Win Shein, minister for finance and revenue.

More importantly, a bulk of evaluation and verification of investment proposals are now assigned to the departments of the finance ministry such as the Internal Revenue Department (IRD) and the Customs Department (CD).

The number of representatives of other ministries on the MIC has also dropped as the government increased the private sector representatives from two to five, out of a total of 11.

These three trends have combined in a remarkable power shift in MIC, investment experts say, as the finance ministry is now set to play an increasingly central role in getting an investment licence.

“We have only seen a few meetings under the new chair, however, from now on we expect proposals to be more carefully scrutinised. The MIC seems more careful and better equipped to assess whether the explanation of the applicant holds water or whether the proposal is properly substantiated. The government does not want to give away tax holidays for projects that are not sustainable or correctly represented,” Edwin Vanderbruggen, partner at VDB Loi, a leading law and tax advisory firm, told Myanmar Business Today.

Edwin, whose company’s investment licensing team in Myanmar helps foreign investors obtain MIC permits for investment projects, said the financials of the investment proposal have also become crucial.

“With the IRD and the CD taking care of more of the evaluation effort, more emphasis is put on the financial planning of an investment. The capitalisation, funding, capital expenditure, revenue, labour and other key points of the MIC’s investment proposal template now seem to receive even more attention.”

Social issues are now playing a bigger role too, Edwin said. “There has been some turbulence in local media about the MIC supporting projects that had adverse social consequences. With five private sector members out of 11 MIC members, it is likely that social issues will be given more weight,” he added.

Infrastructure and good governance to spur Myanmar’s economic development

Posted in Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Published in Myanmar Business Today (Vol 1, Issue 20) on June 20, 2013

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Good corporate governance and infrastructure development are key to Myanmar’s continued economic development, a senior KPMG official said.

“Myanmar is poised for rapid economic growth. It is also making excellent progress towards creating the right environment for the investments required to achieve its economic potential,” KPMG Global Chairman Michael Andrew said while discussing the future of the “next economic frontier” with delegates attending the World Economic Forum on East Asia.

KPMG is a global network of professional firms providing audit, tax and advisory services, and one of the “Big Four” professional service firms.

“Many of the CEOs that I talk to in Asia and beyond are considering investing in Myanmar.  Before they commit they want some basics; namely a good and clear corporate governance structure and to know that the rule of law and contracts will be respected,” Andrew said.

The KPMG chief said Myanmar will likely go through the many phases of growth, initially of low cost manufacturing, then consumer industries, banking, energy and technology at a faster pace than previously industrialising economies. Each phase of this growth will require policy setting and infrastructure which is adaptable, he added.

While in the recent past China has been the largest investor in Myanmar, KPMG is seeing increasing interest from a diverse range of sources, particularly Japanese and ASEAN countries. 

Andrew added: “Potential investors are also telling us that they see continued infrastructure development as being key to the successful and continued growth of Myanmar. Without transport connectivity, power and water supply business simply can’t operate.”

Myanmar Issues New General Regulation on Tenders

Posted in Business, Legal, Myanmar, Yangon by Sherpa Hossainy on July 9, 2013

Published in Myanmar Business Today (Vol 1, Issue 16) on May 23, 2013

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The President’s Office of the Union of Myanmar has recently issued a directive with rules that government departments need to follow with respect to tenders.

The rules, under directive no. 1/2013 titled “Tender Rules in Allowing to Conduct Investment Activities and Economic Activities”, are applicable to oil and gas tenders, mining, tenders for government land, infrastructure BOTs and service activities such as telecommunication.

The tender rules cite “the need for transparency, accountability, responsibility and the possibility to inspect in allowing to conduct the respective investment activity and economic activity by government departments and organisations.”

The rules set forth a number of general rules that the government departments must follow with each tender they organise, whether it is for purchasing goods or services, construction projects or allowing an economic activity by enterprises.

“The tender rules will apply immediately, for example to the onshore and offshore oil and gas tenders, the ongoing infrastructure projects and the telecom tender. A number of these tenders are actually already in compliance with the new tender rules, as far as we can see,” Edwin Vanderbruggen, partner at VDB Loi, a leading law and tax advisory firm with offices across Southeast Asia, told Myanmar Business Today.

The rules require a government department to organise a tender committee, with representatives of the region or the states if needed, which will set out the tender rules “precisely” in advance. The committee will also have to invite all the bidders at once to evaluate the submitted prices.

The tender will have to be properly advertised in newspaper and on websites at least one month in advance, the rules say, while bids must be opened in public, meaning before representatives of the bidders.

The government department must ask for a deposit from the bidders and assess their financial background, according to the rule. The rules also provide specific rules for tenders for purchases, construction, land tenders, and services.

Employment to be provided by a bidder in the appropriate region comes forward throughout the tender rules as an important factor.

Tenders for land leases are largely to be decided on the prices offered in the bids, Edwin said.

According to the rules, delays or flaws in implementing the activity must be documented and investigated by the government department.

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Investment arbitration will increase FDI, say experts

Posted in Bangladesh, Dhaka, Investment, Legal by Sherpa Hossainy on February 4, 2012

Published in The Independent on 27 January 2012

Read the article on Independent website

Digital print version

Foreign direct investments into Bangladesh can be boosted by formulating an internationally recognised arbitration law, legal experts said at a dialogue on Thursday.

Arbitration is an alternative dispute resolution (ADR) tool which allows two parties settle legal issues outside court, avoiding lengthy judicial proceedings and huge costs.

The experts were speaking at a dialogue on investment arbitration, organised by Bangladesh International Arbitration Centre (BIAC) at Hotel Ruposhi Bangla. Shafique Ahmed, minister for law, justice and parliamentary affairs, Dr Kamal Hossain, eminent lawyer, and Gavan Griffith, Queen’s counsel at the Australian Bar, were  present.

Griffith, a chartered and international commercial arbitrator, in his keynote speech, said  different states have different laws but local judgement is not acceptable internationally.
“Commercial entities want to know if there will be finality in case of a dispute resolution. In absence of an internationally recognised dispute settlement tool foreign companies get reluctant to invest as they feel unprotected,” he said.

Griffith said some commercial entities prefer some states over others for businesses because there is enough protection and justice for them. Some states are making arbitration laws allowing foreign investors, if treated unfairly, to claim damage against the state, he added.

“Bangladesh has a standard arbitration law, which is similar to that of the UK, but without an international treaty this will not be recognised globally. You have to create a level playing field,” Griffith said. He said investment arbitration is a tool to make the world a better place for trade and Bangladesh should adopt the internationally recognised New York International Treaty for Arbitration, to protect foreign investments.

The Law Minister Shafique Ahmed said Government is willing to cut down the lengthy court procedures and amending the age-old civil procedural law formed in 1908. “Alternative dispute resolution (ADR) is the only way to deal with the backlog of cases,” he said.

The minister said proper arbitration and investment protection law will encourage foreign investors and the ministry is going to amend Bangladesh Arbitration Act 2001 upon recommendation from the law commission soon.

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