Entering Responsibly in Risky Markets: A Look at Myanmar

Authors

• Jeremy Prepscius

  Former Vice President, Asia-Pacific, BSR

• Chris Nolan

  Former Associate Director, BSR

Market entry in high-risk, transitional countries can often be characterized by significant and ongoing political, economic, and legal change and uncertainty, as well as profound opportunities for business. In such environments, business can contribute tangibly to a country's national development. But the stakes are high--for the company and the country. When countries are at their most vulnerable in their development trajectory, changes enacted are tenuous, and trusted, committed external partners--including business--are critical. Though companies are often tempted to rush in for fear of not "getting in at the ground level,"responsible businesses must consider the investment's social, economic, and environmental risks and opportunities even as they look at core business prospects, not as an afterthought. Short-termism is a perfect way to ensure investment booms in such a market spell doom for a country's prospects. Today, no country embodies these risks and opportunities more than Myanmar. The political and economic reforms sweeping the country have dramatically shifted its outlook and much of the world's perspective toward it, creating once unthinkable opportunities for business. While opportunities in sectors ranging from oil and gas to manufacturing, travel and tourism, information and communications technology (ICT), financial services, and agriculture may appear boundless, the risks of investing in this long-isolated nation are substantial, given the continued predominance of the military in politics and the economy, the vastly underdeveloped financial and legal/regulatory institutions, the weak rule of law and lack of an independent judiciary, endemic corruption, and poor human and labor rights records.

A Country in Transition

The political and economic reforms introduced by former military officer and President Thein Sein have been significant, capped most recently by the election that brought Nobel Peace Laureate Aung San Suu Kyi and the opposition party, the National League for Democracy, into parliament. In one of the most notable economic reforms to date, Myanmar's Central Bank ended multiple informal exchange rates and created a system more conducive to foreign investment and trade. On the security front, cease-fire agreements are in place between the military and most of Myanmar's armed ethnic groups, many of which are located in resource-rich areas along the country's borders. Notably, however, fighting continues between the Myanmar Army and Kachin Independence Army in the country's northern Kachin state, and there have been several reports about human rights abuses by the Myanmar Army in that conflict. For a country rich in natural resources, including oil, gas, minerals, forests, fertile agricultural lands, and fisheries, the recent easing and suspension of financial and investment sanctions by the United States and the European Union has Myanmar bracing for an investment boom. In early May, the government approved a foreign investment law that gives a five-year tax exemption to foreign businesses that can be extended by three more years under certain conditions. According to a Reuters report, incentives include the opportunity for companies to receive tax exemptions or relief on profits, provided the savings are reinvested in the business within one year. Many practical considerations for business remain, however, including poor road infrastructure, a dearth of office space in major cities like Yangon, spotty phone service, a severe lack of electricity throughout much of the nation, and frequent power outages. Decades of systemic repression have also left the workforce--particularly the younger workforce--largely uneducated.

Risks and Opportunities Behind the Open Door

A business considering investment in Myanmar should carefully examine the risks and opportunities, as well as the applicable international standards for responsible business conduct. Businesses should seek to identify and understand potential social, economic, and environmental risks and impacts and be prepared to responsibly manage them--before an investment decision is made. Likewise, companies should identify how investments may actively support Myanmar's national development and the ongoing reform process. Among key risks for business is a bureaucracy left weak and inefficient from decades of military domination and lack of interaction with the outside world. As a result, "the country doesn't have the capacity to absorb a lot of new investments,"said David Scott Mathieson, senior researcher for Burma at Human Rights Watch. Mathieson added that the legal system is an "absolute shambles.""It's been used for years as a tool of the state, and to protect vested interests,"Mathieson said, noting that decades of military rule has created a culture of "post authoritarianism,"meaning "a lot of people will not do the right thing, not because they don't want to do the right thing, or because they don't know what the right thing is, but rather, they don't know how it will be received from their superiors."On a practical basis, this attitude of many middle-level bureaucrats illustrates how the military, while not technically in charge of the government, continues to dominate the country. Myanmar has a legacy of corruption (the country ranked second to last in the 2011 Transparency International index), something which could be exacerbated by the flood of new foreign capital into the country. Indeed, no rule of law exists in Burma to prevent investments from harming local communities, according to a warning the advocacy organization the U.S. Campaign for Burma (USCB) sent to the U.S. government for binding requirements on investments and financial transactions. In regard to labor, a primary risk for businesses entering Myanmar is the existence of forced labor, a practice largely of the military and military-backed enterprises. The International Labour Organization (ILO) has been working with the government since 2002 to end the practice and will make an assessment of Burma's efforts in June. If the ILO makes a positive assessment, that would allow the EU to consider allowing Burma to ship goods and services to Europe at preferential tariff rates under the Generalized System of Preferences and possibly tariff-free under "Everything but Arms." This would require a legal procedure, which might take until the end of this year, according to Seamus Gillespie, head of European External Action Service's Southeast Asia division. Despite these risks, the country has declared its intention to attract investment in a range of sectors (not just low-paying manufacturers in the textiles sector, for instance), and to do so in an environment that respects labor, social, and environmental standards, according to Gillespie. The government is also seeking to replace resource-based foreign investment with production-based investment, Myanmar Energy Minister Than Htay stated recently at the World Economic Forum in Bangkok. According to Mathieson, there are areas conducive to investment that supports broader development--namely, agriculture. Significant investment is needed to help the national agriculture sector begin to modernize, which is central to any rural development efforts. Gillespie said there is a debate over whether the country, which is rich in fertile soil, should focus on small-scale, sustainable farming or larger, industrial monocultures. As Mathieson said, "turning the Irrawaddy delta back into the rice bowl of Asia would be very interesting."Further, the power and energy sector can invest in sorely needed upgrades to the country's power grid and help the government develop a national energy policy, and the financial services and ICT industries can help support small business development through improved access to affordable communications and financial services. Above all, the country needs to create a vast number of jobs to stave off what Aung San Suu Kyi recently referred to as a "ticking time bomb"--the generation of undereducated, unemployed young people. In pursuing such opportunities, companies must understand who their potential business partners are in Myanmar. Arguing that the U.S. Specially Designated Nationals list of individuals and organizations that U.S. companies and individuals cannot do business with is significantly outdated, the USCB has created its own version of the list. Taking a medium- to long-term view with an investment is vital, along with the consideration of how an investment can support rather than undermine Myanmar's development and reform agenda. Business can support positive reforms by adhering to international standards and guidelines such as the OECD 2011 Guidelines for Multinational Enterprises, 2012 IFC Performance Standards, UN Guiding Principles on Business and Human Rights, and making public responsible investment criteria that guides whether and how an investment is made.

Next Asian Tiger or Resource-Rich Failing State?

Myanmar is not the first high-risk, transitional country that has drawn the interest of international investors. Responsible investment in Myanmar, as in any high-risk country, requires that companies take some important steps:

• Understand the country and investment context. Potential business risks and impacts--positive and negative--of an investment must be clearly understood. We recommend credible and thorough application of social and environmental due diligence tools (e.g. social and environmental impact assessments and human rights impact assessments), in accordance with international standards, before an investment decision is made. An increasing number of Myanmar country reports are also available for review.
• Engage credibly and transparently. Companies should engage with a broad range of stakeholders at the pre-investment phase in order to understand the spectrum of views on key issues and share social and environmental due diligence findings with stakeholders and the broader public.
• Manage risks and impacts responsibly. Companies deciding to invest should deploy a proportionate number of risk-management resources, in accordance with international standards such as IFC Performance Standard 1, pertaining to environmental and social management.
• Support national development. Identify and plan for how investment can meaningfully support the nation's economic and social development.

The above steps are not the norm for most companies, and the time and money required to take such steps are significant. However, the stakes in entering a high-risk, transitional market are always high, and in Myanmar they've never been higher: Will it be the next Asian tiger or a resource-rich failing state? Business will play a large part in the outcome, and the world is watching.