BKKPOST:Jun19 Burma investment

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/* ---------- "BKKPOST:Jun19 Burma investment" ---------- */
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Subject:BKKPOST:Jun19 Burma investment
Date: 20 Jun 1994 16:34:18 +1000
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Sunday Perspective
by Jim LoGerfo

THE head of Thailand's Board of Investment recently made a trip to
Burma with a number of Thai businessmen to assess the
possibilities of investing in the Burmese economy. While Burma
might seem to offer a wide range of opportunities for profitable
activities, there are also many obstacles that must be considered
before making a decision to invest.

  "In Burma you can get some of the best deals in the world, but
then again everything is illegal," says a Bangkok-based American
businessman. His experience captures well the contradictions of
doing business in Burma, a country rich in natural resources but
still fettered by official regulations and corrupt military
leadership. It has only been relatively recently that a foreign
businessman like him could even begin to take advantage of the
many opportunities available in Burma.

After 26 years of tight official control over economic activity,
the "Burmese Way to Socialism" had proved to be the high road to
stagnation, and in September 1987 the Burmese government took its
first steps towards liberalizing the economy by opening domestic
trade in rice and other grains to the private sector.

While the government has since promulgated a foreign investment
code and now welcomes the establishment of foreign-owned
businesses in many sectors of the economy, the attractiveness to
business of the country's extensive natural resource base and
growing domestic market depends on the practicalities of doing
business in Burma and the political and human rights situation.

The possibilities for profit in Burma are many. A report prepared
in August 1993 by the US Embassy in Rangoon lists five areas of
particular economic potential: telecommunications, mining, wood-
based industry, agro-industry, and development of natural gas
resources.

With one of the lowest per capita telephone ownership levels in
the world, there is certainly room for investment in
telecommunications. Foreign firms wishing to enter this industry
are required to sign into joint ventures with the state, and the
same is true in mining and energy.

In other sectors 100 per cent foreign ownership is possible. For
the first three years, the Burmese government grants new foreign
enterprises a tax holiday, and after that they must pay income
tax, profit tax, and commercial tax just like local firms. Income
tax is 10 per cent for residents and 30 per cent for non-
residents, while the profit and commercial taxes both stand at 30
per cent.

Despite official Burmese efforts to attract capital from abroad,
the numerous obstacles to conducting business there such as the
exchange rate, repatriation regulations, bureaucratic corruption
and red tape, and the lack of infrastructure are certainly
restricting the inflow of foreign funds. The exchange rate regime
is a clear disincentive to investment.

According to the US Embassy report, "foreign investors are
generally required to pay local staff salaries, rents, telephone,
and utility charges in foreign currency." However, foreign
currency which is used to pay kyat-denominated local expenses is
converted at the grossly overvalued official rate of 6 kyat to the
dollar, which appreciably raises the cost of doing business in
Burma. The black market rate, meanwhile, is about 110 kyat to the
dollar.

Foreign capital enjoys legal protection in Burma. By law the
government will not nationalise foreign enterprises, and the last
nationalisation occurred over 25 years ago in 1968. But while
foreign businessmen do not have to worry that their assets will be
seized, they do face problems in repatriating their profits.

"Repatriation is difficult. The Foreign Investment Commission
investigates applications for repatriation on a case-by-case
basis. Only one company has been trying to repatriate and it has
only succeeded in repatriating earnings from exports," explains a
Western diplomatic source.

Counter-trade is one strategy that businesses have employed to get
around this obstacle. In counter-trade a firm uses locally-
generated profits to buy exportable goods like timber, and holds
the earnings from the sale of the exports in an overseas account.

Doing business in developing countries often requires applying
grease to the bureaucratic machinery in the form of under-the-
table payments to well-placed officials. Daw Ann The, a Burmese
knowledgeable about local business conditions, says that
"corruption in Burma is not as bad as Thailand, but it depends on
the ministry. If one goes to the minister and he is forward-
thinking, then maybe payoffs will not be involved."

Another way to avoid payoffs, she says, is to offer an attractive
package to the government that might include providing training
for employees or free services to the state.  For example, as part
of its contract to provide a cellular telephone system in Rangoon,
Ericsson Telecommunications Corp offered the government 200 free
phone lines and overseas training for local personnel. After the
signing of the contract, "it is expected that the foreign firm
will take the officials and their entourage out to dinner," says
Ann The.

John Chaw, a Burmese-American businessman, claims that whether a
firm must buy off officials depends on its contacts in the
bureaucracy. "Without contacts inside you would have to pay
bribes. With such contacts things go smoothly with little or no
payments. You could still do business without contacts, but you do
not know how long you would be able to operate."

He warns that "Once you have inside contacts, if they collapse you
would go down too, unless you stay clean from politics."

There are problems not only with corruption but also with official
regulations and bureaucratic arbitrariness. Charles da Costa, the
managing director of an import-export firm, says that the amount
of paperwork and length of time needed to run his business legally
are so prohibitive that he prefers to pay the cost and sidestep
the system. "I have never done business by the book. You are an
idiot if you volunteer."

He cites an experience he had been trying to deposit money at a
bank as an example of the kinds of difficulties that state
officials routinely create. "I had about [US]$4,000 in $100 bills
which I took into the government bank. The bank was going to make
me write down the serial number of each bill, and they were going
to fax the list to New York to see if the money was counterfeit."

He operates through an agent because of the labrynth of
regulations that the government has created around import and
export. Da Costa purchases exportable goods in Burma, then passes
them on to his agent who for a fee handles all of the paperwork.
He explains that "what I buy and remove, I have to bring in
something in return. For everything my agent exports, he has to
import something according to a government formula."

Furthermore, da Costa is required to ship his goods through the
Five-Star Line, the government carrier, which charges an inflated
price. Some objects he transports out of Burma himself. "I carry
all the handicrafts out myself, and usually end up bribing the
customs agents."

Because of such intricacies in doing business in Burma, both Ann
The and Chaw agree with da Costa that having a good local partner
is important. Such a person must know the ins and outs of the
bureaucracy, and should be able to rent office space and land at
local prices. "Foreign businessmen should have a partner or some
Burmese friends in Burma," says Chaw.

Regardless of who one's friends are, there is no avoiding the
barriers to business created by Burma's woeful lack of
infrastructure. At present there are a total of 26 international
telephone lines. Ten of them connect Burma with Singapore.

International telephone service is slated for expansion, with 300
new lines planned for 1994. One hundred and twenty of these lines
will be allocated to the new International Business Center built
near the Rangoon airport. A Western embassy source cautions that
"it is possible that international calls are monitored." Domestic
service within Rangoon and to provincial cities is marginally
adequate, but most villages do not have telephones.

Related to the communications system is the broader question of
access to information. Burma is a military authoritarian state. It
does not permit the free flow of information within national
borders. There are three daily newspapers -- the New Light of
Myanmar in Burmese and English, both controlled by the government,
and one privately-owned Burmese-language daily operating under
conditions of strict censorship. The latter is preferred by Daw
Tan Tan, a Burmese schoolteacher, because "it has more information
and better gossip."   The government has banned the import of
foreign newspapers, although the Bangkok dailies are sometimes
available on the streets. Newsweeklies such as Asiaweek, Newsweek,
and Time are permitted circulation. Access to print media is
better for foreigners than for the Burmese because expatriates can
use the United States Information Service (Usis) library, which
collects many foreign newspapers and periodicals. In general,
embassies make foreign newspapers ava
ilable.

Star TV provides cable service in Burma. The government tried to
control the spread of satellite dishes by requiring all owners to
register their dishes by August 30, 1993. By law, any satellite
dishes purchased after that are illegal and must be turned over to
the state. The government has yet to enforce this regulation.

The road network is in dire need of improvement. Most of the 720-
km "highway" from Rangoon to Mandalay consists of a single bumpy
lane. The narrowness and poor condition of the road along with the
regularity of military checkpoints means that the trip between
Burma's two most important cities takes over 12 hours. In
upcountry areas this road is swept by small groups of local
villagers, and drivers are expected to drop money from their
vehicles as they drive past to pay for the maintenance service.

Fuel rationing makes road travel very expensive. Civil servants
can buy 80 gallons of gasoline a month at the subsidized price of
16 kyat (about 15 cents US) per gallon, while private citizens are
entitled to purchase only eight gallons a month. Civil servants
buy the maximum gasoline allocation every month, then sell what
they do not need on the black market at 220 kyat (US$2) a gallon.

Despite problems such as profit repatriation restrictions and
Burma's underdeveloped infrastructure, foreign capital has been
flowing in. In terms of value, the leading sectors of foreign
investment have been oil and gas, hotels and tourism, and mining,
and the biggest investors have been Thailand, the US, Singapore,
Japan, and the Netherlands (See tables 1 and 2).

A number of foreign firms led by the Thais had been engaged in
logging, but the Burmese government has declined to renew most of
the timber concessions in order to restructure the industry, add
value to the logs through domestic processing, and capture more of
the profits for Burma.

Foreigners opening businesses in Burma seem to be banking on
Slorc's ability to deliver continued political stability. In
truth, Slorc's grip on the wheel of the ship of state has become
firmer over the last several years. Slorc is engaged in three
major political projects designed to ensure future power -- the
drafting of a new constitution; the creation of its own political
vehicle, the Union Solidarity and Development Association; and the
negotiation of cease-fires with ethnic insurgents.

Slorc is resigned to the fact that a politically-significant
segment of the population will not tolerate perpetual military
rule. Only an elected government can command the degree of
legitimacy necessary to rule without extensive coercion. After the
disastrous (for Slorc) elections of 1990 which resulted in a
landslide victory for Aung San Suu Kyi's National League for
Democracy (NLD), Slorc realized that it needed to hold elections
under more controlled circumstances.

In 1992 it formed the Convening Commission to choose one-third of
the 700 delegates for the National Convention entrusted with the
drafting of a new constitution. Another third of the delegates
consists of members of opposition political parties including
"acceptable" representatives of the NLD, making up one-third of
the National Convention, with the final third composed of various
sections of Burmese society ranging from labour leaders to the
heads of the ethnic minority groups.

The National Convention began its work in early 1993. When it
adjourned for the year in September, Chief Justice and Chairman of
the Convening Convention Aung Toe announced the basic principles
adopted by the convention, which included granting the armed
forces "authority to take power over the state in the event of
national emergencies" as well as the power to appoint military
personnel to the legislature, while giving it the right to
independently administer all of its own affairs.

A well-connected Burmese army major explains what the future place
of the military will be: "The role of the military is to defend
and protect the well-being of the citizens. Once the new
constitution transfers power to the new government, the military
will have no political role."

But while he describes the military as simply "an outsider
watching over," he concedes that under certain circumstances this
hovering outsider will directly involve itself in political
affairs. "If anything would hinder the well-being of the citizens,
the military will not just stand and watch. As far as the military
is concerned, we will protect the unity, culture, and religion of
the country. We will not stand and watch the destruction of
national unity by politicking and such."

Political scientist Adam Przeworski writes that "the process of
establishing a democracy is a process of institutionalizing
uncertainty," in that the outcome of the contest for political
leadership is not determined in advance but rather decided by
popular ballot. One way that Slorc is protecting itself in the
face of that uncertainty is by constitutionally enshrining a
leading political role for the military. Regardless of election
results, the armed forces will retain the right to intervene in
case of "national emergencies," as defined by the military itself.

Slorc apparently intends to use the constitution to further
decrease the risk inherent in the electoral process by barring
Aung San Suu Kyi from the highest political office. Chief Justice
Aung Toe has stated that the National Convention might stipulate
in the constitution that any individual who has citizenship or
special rights in a foreign country, or whose spouse or children
have foreign citizenship or privileges abroad, cannot become
president of the union. Aung San Suu Kyi's marriage to Dr Michael
Aris, a British citizen and Oxford professor, would disqualify her
as Burma's next president.

The military leadership is apparently working for an "Indonesian
solution" to the challenges of demands for democracy and ethnic
unrest. Lt-Gen Khin Nyunt has made several trips to Jakarta to
study Suharto's "New Order." Gen Suharto and his khaki cronies
have maintained control over their large, multi-ethnic island
state for nearly three decades through a combination of political
patronage, stage-managed elections, and moderate repression. (In
East Timor the Indonesian state has been much more liberal in its
application of force).

Their primary political instrument has been Golkar, the
government-controlled political party which has consistently won a
comfortable majority of about 60  per cent in every election since
1965. All civil servants in the extensive state apparatus are
expected to vote for Golkar candidates.

The Burmese equivalent of Golkar is the Union Solidarity and
Development Association (USDA). Officially registered in September
1993 as a "social organization," observers believe that Slorc
established the USDA to mobilize grass-roots support for the
military and military-backed political parties, particularly for
the general elections the government has promised to hold.

The USDA held a series of mass rallies in January of this year,
which its secretary general U Than Aung said were intended to
reflect the desire of all Burmese for peace, tranquility, and
economic development.  Not coincidentally, he also noted that
Slorc, the government, and the USDA shared the same objectives.

The military junta has also been offering "peace, tranquility, and
economic development" to Burma's many ethnic minorities. It has
been making a major effort to reconcile with most of the armed
ethnic groups in order to consolidate central state control over
the national territory. Slorc has already reached ceasefire
agreements with the Kokang, Wa, Shan, Pa-O, Palaung, Kachin, and
Karenni peoples.

Its strategy seems to be one of gradually isolating the most
intransigent minorities -- the Karen and the Mon groups -- by
cutting deals with other ethnic peoples while calling upon
Thailand to pressure the remaining holdouts into submission. What
Slorc has been offering is not only an end to military conflict
but material incentives as well. Following the conclusion of
successful talks with the Kachin Independence Organization, Slorc
announced that it will allocate 20 million kyat (about $180,000 at
the black market exchange rate) for the construction of roads,
bridges, schools, and hospitals in Kachin State.

While the Karen and Mon groups cannot hope to oust Slorc from
power, they might be able to retain control over their respective
territories for some time, and even if they lose their lands to
the Burmese army they could operate as guerrillas for years to
come. Rangoon will have to give them much more than they are
offering now if these groups are to be brought back into the
national fold. Another ethnic issue facing Slorc is Khun Sa's
recent declaration of an independent Shan state.

T o the extent that the current regime is successful in delivering
economic development, maintaining order, holding and winning
(managed) elections, and settling with ethnic insurgents, it will
gain international credibility and increase Burma's attractiveness
to foreign capital. A final consideration for those wishing to do
business in Burma is the human rights situation.

Investing in Burma now invariably means providing financial
support to Slorc, a military regime which continues to hold Nobel
Peace Prize winner Aung San Suu Kyi under house arrest and
routinely imprisons dissidents, censors publications, uses forced
labour on infrastructure projects, and wages war on ethnic
minorities.

For smaller firms or for those unconcerned with international
image, association with such a government may not be a problem.
But large, highly visible corporations based in Western countries
such as Texaco have been criticised by human rights groups for
their Burmese operations.

Although opportunities for profit in Burma do exist, the
overvalued exchange rate, repatriation restrictions, official
corruption and regulations, infrastructure limitations, political
uncertainties, and human rights violations all create an
environment hostile to business. As da Costa says, "Burma may be
one of the tougher places to do business."





          Table 1:  Foreign Investment in Burma by Sector

(as of November 30, 1993)



Foreign Capital Sector:            Number of Ventures:
(US$million):



Agriculture                1                   2.69
Fisheries                  9                  87.58
Mining                    10                 155.35
Oil and Gas               20                 381.10
Manufacturing             25                  89.27 Transport
1                   1.00 Hotel and Tourism         18
287.33

------                 ------------



TOTAL                     84               1,004.32



Source:  "Investment Opportunities in Myanmar," Ministry of
National Planning and Economic Development, the Government of the
Union of Myanmar, November 30, 1993.







Table 2:  Foreign Investment by Country of Origin

(as of November 30, 1993)



Foreign Capital Country:         Number of Ventures:
(US$million):



Australia                2                      27.20 Austria
1                      71.50 Bangladesh               2
2.96 Canada                   1                      22.00 China

1                       0.38 France                   1
10.00 Hong Kong               11                      56.64 Japan

5                     101.14 Korea                    7
59.83 Macau                    1                       2.40
Singapore               15                     103.94 Thailand
17                     210.09 The Netherlands          1
80.00 United Kingdom           7                      43.31 United
States           10                     203.19

------                     ------------



TOTAL:                  84                   1,004.32

Source:  "Investment Opportunities in Myanmar," Ministry of
National Planning and Economic Development, the Government of the
Union of Myanmar, November 30, 1993.