Development continues on three special economic zones in Myanmar

Offering a range of attractive investor incentives, Myanmar’s special economic zones (SEZs) hold significant potential to attract new foreign direct investment (FDI), support industrialisation and manufacturing activities, and boost employment and export receipts. The country’s sole operational facility, the Thilawa SEZ, has already become a magnet for FDI inflows, with its second phase of development attracting significant investor interest. Two larger-scale developments, Dawei SEZ and Kyaukphyu SEZ, are under development, but have faced delays on account of environmental, financing and land acquisition challenges.

Legal Foundation

SEZs in Myanmar have their legal foundation in the Special Economic Zone Law of 2014, which came into effect in 2015 with the publication of its rules for implementation. The law separates SEZs into export-oriented free zones; and domestic market-oriented promotion zones, which may also offer support services to SEZ businesses. The law established incentives for SEZ investors, including a seven-year income tax holiday, which can be followed by five years of 50% income tax reduction. SEZ businesses also benefit from a 50% reduction on capital gains taxes, value-added tax exemptions, and Customs duty exemptions for raw materials, production machinery, spare parts and construction materials.

Promotion zone incentives are similar and include the same Customs duty exemptions as free zone investors but for a period of five years, followed by a 50% reduction on import duties for an additional five years. Promotion zone investors are also offered the same income tax holidays and reductions, and a 50% reduction on capital gains tax for any re-invested profits.

There are three SEZs that are currently operating or that are under development in Myanmar: the aforementioned Thilawa, located near Yangon; Dawei, located 680 km south of Yangon and 350 km west of Bangkok; and Kyaukphyu, located in Rakhine State along the country’s western Bay of Bengal coastline.

Inaugural Zone

Development on Thilawa SEZ began in October 2013. It was launched under a partnership between the government of Myanmar and Myanmar Japan Thilawa Development (MJTD), with the governments of Myanmar and Japan both holding a 10% stake in the project. Myanmar Thilawa SEZ Holdings is a consortium of nine Myanmar companies and holds a 41% stake in MJTD, while a separate consortium of Japanese companies holds a 39% stake. Located near two Yangon port terminals, the SEZ is split into two sections: Zone A, which has been operational since September 2015; and Zone B, which has been under construction since February 2017.

Newcomers

In 2008 a concession was granted to Bangkok-based Italian-Thai Development PLC to build the Dawei SEZ, an $8.6bn, 205-sq-km free zone in Tanintharyi Region, which encompasses manufacturing clusters and a deepwater port, as well as supporting infrastructure, such as power grids and a 160-km road link to the border with Thailand.

While development has stalled due to a lack of private financing, Japan agreed in December 2015 to join the governments of Myanmar and Thailand as a stakeholder in the special purpose vehicle that now controls the SEZ, and a new concession agreement has been negotiated to resume project activities.

The Kyaukphyu SEZ is a planned transportation and manufacturing hub under development by a consortium of companies led by China’s state-owned CITIC Group, which was awarded a contract to develop the project in December 2015. The original terms gave the Chinese consortium an 85% stake in the project, with its planned deepwater port expected to cost $7.2bn, although the government has recently moved to downscale both the size and price of the project, likely in response to rising Chinese influence and concerns regarding unsustainable debt levels.

Investment Attraction

With an array of incentives and relaxed entry requirements on offer, SEZs offer an important avenue for FDI inflows and stand as some of the most attractive destinations for investors. In July 2018 U Than Myint, the minister of commerce and chairman of the Myanmar SEZ Central Working Committee, reported high demand for spaces in the Thilawa SEZ’s Zone B. According to Daw Cho Cho Win, the vice-chair of the SEZ Management Committee, 57% of the 101-ha Zone B has already been leased, with seven companies receiving permits to operate. Daw Cho Cho Win said there are 70 industrial projects active in Thilawa, as well as nine trade projects, four service sector projects, one real estate project, one logistics project and one hotel project.

Thilawa has attracted considerable FDI in recent years, with investors from 17 countries moving to invest $1.4bn in the zone up to April 2018. The government reports that Singapore tops the list of FDI sources, with $503.7m of investment, followed by Japan ($425.5m), Thailand ($151.8m), South Korea ($54.6m) and Hong Kong ($47.2m).

Stop & Go

Despite holding high potential to boost FDI and industrialisation, the Dawei and Kyaukphyu SEZs have faced several delays in recent years, although work on both is set to resume in the near term. Under development as a public-private partnership, the Dawei SEZ stalled in 2013 as a result of financing challenges. The project has also faced resistance from local communities regarding potential environmental impacts, limited compensation for residents who may need to relocate and lack of transparency in the planning process. Work on a planned 160-km highway linking the zone to Thailand was also suspended due to safety concerns.

However, in September 2018 local media reported that work on the highway had resumed, with the Myanmar and Japanese governments negotiating to form a new partnership under which Japan would spearhead development. Japan’s success with Thilawa makes it the ideal partner for new SEZ construction, and Japanese financing could help revive the stalled project.

In November 2018 Myanmar and Thailand signed an agreement for joint upgrades of the existing highway, with Thailand’s Neighbouring Countries Economic Development Cooperation Agency set to conduct survey and design work on the two-land road, which will traverse the Htee Kee border crossing via Myittar.

Kyaukphyu Renegotiation

The government appears keen to avoid borrowing too much to finance SEZ development, as evidenced by recent developments at the Kyaukphyu SEZ. In September 2018 U Khin Maung Cho, the minister of industry, reported the government was negotiating with CITIC to establish a framework agreement for Kyaukphyu, after years of concerns over the price tag and CITIC’s large stake in the project. According to U Khin Maung Cho, the agreement hinged upon usage of the deepwater port, with the government moving to develop it in four stages to avoid taking on unnecessary debt.

In October 2018 the authorities announced the successful renegotiation of a framework agreement for the Kyaukphyu SEZ, which reduced CITIC’s 85% stake in the project to 70%, and cut the cost of developing its deepwater port from $7.2bn to $1.3bn. According to local media, the Chinese consortium agreed to new financial arrangements which will reduce Myanmar’s debt burden. The SEZ Management Committee reportedly plans to incorporate a local company and capitalise it using grants of leaseholder interest on land earmarked for the project, which will provide $300m worth of financing.

The Dawei SEZ Management Committee will sell shares via a government-designated entity to provide the remainder of its financing. The land lease period for each of the project’s four phases has been set at 50 years, extendable by 25 years, with the Myanmar Port Authority operating the deepwater port.

Once the port’s first phase begins operations, the authorities will monitor traffic and revenue for two years prior to any further expansion decisions. Although the government of Myanmar may still be required to take on debt to finance its larger stake – local news reports estimate it could cost up to $900m – the debt-equity ratio is expected to be 70:30, with authorities announcing plans to seek concessional or soft loans for any Kyaukphyu borrowing.

In early November 2018 Myanmar and CITIC authorities officially signed the new agreement. U Aung Htoo, deputy minister of commerce, told media the project’s next step will be an environmental and social impact assessment, set to commence by the end of 2019, following which construction of Kyaukphyu’s deep-water port and associated industrial zones will begin.