Legislative reforms to boost trade and investment in Myanmar

Approved foreign investment in Myanmar has dropped off since the early years of economic liberalisation. The government now seeks to attract new inflows in an effort to boost exports and employment, reduce the trade deficit and diversify the production base.

Companies Law

A number of major legal reforms have been rolled out to increase international trade and investment. The most recent of these is the Myanmar Companies Law, which replaces the Companies Act of 1914 and is slated to come into effect in August 2018. Drafted with technical assistance from the Asian Development Bank, the new law is expected to reduce red tape and delays for companies seeking to launch operations in Myanmar, as well as relax registration requirements for small and medium-sized enterprises (SMEs). Significantly for foreign investors, the new Companies Law reforms foreign ownership regulations and enables global investors to trade on the Yangon Stock Exchange (YSX) (see Financial Services chapter).

Under previous legislation, companies were classified as either Myanmar or foreign-owned. Although the distinction will continue under newly introduced reforms, foreign investors are now able to obtain up to 35% ownership in a Myanmar company before it is no longer considered local. The law also removes the requirement that foreigners receive regulatory approval prior to purchasing shares in a Myanmar company, stipulating only that the regulator is notified when a company exceeds the foreign ownership threshold.

Significantly, the law also does away with a requirement that foreign companies obtain a separate permit to trade. It is expected that this will reduce the regulatory burden on foreign companies and level the playing field, especially as the 35% ownership threshold is not a cap, and shares can be freely exchanged between foreign and local investors. This means some local companies could potentially benefit from increased foreign investment and capital as international participation in YSX trading activities rises. However, it remains unclear if all local companies will benefit from foreign participation. Soon-to-be-published bylaws are set to clarify whether certain local sectors, such as banking and insurance, will remain hands-off for foreign investors.

Investment Law

The Myanmar Foreign Investment Law (MFIL) came into effect in 2012 and permitted investment through 100% foreign-owned investment companies, joint ventures and public-private joint-venture contracts with the government. It also set percentage limits for investments across a number of sectors, stipulating that a joint venture with a Myanmar citizen or business was required in areas such as agricultural processing factories, hazardous chemicals, and activities which could affect or damage public health, the environment, the national economy or national security. While the 2012 MFIL helped boost foreign direct investment, it did not maintain momentum, as investors continued to face complex bureaucratic procedures and lengthy delays. Domestic investors also complained about unfair treatment, as they were governed by the Myanmar Citizens Investment Law (MCIL), which did not offer the same tax exemptions.

In response, the International Finance Corporation (IFC) partnered with the Directorate of Investment and Company Administration (DICA) to draft the Myanmar Investment Law (MIL). Coming into force in October 2016, the MIL combined the MFIL and the MCIL under one umbrella and provided a general legal investment framework. It was followed by the more detailed Myanmar Investment Rules, which came into effect in March 2017, and two notifications in April 2017 which clarified sectors to be promoted, defined tax incentives and restricted certain investment activities.

Three investment policy areas took priority during the MIL drafting process: the authorities sought to make improvements to the legal and regulatory framework, simplify and streamline administrative procedures, and target areas with the greatest potential for private sector growth, such as labour-intensive manufacturing.

“The MIL will not only help to level the playing field for both foreign and domestic investors, but it will also strengthen the safeguards investors seek,” Charles Schneider, senior operations officer at the IFC, told OBG. “Myanmar is putting a clear framework in place for the protection of investors by incorporating into national law international rules and best practices; multilateral agreements, such as the ASEAN Comprehensive Investment Agreement; as well as principles related to land access rights and the transfer of funds.”

Reforms

More specific reforms included reducing the amount of time required to obtain Myanmar Investment Commission (MIC) approval from six months to three, slashing the number of firms required to obtain MIC approval for a new investment, and rolling out investor protection reforms to safeguard against unfair treatment and expropriation. The MIL also established a new mechanism to detect and address investor grievances to prevent the need for international arbitration. This could play an important role in improving the country’s position on the World Bank’s annual “Doing Business” report, in which it ranked 171st out of 190 countries in 2018 (see Economy chapter).

The MIL makes no legal distinction between domestic and foreign investors, offers specific provisions for domestic SMEs and other local businesses, and includes a seven-year corporate income tax holiday for investors in priority sectors – up from three years previously. The number of prohibited or restricted investment areas was also reduced from 21 to 12. Although the MIC was not accepting new investment applications during the first quarter of 2017, DICA reported in October 2017 that approved foreign investment reached $4.35bn in the first half of FY 2017/18, well above the $1.25bn during the same period in FY 2016/17.

Textiles Growth

Legal reforms are also expected to boost decentralised investment in priority sectors, supported by the country’s existing competitive advantages, namely its large, low-cost labour force. This has already been the case for textiles, with industry media reporting that apparel exports rose by 26.5% in 2013 and 27.4% in 2014, as global retailers began sourcing from the country. In February 2017 more than 400 apparel manufacturing units were active in Myanmar, employing over 300,000 people. Recent estimates by industry media expect 1.5m jobs will be created, generating $12bn in export revenue by 2020.

Behind liquefied petroleum gas, dried legumes and raw sugar, non-knit men’s suits were the country’s fourth-largest single export category in 2016, generating $577m, or 4.9%, of export receipts, according to the Observatory of Economic Complexity (OEC) at the Massachusetts Institute of Technology. The OEC reports that the country’s combined textile category exports amounted to $1.65bn in 2016, against $3.31bn of mineral products and $2.67bn of vegetable products.

Challenges

However, there are rising concerns regarding shifting labour regulations, including recent increases to the minimum wage, which could potentially impact investment in labour-intensive industries. In January 2018 Myanmar’s National Committee for Minimum Wages agreed to raise the basic wage from MMK3600 ($2.75) to MMK4800 ($3.70) per day. While generally seen as a good thing, the raise also underscores the vulnerability of over-reliance on any one sector. “The minimum wage here is barely a living wage, and most people will not work for such a small sum. At the same time, the garment industry is highly sensitive to wage changes,” Thomas Kring, economic advisor at the UN Development Programme, told OBG. “If Myanmar wants to develop its garment industry, it should avoid becoming too dependent on the sector, so wages don’t stagnate, causing broader economic problems.”

Other challenges involve added bureaucratic hurdles. While the initial intention of the MIL was to facilitate investment, the complexity of issuing new licences is likely to make the approval process lengthier. “The MIL’s implementation rules continue to grant approval authority for certain activities to other ministries and agencies separate from the MIC. Without a clear approval process or criteria, the intention to streamline investment approvals is undermined,” Pedro José Bernardo, principal foreign consulting attorney at law firm Kelvin Chia Yangon, told OBG. “Companies that seek to operate in certain sectors or invest in large projects, such as power, mining and telecommunications, may be presented with more challenges to entry when the MIL is actually implemented because of the decentralised approval process that continues to be included.”

Additionally, due to the novelty of the law, problems have arisen related to the lack of capacity and organisation at the institutions and ministries responsible for issuing permits, making delays common. “This is a very new initiative, and we have to reduce a lot of the red tape and simplify procedures [that] we are not familiar with,” U Aung Naing Oo, director-general at DICA, told local media in October 2016. “The state and regional governments are very new, so they don’t have a lot of experience and exposure in decision-making or screening investment. So that can be a bit cumbersome for us because we need to educate the state and regional governments and the local business community on how they can make use of the investment law. Also, we have to draft the rules to ensure the law progresses well, we have to consult with the state and regional governments for many areas, and we have to consult with the ministries for setting up the promoted sectors.”

Foreign Hires

Investors also raised concerns after DICA unveiled two new draft laws in late October 2017, regarding the appointment of foreign experts. Under the new rules, any MIC-licensed company must submit a work permit application prior to appointing a foreign expert, or within seven days of their arrival to the country. The regulations have been met with criticism from some stakeholders, claiming it will be difficult to plan for the exact duration of a foreign expert’s tenure at any company. Exacerbating the problem, the regulations also stipulate that if a new foreign expert is appointed in place of one who has just resigned, the company must submit evidence that the outgoing employee has left the country – a challenge in the case of employees who may leave to join another company in Myanmar.