The long road of reform - Phil Taylor

Burma has recently made rapid progress along the road to democracy. But legal uncertainties and the rise of an untested opposition party make foreign investment a very complicated prospect.

In May 2012, everything changed for Burma– again. Aung San Suu Kyi’s victory in the country’s by-elections, along with wins for 42 other members of her party, came only 18 months after her latest release from house arrest, and two years after the start of a series of significant but controversial democratic reforms.

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The success of the progressive National League for Democracy (NLD) triggered a significant easing of sanctions on direct investment by the USA and a year-long suspension of EU restrictions. Some say the by-elections have put the country firmly on the path toward true democracy and an open investment environment, and one senior UK government figure recently described the Burmese government as ‘fresh and full of ideas […] an enlightened government which wants to try.’

‘For the first time, there is a sense of real hope in the country,’ commented Lord Williams of Baglan, distinguished visiting fellow and acting head of the Asia programme at Chatham House, during a seminar hosted in London by law firm Orrick Herrington & Sutcliffe. ‘Aung San Suu Kyi and President Thein Sein have made a clean break with the past and are bringing Burma into the 21st century.’

There are undeniably huge opportunities for investors in a resource-rich country of 60 million people which is desperately in need of revamped agriculture, communication, energy, financial and transport infrastructures. ‘There is tremendous interest and enthusiasm in the possibility of establishing a presence in Burma and exploring the possibilities – the kind of initial enthusiasm that often accompanies this kind of relaxation,’ says Nicholas Coward, chair of Baker & McKenzie’s global trade and commerce practice group.

Foreign investors who’ve visited the country recently have largely come away impressed with what they have seen. There is, they say, a ‘dramatic and telling’ contrast with China in terms of the openness of Burmese society. Others report a huge amount of interest, energy and enthusiasm for reform and doing business, and an enterprising culture.

But Burma is never a straightforward proposition. Rapidly increasing land prices and under-developed electricity and transport networks make it very difficult to establish a viable business in the country in the short term. Investors may also encounter a serious lack of human resources as a result of a whole generation of people missing out on higher education in the 1990s (the country’s universities were completely closed twice during that decade, for two to three years each time). Completing what should be straightforward formalities can be extremely time-consuming: simply to incorporate a company, an applicant must arrange a personal meeting with a senior official in Naypyidaw, Burma’s new administrative capital, which is located approximately 200 miles north of Yangon (tellingly, no foreign governments have yet taken up the invitation to move their missions there). The entrenched interests of a small group of crony businessmen who have grown extremely wealthy from opportunities provided by the military regime will continue to create barriers in certain areas.

Stuart Witchell, senior managing director of the Asia Pacific global risk and investigations practice at FTI Consulting, adds a number of risks to this list, including corruption (which remains endemic particularly at the lower levels of administration and will take a long time to disappear), the spectre of political and military involvement in business, regional conflicts and the question of ethnic minorities, and geopolitical uncertainties arising from the aspirations of China and the US.

 


Aung San Suu Kyi and President Thein Sein have made a clean break with the past
Lord Williams of Baglan acting head, Asia programme,Chatham House


The country’s human rights record cannot be ignored either. As IBA Global Insight went to press, there were 100 boat people missing in the Bay of Bengal, fleeing ongoing sectarian violence raging in the Western province of Rakhine. Many commentators argue that sanctions should have remained in place – and foreign investors should stay away – until all human rights issues are dealt with. They are critical of international corporations which are looking for ways to make money in Burma, saying events such as the release of political prisoners, the holding of by-elections and even the lifting of pre-publication censorship on the media do not go far enough. ‘The reforming regime is all about reforming the economy, not the politics. Any political reform is only enough to reform the economy […]. They are trying to normalise the dictatorship,’ Mark Farmaner, UK director of the Burma Campaign UK, told IBA Global Insight recently.

A contrasting view is that multinational companies are largely welcomed by local people and can be a force for good, providing they proceed carefully and put corporate responsibility first. Orrick partner Robert Pé, who has a strong family connection with Burma, points to the example of French oil company Total, which has had a presence in the country since 1992 according to its website.

‘It is viewed as a model employer by many people in Burma, and they are saying “We need more of this,”’ he comments. ‘There’s an opportunity for cautious and responsible Western companies to play a meaningful role and do successful business [in Burma].’

The use of the word ‘cautious’ illustrates the middle ground in what can be a highly-polarised debate. Although companies such as Total appear to have done much to present a positive image of foreign companies, others – including several Chinese state-owned enterprises – have left a negative impression. The government is understandably keen to protect the country from exploitation by foreign investors, which may account for its failure to provide a clear plan for the development of the economy in general, and the foreign investment programme in particular. Specialists say, therefore, that now is a good time to investigate investment opportunities but not necessarily to go any further. ‘It’s not too early for foreign investors,’ says Jeremy Kloiser-Jones, CEO of Bagan Capital, Burma’s first investment bank. ‘The time is right to start engaging and set up channels of communications, but not to write big cheques straight away.’

Burma has only been open in any realistic sense of the word for a matter of months, and outsiders are beginning to see the problems of any economy that has been closed for decades coming to the surface, including licensing issues, bureaucracy, protectionism, political influence, vested interests, and difficult visa requirements. But analysts agree that these issues are negotiable, provided an investor is patient and forward-looking, taking time to establish relationships and become familiar with local culture and business practice. This could make the difference between a smooth investment experience and complete failure.

Corrupt judges
Restrictions or permissions provided for by law are a big concern for any foreign investor. Much of the law affecting foreign investment in Burma is archaic: on the statute books are the Companies Act 1915 (with its rules from 1940 and regulations from 1957), Arbitration Act 1944 and Special Companies Act 1950.
 


The reforming regime is all about reforming the economy, not the politics. They are trying to normalise the dictatorship
Mark Farmaner UK director, Burma Campaign UK

The age of these laws is not necessarily a big problem, however. Those dating from British colonial times use principles familiar to many commercial lawyers and have been well tested. More confusion may result from the ongoing effort to reform a huge amount of legislation (about 400 statutes, according to one estimate). ‘Half of the local newspaper is taken up with new regulations, for example improving labour law, the minimum wage, or the implementation of a stock market in 2015,’ comments Baker & McKenzie dispute resolution partner Chirachai Okanurak. ‘[Doing business in Burma] is getting easier when compared with the past, but […] it takes time to improve regulations.’

‘The greatest concern would be that in the rush, insufficient thought and care is being taken over what is done,’ adds Coward. ‘The rush to do things quickly is commendable on one hand, but by the same token if the laws put in place are not carefully thought through in advance, [the country] may end up with imperfect legislation that would be very difficult to undo and change.’

The progress of legal reform is rarely smooth, and can also be hampered by political considerations. A revised version of the Foreign Investment Law (replacing the 1988 one) was set to come into law on 21 September 2012 after being passed by Parliament earlier in the month. It was expected to clarify many areas of doing business in Burma by, among other things, allowing foreign exchange at a prescribed rate, describing a mechanism for dispute settlement, extending the tax holiday for foreign investors, providing for the establishment of special economic zones and laying out more detailed employment rules. Reportedly, though, the law was delayed by order of President Thein Sein due to its arousing ‘concern among investors because of its protectionist provisions.’ A revised bill was returned to Parliament a month later, and was finally passed on 1 November. It has been widely reported that law is now more foreign investor friendly, with certain of the more controversial provisions removed.



Although progress with this particular statute was, in the end, positive, there are doubts over how well Burma’s legal system can deal with commercial disputes that may arise in future. Commentators say the courts are not viewed favourably by anyone, even domestic companies, while judges are held in very low regard with bribery being a serious issue as a result of low wages. Local lawyers, although enthusiastic, have also suffered from the lack of a high-quality education system in the past few decades. The best of them are now in their 60s. ‘There is lack of international experience among local lawyers, so much so that, for cross-border transactions, rising and ambitious local companies are seeking out law firms or lawyers in Burma who have been trained overseas,’ says Alessio Polastri, managing partner of P&A Asia.

The good news is things are likely to improve: delegations from various parts of Burma’s legal sector have been actively seeking out assistance from other countries, and lawyers such as Pé are working hard to pass on their knowledge. Progress will take time, however, and most practitioners agree that international arbitration could play a very important role in helping to fill some of the gaps created by the weak court system. ‘If you look at China, when they opened the country arbitration was the best type of dispute resolution at the time. Burma is probably the same,’ says Okanurak.

‘I believe that being a signatory to the [1959] New York Convention [on the Recognition and Enforcement of Foreign Arbitral Awards] is an essential requirement for a country wanting to promote itself as a worthy destination for investments,’ adds Polastri. ‘I am certain that more foreign investors would be able to commit after Burma becomes a signatory.’


Be cautious and hold the Burmese government accountable to international labour and human rights standards before joining the “Burma Rush"
British Chamber of Commerce


The country is already signed up to the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards which provides one theoretical means of enforcement of awards from other countries. Accession to the New York Convention would, however, result in two positive outcomes: a more reliable way for foreign investors to enforce their legal rights (which does not depend on an arbitral award being consistent with the domestic law of the country where it is being enforced), and a clear indication that Burma is open for foreign business.

During a visit to Burma in May 2012, Pé met with the country’s Minister for Industry, U Soe Thein, and the Attorney-General, both of whom he describes as being very receptive to the idea of signing up to the New York Convention, and very aware of the significance of the step. There were also discussions over the importance updating the Arbitration Act 1944 and the possibility of adopting the Uncitral Model Law on Arbitration – although signing the Convention was the main focus of the discussions.

According to Pé, those officials appeared genuinely committed to change, and were not saying only what they thought Western businesspeople would want to hear. This is backed up by Kloiser-Jones, who describes a tender process in which his firm participated being conducted ‘with rules and transparency one would expect in a developed economy’, even during closed meetings when there was no need for a performance to be staged.

Elections, sanctions, stability
Casting a shadow over much of this discussion is the question of Burma’s political future. It is widely accepted that, after the next election in 2015, the NLD will become the majority party. Although human rights advocates welcome this prospect, it throws up various practical issues for those taking a more commercial viewpoint. ‘It will definitely affect investment – political stability is always a big influence,’ says Coward. ‘At least from a US sanctions standpoint, while sanctions have been relaxed, it’s with a keen eye to the political situation.’

Some have criticised Western companies for becoming too close to Burma’s current government in their attempts to gain a financial foothold. There is a sense that some investors may prefer not to see a party with limited political experience and business acumen coming to power, an opinion echoed by Junko Ogushi, a partner of Japanese law firm Atsumi & Sakai. ‘I personally would prefer to see the current party remain in power. The President appears willing to move forward on democratic reforms,’ she says. ‘There’s no doubt that Aung San Suu Kyi is an iconic figure, but I wonder if this alone is enough to move the country’s economy forward. I don’t know how business friendly she is in terms of foreign investment.’

If it should attain power, the NLD would certainly have a lot of work to do in order to build investor’s confidence. During its rise, it has depended quite heavily on Suu Kyi’s leadership and has not spent time building the apparatus normally associated with a shadow political party. ‘The NLD is aware of these perceived shortcomings and is making every effort to address them,’ says Pé. ‘Among other initiatives, they are encouraging educated and experienced overseas Burmese to move back and help out.’
Suu Kyi has also formed a good relationship with President Thein Sein, and it is likely she will continue to develop this partnership with him and other members of the present government. It is noteworthy, for example, that Parliamentary speaker Shwe Man, who is viewed as being politically astute, recently appointed Suu Kyi as chair of the new Parliamentary committee on the rule of law.


The entrenched interests of a small group of crony businessmen who have grown extremely wealthy from opportunities provided by the military regime will continue to create barriers
Erivaldo dos Santos


Some argue that if local companies are not fearful of political changes, then international companies should not be afraid of either the new policies of the current government or the rise of the NLD. James Finch, a partner of DFDL in association with Myanmar Thanlwin Legal Services, says he has never been told by any foreign company that democratisation would be a stumbling block or setback to economic progress. ‘All look forward to democratic change in Burma. One of the most interesting features of the democratisation is that many stakeholders are included, including members of earlier governments,’ he says.

Expect uncertainty
At a time of dramatic changes and great uncertainties, it certainly pays to venture slowly into Burma. After sanctions were eased earlier this year, artist and NLD candidate Saw Hlaing was quoted by the magazine of the British Chamber of Commerce in Japan as urging companies to ‘Be cautious and hold the Burmese government accountable to international labour and human rights standards before joining the “Burma Rush”.’

At a lower level, thorough due diligence is important, including properly understanding the political and military connections of local partners, and their track record with other foreign investors.

Investors must also be prepared for more political and legal changes in the future, and should expect to hear some mixed messages from the top. In September 2011, for example, President Thein Sein publicly announced the suspension of a hydroelectric project in the north of the country which was to be developed by China Power Investment Corporation, a state-owned enterprise. Although the President cited public opposition to the project and its potential environmental impact as the main reasons, some analysts say the decision was motivated by fears over the recent aggressive expansion of Chinese companies, and those enterprises’ questionable governance standards. Recent large-scale protests over plans to expand a copper mine jointly owned by another Chinese state entity seem to support this hypothesis. ‘One reason for government reforms has been the over-reliance on China – there are concerns China has been exploiting the country for its own benefit,’ says Witchell.

Senior leadership figures from Burma have also been actively courting support from Western countries such as the US and Britain. However, during his recent trade visit to China, President Thein Sein was quoted by Reuters as reassuring China that ties are still strong and that Burma continues to see it as a true friend. This seemingly contradictory approach may simply be a good example of diplomacy at work; it may also indicate that Burma’s present government is trying to please all of the people all of the time – something that is notoriously difficult to do.

 



Phil Taylor is a freelance writer and editor. He can be contacted at phil@phiine.com