By Patricia Lee
The newly-opened Myanmar, with its rich oil and gas and mining reserves, may at first glance appear to offer a wealth of opportunities to international investors. Equally, however, it presents a number of significant challenges and risks following nearly 60 years in isolation. The prevalence of corruption, a fairly unsophisticated legal system and a less-than-robust political structure which potentially underlies the threats for civil unrests would top the list of concerns among multinational corporations and international financial institutions, experts told Thomson Reuters.
Having been closed to the world for slightly more than half a century, Myanmar's lack of infrastructure, including proper roads and telecommunications networks, together with its under-developed financial services sector and outdated legal system, will present immediate challenges to international investors. An infrastructure strong enough to support trade and finance will need to be built, and its law overhauled, to bring Myanmar in line with the commercial and financial practices in the 21st century, experts have warned.
In her recent address, Aung San Suu Kyi told the world: "There are many good laws existing in Burma but we do not have a clean and independent judicial system … Investors in Burma, please be warned: even the best investment law would be of no use whatsoever if there is no court clean enough and independent enough to be able to administer these laws justly."
Top risk: corruption
With a ranking of 180 out of 182 countries on Transparency International's Corruption Perception Index 2011, Myanmar is low on the ranking and it is perceived as the third most corrupt country in the world. "Because it is considered to be the third most corrupt country in the world, then everything that sits under the government structure has to be questioned," Peter Coleman, executive director, Deloitte Forensic in Singapore told Thomson Reuters.
Alastair Henderson, a dispute resolution lawyer and partner at Herbert Smith in Singapore, said Myanmar being low on TI's Corruption Perception Index 2011 would be a big issue for companies and investors looking to jump on the bandwagon. "Particularly with the UK Bribery Act 2010 and the U.S.'s Foreign Corrupt Practices Act (FPCA), which have created fierce anti-corruption regimes affecting many international businesses, companies will find themselves presented with a lot of challenges," he said.
Uncertainty of law, unreliable legal system
Henderson, who supervises the firm's arbitration practice across Southeast Asia, said because Myanmar had spent a long period in isolation and many of its laws were still based on British India laws dating back to the 1930s and 1940s or earlier, the country would need to upgrade and overhaul its legislation to bring it in line with today's commercial and financial practices. "A lot of Burma's law does not reflect the technology, economy and financial developments in the last 60 years. A lot has changed [in the outside world] over that period of time," he told Thomson Reuters.
Henderson pointed out that it is essential that international investors fully appreciate the sheer risks in Myanmar due to the uncertainty of its law and the unreliability of its legal system. He warned that these uncertainties might lead to investors being unable to recover their investments as they had expected. "It is likely that some investors will lose money [investing in Myanmar], and that's true in any investments. You can have splendid contracts between investors and local business partners, but what's the value of that if you can't expect the Burmese courts to enforce them? Investors need to be very clear sighted of the substantial risks of investing in Myanmar. They need to think carefully about how they will mitigate their risks," he said.
Coleman pointed out another difficulty presented by Myanmar's legal structure which stemmed from the lack of a separation of powers between the courts and the government, which he said, would have implications for any decisions made by the courts. "The government of Myanmar is run by the military and the court is appointed by the government, so the court is, in effect, run by the military," he added.
International arbitration not an effective alternative
With Myanmar not having signed up to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), Henderson said that would be a further stumbling block to any international investors should they become embroiled in law suits with local businesses and decide to go to arbitration. "Investors in high risk countries may look to international arbitration as a way to settle their contract disputes because they believe that it has benefits in terms of neutrality, efficiency and international enforceability. However, do not assume that the local court would enforce an international arbitration award or, therefore, that international arbitration will provide an effective alternative to the local courts," he said.
Another potential risk which investors might have overlooked is the uncertainty posed by the suspension of the European Union (EU) and U.S. sanctions. Coleman said while the EU and U.S. sanctions had been suspended, they were not lifted. The political implication of that, he said, is that any change in political leadership could potentially result in a loss of capital. "The U.S. government has said that it is suspending the sanctions but not lifting them. And all other governments have followed suit. The sanctions are likely to be permanently lifted once the government has started to demonstrate that it is leaning towards a higher level of democracy and transparency than it is now," he said.
Reputational due diligence
Unlike most countries where international investors are able to carry out database searches through official sources and records, Myanmar does not yet offer such official access, according to Coleman. Singapore's Accounting and Corporate Regulatory Authority (ACCRA) for instance, is the national regulator of Singapore business entities and accountants and it is also where investors are able to gain official access to information about local companies. He said such a regulator with open access to information does not yet exist in Myanmar.
Coleman said the lack of any such official access to information in Myanmar implies that investors may not have sufficient and reliable information on who they are dealing with locally. "Does the company actually exist? There is no way of knowing. Companies are forced to engage accountants and lawyers to try to get access to such information. But they have to rely on the local company initially; they have to be on the ground, they have to have someone locally they can trust, and they have to speak to people in the industry," he said.
Coleman said even if investors were able to obtain information about a potential local partner or a particular business that they are looking to invest into, there is no way of knowing if the information is reliable or accurate. "This is because you are relying on what someone is prepared to tell you. This would also make financial due diligence difficult; there is no legacy of a sophisticated financial system in Myanmar. Investors would have to depend on reputational due diligence, which means asking a lot of people what they think about the business [that they are investing into], understanding their motivation [for getting into the business with you], and finding out whether other local businesses are somehow at loggerheads with the people you want to do business with," he said.
Coleman said the difficulty in obtaining information in Myanmar generally reflects the lack of infrastructure in the country. He cited the local banks as example, which he said, do not operate in the same way like their counterparts in Singapore, Thailand or Malaysia do. "Every significant business in Myanmar is to some extent partly or wholly owned by the government which is of course run by the military. The banks are to some extent owned by the government.
"There is not enough infrastructure; the roads are not particularly good, air services are either not available or not reliable, travelling to the capital is a four to six-hour drive. There is little access to internet and your mobile phone does not work locally unless you get a local Myanmar SIM card. Water and power supply, telecommunications infrastructure, hotels and airport are just some of the basics that would be required to be improved or built from scratch to meet international standards, and they will take about five to seven years at least to build. Investments have to be encouraged to set up before any services or businesses can be done," he said.
Henderson said while there are willing hands in Myanmar to change its law, there is a lot of scope for the international community to contribute its expertise to help the country with its law and legal system.