Fitting together the pieces of the infrastructure puzzle: Breaking new ground in Myanmar

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After Myanmar’s new government took office in 2016, it announced the development of the country’s infrastructure as one of its immediate priorities. As part of the initial 100-day programme, various ministries unveiled their blueprints for upgrading aging infrastructure and narrowing the infrastructure deficit. The Ministry of Construction, for instance, drew up the Myanmar National Building Code to ensure compliance with revised safety and quality standards for both existing and future developments.

Since the opening of Myanmar’s economy in 2011, the country’s commercial and financial capital Yangon has undergone rapid urbanisation and economic growth. The fast pace of development has strained the city’s infrastructure and worsened traffic congestion. To tackle the city’s traffic problems, the new Yangon regional government launched the Yangon Bus Service (YBS) in January 2017. This new public transport system revamped the fare system and consolidated bus lines, cutting bus routes from 300 to 79. The plan: to put around 4,500 buses on the roads, up from the initial fleet of 2,000 buses.

Breakneck development in Yangon has led to a surge in demand for energy, weighing on the city’s aging power distribution network. This has resulted in frequent power outages. The new heavyweight Ministry of Electricity and Energy, formed between a merger of the Ministry of Electric Power and the Ministry of Energy, is now leading the initiative to address the nation’s urgent power demands. Aided by the World Bank and the United Nations, the Myanmar government has developed a National Electrification Plan to achieve full electrification by 2030. There are also plans to increase the nation’s power generating capacity from 5,235MW to 29,000MW by 2031.

To realise the nation’s economic potential, Myanmar needs to improve connectivity and mobility as a priority. The Ministry of Transport and Communications has already taken steps to rehabilitate existing transport infrastructure. The ministry has partnered with the Japan International Cooperation Agency (JICA) to implement the National Transport Development Plan, which will modernise existing infrastructure and introduce new transport corridors. The Asian Development Bank (ADB) estimates that Myanmar would need to invest US$45bn to US$60bn in transportation projects through 2030 to enhance transport links.

To further its infrastructure agenda and support the nation’s economic liberalisation, Myanmar needs to address existing challenges. This paper seeks to:

• Assess the outlook for infrastructure development in Myanmar

• Discuss solutions to challenges facing the sector

• Share opportunities for infrastructure investment in Myanmar.

Introduction

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What are the challenges?

Legal and regulatory framework

A robust legal and regulatory framework is critical to the success of any infrastructure market. To attract private sector participation in government infrastructure projects such as power, water and transport, well-defined investment laws as well as the consistent application of those laws are crucial.

However, Myanmar is still in the process of modernising its legal system. Enacted in October 2016, the new Myanmar Investment Law is largely untested and lacks clarity in certain areas. Meanwhile, the country has yet to develop formal laws to govern, regulate and protect public-private partnerships (PPP). With that in mind, foreign investors will need reassurance that competitive processes will be fair, that their investments will be secure and that their intellectual properties will be respected, before they are willing to share their expertise and provide capital funding. Therefore, Myanmar needs to address and bridge the gaps in its regulatory framework to boost investor confidence and reduce uncertainty.

Project structure

Structuring and delivering large-scale infrastructure projects is extremely complex. A high level of planning is involved and governments need to invest significant time and money to bring these projects to market.

Project owners need to conduct feasibility studies to establish the economic and technical viability of the transaction; determine the most appropriate commercial structure for the project; identify and allocate risks to make the project bankable; and craft a fair and transparent tender process. They then need to successfully market the project to attract investors by advertising in procurement publications, organising market awareness presentations, arranging investment roadshows, or holding one-on-one meetings with potential investors.

As an emerging economy and one that has only recently opened its doors to foreign investment, Myanmar has not chalked up significant experience in bringing mega-projects to fruition together with foreign partners. A major challenge is to clearly articulate the project requirements and obligations of all parties involved in formal procurement tender documentation.

There are other areas to work on – these include standardising bidding processes and managing the roles of different stakeholders at each stage of the project lifecycle. Myanmar also needs to be more nimble in anticipating and dealing with risks or problems that could arise.

Legal and regulatory framework

Project structure

Capital and banking markets

Risk management

Government agency coordination

Ownership rules

Capacity & experience

Key challenges at a glance

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Capital and banking markets

Capital has become globally mobile. As a result, projects and countries are competing for the same amount of limited investment dollars. As an emerging market, Myanmar needs to be aware of this when structuring infrastructure projects to improve marketability.

Myanmar’s banking and finance sector is still at a nascent stage. Launched in March 2016, the Yangon Stock Exchange (YSX) only has four listings to-date. Foreigners face restrictions in trading on the local exchange, limiting Myanmar’s ability to tap on international capital markets to support investment into the country. The relatively limited balance sheets of local banks, coupled with the highly-selective lending policies of foreign banks in Myanmar, further narrows potential sources of capital.

Project debt financing has yet to take off in the country as most lending is backed by assets or through corporate guarantees. There is still a lack of understanding on non-recourse project financing structures as a source of funds. Therefore, Myanmar needs to further strengthen its regulatory and banking framework to reassure financiers and investors that their interests will be protected.

Risk management

Because of its constrained public budget, Myanmar needs to tap the private sector to finance its infrastructure projects. An important element in PPP financing is the assessment and allocation of risk. The challenge: to negotiate for and develop a risk allocation mechanism that will be fair to all parties involved.

Myanmar may face perspective differences on risk allocation, especially when there is a lack of understanding on the risk appetite of the involved parties. Meanwhile, private sector involvement does not necessarily mean that all risks are transferred to the other party. Risks that are not allocated effectively in the early stages of the project life cycle could lead to a knock-on effect. Should the project fail, the government may still have to bear the resultant project risks.

Therefore, the Myanmar government needs to clearly identify the parties that control the levers over specific risks and allocate risks to the parties that can best manage them. Furthermore, it should manage and transfer risks in a way that best maximises its value for money.

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Government agency coordination

Major infrastructure projects require the involvement of multiple government agencies. These projects will only continue to multiply, becoming bigger and more complex. The government agencies involved will therefore need to possess excellent project management skills.

The successful delivery of these projects hinges upon efficient planning and implementation by these agencies. For example, infrastructure projects such as township, roads and highways require the concerted effort of the Ministry of Planning and Finance, the Ministry of Construction and the Ministry of Energy and Electricity to ensure proper budgeting, zoning, land acquisition, power and utility supplies.

At times, coordination and interface issues can surface between the project owner and government agencies involved. Lack of communication could lead to confusing requirements, or worse, conflicting rules and specifications. These issues could delay the project delivery as the agencies take time to sort out details. Coordination issues could also lead to inflated project costs as private sector contractors and developers build in contingencies to account for the delay.

Ownership rules

While the Myanmar government has opened up certain industries and sectors to foreign ownership, certain restrictions still exist. For example, only Myanmar citizens can purchase land and property in the country. The government owns most of the land and leases it to citizens through the Build-Own-Transfer (BOT) agreement or renewable leases. A “condo law” was passed in March 2016, allowing foreigners to buy up to 40% of the project. However, the law itself has insufficient clarity triggering confusion among investors.

Capacity and experience

The procurement of large-scale infrastructure projects is complex and lengthy. Compared with its regional peers, Myanmar is still in the early stages of infrastructure development. Therefore, its public officials need to close the gap in terms of the technical, legal and financial knowledge necessary to get infrastructure projects off the ground.

As Myanmar continues to fine-tune its administrative processes, it will need to develop rigorous procurement processes for contractor and vendor qualification, evaluation, selection and negotiation. This will allow public officials to challenge recommendations effectively and make conclusive decisions.

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Preparing for the future

A transparent procurement processes is fundamental to the effective management of a country’s infrastructure projects. Myanmar can take its cue from precedents set in other regional powerhouses, and adopt solutions that are tailored to its specific local circumstances. We discuss some of these principles in more detail.

Focus on developing legal and regulatory frameworks

Myanmar needs to enact more rigorous and specific legal and regulatory frameworks to develop its ambitious infrastructure programme. By removing legal impediments to investment, it will have a wider pool of funding to tap on.

Projects that do not have sufficient revenues to cover the cost of investment will require government subsidies to make them bankable. However, currently, some governments from a few ASEAN countries are subject to limitations on how they subsidise PPP projects. Having the right legislation will be is necessary to move things forward.

Strong institutions need to be established to drive the effective development of infrastructure projects. The PPP Centre of the Philippines, and the Indonesia Infrastructure Guarantee Fund are both good examples. Fundamental to the success of these institutions are clear and transparent procurement frameworks; and delegation of decision-making powers from their central governments.

In a welcome move, Myanmar’s President’s Office recently issued new tender procedures for the construction, procurement of goods and services, leasing and selling carried out by government departments and organisations.

The aim: to “eliminate waste of the State’s funds, corruption and monopolising tenders” and to “ensure just and fair competition, transparency, accountability and responsibility.” These procedures apply to all construction or procurement of goods and services worth MMK10 million (approximately US$7,000) or more. The success of this initiative will rest on the specific details and implementation.

Learn from “role model” success stories

Countries such as Australia, Canada, Japan, South Africa, Singapore and the UK, have developed excellent infrastructure programmes and have a track record of delivering projects across a wide variety of sectors. Their success stories illustrate how a government might approach and manage differing infrastructure needs and structures. To elevate and strengthen its groundwork for infrastructure project developments, Myanmar needs to recognise and adopt globally-accepted principles and commercial positions when structuring projects and drafting contracts. The Myanmar government could also identify and learn from the critical success factors of precedent-setting local projects that have achieved financial close. It can pinpoint key clauses in contracts that have driven bankability, and then base commercial positions on precedent clauses of projects elsewhere, for example, compensation on termination provisions.

Focus on developing legal and regulatory frameworks

Learn from “role model” success stories

Strengthen project structuring and risk management capabilities

Explore alternative sources of financing

Engage external expertise

Develop a central pool of resources

Proposed solutions at a glance

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Strengthen project structuring and risk management capabilities

As infrastructure projects are large and long-term, the government and project sponsors are exposed to risks from start to finish – from the project’s procurement to decommissioning.

When defining the commercial structure of a project, the Myanmar government needs to identify and mitigate these risks irrespective of whether the project is a traditional procurement or a PPP. The government should follow the basic principle that individual risks should be borne by the party best placed to manage and mitigate that risk. For example, a construction company is best placed to manage and deliver a construction programme since that is its core skill. As the government is not equipped with the capabilities to do so, it should transfer construction-related risks to the entity that has been awarded the construction project. In the case of traditional procurement, the contractor should bear the risks of overspending and delays through a fixed price turnkey construction contract that includes liquidated damages and performance bonds.

In PPPs, the government transfers the risks to the special purpose vehicle (SPV) that has been awarded the contract. The PPP Contract and Tariff Payments mechanisms incentivise the SPV to deliver projects on time and budget and subsequently operate the assets/services at contractually determined levels of performance. The SPV usually passes on some of the risks to its contractors through its own fixed price turnkey construction contracts and operational sub-contracts. If the SPV cannot deliver on time, it will not receive any payment and may then have trouble repaying the banks. Likewise, if the SPV fails to deliver services at the required service standard, its reverse stream is impacted.

The Myanmar government needs to practise equitable risk allocation to avoid expensive or even unbankable projects. For both traditional

procurement and PPP projects, financiers, contractors and operators will price risk into the cost of the project. If the risk is not allocated fairly, these players would price high premiums for risk into the bids or fail to find financing, or not bill at all.

Explore alternative sources of financing

As Myanmar has a constrained government budget to bankroll its infrastructure needs, it may have to turn to alternative sources of financing such as international banks/lenders, multi-lateral organisations, insurers, pension funds and endowment funds.

These institutional investors have long-term investment horizons, with trillions of investment dollars at their disposal. While infrastructure investment is an alternative investment vehicle that could form part of their diversified portfolio, the sector receives very little of these funds. If any, the funds are almost exclusively directed towards direct infrastructure investment in mature economies.

Pension funds, infrastructure funds or sovereign wealth funds are generally reluctant to invest in greenfield projects to avoid exposure to construction risk.

To target these investors, the Myanmar government may need to market brownfield projects instead. Brownfield projects are existing infrastructure assets that need repair or improvement but could already be generating cash. If it wants to seek funding for greenfield projects, the Myanmar government will need to structure these projects such that the risk allocation would be palatable to investment committees.

Another potential source of funding is the Beijing-based Asia Infrastructure Development Bank (AIIB) – a new multilateral financial institution founded to address urgent infrastructure needs across the Asia-Pacific region. The bank commenced operations in December 2015 with a capital of US$100bn.

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Myanmar has benefited from the AIIB’s efforts to champion and lead infrastructure financing in the region. Already, the AIIB has joined the ADB and the International Finance Corporation in providing debt financing to a power plant project in Myanmar. Meanwhile, Myanmar could also rely on the credit enhancement schemes of financial institutions and multilateral agencies to reduce the cost of financing and improve project bankability.

Engage external expertise

As Myanmar continues to improve its tendering and procurement processes, its public officials can complement their in-house skills by drawing on the specialist expertise and insight of external advisors and organisations to narrow knowledge gaps.

Myanmar can also seek partnerships with other countries to exchange resources, skills and experience. It can also participate in regional initiatives such as the Temasek Foundation Leaders in Urban Governance Programme, a mentoring programme that shares best practices in creating liveable cities through proper governance, infrastructure and sustainable development.

International organisations such as the ADB, AIIB, UK Aid and the World Bank offer robust guidelines on procurement processes for infrastructure projects. Myanmar can earn the confidence of foreign investors by adopting various policy guidance and standards, which are well respected by the international infrastructure and financing community.

In addition, Myanmar can engage external advisers that have vast experience in developing and procuring projects across sectors and countries. Armed with a broad knowledge base, these advisers are able to tailor solutions for specific projects. They can help Myanmar with developing a transparent tendering process and take bankable projects to the market.

Develop a central pool of resources

Myanmar can deepen its capabilities by developing a specialised pool of resources that can be deployed to high risk and complex projects. By housing expertise in a centralised pool, these professionals can provide critical support to implementing agencies and procurement bodies across the entire project lifecycle. Myanmar will be able to harness the benefits of this strategy by building on each experience gained and sharing lessons learnt across future projects and sectors.

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Unlocking opportunities

Dubbed Asia’s “last frontier”, Myanmar holds much economic promise. To unlock its potential, Myanmar needs to urgently overhaul and modernise its infrastructure nationwide. It needs to upgrade its power and utility capabilities and design modern transport networks to support the country’s rapid urbanisation and explosion of international trade. This infrastructure reconstruction offers investors a tremendous opportunity to gain a foothold in the country.

Although it faces challenges such as access to funding, implementation issues as well as skillset gaps, government bodies at both regional and union (or federal levels) have made a collective effort to develop Myanmar’s infrastructure with the support of international aid agencies such as the ADB, JICA and the World Bank.

Some progress has been made on this front. For example, Myanmar has completed the terminal extension of the Yangon International Airport and has built a new domestic terminal. It has commenced the Phase 2 development of the Thilawa Special Economic Zone and has also successfully built several mixed-use developments such as Myanmar Plaza and Junction City in Yangon.

The relevant ministries and international development aid agencies need to continue collaborating on two fronts. For one, they need to enact new regulations to govern the infrastructure landscape. Secondly, they need to continue rehabilitating aging infrastructure. With this, Myanmar can look forward to a transformed infrastructure landscape and better connectivity in coming years.

Myanmar needs to develop a strong investment narrative surrounding its infrastructure agenda. Implementing best practice procurement processes, reforming its regulatory frameworks and addressing investor concerns will help it to eventually narrow its infrastructure gap.

Contact us

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Visit us at www.myanmar.pwc.com

Managing DirectorOng Chao Choon+65 9780 2077chao.choon.ong@sg.pwc.com

Mergers & AcquisitionJovi Seet+95 9 4500 44355jovi.s@mm.pwc.com

Capital Projects & InfrastructureMark Rathbone+65 9675 3514mark.rathbone@sg.pwc.com

Capital Projects & InfrastructureBrandon Lye+95 99678 3446brandon.ys.lye@sg.pwc.com

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