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

    www.myanmar.pwc.com

  • Myanmar : Fitting together the pieces of the infrastructure puzzle 3

    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 cou

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