Foreign Investment in Burma: Analysing the statistics

by Derek Tonkin

(Mizzima News) -The article by Solomon in Mizzima on 6 July highlights the latest data about foreign investment in Burma. Perhaps I might try to interpret them from the perspective of a former investment director.

The figures quoted are taken from investments licensed by the Myanmar Investment Commission (MIC) set up under the 1988 Foreign Investment Law (FIL). However, it is not obligatory for foreign investors to invest under the FIL and many investments of US$ 250,000 to US$ 1 million made in SMEs (small to medium sized enterprises) will have been made, quite legally, outside the FIL. The benefits of investment licensed by the MIC are mainly in the incentives and guarantees provided under the FIL. But investors in SMEs may well feel that the procedure for securing an MIC licence are time-consuming, and they are perfectly content to conclude investment contracts outside the FIL.

This particularly applies to Thai and Chinese entrepreneurs, but European investors with close connections in Burma or long residence there may well choose to invest in this way. This situation is not unique to Burma, but applies throughout South East Asia and further afield. The incentives available under the foreign investment legislation may be attractive to larger investors, but less so perhaps to smaller investors who recognise that profits and business expansion can only come through trading operations, and the sooner these start, the better. So the US$ 15 billion investment licensed by the MIC under the FIL is by no means the whole picture, and I would not be surprised if non-MIC authorised foreign investment were to be as great, though I simply do not know and am reluctant even to hazard a guess.

Another important qualification is that this US$ 15 billion is only approved, that is, contracted investment registered with the MIC. Realised or completed investment by its nature will not be as large, for a number of reasons. In the case of Western investment in the 1990s, notably in the oil, gas and extractive industries, funds actually invested in Burma appear to have been at least 80 per cent of contracted value, while the realisation of Asian investment appears to have been rather lower, perhaps as low as 60 per cent. In any case, contracted investment is frequently based on two or more phases of investment, and though the first phase may in due course be completed, delays in the second phase may occur, for market or funding reasons. However, the contracted total remains, and it is sensible to contract for all phases at the start because this avoids the need to apply for additional investment authority from the MIC should a second phase of investment not covered by the original licence be agreed at a later date. Furthermore, investments, although approved, may be deferred or abandoned.

A particular difficulty is pin-pointing the nationality of the beneficial owner. An investment made in Burma by a company incorporated in a particular country is not necessarily a guide to the nationality of the beneficial owner, unless the company is a well-known multinational. The preferred and recommended structure for an overseas investment in any country in South East Asia is through a single-purpose off-shore company which could be incorporated in jurisdictions as different as the British Virgin Islands (BVI), Luxembourg, Labuan, Delaware, Netherlands Antilles or Gibraltar. The BVI is especially popular, and though it is a British Overseas Territory, almost all current investments in Burma made by a company incorporated in the BVI do not have mainland UK beneficial interests, but are made by companies incorporated in such diverse countries as Hong Kong, Singapore, China, Malaysia, Russia, and Canada. However these BVI companies are registered with the MIC as "UK" because the BVI is a British Overseas Territory. In point of fact, mainland UK investment mostly by oil and gas companies in the 1990s has in almost all cases been sold on to other non-UK beneficial owners.

Investments made by companies incorporated in the BVI are rarely channelled through the BVI itself, and dividends and other financial operations connected with the investment in Burma are also generally handled outside the BVI. But such off-shore companies are invaluable for beneficial owners to "park" their equity (shareholding) for the tax advantages (which vary from jurisdiction to jurisdiction) and for flexibility in managing the share structure. Thus a Malaysian company using a BVI company to register its investment in Burma can without difficulty sell part of the equity of the BVI company to, say, a Singapore company without having to renegotiate the original foreign investment licence. When Rothmans of Pall Mall Singapore (owned by British-American Tobacco in the UK) were persuaded to pull out of Burma in 2003, it was only necessary for them to sell their holding in a Singapore Joint Venture company to their Singapore partners Distinction Investment Holdings. The Joint Venture in Burma with Union of Myanmar Economic Holdings, Rothmans of Pall Mall Myanmar, remained essentially unchanged and licensed production of "London" and "State Express 555" brands continued.

Countries in South East Asia have little alternative when reporting the sources of foreign investment but to note the location of the investing company, whose beneficial owners may well change within a very short time of signature of contract. This is particularly true where promotional entrepreneurs make an investment with the deliberate intention of selling on at a profit as soon as possible. They have the expertise in the market or in the sector, and investors will pay a premium for access to a well structured investment which is fully licensed.

So when you read that the UK and colonies have invested US$ 1.8 billion in Burma, I have no reason to contest that figure, but I would add that the beneficial mainland UK ownership of those investments today is in my estimate less than 1 per cent of that total. The UK Government discourages investment in Burma, but would be most reluctant to exert undue pressure on the BVI Government to confront companies from Hong Kong, Singapore, China, Malaysia, Russia and Canada which use BVI-based financial service facilities, the main source of the islands' GDP.

Derek Tonkin is the Chairman Beta Mekong Fund Limited 1994-2000