The Burmese economy is emerging from international isolation – but for foreign investors and their advisers much hinges on a general election later this year. Grania Langdon-Down reports.
As the most exciting ‘frontier’ market in south-east Asia, Myanmar’s natural resources and largely untapped consumer base have caught the attention of global corporates and investors. But will there be a ‘gold rush’ or a more cautious ‘wait and see’ approach as the country prepares for an election later this year? (‘Myanmar’ is used in preference to ‘Burma’ in this article in line with general business use in the country.)
After more than 50 years of military rule, Myanmar’s transition to a nominally civilian government in 2011 and the opening up of its borders have also seen leading UK law firms with strong footprints in the region keen to be part of its future.
The signs are hopeful. President Thein Sein, who took power in 2011, has dismantled the fixed exchange rate, eased media censorship, released hundreds of political detainees and held talks with opponents including Aung San Suu Kyi. After release from house arrest, she became a member of the lower house of parliament.
The suspension of most US and European sanctions in 2012 meant companies could start looking at investment opportunities, while development aid has been pouring in to boost reform.
There is certainly much to be done, but that raises its own challenges as poorly regulated development risks doing more harm than good in a country where colonial British law remains largely in place, unless superseded by new but often poorly drafted legislation. In addition, the economy is still mainly cash-based, with an antiquated banking system and a chronic lack of capital (both human and financial).
Add in the still powerful influence of the military, continuing human rights issues and long-running ethnic tensions, particularly with the Muslim Rohingya minority, and it is clear that opportunities need to be balanced against substantial risks.
But with a population of 51 million, an eager consumer market and a wealth of jade and gems, oil, natural gas and other mineral resources, the country’s economic and strategic importance – with India to the east and China to the west – should not be underestimated.
Market reform initiatives have already seen global corporates compete for contracts, particularly in the telecoms and power sectors. However, it is the excitement of watching a country reawakening that is so palpable among practitioners.
Allen & Overy senior associate Kathryn Thornton moved to Myanmar from Sydney in 2012. Initially seconded to a local law firm, she now works on Burmese transactions, provides training to local lawyers and is developing her knowledge about the country’s legal practice and business environment from the magic circle firm’s Yangon (Rangoon, as was) office.
‘A lot will hinge on the results of the election and the pace of reform that follows,’ she says.
‘But in the meantime it is a privilege to watch Myanmar open up before your eyes. It’s certainly too exciting to go anywhere else at the moment. As a lawyer, you couldn’t ask for anything more in terms of the work we are doing and the opportunities we are being given to be involved in key infrastructure projects.’
Peter Church, special counsel with Stephenson Harwood, has ties with Myanmar which go back to the 1990s, when he spent some time in a monastery in Yangon and was ordained as a Buddhist monk.
Church has lived and worked in south-east Asia for 40 years and says Myanmar is currently the most exciting ‘frontier’ market in the region.
But he also cautions against assuming there will be no turning back, because the military will not easily let go of the reins.
Under a 2008 constitution drafted during military rule, a quarter of parliamentary seats are reserved for unelected serving officers, along with some key cabinet posts. This gives the military an effective veto on constitutional reform.
‘I thought when I first went to Myanmar it would follow the same path as Indonesia, as a democratising military dictatorship,’ Church says. ‘But I was wrong. It changed direction and by 2000 the US and Europe had put in place strong sanctions and the country went further into the wilderness.
‘Now there is a “gold rush” mentality among some companies and investors as the country opens up, but that doesn’t mean there are opportunities for everybody now or in the future. However, it does mean there are many opportunities for legal and other advisers because there are hundreds of questions that need to be answered before you invest in a new country.’
As part of the Association of Southeast Asian Nations (Asean), Myanmar should benefit from its big plans for 2015 – the launch of the Asean Economic Community, which it hopes will drive regional economic integration by allowing the free flow of goods, services, investment and labour across the region’s 10 member states.
UK lawyer Lucy Wayne, who opened the first foreign law firm in Yangon in 1995, warns that Myanmar has to find the right balance between ‘developing fast and developing well’ because training key personnel takes time.
She moved to Asia in 1992 to become managing lawyer of Ho Chi Minh City-based Indochina Consulting Services. In 1994 she launched Lucy Wayne & Associates in Vietnam, expanding into Myanmar as LWA Consultants a year later until sanctions forced her to close the Yangon office in 2002.
Last year she relaunched her practice in Yangon. While there is no demand yet for outbound investment advice, highlights from the firm’s caseload over the last five months illustrate the inbound pace of change: a $100m acquisition of a major residential and commercial development; a $288m deep-water production sharing contract; one of the first IPOs; a $500m investment joint venture in the power and construction fields; the financing and restructuring of a petroleum services business; structuring investment for the manufacture and sale of consumer products, and the establishment of distribution networks; a large tap water project; and a high-end eco-resort project.
However, with this explosion of interest, comes concern over the lack of local legal expertise. Universities were often closed and legal education suffered during the military regime.
Wayne says she only decided to reopen in Yangon because former employee and experienced Burmese corporate lawyer Win Naing agreed to go into partnership with her. She has hired an experienced Spanish office manager and expects to have at least 10 Burmese lawyers in training by the end of the year: ‘Growing in size is less important to us than ensuring the quality of our work product.’
One worrying trend she identifies is where local companies – both Burmese and foreign-invested – are poaching local lawyers to build their in-house legal capabilities: ‘What they don’t realise is that the lawyers they are employing are, for the most part, very inexperienced and not yet qualified to work in-house. I fear that this may cause them some serious problems in the future.’
Reasons to invest
Herbert Smith Freehills’ Brian Scott and Sally Austen cite the following key drivers behind Myanmar’s attraction for international investors:
- Cheap labour and high literacy: Myanmar claims to have a 91% literacy rate and, as a former British colony, many Burmese speak reasonable English.
- As a consumer of infrastructure: infrastructure development will be necessary if Myanmar is going to develop its economy.
- As a substantial domestic and consumer market: Myanmar’s population of 51 million presents an attractive market for many multinationals.
- Natural resources: Myanmar has a wide range of resources, ranging from oil and gas through to timber.
- Favourable foreign investment regime: the reformist government’s efforts should attract foreign money to fuel economic growth.
- Strategic location: sitting between China and India should enhance Myanmar’s trading position once it fully liberalises.
The Law Society has been supporting the International Bar Association’s initiative to help build legal capacity in Myanmar. Stephen Denyer, the Society’s head of City and International, has first-hand experience of the region. As global markets partner for Allen & Overy, he worked on the strategy for Myanmar as the firm cemented its regional presence.
He urges caution: ‘[Myanmar] makes sense predominantly for firms that are already strong regionally. I don’t think there is a strong case for firms just launching a practice if they aren’t already active in Asean.’
Gerwin de Boer, the Society’s international policy adviser for south Asia and Asean, says Myanmar is a country in a ‘delicate’ position with regard to access to justice and human rights: ‘We are working extensively on business and human rights guidance for our members. We expect to publish a report and practice notes later this year which will be very relevant to law firms, and their clients, who do business in Myanmar.’
It is not an easy country to do business in, he stresses: ‘The firms that do work there tend to have ample experience in entering new markets and are able to build on a long-established presence in the region. For most members, Myanmar is still too underdeveloped in terms of economy, legal profession and legal market to offer real and sustainable business opportunities.’
Most firms run their Myanmar desks from their main Asia-Pacific offices, including Herbert Smith Freehills, Stephenson Harwood and Linklaters Singapore Pte Ltd. But there are now more than 50 foreign law firms with offices in Myanmar, according to Wayne. Many are Asian firms extending their regional footprint. However, more recently Allen & Overy, which initially staffed its Myanmar offering from Bangkok, and Baker & McKenzie have entered Yangon.
Simon Makinson is chair of Allen & Overy’s Asean group and head of the Myanmar practice group. Based in Asia since 1988, he relocated from Bangkok to Yangon last year to work on transactions for clients including Japanese companies, international financial institutions, multilateral agencies and telecoms companies.
It was work on a telecoms bid that initially led to Thornton’s secondment with Myanmar Legal Services Ltd (MLSL), which has been practising in Yangon since 1998.
‘MLSL has strong experience advising foreign clients on inbound investments into Myanmar’s oil and gas, mining and infrastructure sectors,’ Makinson says. ‘But we found we needed more of an Allen & Overy scope of office so we took space in Yangon in mid-2013 and formally opened the office last year.’
He and Thornton were joined by senior associate Chris Burkett. It is expensive setting up your own office, Makinson says, because office space is in short supply and good local staff are relatively expensive. But foreign law firms are generally welcomed by the attorney general’s office.
He has recruited four local people to liaise with government ministries which are largely based in the new administrative capital of Naypyidaw and are not used to dealing with queries other than face to face.
Thornton has seen huge changes during her three years in Yangon. ‘On a superficial level, you see foreign brands coming into the market, more western dress on the streets, smartphones, social media taking off, a huge increase in the number of cars,’ she says.
‘But, deeper than that, people are very open to discussing proposals. Time will tell if it can keep its own identity, but there is a real acknowledgement among the decision-makers that Myanmar needs to do what is best for the country on its own terms. This is evident in the legal reform programme – for instance, the investment law currently being drafted has involved a number of public consultations so the process is moulded for Myanmar.’
Herbert Smith Freehills partner Brian Scott has lived in south-east Asia for 10 years and works out of its Singapore office, heading the corporate team with particular focus on the mining, energy and resources sectors. He says the firm keeps the option of opening an office under review but, in the meantime, plans to maintain its secondment programme with MLSL.
‘You can see the advantage of running our operation through Singapore if you look at an example of our current work,’ he explains. ‘We need a telecoms specialist, an M&A lawyer and a finance team – we are not sensibly going to have that degree of specialism in Myanmar.
‘So we have someone on the ground building up our knowhow. We also recruited a Burmese lawyer a few months ago to join our Singapore office and develop his capabilities with a long-term view of him being part of a Myanmar practice as we see how the market shapes up.’
Senior associate Sally Austen was Herbert Smith Freehills’ first secondee in Yangon. ‘It is challenging,’ she says, ‘as firms are struggling for resources, but it is also very rewarding because any insights you gain are very valuable for clients.’
At Stephenson Harwood, Church says it chose to form an alliance in May 2013 with Myanmar law firm U Tin Yu & Associates, experts in corporate and commercial matters, litigation, real estate, IP and employment law, as well as taking on a Burmese lawyer in its Singapore office.
LWA Consultants is one of the few foreign firms with a full local law capacity. Wayne says the shortage of experienced local lawyers means the advantages of having a physical presence in Myanmar are ‘dramatically reduced’.
Around 40% of her firm’s work comes from foreign law firms. ‘We are specifically not associated with any one foreign firm so that we can remains independent,’ she explains.
As with many emerging markets newly opened up to foreign investment, risk management and due diligence are critical to protect the reputations and brand value of both law firms and their clients.
‘Anti-money laundering and bribery are among the key areas where we advise international clients,’ Austen says. ‘But corruption is [not] endemic in Myanmar, though that is a symptom of it being shut down for 50 years. It hasn’t built up institutional facilitation payments or other forms of bribe that routinely arise in other jurisdictions.’
Thornton says the local Burmese manufacturer of a household-name product put notices in its delivery trucks’ windows stating they do not pay ‘tea money’ or bribes and the issue faded away. ‘There is a strong push for responsible investment, not just from outside but from the inside as well,’ she says.
There is a danger, however, that clients could be exposed to remnants of the US sanctions regime.
US citizens and corporations remain prohibited from dealing with specially designated nationals, the Ministry of Defence, state or non-state armed groups or any entity owned 50% or more by any of them.
Myanmar’s parliament has adopted an anti-corruption law which establishes a new agency to investigate allegations of corruption. Scott says foreign investors must allow for their business to be scrutinised by both internal and external agencies.
What is clear is the strong desire among practitioners to help the country develop.
Stephenson Harwood is the first firm to hold the role of honorary legal adviser to the Myanmar Federation of Mining Association. It is also on the legal advisory committee of the Union of Myanmar Federation of Chambers of Commerce and Industry (MFCCI), the largest not-for-profit business federation.
‘It is very important to build relationships on the ground,’ Church says. ‘You have to put in to get back. It is particularly important in a country that is so poor and so behind that you help train and provide education.’
His firm put on a seminar with the MFCCI advising how to negotiate with foreigners. ‘It is very important when you are drawing up an agreement that your [Myanmar] counterparts really understand it,’ he stresses. ‘If you tried to slip in a clause which they didn’t understand it would be a very short-term strategy because it would destroy the relationship.’
Allen & Overy is one of the private sector leaders of the recently formed UK/Myanmar Financial Services Taskforce, which provides expertise to government departments and other bodies. The firm also runs training sessions with the attorney general’s office, and financial and corporate law courses at the two main universities for both the faculty and the undergraduates.
This gives Allen & Overy associate Joshua Htet, who qualified in the UK and now specialises in banking and project finance in the London office, the chance to return home to Myanmar to help with the firm’s pro bono projects. ‘Partners who come out to help on the course at the universities are blown away by how thirsty everyone is for knowledge,’ he says. ‘When I go back I see a huge tide of change coming but I don’t think it will swamp Myanmar, which is proud of its heritage.’
While there is a degree of scepticism about how far the country will open up, he asserts: ‘The momentum is there and it will be hard to stop.’
Grania Langdon-Down is a freelance journalist