Feb 12, 2013

Gold rush: Japan Inc. flocks to Myanmar

The visa section at the Myanmar Embassy in Tokyo used to be a quiet and lonely place, but not anymore. Pointing to boxes containing hundreds of Japanese passports bearing business visas, the staff there told me the deluge began in early 2012.

ANA now has all-business-class direct flights to Yangon from Tokyo, and is operating near full capacity. The Japan External Trade Organization (JETRO) office in Yangon reports being swamped by requests for assistance by Japanese firms looking to cash in on Asia’s most promising frontier. PR giant Dentsu is opening an office there this week. I even met a young Japanese nail artist in Yangon who thought she would try her luck in Asia’s latest boomtown.

Until a couple of years ago there were few vehicles on Yangon’s streets, and hotel rooms went begging. The new normal, though, is traffic jams, packed hotels and spiking rental rates for housing and offices.

Japanese firms are in catch-up mode, lamenting that their government’s support of U.S.-led sanctions against the military regime opened opportunities for China and India.

Meanwhile, the Association of Southeast Asian Nations (ASEAN) members, under the guise of constructive engagement, “held their noses, averted their eyes — and grabbed whatever they could,” said a diplomat who prefers anonymity.

Sanctions played a crucial role in nudging Myanmar to embrace political reforms that have taken hold with surprising rapidity since the Saffron Revolution protests in 2007, named for the Buddhist monks who were at the forefront of the protests, and whose robes are actually maroon colored.

Political reforms are happening because the military/political leaders wanted to end their nation’s isolation and benefit from having a more prosperous economy.

They were also eager to counter China’s unappreciated dominance of their country, and there is no love lost for India owing to resentments accumulated during their shared history under British colonial rule.

Lifting sanctions was the key to turning on the taps of international financial institutions and attracting needed investments and development assistance from Western nations and Japan.

The key to ending sanctions was initially the November 2010 release of the opposition politician and chair of the National League for Democracy, Aung San Suu Kyi, who had been under arrest for almost 15 of the 21 years from July 1989 — and then convincing her to participate in the political process.

To achieve these goals required the new government under Thein Sein — the prime minister from 2007 until his appointment to the presidency in March 2011 — to promote substantial reforms. And it has.

“Democratization might not be in their DNA,” a consultant told me, “but the elite see this as a means to growth and a bigger pie to slice up.” And, once powerful interests have a growing stake in the new system, they become its guarantors.

The gold rush of Japanese firms into Myanmar is an endorsement of recent political gains and will help sustain the process. Yesterday, a large Keidanren (Japan Business Federation) mission returned from Myanmar after looking into how to improve the investment environment.

Prominent on their radar and that of the government of new Prime Minister Shinzo Abe is Thilawa, a sleepy port about an hour’s drive east of Yangon that’s slated for a major Japan Inc. development project. In addition to relieving a transport bottleneck, the project includes a special economic zone for manufacturing.

The story of how Japan landed this plum deal is revealing. As it was reported in the Western media, Pres. Thein Sein was dining in Tokyo in October 2011 with Hideo Watanabe, chairman of the Japan-Myanmar Association and a former minister for posts and telecommunications. After the president had a map brought out, he pointed to a 2,400-hectare area around Thilawa and told Watanabe that he wanted Japan to take on this project.

Some wrangling ensued, but in September 2012 a consortium of government agencies and Japanese firms, including Mitsubishi, Sumitomo and Marubeni, announced that they had lined up an $18 billion package. It also appears that Japan will take a $3 billion stake in a similar port project further to the south at Dawei, in which Thailand has been the major player. That project has been stalled due to local opposition and conflicts over land grabs.

Japanese companies, seeing stagnant sales at home, are eager to buy into Asia’s growth prospects, and in fast-tracking this deal — and a mega-infrastructural project in Jakarta, Indonesia, exceeding $50 billion — they are reminding observers that the “declining Japan” story has been overdone.

In fact Team Abe’s diplomatic offensive in the region, often portrayed as a way of highlighting China’s regional isolation over territorial disputes in the South China and East China seas, also signals Tokyo’s support for Japanese business participation in regional economic growth and integration.

Overall, China is Myanmar’s largest investor — to the tune of $14 billion in FY 2011 alone, mostly in energy projects. In contrast, between 1988-2011 Japanese firms invested a total of $217 million in Myanmar, making Japan its 12th-largest foreign investor.

But Japan Inc. is roaring back. The Japanese government recently forgave $3.6 billion in bilateral debt and provided a nearly $1 billion bridging loan so that the World Bank and the Asian Development Bank could resume lending. In addition, Japan just announced an extra $220 million in soft loans for infrastructure and human-resource development — the first such lending in 26 years.

As in all gold rushes, there will be stiff competition from the usual suspects, but there are many appealing opportunities in banking, finance, telecoms, infrastructure, mining and energy — while low wages make Myanmar a competitive manufacturing export platform.

However, legislation regarding foreign investments was only passed at the end of 2012, and Myanmar’s judicial system is not reliable, so for overseas investors it is a case of navigating uncharted waters.

Land grabs are one of the major challenges to the rule of law in Myanmar, and a major source of local grievances and political instability. According to Myanmar Legal Network, the land-acquisition process is murky and presents significant opportunities for bribery and manipulation of cases.

Since Thilawa is close to Yangon, where many civil-society organizations and international institutions are based, this project will be subject to extensive scrutiny especially as it involves regime cronies blacklisted by the United States. Taking care of farmers and fisherman affected by the project won’t be that costly in the larger scheme of things — while disregarding their interests risks reputational damage and a nationalistic backlash.

The politics of foreign investment and resource extraction are hotly contested in Myanmar, a sign of just how vibrant democracy has become.

To its regret, China knows this story all too well, as anti-Chinese sentiments are rampant. A high-profile conflict at a copper mine in the north, involving the military and a Chinese company, underscores the risk of ties with the power elite in Myanmar and the political risk to foreign investors engaged in ventures that ignore local land rights. While the government was explaining the need to honor contracts and the rule of law, the public saw a shady deal displacing local residents. A major Chinese dam project is also suspended due to protests against displacement of local communities.

A gold rush generates a no-holds-barred mentality, and in Myanmar, regional competitors have a head start — but Japan Inc.’s ace up its sleeve compared to its rivals is an enviable reputation for integrity as an investor and employer. That’s a brand to trade on that’s well worth preserving.

Source: The Japan Times

 
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