Thursday, September 21, 2017

Politics aside, Belt and Road is Asia’s medicine: PwC

The political will and financial resources from China’s Belt and Road Initiative will help Myanmar and Asia to fill the infrastructure demand, according to the managing director of professional services firm PwC Myanmar.

Ong Chao Choon (left), managing director of PwC Myanmar, is speaking at the 2nd ASEAN-Myanmar Forum hosted by the Singapore Institute of International Affairs on June 28 in Sedona Hotel. Zarni Phyo / The Myanmar TimesOng Chao Choon (left), managing director of PwC Myanmar, is speaking at the 2nd ASEAN-Myanmar Forum hosted by the Singapore Institute of International Affairs on June 28 in Sedona Hotel. Zarni Phyo / The Myanmar Times

During the 2nd ASEAN-Myanmar Forum hosted by the Singapore Institute of International Affairs on June 28 in Sedona Hotel, The Myanmar Times interviewed Ong Chao Choon, managing director of PwC Myanmar, Jovi Seet, senior executive director of mergers and acquisitions and Paul Cornelius, who’s in charge of tax.

Mr Ong told The Myanmar Times that the Belt and Road Initiative (BRI) provides the much-needed political will and financial support for Myanmar and Asia’s infrastructure thirst.

“If we take away the politics, the Belt and Road is probably the medicine that most of Asia needs.

“Asia has a huge infrastructure gap of trillions upon trillions of dollars. If you look at the numbers published by the World Bank and other institutions, the numbers from 10 years ago are the same today.

“One of the issues why this gap has not been filled is due to the lack of the will to do it and the money to do it. What the BRI has is someone who is pushing it and someone who provides the finances. In Thailand, Laos, Malaysia, projects are being built, and Myanmar is on the map.

“Having said that, the BRI will have a political element to it because it is a G-to-G [government to government] initiative.

“It will provide much needed infrastructure – if you do not have the proper infrastructure, all the advantages of a low-labour-cost base will be eaten up by the inefficiency of transport and logistics costs,” he said.

Additionally, the managing director was upbeat about Kyaukphyu.

“The biggest project is the test case [of the BRI] and we hope to see it breaking ground in the next six to 12 months, for the Kyaukphyu project.

“That is an investment in a part of Myanmar that really needs investment, one of the poorer parts of Myanmar – Rakhine State.

“The Kyaukphyu project will do a lot of good to Rakhine State and Myanmar as a whole,” he noted.

The interview touched upon many other issues.

Citing the telecom sector as an example, Mr Seet said that mergers and acquisitions (M&A) activities are largely driven by what the Myanmar government has done to liberalise individual sectors.

“The first to liberalise was the telecom sector, bringing in all those foreign operators who can own their business 100 percent. That generated a lot of interest.

“A lot of other M&A activities followed through in a downstream [direction], including the telecom tower space. We are seeing activities catalysed by what the government has done to open up the sectors.

The M&A director added that the change brought by the new investment law is two-fold.

“On the one hand, there is a lot of simplification in terms of granting permits to operate and the access of a longer term for land [leasing],” he said, adding that these changes are helpful as many international companies are keen to have joint ventures and have the ability to own or lease land for a long term. 

On the other hand, the changes in tax incentives and restricted areas for foreign investment present uncertainty for foreign investors.

“A number of businesses are looking to get approval, whether to enter certain restricted sectors or to get tax incentives.

“A lot of incentives are now subject to the Myanmar Investment Commission’s [MIC’s] judgment, as opposed to previously when everything was straightforward – every single application was given a five-year tax break. This has created a bit of uncertainty for parties and it takes time to learn,” he said.

After a long period of wait-and-see approach under the new government, investors in general are still waiting for clearer policies and more details. On the bright side, M&A activities are gathering steam and things are moving faster than a year ago, according to Mr Seet.

“There isn’t really a trigger for the speed of investment to happen in the past 12 months. A lot of the investors, who were sitting on the fence before and during the change of government leadership, are still eyeing the market.

“Now investors are observing how the new government is able to introduce new policies and how they are embracing investments. It’s still wait-and-see.

“For activities, there seems to be a bit of movement with some projects which have started moving – Kyaukphyu SEZ – and there are a number of M&A projects that we are working on where MIC approval tends to be put on the backburner but is now gathering some steam.

“Since April this year, things seem to be moving faster than last year,” he said.

Mr Cornelius added that there are now more areas in which foreign investments can enter.

“The government is actually liberalising the areas and businesses can come in – which was impossible in the past. But now large retail developments will be possible,” he said.

One main challenge for mergers or acquisitions, beyond the legislative restriction, is the gap between domestic and international businesses in valuation process, company structure and corporate governance.

“One of the challenges is that there tends to be a period of time for foreign investors to understand the Myanmar environment and for Myanmar companies to understand foreign investment expectations.

“When that gap is too big, M&A becomes difficult – harmonisation takes time. However, shared values will transcend commercial terms that can help overcome these obstacles,” he said, citing the example of responsible investment and community contribution as values which could help bridge the gap.

Another challenge is the corporate governance, or lack of that, in Myanmar companies and the expectations from foreign investors, according to Mr Ong.

“A lot of Myanmar companies are run by patriarchs or old entrepreneurs whose businesses have lasted for twenty or thirty years.

“He [the old entrepreneur] is used to making decisions centrally. The company is not big so he can actually decide centrally.

“Now you bring in a foreign partner and you need to bring in corporate governance, delegate authority and you have things which are decided by somebody else.

“This is a cultural shift, but it is a shift that Myanmar companies need to go through anyway, whether it is joint venture or passing down the business to the next generation or the business growing beyond its current size,” he said.

Other major issues affecting the M&A sector include the integrity of financial numbers, the level of detail of financial information, and the valuation expectation and gap. Foreign investors look for accurate and detailed information on the financial position of local businesses, which is an expectation that many local companies do not share.

“Foreign investors might come in fairly disciplined in terms of looking at things such as financial model and so on.

“The local investor will have a different expectation on what the assets or the business is worth. If you cannot match that gap, then it’s very hard for M&A to happen,” Mr Ong said.

The interviewees also said that Asian investors are more dominant in this market than Western ones, with Japan, South Korea, Thailand, Singapore and China taking the lead. Increasingly, more Chinese private businesses, as opposed to state-owned enterprises, are entering the market.

During another interview, Yotaro Agari, general manager of planning division for Asia and Oceania at the Bank of Tokyo-Mitsubishi UFJ (MUFG) told The Myanmar Times that the MUFG is "optimistic" on the BRI and "willing to participate" in funding BRI-led projects in Myanmar.

"We also like to capture the business opportunity arising from this Belt and Road Initiative, here in Myanmar and in other places. But here in Myanmar we haven't had one yet," he said.

Asked whether he is optimistic on the BRI, he replied "we are optimistic and we are willing to participate."