Tue 21 Aug 2012
Filed under: Business / Trade,News
BANGKOK — Burma is drafting a foreign investment law to usher in a flood of foreign capital aimed at helping the country emerge from decades of poverty and isolation. But, economists warn the law, as drafted, has problems.
A half century of military rule, and mismanagement nearly destroyed Burma’s economy.
The civilian government that replaced military rule in 2010 is making efforts to restore growth by encouraging foreign investment.
But, Burma’s lawmakers this year have struggled to hammer out a new foreign investment law.
Unsure of what incentives were needed, initial drafts gave foreign investors full ownership of business ventures, eliminating the need for local partnerships but also the opportunity to learn from multinationals.
Newer drafts restrict full foreign ownership in certain sectors or ban their investment completely.
Sean Turnell, an economist with Australia’s Macquarie University, told the Foreign Correspondents Club of Thailand the draft foreign investment law was now facing a local backlash.
“There’s been a bit of a push back against some of the concessions granted to foreign investors,” said Turnell. “In particular, there seems to be a walling off of some of the sectors from foreign investors. Now, that’s a bit unfortunate because in a sense a much more open approach, particularly in sectors that are dominated by local conglomerates that you know dominate the economy, we really need an injection of competition on that front.”
Burma’s military and those close to it have controlled the economy, doling out monopoly contracts and concessions to friends and relatives.
Most current foreign investment in Burma is in extracting rich natural resources such as in gas, mining, and timber.
Burma’s reformist government hopes the new law will diversify and increase foreign investment, partly by offering several years tax-free.
But economists including Turnell say a tax holiday is an unnatural competitive advantage over local entrepreneurs.
“The country has been walled away for fifty years,” said Turnell. “There are incredible opportunities. That’s why the planes are full, that’s why the hotels are full. Foreign investors are worried about issues to do with stability, certainty over tenure, electricity, infrastructure problems. Not a single business person internationally I’ve spoken to has ever mentioned taxation.”
Turnell says the tax break for foreign business could also allow a loophole for Burma conglomerates. They could use their foreign subsidiaries to evade taxes that smaller business would still have to pay.
Khin Maung Nyo, a Rangoon based economist at the Center for Economic and Social Development, says 94 changes were made to the draft law so far, indicating a growing lack of confidence that smaller, local businesses can compete.
“[If] they enjoy foreign tax incentive or not, our local businessmen are not ready to compete with in terms, as I mentioned earlier, in terms of technology or in terms of management, or in terms of capital,” said Khin.
Economists say one of the bigger challenges for investors in Burma is getting access to credit to build a business.
Some farmers turn to loan sharks, paying as much as 10 per cent a month, and falling into deep debt.
Burma’s Eleven Media Group reports a new draft investment law for citizens of Burma could offer some relief.
The legislation would give local investors an exemption on income tax for five years, but only if they produce goods or services deemed necessary for the state.
The Eleven Media Group says the law, as drafted, would mainly benefit private firms contracted to operate state-owned businesses.
The draft foreign investment law is still being debated but could be signed into law as early as this month.