After passing its new telecoms law, Myanmar is one step closer to a telecoms revolution that is likely to spur economic growth and transform its society. The enactment of the law allows Telenor and Ooredoo, the winners of an auction for two telecoms licences held earlier this year, to obtain their operating licences. Both firms can now focus on rolling out their networks, but regulatory concerns, land rights issues and stiff domestic competition may prove tougher challenges than expected. Kanishk Verghese reports

Myanmar has one of the lowest mobile penetration rates in the world, where only 9 percent of its population of 60 million have a mobile phone. Eager to attract foreign investment, the quasi-civilian government, which was installed in March 2011 after 49 years of military rule, has embarked on a series of economic reforms to pull the country out of international isolation. High on the government’s priority list is the telecoms sector, which offers mouth-watering prospects for international telecoms companies. Looking to expand the sector, the government initiated a new round of bidding for two licences earlier this year and also passed a new telecoms law, which lawyers say compares well to neighbouring jurisdictions and hits the benchmark for international best practice. Equipped with a sophisticated regulatory toolkit, the question remains as to how well the new regulator will be able to handle enforcement activities. Furthermore, while competition is expected to heat up between the four telecoms operators, cooperation in some areas will also be vital to achieve cost-saving benefits.

Current landscape

Analysts and practitioners have described the auction for the two operating licences as one of the most exciting greenfield opportunities in the telecoms industry worldwide. In fact, demand was so great that more than 90 international companies and consortia expressed interest. This number was whittled down to a shortlist of 11 bidders, and Norway’s Telenor and Qatar’s Ooredoo emerged the winners in June, becoming the first foreign telecoms operators in Myanmar. Both companies are now waiting for the government to finalise the 15-year licences so they can start building their networks.

The other two mobile licence holders in Myanmar belong to two state-backed companies, Yatanarpon Teleport (YTP) and Myanmar Post and Telecommunications (MPT). YTP functions primarily as an Internet service provider, while MPT, a department of the Communications Ministry, acts as both a regulator and operator. However, both firms have made little headway in developing the communications sector.

New law

After a long wait, Myanmar’s new telecoms law was enacted in October. This is a very big step for Myanmar, says Win Naing, managing partner of Zaid Ibrahim & Co’s Yangon office. “Before October, we only had the Myanmar Telegraphic Act, 1885 and the Myanmar Wireless Telegraphy Act, 1934, which are outdated. There are big changes in the new telecoms law,” says Naing.

Less than a month after the National Assembly voted the law into effect, the Myanmar Post and Telecommunications Department issued a comprehensive set of rules for implementing and regulating major portions of the new law. There are no real surprises in the new law, because a draft of the law was already part of the telecoms licence tender documentation that the government had provided during the bidding process, says Edwin Vanderbruggen, a partner at VDB Loi’s Yangon office, whose firm is acting for Ooredoo. The initial law was rejected by Myanmar’s president, Thein Sein, and was then redrafted slightly to gain approval. “A couple of things were tweaked in relation to the appeal procedure against decisions from the regulator. Those were changed back to be almost entirely in line with the draft of the telecom law that the government had prepared earlier,” says Vanderbruggen.

“The only surprise is what a good job they have made of it,” says Rob Bratby, a TMT lawyer and the Asia managing partner at Olswang in Singapore. One way of assessing the effectiveness of the telecoms law is to compare it to other telecoms laws in the region, says Bratby, whose firm is advising one of the four telecoms companies in Myanmar. “On paper, the regime that Myanmar has is superior to any of their neighbours. If you look across ASEAN, taking out Hong Kong and Singapore from the equation, and see how Myanmar’s telecoms law compares with Thailand, Bangladesh, or India’s telecoms laws for example, it is a good framework and it pretty much hits the benchmark for international best practice,” adds Bratby.

But while the law has received praise for its sophistication, lawyers note that what is written in the law and regulation is only as good as how it is enforced and applied in practice. “In some areas of the law where there is such a sophisticated set of rules, will the nascent regulator be able to apply those effectively in the first instance?” asks Bratby.

The proposed rules also lay out the groundwork to tackle anti-competitive behaviour. “The dominant operator, which is currently MPT, has a number of obligations which will be to the benefit of the new operators. Those obligations are quite far reaching, and require MPT to publish its interconnection rates as well as the terms and conditions under which it is going to provide interconnection services to other operators,” says Vanderbruggen.

Changes are also afoot at the institutional level. As it stands, the government has the regulator within the Communications Ministry, controls and owns MPT, and also has a majority stake in YTP. In order to move towards best practice, the government needs to exit itself from YTP, privatise MPT, and then split the regulatory department off from the ministry, says Bratby. “You then end up with a separation between the minister who sets policy, the regulator which is independently enforcing that policy, and the operators. The law makes it clear that the regulator is going to be separated,” says Bratby. The government has already made policy announcements to exit itself from both MPT and YPT. It plans to hive off the regulatory side of MPT and privatise the operator division within two years, with the new company called Myanmar Telecommunications Corporation. The state will own 12 percent of the new company, Reuters reports. Tin Win, chief executive of YTP, told Reuters the formerly state-owned enterprise had recently been privatised, with the government’s stake limited to 5 percent.

Land issues

With the telecoms law enacted, the path is clear for Telenor and Ooredoo to receive their operating licences. The proposed rules for the law and the government’s effort to decouple itself from MPT and YPT should help level the playing field among the four telecoms players. The challenge for the two international players now shifts to securing land and infrastructure for tower sites. “The land and infrastructure issue is very complex for investors,” says Naing. Foreign companies cannot own land and can only lease land for up to one year. However, these companies can lease land for up to 50 years with the approval of the Myanmar Investment Commission, says Naing.

For his part, Vanderbruggen says that in theory, domestic companies should have a competitive edge when it comes to land acquisition. However, in practice, even local players have found it quite daunting to acquire land in Myanmar. “It is difficult for everybody, including locally owned operators,” says Vanderbruggen. He adds that the land documentation and land right system in Myanmar is often opaque and difficult to understand. “Most of the land is state property, but it is granted to citizens through several different types of land use rights. The documentation for each often differs, and the way one can use the land is also different from one piece of land to the next. If you then add to that the difficulties of having to overlay leases, which are not so common in rural areas, it is very challenging,” says Vanderbruggen.

Stiff competition

Aside from infrastructure challenges, Telenor and Ooredoo face stiff competition from local players MPT and YPT. To compete with their foreign rivals, the two state-backed telecoms operators are seeking partners to invest more than $1 billion. YPT has partnered with the UK’s Epsilon to expand its international network, while MPT is also on the lookout for an international strategic partner. A viable option could be the partnership between Japan’s Marubeni Corp and France’s Orange, which is the back-up candidate if either Telenor or Ooredoo fails to meet post-selection requirements.

While MPT and YPT are searching for international strategic partners, it remains to be seen how those deals will be structured to provide the local operators with similar capabilities to Telenor and Ooredoo. “If MPT and YPT can actually effectively work out deals to bring in the capabilities, experience and capital from international partners, then in theory they should be in a much better position because they have the local market knowledge as well. That being said, the international operators will also be looking to find local partners to help them,” says Bratby.

Bratby notes that the current situation in Myanmar creates an interesting market dynamic. “When most countries move towards a liberalised market, they start from the position of having an incumbent state-owned operator that had everybody connected to it. In Myanmar it is slightly different because the existing national players don’t actually have coverage across a lot of the population,” says Bratby. Therefore, one could argue that the international operators, with their capital and experience, could find themselves in the position of market leaders in a relatively short space of time, he adds.

Vanderbruggen agrees, adding that there is sufficient room for all four companies to operate in Myanmar’s largely untapped telecoms market. “I think you will have a very healthy competition between the four operators, and that’s the way the government intended it,” says Vanderbruggen.

Aligned interests

While stiff competition is expected, cooperation between the four operators will be key to their success. All four have discussed the option of sharing transmitter towers to save on costs as they roll out their networks. Splitting capital costs would make reaching rural areas more economically viable. “It makes perfect sense because there are only 3,000 towers now in Myanmar, and to cover the country, you need about 10,000 towers. And then you’ve got four operators each rolling out at more or less the same time. It would be contrary to logic if no tower sharing takes place,” says Vanderbruggen. “Looking at the legislation and regulation, the government is making sure that the regulations are there to facilitate sharing,” he adds.

“It’s a greenfield launch and we’re going to build the network in partnership with Telenor,” Jeremy Sell, Ooredoo’s chief strategy officer, told a conference in Dubai in October. “This has never been done before – we’re rolling out two greenfield networks and anything made of steel or concrete we want to share. There are no towers that are so strategic you can't share them,” said Sell.

Cautious approach

The stage is set, and the four telecoms operators are gearing up to roll out their networks. Myanmar has made great strides to reform its telecoms sector through the enactment of a new telecoms law and by bringing about change at the institutional level. However, the new law is untested, and the question lingers about how effectively the nascent regulator will handle enforcement. There are some who believe the risks outweigh the benefits in Myanmar. But the outpouring of foreign interest in the country’s telecoms sector suggests that for many, Myanmar is a risk worth taking. Nonetheless, investors are trying to minimise their risk exposure by adopting a careful approach. “Us and Telenor and other investors in the country, we don’t want to put a huge amount of money in straight away. We’ve still got to be a bit cautious and see how it goes,” says Ooredoo’s Sell.

The telecoms sector is seen by many as one of the most important development areas in Myanmar. But it is not just Myanmar’s telecoms companies that stand to greatly benefit from the liberalisation of the sector. As the operators roll out their networks, they will bring internet service providers, content providers, equipment vendors, engineering firms and a whole group of other businesses in their wake, says Vanderbruggen. “By making telecommunication possible, the GDP of the country rises greatly because it’s not just the telecoms industry itself, but also all the other businesses that it makes possible.”

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Go big or go home

Following on from its successful oil and gas offering in 2011, Myanmar’s new civilian government introduced two more bidding rounds in 2013, with numerous lucrative onshore and offshore oil and gas blocks up for grabs. Competition between international oil companies for the recently concluded onshore round has been fierce, and the ongoing offshore round has been no different. Kanishk Verghese reports on the results of the onshore round, discusses which companies have an edge in the offshore round, and analyses some of the challenges ahead for the winners.

Myanmar, a country of 60 million people, is rich in gas reserves, which government officials estimate at 11 trillion to 23 trillion cubic feet. It produces around 19,600 barrels of crude oil and 1.475 billion cubic feet of natural gas each day, according to Reuters. Official data also shows that Myanmar exported $3.5 billion worth of gas in the fiscal year to March 2012, compared with $2.5 billion in 2011 and $2.4 billion in 2008-2009. In recent months, Myanmar’s government has made a concerted push to help draw investment into the country through the introduction of two bidding rounds for several lucrative onshore and offshore oil and gas blocks. Asian firms, especially from China, Thailand and India, have traditionally dominated foreign investment in Myanmar’s oil and gas sector, and are believed to have an edge in the recently concluded offshore bidding round. However, the easing of sanctions from the West has sparked a surge of interest from large European oil companies, which are vying for a large share of Myanmar’s most desirable offshore blocks.

Onshore round

In January, Myanmar’s Ministry of Energy (MOE) invited sealed bids for oil exploration licences at 18 onshore blocks across the country. The move followed the nation’s largest oil and gas offering in 2011, where foreign firms were awarded nine of the 18 onshore blocks. Interested companies could bid for up to three blocks after entering a mandatory partnership with at least one registered domestic oil company of their choice. Since bidders were required to enter joint ventures with local partners, the tender process didn’t appeal to several big international oil and gas companies – otherwise referred to as supermajors – such as Royal Dutch Shell, Chevron Corp, ConocoPhillips and Exxon Mobil.

Nonetheless, the onshore round drew great interest from a host of other oil companies, who rushed to place their bids in the two months from Jan. 17. The MOE announced the list of winners of contracts for 16 onshore blocks in October, which included Italy’s Eni, India’s ONGC Videsh and Malaysia’s Petronas. According to the list (see Table 1), Eni, Petronas, ONGC, Pakistan’s Petroleum Exploration and Canada’s Pacific Hunt Energy Corp each won contracts to operate two blocks.

Thirteen of the 16 contracts were production sharing deals and the rest were petroleum recovery contracts. Only two blocks from the 18 were not awarded due to a lack of bids. The ministry plans to invite sealed bids for the two remaining blocks but details have not yet emerged as to the timing, Reuters reports.

Offshore round

After a successful onshore round, the MOE turned its attention towards the offshore blocks, opening bidding in June for the exploration and development of 11 shallow and 19 deep-sea oil and gas blocks. The bidding round marked the third opportunity for companies to enter Myanmar’s oil and gas sector since 2011, and stiff competition is expected for the 30 offshore blocks. “The potential bidders will be allowed to submit three proposals for any three offshore blocks (shallow water or deep water or both),” the MOE said in April. “There is much more interest in the offshore blocks this time than in the last round in 2011. This is the first time in a long while that supermajors are bidding for oil and gas interests in Myanmar,” says Edwin Vanderbruggen, a partner at VDB Loi in Yangon, whose firm is acting for three of the supermajors.

The bidding round for offshore blocks was closed on Nov. 15, and the MOE is currently evaluating the bids in a process that could take several months. Companies that win licences will operate on a production-sharing basis, and those who are awarded the 11 shallow blocks will have to work with at least one registered local partner. As a result, about 137 local companies rushed to register with the MOE, Reuters reports. An abundance of partnership options for foreign companies could limit the influence of local companies, many of which will likely have to lower their financial expectations. A further hindrance for local players is that while foreign companies are indeed required to partner with a local firm, there is no minimum percentage requirement for the local player, says Vanderbruggen. Under the foreign investment rules, for restricted activity, the local partner is entitled to a 20 percent stake in the partnership. But the offshore blocks do not fall under that rule because it is not listed as a restricted activity, says Vanderbruggen. “In theory you don’t need a local partner at all, but in practice you do. The MOE does not require local partners to have 20 percent. In fact, they leave that open to the agreement between the foreign and local partner, so it could be a percentage much less than 20. In other words, the ministry is looking out for local interests, but only to a certain extent,” he adds. This is of little concern to the supermajors, as many have expressed interest in the deep-sea blocks – which require a significantly larger investment – where a local partner is not required.

On the other hand, international companies could encounter difficulties in finding the right local partner, despite the large pool of registered contenders. According to Win Naing, managing partner of Zaid Ibrahim & Co’s Yangon office, foreign firms have two basic requirements for their partners: the local players should have experience, and their work should be clean. “Among the 157 domestic companies, I think only two or three of them meet the requirement,” says Naing.

Another concern is that local players can easily set up companies, says Naing. “When the MOE announced the local partner requirements for the onshore and offshore shallow water bids, they immediately registered their companies and then proceeded to register with the MOE as oil and gas companies. I think most of these companies are opportunists, and are not real players,” he says.

Competitive edge

While the registered local companies battle one another for a limited number of partnership opportunities, all eyes are on the fierce competition between the international bidders. Companies like Petronas and ONGC, which were both awarded two blocks in the onshore round, have a competitive edge over other bidders because they are existing players in Myanmar and are knowledgeable of how to conduct business in the country, says Naing.

Vanderbruggen agrees: “The calculation for a bid is entirely different for players like Petronas and PTTEP, which already have infrastructure in Myanmar. Firstly, there are fewer uncertainties because they know more about operating in the country. Secondly, they already have taken on the risk. These existing players already know how things work, so it is easier for them to put in a more aggressive bid than it is for newcomers. We saw that in the onshore round, and we may see that again in the offshore round.”

There are also some other uncertainties for international bidders regarding production sharing contracts (PSCs). “You can’t come into Myanmar carefully and half-heartedly, because the capital investment that you need is too high. The PSC model is designed for a bidder to go big or go home,” says Vanderbruggen. He explains that in the instance where a company flips the PSC into a gas sale agreement, it spends a lot of money on exploration. Upon making a commercial discovery, the agreement concludes with the government selling the gas to the company. The company will also be paid to build the infrastructure to transport the gas. “Those transportation fees are a very important part of earning your money back and making a profit. Nobody knows what fees they will get for that transportation. The PSC just says it will provide a ‘reasonable rate of return’. But how do you define what is ‘reasonable’? Is that 6 percent or is that 45 percent? It is very fuzzy, and it is a risk,” says Vanderbruggen.

The concern over the PSC model is another risk added to the shroud of uncertainty that surrounds Myanmar, where a number of new laws remain untested, and a newly installed civilian government is still finding its feet. But with great risk comes great reward, and numerous international oil giants are lining up to take the plunge.

Nonetheless, it will certainly take a very aggressive bid for a newcomer to beat one of the existing Asian players in Myanmar. But, compared to six or seven years ago when heavy sanctions were in place, the country is now ready to do business with oil companies that they have never worked with before, notably from the U.S. and Europe. The western supermajors bring with them a new group of investors, who will demand greater transparency from the government, and clear regulatory guidelines from the outset. “The Myanmar government has little experience in dealing with this new type of investor, and it remains to be seen how flexible the government can be, and how it will adjust,” says Vanderbruggen. “We will see the answer to that in the next few months.”

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Dimming star

Delays in crucial mining reforms means Myanmar has started to lose some of its lustre, says Melanie Burton of Reuters

A year ago, Myanmar was the hot new destination for resources investors looking to make a fast buck in a country opening up to the outside world, but a new mining law is still not passed, the hot-money crowd has filed out and reality has set in.

Yet, while funding options may have slimmed, opportunity is still knocking. “A year ago, everyone was going to Myanmar. You couldn't get on a flight there because every flight was booked,” says Edward Rochette, chief executive of Canadian explorer East Asia Minerals Corporation, which has applied for an exploration permit in the country. “Investors were thinking: ‘It’s wide open, it’s the Wild West, we’ll just sign and be done.’ Unfortunately, it’s going to take time,” he adds.

Explorers have banged up against processing times for prospecting permits stretching out several years, while commodity prices have fizzled and debt and equity funding markets have dried up. The country has to fight harder to attract capital. “In up markets, they (explorers) can sell the blue sky, greenfield projects. In a down market, these companies are on the edge and just cannot attract capital. Most of the people here are at the small end of town,” says a source from a commodities trading house.

This is dampening government efforts to raise foreign capital in the mining sector and has pushed out processing times for local-foreign joint ventures to gain the right to explore, participants said. “There are disappointments in local parties not coming through, there are disappointments in foreign parties not being able to raise money once they promised it,” says Ma Cherry Trivedi of Myanmar-based Two Palms Mining Company, whose company has several permits in the application stage.

Myanmar is rich in minerals including gold, copper, lead, zinc, nickel, tin, antimony and chromite. It passed foreign investment legislation almost a year ago, but its new mining law, designed to help clear the way for foreign investment in the country’s huge minerals sector, is still at least six months away. Myanmar’s mining ministry submitted a draft of the new mining law to parliament on Oct. 1, says Aung Thuyein Win, a director at the ministry. “We hope that parliament will approve it within three months,” he says, adding that after approval by parliament and the president, lawmakers would have 90 days to enact the law. That means it could be law by March 2014, updating legislation dating from 1994.

“The government worries about fluctuations of commodity prices as well as the waiting time,” said Win. But if the government had rushed to pass legislation to capture better prices, it would have risked selling itself short, he said. “The government is still waiting for foreign investors, but they have to protect locals,” he adds.

Doing the homework

Opportunities still exist for investors with longer-term horizons such as commodity trade houses and specialised private equity. The new mining investment law could spark a flurry of interest in companies that have obtained exploration permits. “We are doing our homework on Myanmar right now,” says one private equity investor based in Singapore, noting there was ample investment choice in existing projects elsewhere in Asia, given lower commodity prices. “Myanmar projects are all pretty much greenfield projects ... but if we found a management team with experience and expertise we believed in, then we’d invest,” he adds.

Among the companies in the queue for prospecting rights is Indonesian state-backed tin producer PT Timah, which applied for an exploration permit in Myanmar last year, primarily looking for tin and tungsten. “Timah is expanding to become a regional player,” says an official from the producer, who declined to be named. “We are optimistic, but need some more time.”

Myanmar has approved more foreign direct investment in the past five months than all of last year, but the receding tide of mining-focused capital has left greater scope for the patient. “I have better opportunity now without the crowds than with the crowds because I'll have actual time with the ministry,” says Rochette of East Asia Minerals Corporation.

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