With a population of more than 60 million and a land mass as large as Britain and France combined, resource-rich Myanmar stands as an investor’s paradise. Yet its economy was kept insulated by the former military junta during their five-decade rule. It is, therefore, unsurprising that the country has been wooed by foreign investors since the civilian government, led by President Thein Sein, was installed in March 2011. Eager to attract foreign investment, the government has embarked on a series of economic reforms. High on the government’s priority list is the telecom sector, which offers mouth-watering prospects for international telecom companies.

As it stands, Myanmar has one of the lowest mobile penetration rates in the world, second only to North Korea. The government claims mobile penetration is around 9 percent, but Ericsson, a Swedish telecom company, last year put the figure at less than 4 percent. Myanmar’s former military rulers neglected the telecom sector, and built a lacklustre infrastructure capable of handling only the few subscribers who could afford SIM cards. Despite the country’s political overhaul, SIM cards today still cost more than $200. However, in April this year, the government introduced a lottery-style sale to enable winners to get a SIM card for as little as $2. State-owned Myanmar Post and Telecommunications (MPT) is selling 350,000 SIM cards through a public lottery, and plans to offer additional batches on a monthly basis. “This is telecom deregulation, Myanmar-style,” writes Jared Ferrie of Reuters. Indeed, the lottery is a first tentative step towards a telecom revolution that is likely to spur economic growth and transform Myanmar’s society.

A tale of two licences

Currently, MPT and Yatanarpon Teleport, a joint venture between local private firms and the government, hold Myanmar’s only two telecom licences. Eager to expand the sector, the government has initiated a new round of bidding, with two more licences up for grabs. Analysts and practitioners have described the tender process as one of the most exciting greenfield opportunities in the telecom industry worldwide. Indeed, demand was so great that more than 90 international companies expressed interest in tendering for the two licences. The Telecommunications Operator Tender Evaluation and Selection Committee narrowed that down to 12 applicants to pre-qualify to bid, including Singapore Telecommunications, India’s Bharti Airtel, Japan’s KDDI Corp, South Africa’s MTN, Norway’s Telenor and a Digicel consortium. China Mobile and Vodafone, which were among the 12 shortlisted applicants, pulled out of the tender process in May, saying the conditions set by the committee did not suit them. As this issue of ALB went to print, the government was due to announce on June 27 the two winners.

Lawyers in the region have praised the government’s efforts in ensuring a well-organised and transparent tender process. “The government engaged consultants to assist them with the process, and laid out detailed criteria and a structured process which they have stuck to. The fact that they have done this is a positive sign, and sends a good signal to foreign investors,” says Marae Ciantar, a Singapore-based partner at Allens, who is advising telecom companies seeking to invest in Myanmar.

The bidding process: What to look out for

As this issue of ALB went to print, Myanmar’s government was due to award two foreign telecom companies with licences to operate in the country. Edwin Vanderbruggen of VDB Loi highlights a few sticking points to watch for in the outcome of the telecom tender:

1) Political ties – Vanderbruggen: The first thing to look out for is: How much do political ties count, and how much weight is given to political ties? There is a lot of rumour in the market about Myanmar’s strong political ties with Singapore and the effect this might have on Singapore Telecommunications’ chances. Will it turn out this way?

2) Marketing – Vanderbruggen: The second point is: How much does marketing help? In terms of subscribers, Digicel is probably one of the smaller bidders. But locally, they have made the biggest splash on marketing, PR and advertising. How much will that help?

3) East-West component – Vanderbruggen: The rumour has been for months now that one licence will go to an Asian company, and the other to a Western company. Will this rumour turn out to be true, or are we going to see for example, two Asian companies like SingTel and KDDI, win both licences?
4) Uphill battle – Vanderbruggen: Ultimately, will it matter which companies win the licences? State-owned MPT already has a huge headstart. They will most likely look to team up with a strategic partner as well. MPT, a local company, does not want to be left fighting against the large foreign telecom companies, so they will look to team up with someone. Therefore, not being selected could be a blessing in disguise, because the runner-up from the tender process is then free to team up with Myanmar’s domestic market leader.

Furthermore, the outcome of similar reforms in other countries indicates a direct link between the development of the telecom sector and economic growth. In addition to the creation of thousands of jobs, the expansion and liberalisation of the telecom sector would enhance the efficiency of conducting business and financial transactions, including mobile payment services. As a result, Myanmar’s government has prioritised the sector, and has shown its willingness to roll out reforms fast.

High risk, high reward

Despite boundless opportunities for foreign entrants, investing in Myanmar comes with a high degree of risk. Perhaps the most concerning is the lack of a concrete legal and regulatory framework in the telecom sector. Although the first public draft of a new telecom law made its rounds before the start of the tender process, it is unlikely that a final law will be put in place before the process is completed. “The problem for foreign firms is there is very little detail in terms of timelines and structure, so very little to hang on to,” said Ramakrishna Maruvada, regional head of telecom research at Daiwa Capital Markets, to Reuters.

For his part, Ciantar says that this is not a situation that is unique to Myanmar, noting that some companies who are participating in the tender process have operated in countries that have undergone a similar liberalisation of the telecom market - in Cambodia for example - before the regulatory regime has been put in place. “It does increase the risk, but on the other hand, some international telecom companies have been prepared to invest in countries where this has been the case, and they have been able to operate successfully in these markets – albeit with some challenges when disputes have arisen between market participants,” adds Ciantar.

Nonetheless, the draft law is still with the National Assembly, and it is increasingly unlikely that anything concrete will come through before the two licences are awarded. However, investors will have already taken this into consideration, says Edwin Vanderbruggen, partner at VDB Loi in Yangon. “If there are some big differences between the final version and the draft, then there might be some issues. But during the tender process, the government committed to the bidders that there will not be any differences, and that if there are any changes, they will be to the benefit of the investors.”

Another concern for foreign telecom investors is the competitive landscape. In its current setup, MPT is the market leader in the telecom sector. But it is also the regulator, says Vanderbruggen, and if a regulatory body or telecom authority is created, it will likely consist of former MPT staff. Should this happen, MPT and the regulatory body may still be quite difficult to distinguish from one another. “This is something that the two licence winners will have an issue with. If the case involved a private company with no power, it would not be a problem. But MPT is a state-owned operator that has a lot of power,” says Vanderbruggen.

A longstanding issue for foreign investors looking at Myanmar has been government sanctions. Sanctions imposed during military junta rule barred Western telecom firms and others from operating in Myanmar. At the start of the tender process, EU sanctions on Myanmar were suspended but not lifted. However, they have since been lifted, while U.S. sanctions on dealing with certain listed individuals and companies they own are still in place. These sanctions create a real issue for U.S. companies and U.S. nationals, says Ciantar. “Some non-U.S. companies that we have assisted with potential investments in Myanmar have had issues because they employed U.S. nationals as directors or members of their senior management, This created real issues for those companies, even though the sanctions were not directly applicable,” says Ciantar, who cites examples of the difficulties encountered by some companies that have sought to enter into joint ventures with local companies.

No lack of effort

With such a high level of risk in play, tapping into Myanmar’s telecom sector may seem like a daunting venture. But most international bidders will have had prior experience operating in similar environments. Nonetheless, lawyers advise that potential investors ensure that they conduct thorough due diligence and command a good understanding of the political environment, the legal framework and the regulatory landscape. “Companies need a good understanding of the political and legal environment, and appreciation of the risks involved. They are not going to be able to completely mitigate risk for a place like Myanmar, but they need to understand what the risks are so they go in with their eyes wide open and make informed investment decisions,” says Ciantar.

Demand is soaring, and phone shops are fast popping up in Yangon, Myanmar’s largest city. Companies lining up to invest are treading carefully, and watching the tender process closely and with great interest. Myanmar’s potential is clear to see, but whether foreign investors realise it will depend on the government’s effort to put in place a clear regulatory and legal framework for the telecom sector. Questions remain about a timeframe for the new telecom law, but for a country that is going through a complete political and economic overhaul, reform is undoubtedly a slow process. “The government is being sensible, and not rushing to do too many things at once. They are prioritising reforms, and the positive thing for investors is that each major economic and legal reform so far has generally been positive,” says Ciantar.

Vanderbruggen agrees: “On the ground here, we see that the government is doing a fantastic job. Even though they sometimes have limited resources, they are putting in tremendous effort to improve transparency and ensure good governance.”

The World Bank, which has given technical assistance to the telecom ministry, urged the government to take a balanced approach and send the right message to foreign firms. “It is important for the government to ensure a stable policy and regulatory framework is established so it encourages credible, world class investors to enter the market and provide citizens with affordable and high-quality services,” its office in Myanmar told Reuters. “This is an important opportunity for Myanmar to demonstrate to the world that the country is open and ready for business.”

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