The world’s media has certainly not overlooked the monumental reversal in Myanmar’s international standing and there is clear evidence that the country’s economy is also set for a rapid turnaround.
Myanmar’s government is delivering on promised political reforms, including peace with its opponents, and its efforts to reform the economy will likely pay enormous dividends for the nation and foreign investors.
In the space of a few short years, Myanmar has embraced foreign investment laws that allow 100 percent ownership of assets by foreigners with provision for these assets to be freely traded.
Laws such as this remove the veil of protectionism and nationalism in which many emerging nations feel compelled to cloak their foreign investment regulations. Myanmar’s reforms also send a clear signal to investors about the country’s accessibility and the ease of doing business there.
The industry that holds the key to Myanmar’s economic future is mining. As China – one of the country’s few foreign friends during the dark days of military rule – was all too aware, Myanmar is a potential treasure trove of gold, copper, iron, tin and tungsten.
Minister for Mines Dr Myint Aung is serious about undertaking much-needed mining law reform. Recently, Dr Myint Aung canvassed the views of a number of experienced Australian mining sector advisers in an effort to get the participation formula right. This development is significant as proposed new mining laws must encourage foreign investment in the sector.
Regulations define how a country will generate direct economic benefit from mining, and there are many ways in which governments attempt to capture value in this sector.
One way is for government to impose royalties and taxes that seek to generate national income from revenues and profits of a mining company. One criticism of this model is that a standard royalty or sales tax regime levies the same rate on each mining operator, regardless of the underlying efficiency and profitability of the actual mine. This limits economic activity by only attracting investment in low-cost ventures with access to infrastructure.
At the other end of the spectrum, mining laws can allow for equity participation or production sharing with the government. Under this model, the government takes a share of profit from the mining operation, but exposes the investor to many other challenges.
Mining projects require large amounts of capital and in the case of emerging nations like Myanmar, the government is typically unable to provide capital to fund their share of the equity.
This “free carry” means the foreign investor funds all the risk capital, but ends up generating a lower return because of the dilution in its ownership.
To create a win-win for both the economy and miners, Myanmar is expected to adopt regulations that allow taxation arrangements to be tailored on a case-by-case basis to individual investment proposals.
Australia will play a lead role in assisting Myanmar establish a world-class platform of laws and regulations to attract foreign investment into its mining sector, and this assistance will be accelerated with the Australian government’s recent announcement of a further US$20 million aid package to provide extra support for trade and investment in Myanmar.
(Dr Nigel Finch is an associate professor at the University of Sydney Business School and a member of the Sydney Southeast Asia Centre.)