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OECD review urges government to continue regulatory reform

The government needs to continue its efforts to reform the regulatory framework and create a favourable investment environment to sustain economic development, the Organisation for Economic Co-operation and Development has urged in its first investment policy review of Myanmar.

The review, which took about 18 months to complete, was officially released at a ceremony at in Nay Pyi Taw on March 1 and was the focus of a discussion held at Traders Hotel on March 4 attended by ministers, government officials, foreign investors and other interested parties.

“The investment policy review has helped to provide a roadmap for reform to improve the investment climate, including both quick wins and more long-term reforms,” the head of investment policy reviews at the OECD’s Directorate for Financial and Enterprise Affairs, Stephen Thomsen, told Mizzima Business Weekly in an email on March 5.

The review had also helped to build capacity in the Directorate of Investment and Company Administration (DICA) and elsewhere in the government “to implement these reforms and has improved both transparency and inter-ministerial capacity on investment climate issues,” Mr Thomsen said.

The review was praised by U Myo Min, the director of DICA, under the Ministry of National Planning and Economic Development, in an opening speech at the March 4 event.

“The review allows us to take advantages of OECD diagnosis and benchmarking to support Myanmar’s ambitious reform programme,” U Myo Min said.

“It also provides access to recommendations based on good practices in investment policy making and implementations; we are looking closely at many recommendations made by the OECD,” he said.

U Myo Min acknowledged that the government needed to continue to streamline procedures for improving investment while simultaneously minimising policy uncertainty.

“We need to review the many restrictions on foreign investment over time and gradually to align our investment regulations with those in other countries,” he said.

The government also needed to continue to improve mechanisms for promoting investment, such as through the one-stop centre that opened recently in Yangon.

U Myo Min said the government was moving quickly to improve the investment climate, such as through the Foreign Investment Law and the Special Economic Zone Law, but recognised that much more needed to be done.

“The OECD recommendations will help provide a roadmap for reforms,” he said.

Mr Thomsen said the new investment law was a positive step and welcome efforts to harmonise the process.

“There are a number of steps the government is taking, but the question is if the government moves very quickly what will the problems be in implementing the legislation,” he said.

Once enacted, laws needed to be implemented and enforced, he said. The government needed to help build capacity to ensure laws were properly enacted and enforced.

The investment policy review says that the government should enhance the level of legal protection and predictability provided to investors in the current laws. It said that if additional legal standards of protection were incorporated in the current legislative framework, the scope and the context of the protection granted to investors must be clearly delineated and defined.

Elaborating on these suggestions in his email, Mr Thomsen said that if the government chooses to strengthen the protection dimension of its investment legal framework – which is still rather poor on investment protection and is mainly focused on incentives as well as screening procedures – it should be clear about what exactly it is granting to investors.

Incorporating additional standards of legal protection amounted to committing to extra legal obligations for state authorities, to which they must agree to be bound, he said.

Mr Thomsen cited unlawful expropriations as an example of the need to carefully delineate the scope and content of protection provisions.

Better protection against unlawful expropriations would send a positive signal to investors, he said, adding that the existing law lacked clarity because while it prohibited the nationalisation of businesses, it was silent on other forms of expropriation.

Mr Thomsen said the government would have to decide what types of measures it would adopt to protect investors.

“If they want, for example, to preserve their right to issue regulations that may amount to an indirect expropriation, they should clearly draft the expropriation provision accordingly. If they do not so, the risk is either to provide a protection that is too vague and uncertain to truly reassure investors; or to overcommit and thus to take the risk to be held liable for a violation of investors’ granted rights – which might imply large amounts of money to be paid in compensation,” he said.

Mr Thomsen also raised the issue of national treatment provisions in investment legislation.

“It might be a positive step towards a more friendly investment climate to incorporate an NT (Non-Tariffs) clause in the investment legislation. But in such a case, it is important that exceptions to this principle of non-discrimination between foreign and domestic investors are made in a clear and unambiguous manner, either in the separate regulation or in the law itself,” he said.

“The idea is that in adopting unambiguous legal provisions, the government provides more legal predictability and security to investors but also to itself, and thus understands what it is signing up for,” Mr Thomsen said.

The review said Myanmar is the second most restrictive economy for foreign investment in terms of statutory restrictions and that foreign direct investment would rise by more than 30 percent if the government eased restrictions.

Mr Thomsen said that in the short to medium term, the priority should be to simplify and reduce the scope of the Myanmar Investment Commission’s approvals process.

He said screening should focus on the largest and most environmentally sensitive projects or those with the greatest potential social impact.

Other investors should only have to notify DICA that they had fulfilled the necessary conditions to invest. This would provide greater certainty to potential investors and increase their willingness to invest, Mr Thomsen said.

Myanmar offers tremendous potential for foreign investors, including those from OECD countries, Mr Thomsen said.

Some potential investors were waiting to see how the situation developed during the next two years, but many wanted to invest quickly to benefit from a first mover’s advantage in the market and from competitive wage rates in Myanmar, he said.

There was a marked increase last year in investment in manufacturing, such as garments, and in tourism, he said.

The review raised concerns about duplication, referring to over-lapping responsibilities evident among some of the 30 government ministries, as well as poor inter-ministerial cooperation. It said this affects both policy effectiveness and the overall investment climate because of the uncertainty created for investors.

Asked about the impact on potential investment of the political landscape of the elections due to be held next year, Mr Thomsen said some investors were waiting to see what would happen.

“I think some investors are slowing down; they’re waiting to see,” he said.

“Many investors are coming into Myanmar: Coca-Cola, Pepsi, and many others. So, I think investors are coming. Once the election is out of the way, there might be a flood of investment,” Mr Thomsen said.
The review stressed that the objective of a good investment climate is not just to increase investment but also to improve the flexibility of the economy to respond to new opportunities as they arise.

This meant allowing productive firms to expand and those which were uncompetitive, which included state-owned enterprises, to close.

It said the government needed to be nimble and to respond to the needs of the business community through public consultation and be prepared to change course quickly if a policy failed to meet its objectives.

It urged the government to create a champion for reform within the government itself.

“Most importantly, it needs to ensure that the investment climate supports sustainable and inclusive development,” it said.

Mr Thomsen said it was important that the government was careful to ensure that the pace of reform did not get too far ahead of the capacity of individual ministries to implement legislation.

“There is a justifiable urge for quick wins, but laws need to be implemented and enforced if they are to have the desired impact,” he said.

“The government should also think about reducing the scope for investors to benefit from tax holidays. This money would be better spent on education and infrastructure.”

source: Mizzima