Huge potential of Myanmar construction industry is waiting to be released

The Myanmar construction industry has been growing at a rate of 15% per annum, but this spectacular headline figure conceals a much more complex picture, according to the co-author of a major report about the country’s construction industry.
Timetric analyst Danny Richards, who wrote “Construction in Myanmar – Key Trends and Opportunities to 2016”, said the huge potential of Myanmar was pent-up and waiting to be released.
“There has been fast growth in the past five years and our latest numbers suggest real term expansion of around 15% per year. But a lot of that overall figure has been tied up with heavy spending on developing the new capital city of Naypyidaw in the jungle. The Government spent fantastic amounts on new buildings and statues to military leaders. You see so many lovely roads and hotels there that you would not believe you were in Myanmar. The rapid growth was also driven by the construction of big oil and gas pipelines from China to the Bay of Bengal, paid for with Chinese money,” said Richards.
For the moment, overseas investment is dominated by China and Japan. Most Western firms are still hesitant to take the leap into what they see as an unpredictable market, although many will be in attendance at the Myanmar International Trade & Investment Summit is in Yangon on March 4 and 5.
“What we’ve got now is a country opening up to investor interest and anticipating massive growth in tourism. This will expose a lack of hotel rooms, a lack of office space and infrastructure weaknesses. So, there’s a sense of massive growth, but also of huge underinvestment in infrastructure over the last two decades when Myanmar was held back by economic sanctions and the political situation. There’s been a lack of investment, particularly from Western investors because of perceived reputational risk,” said Richards.
Richards’ assessment is surprisingly cautious given some of the figures outlined in the Timetric report, which suggest rapid and unstoppable growth.
For example, the report says the construction industry will increase in value at a CAGR of 7.84% over the forecast period up to 2016. The two most successful areas are infrastructure and residential, which together generate around 80% of the total construction market. Both areas are expected to grow significantly.
Timetric says the construction of roads and power plants will enable the infrastructure market to grow at 8.89% and the report projects growth of 7.18% for the residential market driven by the expanding middle-class population and rising housing demand.
Tourism is another growth area. For years, visitors have been put off seeing the great beauties of Myanmar because of the disturbing presence of a military dictatorship. But that is changing fast and if low-cost airlines took a punt on Myanmar, the 500,000 tourists a year could suddenly become millions.
Myanmar is also hosting two important sports events, the 2013 Southeast Asian Games (SEA Games) and 2014 Asian Summit. The influx of visitors will increase demand for hotel and land. Timetric expects the commercial construction to grow 8.01% with a large contribution from tourism.
Richards acknowledges that the figures for growth are striking. But Myanmar’s construction industry was starting from a very low base, he says, especially in the development of infrastructure, which is so poor that it poses a fundamental challenge to economic growth. The CIA ranks Myanmar 101st in the world in terms of its infrastructure quality and estimates that only 3,200 km of the country’s 27,000 km of roads are paved.
Richards says the economic picture is complicated by the country’s developing politic situation, which has taken everyone by surprise. Long a military dictatorship, Myanmar has tried to clean up its act. In 2008, the name was changed from the Union of Myanmar to the Republic of the Union of Myanmar. In 2010, allegedly democratic elections were held.
This claim was disputed by pro-democracy opposition groups in Myanmar after the military-backed Union Solidarity and Development Party declared victory with 80% of the votes. The United Nations and Western countries condemned the elections as fraudulent.
But since the elections, the military-led government, ruled over by the former military commander Thein Sein, has stunned the international community by embarking on a series of reforms toward liberal democracy and a mixed economy.
The political reforms have included the release from house arrest of the pro-democracy leader Aung San Suu Kyi, the amnesties of more than 200 political prisoners and the establishment of a National Human Rights Commission. The Government has also brought in new laws to allow trade unions to exist and even to go on strike. Press restrictions have been relaxed.
There are still controversies. More than 1,600 political prisoners have not yet been released and there are regular battles between the Army and local minority groups demanding greater political freedoms.
But the reforms have been enough to change international opinion about Myanmar, a fact which has far-reaching consequences for the economy. The long and crippling period of economic isolation, during which China was the one major economy to do a lot of business with Myanmar, seems to be over. This new openness was symbolised by the visits of US President Barack Obama and Secretary of State Hillary Clinton to the country in 2012.
As a result of its newfound credibility, the Myanmar Government was able to persuade its creditors in the Paris Club to cancel half of the arrears Myanmar owed them in two stages, rescheduling the rest over 15 years, with seven years’ grace.
Also in January, the Asian Development Bank (ADB) said the arrears owed to it had been cleared with the help of Japan so it could resume operations in Myanmar. It offered a US$512 million loan for social and economic projects. The World Bank also said Myanmar had paid its debts, again with the help of Japan, and it had responded with a US$440 million loan. On top of that, Norway has cancelled a US$534 million debt, while Japan has cancelled more than US$3 billion. “These agreements result in total debt relief of around US$6 billion, that is, more than 60 percent of total debt,” the Myanmar Government said in a statement.
“The country’s huge debts were holding back investment,” said Richards. “Japan’s loans, especially, will allow much more investment in infrastructure, schools and hospitals. The Government doesn’t have the funds, but it can now access money from foreign donors. If the military government sticks to its end of the bargain, then over next five to 10 years there will be a lot of aid money into Myanmar and there should be huge spending on infrastructure. Donor money is a reliable source because it is guaranteed for a period of time, whereas investors can pull out at any time.”
Meanwhile, the Myanmar Government also brought in a new Foreign Investment Law in November 2012 in a bid to increase foreign investment. “It creates a bit more certainty in terms of taxes and land leases. The land lease is one big issue because now the maximum is 50 years for a foreigner to get a lease, with a possible extension of two 10-year periods. Before there was no set limit,” said Richards.
China and Japan dominate foreign investment in Myanmar, but Richards sees opportunities opening up for Western firms willing to take a gamble.
“There’s lots of domestic resentment of the dominance of China in terms of the economy, especially in certain regions of Myanmar. So there is a growing openness to Western involvement. The Government wants to balance interests. It feels it can use the West as a bargaining chip with China to create competition for opportunities. Having said that, China is in a much stronger position than any other nation.”
Some of the Myanmar Government’s ambitions may not come to fruition. Perhaps the most grandiose plan was the US$11 billion Dawei Port project, a joint initiative with Thailand, which would significantly shorten travel times to markets in India, Europe and the Middle East by controlling a deep sea port on the Indian Ocean.
Recently, Thai Transport Minister Chadchat Sittiput said development of the complex on Burma’s western Andaman Sea coast, only 250km from Bangkok, is on hold. Chadchat said the project had stalled because of disagreements with potential Japanese investors about its feasibility. Reports say the Burmese Government has also gone cold on the project.
Such hesitations suggest it will be a bumpy ride for Myanmar over the next few years. There’s also the problem of a lack of semi-skilled and skilled workers as they are all working in Thailand.
But the rich possibilities will be there, Richards says, although he expects Western investors to be cautious at first. A critical mass of investors will want to see the infrastructure projects moving forward before they commit to investing in Myanmar.
“There are still concerns about the rule of law and corruption. A lot of investors will wait and see whilst others will want first advantage. The opportunities for Western firms at first will be in the supply of equipment and materials rather than going and doing jobs on the ground. But in five years time, it could be a vastly different picture with a lot more opportunities available, especially as the regulatory environment improves,” he said.
Author: David Smith
Photo: The world’s second tallest statue, Bodhi Tataung, in Monywa, Myanmar by McKay Savage