Investment incentives to boost growth in Myanmar construction and real estate

 

Since the beginning of Myanmar’s economic and political reform in 2011, the construction industry has experienced mixed fortunes. Although the government has recognised the economic multiplier effects of infrastructure development, some large-scale projects have been held up by bureaucracy and investor scepticism.

However, recent efforts suggest cause for optimism, including the large-scale urban development projects planned for Yangon and Mandalay, and the government’s assertion of its commitment to infrastructure development and public-private partnerships (PPPs) under the Myanmar Sustainable Development Plan (MSDP) 2018-30. Meanwhile, large-scale real estate projects – particularly mixed-use developments – are nearing completion, which should further improve investor confidence for current and future projects.

Key Figures

The most recent data from the Central Statistical Organisation (CSO) shows that the construction sector contributed MMK4.5trn ($3.2bn) to GDP in current prices in 2015, equivalent to around 6.2% of the total. This was slightly up on the previous year, when the sector contributed MMK3.8trn ($2.7bn), which represented about 5.2% of total GDP.

According to the World Bank’s Economic Monitor for Myanmar, published in May 2018, though the construction industry expanded by 7.6% in 2017/18, this is half of the growth rate observed in 2015/16. The sector represented 5.7% of GDP and 18% of industrial output. Given that approximately 6% of the total population, or 9% of the urban employed population, work in the construction industry, slowdown of sector activity would impact a sizeable number of household incomes and the rate of poverty reduction.

Priorities

The government’s efforts to prioritise large-scale infrastructure development in order to boost the economy presents significant opportunities for the construction sector, but since 2016 there has been a sense of frustration regarding the slow pace of some planned projects. Many of the plans to construct and improve roads, bridges, buildings and airports across the country, as well as improve rules and regulations that would boost the efficiency of large-scale projects, have been held back by bureaucratic delays.

The Ministry of Construction aims to ensure that roads in rural areas are upgraded to all-weather roads by 2030, providing 90% of the rural population with access to paved streets. The upgrades will not only improve how efficiently goods can be transported, but also how quickly local people can access health and education services. Additionally, the government intends to provide urban planning for all of the country’s 330 townships, as well as construct 1m apartments by 2030.

To help meet these objectives, the government announced in May 2018 that it will form a regulatory body to supervise and examine the quality of construction projects. In August 2018 a law was being drafted to establish the Construction Industry Development Board. If passed, the legislation will ensure a level playing field for all construction companies, whether large or small, and standardise regulations and specifications.

Furthermore, the government has signalled its enthusiasm to undertake projects through PPPs by joining with knowledgeable foreign entities such as the Asian Development Bank, the World Bank, the Japan International Cooperation Agency (JICA), the Korea International Cooperation Agency and the Thailand International Cooperation Agency. To this end, a project bank to facilitate major PPP proposals was established under the MSDP 2018-30 in December 2018. Though the country has experience with PPPs in large-scale developments, such as the Thilawa Special Economic Zone (SEZ) near Yangon, it does not yet have a specific PPP law or legal framework governing such projects.

Home Building

Another priority for the authorities is the provision of affordable housing. According to the Ministry of Construction, more than 3000 apartments were built in FY 2016/17 in Yangon and Mandalay. It aims to construct another 180,000 nationwide by the end of FY 2020/21. In addition, as the government looks to foster national reconciliation and strengthen relations with ethnic minority groups, who largely reside in the border areas, it recognises the benefits that can be gained from better connectivity. Under a period of military rule, many of the regions in Myanmar experienced little infrastructure development. In its two-year performance review published at the end of the first quarter of 2018, the Ministry of Construction drew attention to its progress in these minority regions since the National League for Democracy led the government in 2015. For example, the ministry had built and maintained 60 roads with a combined length of 2383 miles in Kachin State, in addition to the construction and maintenance of 49 bridges. In particular, the newly built Yat Bawt Bridge in the state’s Nawngmun Township is expected to improve connectivity to the Hkakabo Razi region in the state’s far north, an area which holds significant tourism potential.

Meanwhile in Kayah State, the ministry reported that it had upgraded 96% of the roads to asphalt and widened the main route connecting the country to Thailand. The performance review also indicated that the Ministry of Construction is seeking to improve infrastructure in two of the most remote and least developed parts of the country: the Rakhine and Chin States.

In other parts of the country, the government has highlighted some of the major infrastructure projects that it views as priorities. These include already completed upgrades to two 10-mile sections of the Yangon-Mandalay Expressway, a crucial artery that connects the country’s two largest cities. Such improvements could offer significant economic benefits to Myanmar, especially if Mandalay fulfils its potential as an economic hub in northern Myanmar.

Regulatory Delays

Despite the government’s plans and priorities, however, some players in the private sector would like to see a more transparent policy direction to expedite project delivery. “Investors understand that large-scale projects need time to move forward, but without basic infrastructure like power, transport and logistics, as well as clear-cut policies, attracting investment remains a challenge,” Daw Aye Nyein Thu, business development director at National Infrastructure Holdings Company, told OBG. “If the situation does not improve, companies can easily move to other markets in the region – such as Vietnam and Thailand – where policies are more clear.”

While major infrastructure projects in Myanmar are overseen primarily by the Ministry of Construction, which is headed by U Han Zaw, large-scale projects usually require input from several ministries. For example, the construction of new schools will usually involve negotiations with the Ministry of Education, while the building of hospitals requires approval from the Ministry of Health and Sports. While this structure is not necessarily unique to Myanmar, private investors often complain that communication between different ministries is poor, leading to delays for major projects. Regional governments also usually have a hand in large-scale development projects planned for their areas.

However, there are those who argue that meaningful progress in the construction sector has been made in the last few years, pointing to the possibilities made available through the efforts to support other industries. U Kyi Tun, managing director of local construction firm Trust and Gain Company, told OBG that the decision by the government to increase spending in the health and education sectors is encouraging for the construction sector, as it would lead to a boost in hospital and school construction projects. The government aims to spend around 9% and 4.5% of the 2018/19 budget on education and health, respectively.

Major Companies

Most of the largest construction companies operating in Myanmar today have been involved in the industry for many years. Some are arms of major conglomerates, while others specialise purely in construction. Of the former, major industry players include Shwe Taung, which is owned by businessman U Aik Htun, and has operations in the energy, infrastructure and building materials industries. Other notable construction companies include Htoo Group, which is owned by U Tay Za, and Max Myanmar, a local conglomerate of which the chairman is U Zaw Zaw. These groups, and many others like them, are not only involved in the construction of mixed-use real estate projects, but also in major infrastructure projects across the country.

For example, Shwe Taung built Junction City, a large-scale residential, commercial and retail project in the heart of Yangon spanning across 2.6 ha of land, which opened in 2017 after three years of construction. Shwe Taung also constructed several other mixed-use developments around the commercial capital, and has similarly been involved in the construction of highways, roads and bridges across the country.

Another high-profile construction company is Asia World, which is owned by U Htun Myint Naing. The company has been involved in major infrastructure projects, including the development of Yangon International Airport, Asia World Port Terminal in Yangon, and a number of major energy projects in the north of the country. Some of the major companies involved solely in construction include Naing Group, Shine Construction and Motherland Construction.

Public Procurement

Myanmar has made efforts to establish an open and competitive public procurement system as part of its commitment to economic and political reform beginning in 2011. This has resulted in two presidential instructions and two directives on public procurement. In more recent years, the Ministry of Construction has worked alongside the World Bank on the Modernisation of Public Finance Management Project, which aims to develop a stronger public financial management system that includes a modernised national public procurement system. In 2015 Myanmar established the Public Procurement Rules and Regulations Steering Committee, which was re-organised the following year to include the deputy minister of planning and finance as chairman.

In October 2017 the Ministry of Planning and Finance announced intentions to improve access to capital for winners of government tenders for construction projects. To this end, the Construction and Housing Development Bank said it would provide unsecured loans at an interest rate of 12% per annum to the winning bidders for up to half of the project expenses. Such moves are encouraging in Myanmar’s construction industry, where companies often struggle to gain access to capital and where local banks have limited lending capacity (see Financial Services chapter).

Materials

The continued focus on nationwide road development is expected to benefit the construction equipment industry. Access to building materials inside Myanmar is relatively limited, although the situation has improved since reforms began in 2011. “We expect the market for construction machinery to grow by up to 20% in 2019, mainly driven by road construction projects in the pipeline and demand from the agriculture sector,” U Htun Lynn, managing director of construction equipment distributor Htun Nay Wun Thitsar, told OBG.

In 2016 the government added construction materials to a list of industries where foreign companies can form joint ventures with local firms, a move that should improve capacity volumes. The Ministry of Construction anticipated that foreign companies would import high-quality building materials, which in turn would promote development of the sector.

Another development in the industry has been the establishment of factories for building materials within the country. For example, there are more than two dozen cement factories across the country. Among the largest is a plant in Mawlamyine, Mon State, that is being operated by Thailand’s Siam Cement Group. Operations started in March 2016, with the plant producing 5000 tonnes of cement per day on site. Another cement factory lies in Pyi Nyaung village, located in the Mandalay Region. It is operated by Shwe Taung Group and backed by the World Bank’s International Finance Corporation. However, both development projects have been met with questions regarding their environmental impact, highlighting some of the challenges related to large-scale construction projects across the country.

Staffing

Another challenge that construction companies face in Myanmar is a shortage of skilled workers who can ensure that buildings are of sufficient quality. Engineering projects in the country are overseen by the Myanmar Engineering Council, which currently awards Registered Professional Engineer Certificates as part of its plans to improve the quality of local engineers to an international standard. To this end, the council established the Engineering Education Accreditation Committee, which is tasked with fostering relationships between technological universities and institutions. However, for the quality of engineers to improve, further efforts are needed in the education sector, including a focus on vocational skills (see Education chapter).

Myanmar has no shortage of construction workers, but most have no formal training and typically work at high risk for low wages. Workplace safety rules are currently covered by the 1951 Factory Act. Discussion of a workplace health and safety law has been ongoing since 2012, and in April 2018 a draft of the law was submitted to the Hluttaw, or the Assembly of the Union.

Informal Settlements

Yet another challenge, one that has been faced by successive governments, is informal settlements. These are particularly an issue in Yangon, as is it a popular destination for employment seekers from other parts of the country. The government estimates there are 440,000 squatters living in 110,000 households in Yangon, the majority located on the city’s northern outskirts. The issue has become more prominent since the reforms began in 2011, driven in part by rising land prices.

In 2016 the Yangon regional government – under the leadership of the National League for Democracy – announced it would conduct a survey of the city’s squatter community. Those who qualify as real squatters would be given an identification card that would eventually see them resettled; however, as of December 2018 there had been little progress on this front.

Foreign Interest & Demand Drivers

Besides the country’s clear need to address its infrastructure deficit, one of the expected major growth drivers in the construction sector over the medium to long term is linked to geopolitics, specifically China’s desire to improve connectivity with its southerly neighbour as part of its ambitious Belt and Road Initiative.

In September 2018 the two countries signed a memorandum of understanding for the China-Myanmar Economic Corridor (CMEC), which would connect China’s Yunnan Province to Mandalay in the centre of Myanmar, Yangon in the east and Kyaukphyu in the west. With the last connection, China plans to press ahead with developing a special economic zone and deep-sea port. The corridor also aims to improve economic ties between the two countries through initiatives such as industrial zones, trade quotas and tax breaks.

If it goes ahead as planned, the CMEC could see China invest billions of dollars in Myanmar, potentially bringing huge gains to the country’s construction sector. The priority plans under the CMEC include five mega-projects: New Yangon City, Yangon-Ayeyarwaddy Development Project and Pathein Industrial City; New Mandalay Resort City; Myotha Industrial Park in Mandalay; and the Muse Central Business District.

China is not the only country interested in pursuing major construction projects in Myanmar. Despite multiple setbacks, India hopes to move ahead with its planned Kaladan Multi-Modal Transit Transport Project, which would connect the Indian city of Kolkata with Sittwe Port in central Rakhine State. From there, it would link Paletwa in Chin State to Mizoram State in north-east India. The entire project, including the construction of ports, inland water terminals and roads, is expected to be completed by 2019-20.

Japan has also been heavily involved in major construction projects in Myanmar. As well as the multi billion-dollar Thilawa Special Economic Zone on the outskirts of Yangon, Japanese interests also include upgrades to Myanmar’s outdated railway system. In 2015 JICA announced that it will invest $250m to upgrade the Yangon circular railway, which is expected to be completed in 2020. Additionally, the Japanese company also proposed to construct two underground railway lines in the commercial capital and a light rapid transit system to improve traffic flow.

Roads & Mega-Projects

Yangon’s increasingly gridlocked streets have led to other investment opportunities in the sector. The Ministry of Construction has invited companies to submit bids to build an elevated ring road around Yangon as part of a PPP worth an estimated $1.5bn. The road is expected to connect Yangon Port in the city’s downtown area with Yangon International Airport, then to the Yangon-Mandalay Expressway. In November 2018 the Ministry of Construction announced that it had received 12 applications for the project, 10 of which were shortlisted in the following month as prequalified bidders. The winning bidder is expected to be selected by June 2019.

Meanwhile, the planned mega-project in Mandalay could contribute to Myanmar’s second-largest city becoming an even more important economic hub in the northern region, especially for Chinese companies. New Mandalay Resort City is set to occupy close to 4050 ha in the nearby town of Pyin Oo Lwin and will be developed over three phases. Phase one will include the construction of an IT facility, convention centre, schools and a commercial zone, while the second phase will focus on developing industry and tourism. The third phase is expected to include houses, agricultural zones, hotels and a golf course. The Department of Urban and Housing Development in Mandalay Region announced in November 2018 that it anticipates works on the project will commence in 2019.

While these projects bode well for construction growth, the sector’s prospects remain inextricably linked to the performance of the wider economy. “The construction sector is peculiar in that it is influenced by growth in every other sector,” Daw Mie Mie Soe Nyunt, director of Kyauk Sein Nwe Construction, told OBG. “As such, Myanmar’s construction sector will only experience sustainable growth when all other sectors are properly developed. In the meantime, the most promising opportunities lie in the construction of industrial and commercial buildings.”

Outlook

Despite a mixed performance in recent years, there are reasons to be optimistic about Myanmar’s construction industry in the medium and long term. Government priorities, coupled with increased interest from the country’s powerful and wealthy neighbours, could see billions of dollars being contributed to large-scale projects around Myanmar; however, that is not a guarantee for success, and further efforts are required in order to speed up bureaucratic delays and improve access to capital for major developments.

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The Report: Myanmar 2019

Construction & Real Estate chapter from The Report: Myanmar 2019

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