Development continues on Myanmar logistics corridors and multi-modal transport

 

If Myanmar is to fulfil its economic potential, significant investments are required in transport infrastructure. In all areas – from roads, to railways, to ports – the country has fallen behind its neighbours in the region. Encouragingly, the government recognises the need to prioritise this area, and has begun to make progress on much-needed projects, often with the help – financial and otherwise – of development partners. If government enthusiasm is matched by effective efforts to remove red tape and improve access to capital, then the prospects for the transport sector are bright.

Structure & Oversight

Transport in Myanmar is overseen by the Ministry of Transport and Communications (MoTC), headed by U Thant Sin Maung. Before the National League for Democracy (NLD) came to power in 2016, transport, rail transport and communications were managed by three separate ministries. Their merger was part of the NLD’s structural reform plan to reduce the number of ministries and make government more efficient. Key departments within the MoTC include water resources and river systems, civil aviation, marine administration, and meteorology and hydrology. It is involved in varying capacities in the operations of transport-oriented, state-owned entities, including flag carrier Myanmar National Airlines, Myanma Port Authority and Myanma Railways.

Infrastructure Development

Since coming to power, the NLD-led government has recognised the benefits that significant infrastructure investment can bring to a developing economy. According to the “Transport Sector Policy Notes” report published by the Asian Development Bank (ADB), in 2016 there were about 20m people in Myanmar without access to basic roads, while 60% of highways and most rail lines in the country were in poor condition. The report noted that in the previous four years vehicle numbers had doubled, travel in Yangon had become two to three times slower, and public transport operators had lost between 35% and 65% of the market. The ADB estimated that some $60bn in transport infrastructure investment is necessary between 2016 and 2030.

Limited nationwide transport connectivity – including poor-quality roads, slow railways and clogged waterways – has an impact on profit margins and productivity in all industries and restricts the development potential of rural areas. The government’s commitment to improving infrastructure is highlighted in high-profile projects in the pipeline, including an elevated highway in Yangon slated for completion in 2022, as well as upgrades to railways, ports and airports.

Strategies

In 2014 the government completed its National Transport Master Plan (NTMP), which proposed projects related to the improvement of road, rail, maritime, inland water, and air transport systems and networks in Myanmar. A transport strategy for Greater Yangon was unveiled at the same time, which focuses on three main areas, namely strengthening road maintenance and improvement, facilitating public transport development and enhancing traffic management.

As of December 2018 the MoTC was collaborating with the Japan International Cooperation Agency (JICA) to establish a National Logistics Master Plan (NLMP) to supplement the NTMP, with the aim of developing infrastructure to handle an expected 85% increase in cargo movement to and from Myanmar to 312m tonnes by 2030. The strategy, which is due to be completed in 2019 and will include 167 project proposals, aims to create an efficient and competitive logistics system that will attract foreign direct investment and strengthen industrial development.

Central the NLMP is the establishment of six logistics corridors that run through the country: a North-South Logistics Corridor between Yangon and southern China; a South-East Logistics Corridor to Thailand; a Trans-Myanmar Logistics Corridor connecting Kyaukphyu in Rakhine State with Tachileik in Shan State; a Myanmar-India Logistics Corridor; a Main River Logistics Corridor; and a Coastal Marine Logistics Corridor.

Another area of priority for the government has been to upgrade the country’s railways, many of which were built during the British colonial era. The rail network is extensive, but most lines have suffered from underinvestment for several decades, meaning that journeys are often slow and uncomfortable. For example, a journey on the 620-km line connecting the two biggest cities, Yangon and Mandalay, can take 12-15 hours. Consequently, it is underutilised and its economic potential is largely wasted.

Therefore, improving the Yangon-Mandalay route is the government’s number-one focal point in this area, and a programme of upgrades via the Yangon-Mandalay Railway Improvement Project is under way to strengthen the quality of the service and significantly reduce travel times (see analysis). Work on the first phase began in November 2018, with a groundbreaking ceremony at the Nyaunglebin railway station in the Bago region, 80 km north of Yangon. Funding for the programme is being provided by an official development assistance loan from Japan. As such, Japanese companies and JICA are expected to be heavily involved in the works carried out. The first phase is slated for completion in 2023, and will shorten train journeys between Yangon and Bago to one hour and from Bago to Mandalay to seven hours.

Meanwhile, in Yangon, JICA is assisting Myanma Railways in upgrading the 460-km Yangon Circular Railway, a crucial commuter link for a large number of the city’s residents. Financed by a $250m loan from JICA, the project intends to reduce travel times on the 39-station loop from three hours to under two hours.

Guided by the 2014 plan for Yangon, Myanmar’s commercial capital is likely to see considerable changes to its transport infrastructure in the coming years. In January 2016 the regional government completely overhauled the city’s outdated – and often dangerous – bus system, replacing it with the Yangon Bus Service (YBS), which has been met with mixed feedback from city residents. The government has also invited private companies to submit bids for the construction of an elevated expressway around the city through a public-private partnership (PPP) at a reported cost of $1.5bn. The 47.5-km ring road is expected to connect Yangon Port in the city’s downtown area with Yangon International Airport, Mingaladon Industrial Park and the Yangon-Mandalay Expressway.

Investment Opportunities

The sheer scope of the government’s transport plans creates significant opportunities for private companies, and the government appears keen to work with foreign firms to ensure that the projects are structured and implemented in line with international standards. At the Yangon Investment Forum in May 2018, U Phyo Min Thein, chief minister of Yangon, announced that his government welcomed foreign investment, particularly in the areas of trade, logistics, industry, public transport and energy.

In its own recommendations on investment opportunities, the Directorate of Investment and Company Administration urged companies to take advantage of the government’s intention to improve transport integration with neighbouring countries, either through build-operate-transfer agreements or other PPP arrangements. It highlighted opportunities in the areas of road, bridge and railway construction, the development and operation of airports, the construction of ports and logistics infrastructure, and the establishment and oversight of industrial parks, including related infrastructure.

PPP

The PPP model is a key component of Myanmar’s infrastructure drive. The government hopes that following best practices in such partnerships will mobilise private finance and foster more efficient and cost-effective project management, as well as bring greater innovation to large-scale projects. In recent years Myanmar has worked closely with multilateral finance institutions to develop PPP capabilities, most notably the ADB, the World Bank and its sister organisation, the International Finance Corporation. Projects that have been completed or are ongoing under PPP arrangements include the Thilawa Special Economic Zone (SEZ) and the Yangon-Mandalay Expressway.

Given the relative lack of experience in the government for implementing large-scale projects, the shift towards PPPs makes sense. The country’s weak tax-collection system and long-running budget deficit make it infeasible to finance most plans through public funds, and private involvement is an obvious alternative. However, Myanmar presently lacks a clear legal and regulatory framework for PPPs, which may deter some investors seeking certainty regarding the operating environment and long-term returns.

The Myanmar Sustainable Development Plan (MSDP) 2018-30 calls for a wide-sweeping PPP programme to assist in the development of all types of infrastructure around the country (see Trade & Investment chapter). The MSDP includes plans for a project bank, which will identify priority infrastructure developments suitable for implementation under a PPP model. It is anticipated that the project bank will focus on energy and utilities projects in its early stages, as these initiatives offer the best prospects for long-term commercial viability.

Foreign Direct Investment

Foreign investment in the transport sector has been an important driver of growth in the economy since Myanmar started opening up to foreign investment in 1989, with international companies investing around $9.3bn in transport and communications since then.

China has been one of the most important participants over the past 30 years. As Beijing looks to pursue increased investment in its southerly neighbour through a planned China-Myanmar Economic Corridor (CMEC), this involvement looks set to continue. The country sees Myanmar as a key component of its ambitious Belt and Road Initiative (BRI), particularly in regard to its planned deepwater port and SEZ in Kyaukphyu in Rakhine State (see analysis).

China is urging Myanmar to move ahead with projects related to the CMEC, and both countries signed a memorandum of understanding in September 2018 to cooperate in the corridor’s construction. Although many details of the initiative remained unclear as of December 2018, it will inevitably involve significant investment in transport infrastructure, such as the planned high-speed railway between Muse, which lies on the countries’ shared border, and Mandalay. Myanmar officials have said the project would likely be later extended to Kyaukphyu and Yangon.

Meanwhile, India sees Myanmar as a key component of its own Act East policy and is keen to improve connectivity between the two countries. One of its most ambitious programmes is the $500m Kaladan Multi-modal Project, which includes construction of a 109-km road connecting Mizoram State in north-east India to Paletwa in Myanmar’s Chin State and then a 158-km river route to Sittwe in Rakhine State. Despite numerous delays, construction of a section of road between Paletwa and Mizoram began in early 2018, although it is unlikely to be finished on time in 2019.

For their part, Japanese firms are leading the way in investments in Myanmar’s railway sector, as well as in airport safety and security. Japan’s JGC Corporation held a majority 55% stake in a consortium to build the $1.5bn Hantharwaddy International Airport in Bago, although there are questions about the project’s future. The consortium, which also includes Singapore’s Yongnam Holdings and Changi Airport Planners and Engineers, was selected by tender in 2014, and the project was originally slated for completion by 2016. However, in March 2018 the MoTC announced that the consortium’s agreement had effectively been cancelled after parties failed to agree financing terms. The Japanese government was reportedly still interested in financing the project through a loan, but no agreement had been announced as of December 2018.

There is also significant potential for foreign companies in Myanmar’s maritime transport infrastructure. In February 2018 U Myo Nyein Aye, deputy general manager at the Myanma Port Authority, released a statement about the significant potential for foreign investment in the port sector, and the role it could play in aligning operations with international standards. He cited port projects on the Ayeyarwady and Chindwin rivers, and multi-modal logistics hubs in Yangon, Mandalay and Bago, as well as port terminals in Magway, Pyay, Mawlamyine, Dawei, Thandwe and Heho.

Public Transport

By far the most significant investment in public transport in recent years was a complete overhaul of the bus system in the commercial capital, leading to the launch of the YBS in January 2017. After years of complaints about poor service and safety concerns, the revamp of YBS saw the Yangon Region Transport Authority take control of the city’s bus system, replacing the role of the Central Supervisory Committee for Motor Vehicles, better known by its Myanmar-language acronym, Ma Hta Tha. The most notable changes saw the number of lines cut from 300 to 70, as well as the introduction of monthly salaries for drivers, instead of a commission-based system that allowed overcrowding and dangerous driving to flourish. Old buses were also upgraded in order to improve passenger comfort and safety.

Two years since its launch, however, the publicly funded $56m project has delivered mixed results. While the majority of commuters agree that their journeys are more comfortable in the new buses and the routes are more efficient, some complaints continue about the behaviour of bus drivers.

Import & Export Potential

It is no secret that Myanmar’s location – at the crossroads of India and China, as well as the entry point to mainland Southeast Asia from the west – presents sizeable opportunities for international trade. However, significant improvements are needed in hard infrastructure and the regulatory framework if the country is to fulfil its potential in this area. “Before Myanmar aspires to become a regional logistics hub, the country needs to first address its infrastructure gaps and review the red tape,” U Minn Thu Aung, managing director of Helio International Company, a freight forwarder and shipping agent, told OBG. “Following this, the regulatory framework for import and export should be adapted to international standards to align with the countries that Myanmar does business with.”

As a result of its advantageous location, Myanmar’s neighbouring countries are pursuing large-scale infrastructure projects aimed at boosting connectivity. The largest initiative in the pipeline is the CMEC.

While the details remain relatively obscure, the fact that the BRI has been enshrined in the Chinese Communist Party’s constitution under President Xi Jinping indicates that the political will exists to bring this project to fruition, at least on the Chinese side. Key components of the CMEC include improved roads and railways connecting southern China with Myanmar, and the planned deepwater port and SEZ at Kyaukphyu.

The Kyaukphyu project, led by China’s state-owned CITIC Group, is regarded as instrumental to the BRI as it would give China direct access to the India Ocean. The initial price tag for the development was more than $7.2bn, but recent negotiations lowered the cost to around $1.3bn and reduced CITIC’s stake from 85% to 70% after Myanmar became concerned about the size of the debt it would incur from the development.

Thailand also hopes to tap into its neighbour’s potential. The Bangkok-based Italian-Thai Development (ITD), was contracted in 2008 to develop the $8.6bn, 205-sq-km Dawei SEZ in the Tanintharyi Region, which would become one of South-east Asia’s largest industrial complexes. However, following delays over contract negotiations, community concerns and funding, ITD withdrew from the project in 2013. Work on a planned 160-km highway linking the SEZ to Thailand also stalled repeatedly over safety concerns, though local media reported in September 2018 that construction on the highway had resumed, with the Myanmar and Japanese governments negotiating an agreement for Japan to spearhead the zone’s development.

Airports

There are currently 69 airports in Myanmar, of which 32 are operational and three – Yangon, Mandalay and Naypyidaw – have the capacity to handle international flights. Under the guidance of the Department of Civil Aviation (DCA), the government plans to upgrade domestic airports to meet international standards, reopen some airfields that are no longer functioning and construct new ones. A planned Civil Aviation Master Plan remains under discussion.

The government is planning to upgrade at least three airports: Kawthaung Airport in the Tanintharyi Region, Heho Airport in Shan State and Mawlamyine Airport in Mon State. Four firms are bidding to improve conditions at Kawthaung, two at Mawlamyine and three at Heho. However, if it goes ahead, the most dramatic upgrade to the aviation sector would be the planned Hanthawaddy International Airport in Bago. Pegged at $1bn, the airport is envisioned to have an initial capacity of approximately 12m passengers annually, potentially scaling to up to 30m further down the line.

Discussions regarding the development of Hanthawaddy began in the 1990s and were revived under the Union Solidarity and Development Party government in 2012. A consortium comprising Singapore’s Yongnam Holdings and Changi Airport Planners and Engineers, as well as Japan’s JGC Corporation, signed a framework agreement with the DCA in January 2015, but the project has since stalled. The development was thrown further into doubt in February 2018, when Yongnam Holdings announced that the agreement it had signed with the DCA had expired and had not been renewed. In March 2018 the government said that the deal with the consortium had effectively been cancelled due to the failure to agree on financing terms, and the future of the project was uncertain as of December 2018.

Myanmar’s domestic aviation market has grown by about 150% in the past decade, according to the Centre for Aviation. However, the aviation market intelligence firm predicted that many operators would struggle to survive in a crowded market that, until recently, had at least nine airlines catering to less than 3m passengers.

These challenges became apparent in 2018, when four domestic airlines announced they would end operations, with most of them citing overcrowding in the market. Nevertheless, some operators see scope for renewed competition. U Than Tun, CEO of Myanmar National Airlines, told OBG he expected airlines from abroad to begin entering the market soon, especially from China. “This will have a big impact on the competitive environment, and it is expected to increase the number of Chinese tourists in the country,” he said.

Ports

While there are several seaports throughout the country, most of them are unable to process a large amount of goods, and more than 90% of trade passes through ports in Yangon. The city’s largest ports include Asia World Port Terminal, Myanmar International Terminals Thilawa, Hteetan Port Terminal, Ahlone International Port Terminal and Myanmar Industrial Port. In 2017 Asia World Port Terminal claimed to have managed 39% of the country’s total trade throughput.

The government has said that it hopes that a network of dry ports and upgrades to other infrastructure will help improve the country’s logistics capabilities, allowing it to fully leverage its strategic location between East Asia, South Asia and the Middle East, and capture a larger share of international cargo traffic, which grew at more than 10% per year between 2004 and 2014, according to research by legal firm VDB Loi.

Speaking at the opening of the Ywar Thar Gyi dry port on the outskirts of Yangon in November 2018, U Thant Sin Maung said that dry ports are a good solution for developing the logistics industry, adding that more needed to be built. “We are all in a struggle to improve a logistics industry that fell behind those of other countries for almost three decades,” he said.

Rail

According to the ADB, the number of people using rail transport fell by 21% between 2010 and 2016. The largest decline was in intercity passengers, which fell 36% in the same period. The ADB also estimated that the revenue of Myanma Railways covered as little as half of its operational costs in FY 2014/15, threatening its survival in the medium term. Upgrading the railway network was just one recommendation made by the ADB to improve performance. Others included financial restructuring, rationalising assets and services, and reorganising Myanma Railways to operate according to commercial principles (see analysis).

A priority for the government has been to upgrade the line running between Yangon and Mandalay, its two largest cities, with the assistance of JICA. Improvements to the track are expected to take at least four years, with work on one section of the line beginning in November 2018. Work has also begun on upgrades to the Yangon Circular Railway, a crucial form of transport for many of the city’s commuters, which is regularly beset by delays and poor service. Work on that project is expected to be completed by 2022.

Roads

Nationwide road upgrades are another focus of the government. In November 2018 U Han Zaw, minister of construction, said the government had upgraded 144 roads through the assistance of development partners, including 536 km of concrete road, 576 km of tar road and 1657 km of nylon-tar road. An additional 2117 km of roads and 1940 bridges in rural areas have also been upgraded since 2016, with the government aiming to supply 90% of the rural population with access to all-weather roads by 2030.

Planned upgrades include those to the Yangon-Mandalay Expressway, as well as to the road connecting Myanmar and Thailand, close to the Dawei SEZ. However, the latter project has led to some protests by local groups, who say road construction conducted without consultation with local communities could cause environmental issues.

Another priority project is the aforementioned construction of an elevated highway in Yangon, which will connect the downtown area with the north of the city. In November 2018 it was announced that a total of 12 companies and consortia had submitted bids to construct the road, which will cost up to $1.5bn; 10 of them met the criteria and have been shortlisted as prequalified bidders that can participate in the next stage of the tender process. The winner is expected to be announced around June 2019, and the project will be undertaken as a PPP with the government.

Urban Transit Planning

With traffic congestion becoming a growing problem in Yangon, the authorities have turned to a rather novel transport solution, launching the Yangon Water Bus in October 2017 with private company Tint Tint Myanmar.

The service employs a mixture of locally made boats and catamarans to transport passengers along the Yangon River. U Wunna Aung, CFO of Tint Tint Myanmar, told OBG that a second phase, along the Pazundaung Creek, had also begun limited operations, while the longer-term goal was to provide similar services in the Ayeyarwady Delta. He said that feedback on water buses had been generally positive, but that a lack of connectivity with other transport services in the city was proving to be a challenge. “The government needs to establish an integrated transport system that links boats, buses, trains and all other forms of public transport together,” he told OBG.

Government Revenue & Expenditure

Despite the investments in infrastructure across transport modes, if the sector is to develop efficiently, it must address the financial issues it currently faces. The government’s public transport departments have been running at considerable losses for the past several years. For example, in FY 2013/14 Myanma Railways brought in MMK62.2bn ($44m) in revenue, which covered approximately 59% of the company’s total expenditure for the year. Other departments struggled similarly, including Road Transportation, which made MMK7.6bn ($5.4m) in revenue, against an expenditure of MMK10.1bn ($7.1m). Looking ahead, losses for Myanma Railways are forecast to reach MMK98bn ($69.3m) for FY 2018/19, which began on October 1, up from losses of MMK79bn ($55.9m) in 2017/18 and MMK60bn ($42.4m) in 2016/17.

The ADB recommends that corporatised transport units adhere to an operating ratio of 80%, meaning direct operational costs equal about 80% of revenue. None of the units assessed by the ADB reached that level, however, with Myanma Airways – now Myanmar National Airlines – being the closest and Myanma Railways being the furthest away during the review period.

Outlook

Although Myanmar has not yet reached the economic potential many envisaged when the reforms began in 2011, progress remains steady, and accelerated transport infrastructure development would help overcome many of the country’s most significant development challenges. Myanmar’s geostrategic location links the subcontinent with South-east Asia and can provide China with coveted access to the Indian Ocean. If the government plays its cards right, it can leverage the country’s location to catalyse much-needed investment in infrastructure development that could improve its internal and external connectivity, without assuming unsustainable debt burdens from neighbouring countries and development partners.

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The Report: Myanmar 2019

Transport chapter from The Report: Myanmar 2019

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