State-en­ter­prise sec­tor could make or break Myan­mar’s tran­si­tion

The Myanmar Times - - Business -

WHAT will be the role of state-owned en­ter­prises (SOEs) in an Na­tional League for Democ­racy-led gov­ern­ment, and will it mat­ter? Sit­ting in Wash­ing­ton DC, on the op­po­site side of the earth from Myan­mar, I can­not come close to an­swer­ing the first ques­tion. But, based on a study I car­ried out at the be­gin­ning of 2015, I be­lieve the SOE sec­tor has the po­ten­tial to be­come a ma­jor en­gine for eco­nomic progress. The same sec­tor, how­ever, could also be­come one of the big­gest ob­sta­cles.

To start with a brief his­tor­i­cal over­view, Burma in­her­ited a num­ber of gen­er­ally well-man­aged SOEs when it be­came in­de­pen­dent in 1948. Th­ese be­came less well man­aged dur­ing a pe­riod of par­lia­men­tary democ­racy that lasted un­til 1962, and many new SOEs were cre­ated dur­ing the same pe­riod.

Dur­ing the Ne Win era of 1962 to 1988, al­most all prom­i­nent pri­vate en­ter­prises were na­tion­alised. The SOE sec­tor swelled to en­com­pass most of the mod­ern econ­omy. The sec­tor’s per­for­mance de­clined steadily in the runup to a pop­u­lar up­ris­ing in 1988. This poor per­for­mance was not sur­pris­ing – SOEs in other coun­tries were also per­form­ing poorly, par­tic­u­larly those in newly in­de­pen­dent na­tions emerg­ing from colo­nial rule.

Af­ter 1988, the gov­ern­ment – known first as the State Law and Or­der Restora­tion Coun­cil (SLORC) and later the State Peace and De­vel­op­ment Coun­cil (SPDC) - be­gan to pri­va­tise SOEs. They aban­doned the so­cial­ist path of the Ne Win era, and be­gan to build a mar­ket-based pri­vate-sec­tor-led econ­omy. Pri­vati­sa­tion occurred in sev­eral waves, but never through trans­par­ent pro­ce­dures. As a re­sult, wealthy and pow­er­ful groups and in­di­vid­u­als took pos­ses­sion of sub­stan­tial SOE as­sets. Th­ese pur­chases in turn raised ques­tions as to what the gov­ern­ment did with the money it re­ceived. New SOEs were also cre­ated dur­ing the SLORC/ SPDC era, which ended in 2011. Sev­eral SOEs en­gaged in ex­trac­tive in­dus­tries – no­tably Myan­mar Oil and Gas En­ter­prise (MOGE) - grew ex­po­nen­tially.

An­other phe­nom­e­non, not unique to Myan­mar, was the emer­gence dur­ing this pe­riod of two sprawl­ing busi­ness con­glom­er­ates con­trolled by the mil­i­tary (tat­madaw): Union of Myan­mar Eco­nomic Hold­ings and Myan­mar Eco­nomic Cor­po­ra­tion. A case can be made that th­ese con­glom­er­ates are not SOEs. But the weight of ev­i­dence sug­gests they are ei­ther in the pub­lic sec­tor, or – if the mil­i­tary is func­tion­ally in­de­pen­dent of the gov­ern­ment – in a third “mil­i­tary sec­tor”.

The U Thein Sein gov­ern­ment, from its start in March 2011, made SOE pri­vati­sa­tion one of its eco­nomic pri­or­i­ties. The ob­jec­tive was later spelled out in its Frame­work for Eco­nomic and So­cial Re­forms (FERS), which the gov­ern­ment is­sued in Jan­uary 2013. It re­in­forced this with a num­ber of pol­icy mea­sures, in­clud­ing end­ing the prac­tice of pro­vid­ing un­lim­ited credit to loss-making SOEs.

The TheinSein gov­ern­ment’s over­all record in im­prov­ing the SOE sec­tor’s per­for­mance, how­ever, hardly de­serves a pass­ing grade. One ex­am­ple re­vealed in the course of my study was the ab­sence of an of­fi­cial list of SOEs. At the be­gin­ning of 2015 I com­piled a list of 44 SOEs un­der 17 min­istries us­ing the Yan­gon phone direc­tory for 2014. But some of th­ese – like Min­ing En­ter­prises 1, 2, and 3 – look like hold­ing com­pa­nies for a num­ber of dis­tinct en­ter­prises.

An­other ex­am­ple was the in­ac­tiv­ity of a pri­vati­sa­tion com­mis­sion cre­ated by the SPDC gov­ern­ment. The FERS called for this com­mis­sion to be rein­vig­o­rated, but at the be­gin­ning of 2015 it was not clear who the mem­bers were and I found no ev­i­dence that it had met or made any pol­icy de­ci­sions in the pre­ced­ing year.

The lack of a pri­vati­sa­tion strat­egy was also ev­i­dent. Be­yond the steps to make SOEs less of a bur­den on the bud­get, no plan was an­nounced for which SOEs would be privi­tised first, nor any pro­ce­dures to be fol­lowed by min­istries in the pri­vati­sa­tion of SOEs. A steady stream of news re­ports yielded a pat­tern of in­di­vid­ual min­istries pur­su­ing the pri­vati­sa­tion of SOEs un­der their con­trol with no ap­par­ent anal­y­sis of al­ter­na­tives. A pop­u­lar and wide­spread pri­vati­sa­tion method was leas­ing land con­trolled by min­istries to pri­vate in­dus­tries or real es­tate de­vel­op­ers. The com­pe­ti­tion for prime min­istry-con­trolled land in Yan­gon was fierce, but leases were granted with­out ten­ders and with­out any clar­ity about the cost of the lease pay­ments and how the money would be used.

To bal­ance th­ese neg­a­tive ex­am­ples, one pos­i­tive de­vel­op­ment was the U Thein Sein gov­ern­ment’s com­mit­ment to join the Ex­trac­tive In­dus­tries Trans­parency Ini­tia­tive (EITI). Myan­mar’s first re­port on EITI com­pli­ance is due to be is­sued be­fore the end of 2015. It is ex­pected to make pub­lic much in­for­ma­tion about some of the big­gest SOEs, in­clud­ing MOGE and the Myan­mar Gems En­ter­prise. An­other pos­i­tive de­vel­op­ment is the tech­ni­cal as­sis­tance and in­vest­ment pro­vided by the World Bank’s In­ter­na­tional Fi­nance Cor­po­ra­tion (IFC), aimed at the cor­po­rati­sa­tion and pri­vati­sa­tion of a couple of strate­gic SOEs.

It will not be easy for an NLD-led gov­ern­ment to im­prove the per­for­mance of Myan­mar’s SOE sec­tor. For an ex­am­ple look at In­done­sia, which is 17 years into its tran­si­tion to demo­cratic rule. Its SOE sec­tor is largely un­re­formed. It re­mains a drain on the bud­get and it is highly politi­cised - SOEs are “cash cows” for ma­jor po­lit­i­cal par­ties.

Read­ers should not make the mis­take of think­ing I am anti-SOE, far from it. In a coun­try like Myan­mar, I see com­pelling ar­gu­ments for hav­ing a well-man­aged set of strate­gic SOEs that act to make pri­vate busi­nesses more com­pet­i­tive. The prob­lem is that it is al­most im­pos­si­ble in a coun­try like Myan­mar to cre­ate even one well-man­aged SOE. By well man­aged I mean an en­ter­prise that op­er­ates prof­itably, ef­fi­ciently and trans­par­ently.

Here is one of the ba­sic pol­icy choices an NLD-led gov­ern­ment will have to make: whether to cre­ate a Pri­vati­sa­tion Of­fice, a sep­a­rate SOE min­istry or con­tinue to mud­dle along. Un­der a Pri­vati­sa­tion Of­fice, the SOEs would re­main un­der the con­trol of the rel­e­vant min­istries. But the Pri­vati­sa­tion Of­fice would de­sign and oversee the im­ple­men­ta­tion of a pri­vati­sa­tion strat­egy en­com­pass­ing the whole SOE sec­tor. Un­der an SOE min­istry, all of the SOEs would be sep­a­rated from their sec­tor min­istries and put un­der the con­trol of the SOE min­istry.

It is far from clear which op­tion is best for the peo­ple of Myan­mar. More­over, it may not be pos­si­ble for an NLD-led gov­ern­ment to as­sess the op­tions and make a de­ci­sion be­fore the end of 2016. Even then, if the gov­ern­ment de­cides that new leg­is­la­tion is re­quired, the new par­lia­ment – seek­ing to show re­sults – may amend the leg­is­la­tion in a way that makes the out­come less sat­is­fac­tory.

From where I sit, it is hard to be­lieve that Myan­mar will do any bet­ter than In­done­sia in im­prov­ing the per­for­mance of its SOE sec­tor, at least in the next five years. I hope I’m wrong.

Lex Ri­ef­fel is a non-res­i­dent se­nior fel­low at the Brook­ings Institution, fo­cused on Myan­mar’s econ­omy. He is a for­mer U.S. Trea­sury econ­o­mist and se­nior ex­ec­u­tive at the In­sti­tute of In­ter­na­tional Fi­nance.

Photo: Aung Htay Hlaing

A man walks down a plat­form at Yan­gon Rail­way Sta­tion, run by state-owned firm Myan­mar Rail­ways.

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