State-enterprise sector could make or break Myanmar’s transition
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.
A man walks down a platform at Yangon Railway Station, run by state-owned firm Myanmar Railways.