A military-commercial complex

The US decision to lift economic sanctions on Myanmar in October was hailed as a landmark step in the country’s march from decades of near-isolation — and as a boon for American companies seeking to tap a big market where many had feared to tread.

But critics say the move also had a darker side: it freed the sprawling commercial interests of a military that ruled for almost 50 years.

These companies include Myanmar Economic Corp. (MEC), a secretive conglomerate owned by the defense ministry that operates in strategic sectors ranging from ports to telecommunications. Another is Myanmar Economic Holdings Limited (MEHL), which enriches military officers and veterans with proceeds from lucrative businesses including cigarettes and petroleum imports.

The enterprises project themselves as potential partners for foreign multinationals tempted by the economic prospects under Aung San Suu Kyi’s civilian-led administration. But while they have made a public effort at reinvention, for many analysts they have not shaken off associations with an era of authoritarianism during which thousands were killed.

Foreign companies in sectors from beer to steel have decided that taking on partners linked to a military accused over many years of corruption, land- grabbing and human rights abuses is better than not doing business at all. That commercial dilemma reflects the bigger question of how much has changed in the nation’s power structure since the current government took office almost a year ago.

“It’s hard to think about the future of military-owned companies without thinking about the army’s future place in Myanmar,” says Thant Myint- U, a Yangon historian and analyst. “Like it or not the army has been at the very core of the state — and these companies have been an adjunct to its state-building for decades.”

These businesses want to follow similar reinventions that allowed military- connected companies in countries from Pakistan to Indonesia to profit after the return of civilian government. MEC’s Web site pledges the company’s support for economic development, higher living standards and the eradication of poverty in Myanmar, where growth rates are among the highest in Asia.

Hla Myo, a former army major who is a general manager at MEHL, enthuses that he and his colleagues are “very passionate” about working with US and European companies. MEHL officials are already “seeking opportunities in the west,” to add to joint ventures with Asian partners.

Doors to the wider world that were shut during the sanctions era are now ajar.

Anthony Nelson, a director at the US- Asean Business Council in Washington says there are “potential positives” in exposing the military conglomerates to international norms.

“US multinationals in particular will bring higher standards for rule of law, accounting, labor and respect for the environment than they are used to,” he says.

“Multinationals will need to look at opportunities and weigh the reputational risk that comes with engaging with military-

linked companies on a case-bycase basis.”

Public scrutiny

The attractions for big business are obvious in resource-rich Myanmar.

The arrival of international companies, many in consumer industries, has brought in approved foreign investment of more than $30 billion since 2011, the year the military formally stepped down, according to official figures.

Equally apparent are the reputational risks posed by doing deals with those who prospered during the junta and the military-backed government that followed.

Coca- Cola disclosed in 2015 that its main business partner in the country had links to the jade trade. The industry was then under US sanctions and has been plagued by allegations of corruption and rights abuses. Microsoft struck a software and services deal in the same year with the Shwe Taung conglomerate, whose founder has denied US Treasury suspicions, outlined in a leaked 2007 diplomatic cable, that he was involved in the drugs business. Neither the multinationals nor their partners have been accused of any wrongdoing.

Enterprises with close military ties present an even greater possible hazard.

They are suspected of being the main beneficiaries of a wave of crony privatizations of state assets just before the junta stepped down, according to a 2015 report by Transparency International.

Yeshua Moser- Puangsuwan, the report’s author, says the military’s modus operandi has always been to “insert themselves in various parts of the economy and use this to enrich their shareholders. Despite the political changes in Myanmar, the military remains solidly in control — and its books are still closed to public scrutiny.”

The military-linked companies highlight the power the armed forces retain in this regional trading hub wedged between China and India. Aung San Suu Kyi’s National League for Democracy might have won the November 2015 election with a landslide, but the military holds a quarter of parliamentary seats — giving it an effective veto on constitutional change. It also holds important ministerial posts and a majority on a special security committee with powers to overrule parliament.

MEC and, in particular, MEHL are woven into the country’s political architecture. A 2009 US diplomatic cable published by WikiLeaks said “[ MEHL’s] influence and holdings are key components of the elaborate system of patronage the regime uses to maintain power.” The cable also quoted a local businessman who alleged MEHL officials took bribes from foreign companies seeking contracts, licences and permits. MEHL did not respond to a request for comment.

The two conglomerates’ size and importance to the state is confirmed by the official list of the largest domestic taxpayers. MEHL and its subsidiaries Myawaddy Bank and Myawaddy Trading accounted for three of the top five income taxpayers in 2015- 2016. Myawaddy Trading and MEC’s Dagon Beverages subsidiary are both in the top five sales taxpayers.

Other than these details, MEHL and MEC remain opaque. They publish little about their ownership, management or finances. MEC’s impulse for privacy is ironic because one of its specialities is communications. It is part of a consortium, including Viettel, itself owned by Vietnam’s defense ministry, that was announced in January as the winner of Myanmar’s fourth telecoms license.

MEC’s Web site lists more than 30 other subsidiaries and affiliates. Some are long-standing manufacturing ventures, such as a ship- breaking yard and a disposable syringe factory. Others target new markets such as mobile payments. Still more are pitched at an emerging wealthy elite in the country: a promotional video shows a young couple hitting golf balls at MEC’s Okkala Golf Resort in Yangon before refreshing themselves with MECmade canned drinks.

That is a sharp contrast to the face the company presented at its vast grey Yangon headquarters when the Financial Times visited.

“You guys should not be here,” scolded a staff member, as he gestured frantically to the exit.

“Just go back before our seniors see you. Leave quickly. Go, go!”

MEC did not respond to written questions the FT submitted later at its office.

Building wealth

MEHL, MEC’s more prominent cousin, is officially a source of welfare to serving and former armed forces personnel and their families, according to company documents seen by the FT.

Some of its joint ventures have a strategic edge: it is in business with China’s state-owned Wanbao in the country’s largest copper mine complex, which has long been dogged by land disputes and allegations of violence by the security forces. The companies have denied wrongdoing.

Other MEHL subsidiaries and affiliates have partnerships with Kirin, the Japanese brewer, and Posco, the South Korean steelmaker. Korea’s Inno Group has joined MEHL to develop a $120-million Yangon scheme that will include apartment buildings and a convention center.

None of the foreign companies directly addressed the question of what assurances, if any, they

had been given over their partner’s military ties.

Kirin says it has “no concerns at the moment” about MEHL, which it described as a “pension fund for military veterans.”

Posco, which declined to give ownership details of its joint venture, says it was “not involved in any abuses or illegal actions” in Myanmar. Inno Group did not respond to a request for comment.

MEHL insists it has changed to become more like a normal company. The defense ministry no longer has a stake, according to Hla Myo. More than 320,000 individual shareholders — ranging from veterans to serving officers and military institutions — now own the group, he says.

It made a pre-tax profit of 102 billion kyat (about $75 million) in 2015-2016, of which just under a third was paid back to the shareholders, he adds.

Hla Myo says MEHL is seeking partners to revive moribund industries and is in talks with an western paint company about reviving its paint business.

Critics say MEHL’s wealth may be much greater than publicly acknowledged. It has a prominent position in a jade trade estimated by Global Witness, the UK-based campaign group, to have been worth as much as $31 billion to Myanmar in 2014 as it supplied the world’s largest market in China.

At the 2014 Myanmar gems emporium, the official government auction, MEHL’s Myanmar Imperial Jade subsidiary recorded the second-highest sales figures of any company, with private and joint venture lots totalling almost $150 million, Global Witness claims.

This is why some observers are far from convinced by the companies’ story of civilian-era reform.

MEHL’s top 10 directors all hold military ranks, according to company documents seen by the FT. The board is overseen by a

“supreme group” of seven of the country’s top officers, headed by the armed forces’ commanderin-chief.

A foreign government official who has met MEHL representatives describes the encounter as “out of a wholly different world,” conducted by “a bunch of retired military old guys. I didn’t see any serious attempt at reinvention.”

Vicky Bowman, a former British ambassador to Myanmar who heads the Myanmar Center for Responsible Business, says the companies need to “change their game” on corporate governance, transparency and compliance with laws such as pollution controls.

“Previously they were seen as untouchable,” she says. “We don’t know how far Aung San Suu Kyi’s government will push them to comply.”

There is little sign that Myanmar’s overstretched administration has the appetite — or political clout — to take greater control. The information minister’s office did not respond to a request for comment.

Sean Turnell, an Australian academic and unpaid economic adviser to the Myanmar government, says officials want to eliminate the privileged access enjoyed by the “crony” conglomerates, including the militarylinked companies. But he stresses that there will be no “vendettas,” reflecting caution on Aung San Suu Kyi’s side.

Eric Rose, a US corporate lawyer specializing in Myanmar, expects the Trump administration’s “less ideological approach to business” to enable more US investment — including possible deals with companies that were linked to the notorious junta, if they prove serious about change.

“The opportunities for growth are enormous,” Mr. Rose says.

“And US companies are best placed to help the old military businesses reform.”