The Myanmar Times

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

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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.
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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