Burma Infrastructure Projects ‘At Risk’ From Political Uncertainty

By William Boot 20 March 2014

Uncertainty about reforms to Burma’s military-dominated Constitution threatens to undermine foreign investment in major infrastructure projects such as the ambitious Hanthawaddy International Airport project, a business risk assessor said.

The assessment from Business Monitor International (BMI) follows the collapse of negotiations on an airport contract between Burma’s Department of Civil Aviation and a consortium led by South Korea’s Incheon International Airport Corporation.

“We believe this breakdown once again supports our concerns about the financial viability of [Burma’s] large-scale airport projects. We highlight there is scope for a breakdown in political stability within [Burma] and this poses a major downside risk to these airport projects,” said London-based BMI.

“It is increasingly likely that the government will fail to amend the Constitution in a meaningful way before the 2015 general elections. A failure to address the most pressing issues in the current Constitution would have repercussions for the ongoing reform drive, which could destabilize [Burma’s] already challenging business environment,” BMI said in its latest risk analysis newsletter for Southeast Asia.

The government had named Incheon last August as the winner of a tender to develop Hanthawaddy in a so-called public-private partnership (PPP) with the government. But the Ministry of Transport was quoted by Reuters last week saying there had been a “major change in project policy” which required the South Korean firm and three other shortlisted for the contract to resubmit bids.

The new deadline for bids is April 22, but the ministry admitted to Reuters that the delays would push any completion date for the US$1.1 billion airport back beyond 2018.

It was originally intended for the airport to be ready by 2016 as Burma’s existing airports struggle to cope with a mushrooming foreign tourism industry.

Located near Pegu, 60 miles from Rangoon, the new airport is intended to be capable of handling up to 12 million passengers per year, compared with Rangoon International Airport, which today can process fewer than 3 million passengers.

The problems being encountered in securing a developer for the Hanthawaddy airport underline the difficulty of attracting private foreign investment into large and expensive infrastructure projects, analysts note.

In Burma’s current political-economic climate, foreign investors are more inclined to opt for less complicated investments in consumer goods-related businesses, economist Sean Turnell told The Irrawaddy.

“Consumer goods industries are a relatively known quantity, with brands and products for which there is a readily identifiable demand,” he said. “[They] require much lower levels of capital.”

Big infrastructure projects like the airport, on the other hand, “need substantial commitments of capital, which may be scarce in this interim period between the old and new Burma,” said Turnell, of Macquarie University in Australia and co-editor of the Burma Economic Watch.

A Naypyidaw government official was quoted off the record by Reuters saying Burma is seeking Official Development Assistance (ODA) to help with the Hanthawaddy project.

ODA involves loans and grants for developing economies from Organization for Economic Co-operation and Development countries, mostly European but including the United States, Japan and Australia.

Earlier this month, the Asian Development Bank was quoted saying that a $2 million grant to “assist in the regulation and management of public private partnerships” was being awarded to Burma. The ADB has said there has been an erratic approach by the Burmese government to PPPs.

“The government urgently needs to take control of this process to be confident that PPPs meet the country’s needs,” ADB adviser Grant Hauber was quoted by Myanmar Times. “Private sector involvement in [Burma’s] development can help promote rapid growth, but projects must be set up and managed properly to ensure they’re successful,” said Hauber.

It remains unclear why Naypyidaw ditched its deal on the Hanthawaddy project with Incheon, but another international economist, speaking on condition of anonymity, argued the high risks involved would have been a factor.

“There are three sectors in which foreign investment requires extra attention and deep analysis—natural resource extraction, banking-finance, and infrastructure—for different reasons,” the economist said.

“Setting the first two aside, the reason for giving infrastructure investment extra attention is because, almost by definition, every private sector infrastructure investment is a form of public-private partnership and these PPPs are extremely difficult to structure successfully for several reasons.

“The biggest reason is pricing. The investors always want their investment recovered quickly, which argues for high prices. The next biggest reason is time. Among all investment projects, the payback periods for infrastructure tend to be the longest. The longer the payback period the higher the risk for both the foreign investor and the government,” said the economist, who has regularly visited Burma.

Two other airport tenders were awarded alongside the Hanthawaddy preferred-bidder status in August. A consortium led by Japan’s industrial conglomerate Mitsubishi was named as the preferred bidder to renovate, expand and operate Mandalay Airport. However, no details have been made public on a final agreement.

Pioneer Aerodrome Services, linked with Burmese construction conglomerate Asia World, leads a partnership awarded a contract to expand Rangoon Airport to handle around 5.5 million passengers per year.