As of April first, the Ministry of Electrical Power became the fourth biggest budget of Myanmar with a fresh MMK20trn (€16.4 billion; $18.5 billion) allocation for the 2015-2016 fiscal year.
The ministry plans to spend MMK2.5 trillion – including foreign loans – on improving the country’s electricity supply and distribution, making it the fourth-largest spender behind the finance, energy and defence portfolios. Since 2011, the ministry’s budget has increased from MMK40.9 billion to MMK87.7 billion, during which time capacity has risen from 1591 megawatts (MW) to 2300 MW.
Market sources have however noted that reengaging capital into prioritised sectors such as energy may be accompanied by a widening trade deficit – at least in the short term – as investment in those fields, although fundamental for the economy to generate export revenue, will take several years to yield results.
Owing to the conjunction of a weaker currency, the subsequent rise of the import bill and increasing domestic demand due to wage rises, analysts warn that the government may have to take on initiatives to curb the projected 3.7 billion trade deficit. Satya R, a partner at KPMG in Singapore, gave Infrastructure Investor his insights on the impact of state electrification funding on the country’s trade deficit and the sustainability of the government’s plan.
Infrastructure Investor: What are the prospects for foreign investors targeting Myanmar’s energy infrastructure?
Satya R: “Even as the wider policy is being formulated, private sector capital is making its way to the power sector. Sembcorp Industries was awarded the development and operation of a 225MW gas-fired power plant in central Myanmar last month. This plant alone will bring in foreign direct investment (FDI) of around $300 million within the next 18 months.
In the short term, loans and grants could ease the trade deficit and help the government make the much-needed capital injection into the power and education sectors. Last January, the World Bank pledged $2 billion in new multi-year loans, grants and investments to Myanmar.
Of the $2 billion, half will go to expanding electricity generation, transmission and distribution. In May 2014, the World Bank also backed a $100 million project to improve the quality of education for more than 8 million schoolchildren in Myanmar. The project also extended financial assistance to some 100,000 underprivileged students. This initiative comes under the Decentralising Funding to Schools Project.
Even though Myanmar attracted around $8 billion worth of FDI in the 2013/14 fiscal year, almost double the amount it received in the previous year, the sum still accounts only for six percent of the overall FDI into ASEAN’s six major economies in 2014.
This strongly highlights the growth potential of the country’s relatively untapped economy. There is a strong case for attracting FDI into Myanmar and increasing exports from non-energy sectors.
II: How attractive is the National Electrification Plan to foreign investors?
SR: The Myanmar National Electrification Plan aims to electrify all Myanmar households by 2030. The Plan entails setting up mini-grids and tapping into renewable energy for rural electrification, and setting up large thermal generation capacity to feed into the main grid for urban and industrial electrification.
Foreign investors are taking considerable interest in these opportunities, waiting to inject both capital and knowhow. The government cannot fund this plan by itself, nor is it in a position to give financial incentives to attract FDI. To attract both foreign aid and FDI to fund this plan, the government is putting together a legal, regulatory, environmental, fuel supply and pricing framework designed for the power sector.
II: Is the government putting an adequate framework in place to attract private capital from overseas?
SR: The Foreign Investment Law of 2012 has allowed foreign ownership of power generation. For hydropower and coal power plants, foreign investors will be required to form a joint venture with the government, wherein foreign investors can hold up to 80 percent stakes.
Additional government approvals are required for foreign investors to enter into a joint venture with locals for projects smaller than 10MW.
The Foreign Investment Law provides significant tax incentives, a guarantee against expropriation of foreign investments, and access to international dispute resolution mechanisms.
FDI has already begun coming into the sector following the enactment of this law, but more needs to be done to give investors greater certainty on the domestic legal framework and putting in place a set power purchase agreement for the sector.