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Unlocking Myanmar's state-owned enterprise 'black box'

The concept of transparency has been a goal of government policy in Myanmar since President Thein Sein was inaugurated in March 2011. From an economic development perspective, after the "black box" of military expenditures, the next most significant black box of opaque dealings is the country's state-owned enterprise sector.

     Like many post-colonial countries, Myanmar's parliamentary government from independence in 1948 to 1958 had a socialist-flavored, but market-based, development strategy. In addition to keeping key enterprises like the postal and telecommunications systems in the public sector, the government created a number of state-owned mining and manufacturing companies.

Private goes public

When Gen. Ne Win seized power in 1962, he rejected the market in favor of an extreme socialist path. All significant modern business activities were nationalized. In effect, Myanmar's economy came to look like one gigantic state-owned business, with a shrunken private sector consisting of small farms and services.

     The popular uprising in 1988 that forced Ne Win to resign failed to produce a democratic government. Instead, that government yielded to a military regime that ruled the country until 2011. The military government abandoned the socialist path and restored the market, but it was slow in shrinking the state-owned business sector. It privatized many enterprises in several waves, but also created new ones.

     Consequently, the Thein Sein government inherited an economy that was dominated by state-owned companies and a score of crony-led conglomerates that functioned as quasi-state enterprises.

     The policy of the Thein Sein government toward the state-owned enterprise sector has been clear from the beginning: reduce it through privatization, and improve its efficiency through restructuring and market-based reforms. It is hard to fault the policy. The problem has been implementation.

Theory and practice

Let's begin with the good news, however. Most dramatically, the government took the courageous step of awarding mobile phone licenses to two high-quality foreign companies. These companies are building out Myanmar's mobile phone network at a breathtaking pace, quickly overshadowing the state-owned company that previously had a monopoly over the sector.

     The government has opened other sectors in which publicly owned companies previously enjoyed monopolies. And it has started to corporatize the most important state-owned enterprises as a step toward privatization. A number of these enterprises have also formed joint ventures with foreign partners.

     The worst news that surfaced from a quick study of the state-owned sector at the beginning of 2015 was a pattern of wild privatization of land and buildings by individual ministries, commonly in the form of nontransparent lease agreements.

     A typical example is Hoang Anh Gia Lai Myanmar Center, a large multiuse complex on a main road near Inya Lake in Yangon. According to press reports, the land belonged to the Ministry of Industry and has been leased for up to 70 years. Vietnam's HAG is building the complex under a build-operate-transfer agreement with the Ministry of Hotels and Tourism. No information has been made public about the financial terms of the land lease or the BOT agreement.

     Another major concern is the impact of the state-owned enterprise sector on the government budget. The largest single source of revenue, Myanmar Oil and Gas Enterprise, is directly involved in the export of natural gas to Thailand and China, along with its foreign partners. Any effort to privatize Myanmar Oil and Gas could reduce revenue to the budget, which is already in deficit. At the same time, the state-owned business sector accounts for a large share of the government's expenditures. Excluding Myanmar Oil and Gas, the sector is a drain on the budget.

     A related concern is the mysterious flow of revenue from gem mining, especially jadeite, overseen by the Ministry of Mining. The revenue recorded in the budget from gem mining is a small fraction of what would be expected from the billion-dollar jade auctions that have been held once or twice a year for a number of years.

     A third concern is the status of two of the country's largest conglomerates, Union of Myanmar Economic Holdings and Myanmar Economic Corporation, both of which are controlled by the military. They are off-budget even though they are under the direction of the Ministry of Defense. Moreover, Myanmar Economic Corporation was formally established under the State-Owned Enterprise Law of 1989. The military leadership presumably would argue that these conglomerates are not state assets, but private ones.

     From a public policy perspective, the concept of state assets and their management is not well developed in Myanmar. Instead, government-owned land and buildings, and other physical assets like infrastructure, are viewed as the property of individual ministries. As a result, ministries with no competence in land use planning or management are making decisions that are likely to create inefficient patterns of development for generations to come.

Assessing alternatives

One can rule out having a sectorwide policy presented to the legislature and approved before the next government takes office in March 2016. The Thein Sein government could, however, undertake a sectoral analysis leading to recommendations for the next government.

     One approach would be to create a ministry to oversee all of the country's state-owned enterprises, as Indonesia has done. But the Indonesian ministry is considered one of the country's most corrupt. That could be the fate of a state-owned enterprise ministry in Myanmar as well.

     A possibly less risky approach would be to create a unit within the President's office or the Ministry of Finance to establish a common policy for all state-owned companies, and to manage the privatization process in a consistent manner across all ministries and agencies.

     Or the standard practice could be turned on its head. Instead of starting with a sectorwide policy, the government could start by appointing a well-qualified CEO or "turnaround expert" to improve the performance of a single enterprise, and then provide all the support the CEO needed to succeed.

     Improving the performance of state-owned companies has been a preoccupation of governments around the world at least since Margaret Thatcher was prime minister of the U.K. in the 1980s. Progress has been slow everywhere, and it will be a minor miracle if Myanmar is able to meet the relatively low standard of state-owned enterprise performance among its partners in the Association of Southeast Asian Nations within the next 10 years.

Lex Rieffel is a nonresident senior fellow at the Brookings Institution in Washington.

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