In less than three decades, China has transformed from an inward-looking agricultural-based country into a global industrial powerhouse. However, in recent years the Chinese economy has been showing early signs of a slowdown.
To boost the economy, President Xi Jinping launched the ambitious “One Belt, One Road” (OBOR) initiative in 2013, aimed at addressing the country’s overcapacity and structural weaknesses, and redirecting capital for regional infrastructure development.
Infrastructure projects in ASEAN member-states, including Cambodia and Myanmar, are emerging as a major beneficiary of the OBOR strategy, with Chinese investors accounting for 17% of all infrastructure investment across the region in 2015, according to Citibank. Due to Cambodia’s and Myanmar’s strategic locations, strong natural resource bases and, more importantly, close relations with China, the two countries will continue to attract a high proportion of China’s outbound investment, most of which is expected to be directed towards large-scale infrastructure projects.
Opportunities in Cambodia
Cambodia is considered one of the brightest “frontier” growth stories in Asia, driven by garment exports, real estate and construction, and an expanding services sector.
The most important laws regulating foreign investment in Cambodia are the Law on Investment (1994, amended in 2003), which sets out the general legal regime to encourage investment, and the Law on Commercial Enterprises (2005), which sets out the procedures and requirements for the establishment of an enterprise in Cambodia.
Cambodia has a liberal and open foreign investment regime, with 100% foreign-owned investment permitted in almost every sector, favourable investment incentives and a business-friendly government. Since early 2016, enterprises can now be established through an online registration process, which normally takes four to four to six weeks.
For power projects, industry-specific laws such as the Electricity Law (2001) and Law on Concessions (2007) have been put in place to regulate the sector and ensure adequate protection for affected communities. Nonetheless, their implementation has, at times, been inconsistent, giving rise to the need to liaise with relevant competent authorities in order to secure and maintain all relevant licences and approvals.
According to a joint World Bank and Asian Development Bank report, electricity in Cambodia is “not only more expensive than most neighbouring countries, but the supply is also intermittent”. In response, Cambodia prioritized the development of hydropower to secure cheap and reliable electricity.
In the past decade, development of the power sector in Cambodia has been largely driven by Chinese state-owned enterprises. The largest hydropower projects in Cambodia are funded by China. Chinese firms have invested over US$1.6 billion to build six dams with a combined capacity of 928 MW in Cambodia. OBOR has the potential to further enhance Chinese influence in the development of the power sector.
Opportunities in Myanmar
Myanmar is an exciting emerging market with a new government that has stated it willl continue to encourage foreign investment. China and other countries have been investing in Myanmar for some time, including in relation to a gas pipeline to Kunming, various power projects, mining operations and tourism. The most important law for foreign investors entering Myanmar is the Foreign Investment Law of 2012 (FIL). This law and its implementing regulations provide the legal framework for foreign companies wishing to do business in Myanmar.
The FIL basically categorizes various industry sectors into groups that either: (i) prohibit certain foreign investments; (ii) permit investment but requires a Myanmar joint venture partner; (iii) permit investment but require structuring of the transaction utilizing some type of contractual arrangement; or (iv) permit investment in projects but require a significant amount of land in which a long-term lease is provided under the FIL and certain environmental and social impact studies are required to be conducted.
Significantly, the FIL also now permits foreign subsidiaries in Myanmar, through which foreign companies must conduct their Myanmar operations in order to finance their operations via debt. Previously there were no practical mechanisms to permit off-shore loans. Now the FIL permits a foreign subsidiary to mortgage its long-term lease to the relevant Myanmar land. This, along with other securities available, allows foreign banks to finance Myanmar projects. Filing collateral can still be a challenge, however the hurdles are quickly being addressed.
Myanmar also acceded to the New York Convention in July 2013 and thus contracts can include foreign arbitration clauses. Singapore is often nominated for arbitration matters, however contracts can of course just as easily provide for arbitration in China.
William Greenlee is the partner and managing director, Myanmar, and Robin Ruu Pin Teow is regional senior consultant, China desk and deputy head of corporate and commercial practice group, Cambodia, at DFDL