By: Thinn Nay Chi Sun & Li Bolun
Identifying the right projects that are financially viable and socially meaningful has long been one of the greatest challenges for development finance experts. As Myanmar opened up for trade and investment, all stakeholders such as the government, foreign investors, banks, entrepreneurs and microfinance institutions have navigated carefully through a challenging economic and security environment to develop the financial infrastructure. As the country moves towards graduation from Least Developed Country (LDC), what are the opportunities and concerns for emerging development finance organizations to rethink? Here are a few tips we have prepared.
1. Understand How Myanmar Wants to Finance its Future
Understanding the Myanmar context is the first key investment of time for any new comers in Myanmar’s development finance. Since 2011, Myanmar has managed to boost its economy and increase government revenue in the union level. The lower level of inflation and wider access to finance comes together with the reform of banking systems and foreign exchange market in the country. Tax reforms have also strengthened public finance capabilities of the Union government, which helps to set up high targets for developing projects that require higher investments.
To advance development goals, the Myanmar Sustainable Development Plan 2018-2030 emphasizes on creating quality jobs, growing the private sector, promoting environmentally conscious and socially responsible economic growth, building large-scale infrastructure, as well as addressing social vulnerability. The government aspires to facilitate growth in these sectors by enhancing access to finance market and technology.
As a result, the Ministry of Planning and Finance launched a “Project Bank” in 2018 that portraits the blueprint it finances through various approaches. Currently, the following five approaches have been channeled to development finance projects: 1) spending state budget; 2) receiving development assistance; 3) public-private partnerships; 4) transfer of state-owned enterprises in part of entirely to the private sector; 5) a combination of the above.
There are multiple government agencies that are involved in development finance in Myanmar, depending on the type of financial transaction. The Ministry of Planning and Fiance, Myanmar Investment Commission (MIC), relevant government ministries that oversee specific sectors(such as electricity or environment), Central Bank of Myanmar (CBM) and local authorities all have a say, as approval from one or more of the following entities may be required. Understanding the different needs and priority areas of these government bodies would help smooth the process of approving a large-scale loan or grant.
As Myanmar is a country with ongoing conflicts among different ethnic groups and religions, it is worthwhile considering different needs of diverse stakeholders and conceptualizing projects that maximize the interests of all the stakeholders. Grassroots stakeholders such as community CSOs and religious leaders also need to be consulted before the approval of a project that might confront their interests.
2. Diversify Financial Tools
To ensure financial sustainability and social impacts of development finance, as well as address vulnerability, it is necessary to diversify financial tools and innovate financing models. Blended finance, guarantees for development, local currency financing, green and blue bond financing, GDP-linked bonds, and counter-cyclical loan instruments are all such tools with the potential to meet development needs of Myanmar.
Taking blended finance as an example – it is broadly understood as the strategic combination of development finance with other public or private capital to ensure adequate resources for investment in key areas. Blended finance can therefore involve public-public partnerships as well as public-private partnerships. The benefits of blended finance include increasing capital leverage, enhancing capacity development and social impact, managing risks so that returns are in line with market expectations. One of the famous examples of blended finance is Proximity Designs, a Myanmar-base social enterprise that empower farmers with financial access. In 2019, Proximity Designs signed a blended finance agreement with Skoll and Overseas Private Investment Corporation (OPIC), for a US$10 million loan. Proximity Designs and OPIC discussed financial partnership for a long period of time. As Proximity’s operations are socially driven while OPIC’s funding is more commercial, there was a gap in managing the risks of the investments. The agreement was not reached until Skoll brought about philanthropic funding to the table. This new model of partnership takes advantage of each stakeholder’s strength, while mitigating the risks and capacity gaps. Such models would have more potentials in multiple sectors of Myanmar’s development.
3. Study A Case Carefully
If you understand the operation of one development finance agency thoroughly, then you have a deeper understanding of the whole picture. Rooted in Asia with 40+ years experiences providing development assistance for Myanmar, Asian Development Bank is no doubt an excellent example to study in greater details.
ADB started co-financing operations in Myanmar in 1973. Between 1973 and 2016, ADB’s sovereign co-financing commitments for Myanmar have amounted to $1.57 billion for 17 investment projects and $53.97 million for 43 technical assistance projects. Non-sovereign co-financing for Myanmar has amounted to $363.79 million for five investment projects.
As Myanmar opened up in recent years, ADB’s engagements in Myanmar have surged, covering a wide range of sectors, including energy, public health, education, infrastructure, etc. From 2013 to 2019, the ADB committed loans and grants totaling US$2.4 billion (3.2 trillion kyats) in Myanmar.
In July 2020, The Myanmar Parliament approved a US$250 million loan from ADB to support the budget for its COVID-19 Economic Relief Plan (CERP). The purpose for the loan is to provide social support for low-income households, to enhance the healthcare system and to support small and medium-sized enterprises. In fact, before approving the loans, the Myanmar government has already been providing cash and food support for vulnerable population. ADB evaluates the necessity of adding financial assistance to this effort and channel the loan through its COVID-19 Active Response and Expenditures Support (CARES) program. As a result, it is one of fastest loans approved by both ADB and Myanmar government.
In 2020, ADB has also provided some major loans for Myanmar, including a US$180 million loan for the Yangon city water supply project, a US$171 million loan for rural electrification and a US$483.8 million loan for an expressway connecting Bago Region and Mon State, which makes ADB’s annual commitment to Myanmar exceed US$1 billion.
The surge of ADB’s financial commitment to Myanmar comes together with its deeper understanding and analysis of Myanmar’s cultural and political context. Conflict sensitive approaches are adopted by ADB especially when the projects are locations in ethnic minority areas. For example, ADB is preparing two projects in Mon State and Kayin State on GMS East-West Economic Corridor infrastructure improvement, which totaled US$200 million. Consultations with various stakeholders such as community NGOs, religious leaders, local authorities have been ongoing since the conceptualization of the projects. Civil society organizations are keen on their rights of being fully informed and consulted, which in certain cases become key risk factors for development projects funded by large donors.
ADB’s strategy in Myanmar also includes promoting private sector development, as Myanmar graduated from a least developed country. Currently Myanmar is taking a US$60 million loan from the ADB to establish a Credit Guarantee Corporation (CGC), as the fact that SMEs in Myanmar lack a credit guarantee system hinders the amount of unsecured loans the banks are able to extend to an SME. ADB provides loan at an interest rate of 1% per year during eight-year frozen period and 1.5% per year during the repayment period over the next 24 years. The CGC will be implemented in three stages. Under the first and second stage, a wholly-owned CGC will be developed by the government using ADB loan. In the third stage, the CGC will sign agreements with financial institutions to establish necessary financial systems required between 2021 and 2025.
Financing partnerships enable ADB’s development partners, governments agencies, multilateral financing institutions, and commercial organizations to participate in financing ADB projects. The additional funds are provided in the form of loans and grants, technical assistance, and other non-sovereign co-financing such as B loans, risk transfer arrangements, parallel loans and equity, guarantee co-financing, and co-financing for transactions under ADB’s Trade Finance Program and Supply Chain Finance Program.
It is time to finance Myanmar’s future. It is also time to enhance your strategies and tools to ensure performance of your money in the Myanmar market.
