2017 Project Finance Report: Myanmar
Takeshi Mukawa and Ben Swift, MHM Yangon
Section 1 – National update
1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?
Project financing is a relatively new phenomenon in Myanmar, which has been rapidly developing as the country has opened up to foreign investment and updated its laws relating to foreign investment and financing. Recent high profile project finance transactions include the Myingyan IPP.
In general, the Myanmar legal system has a lack of precedents to confirm the legal position. This is particularly true in relation to project financing, and the answers given to these questions must be understood in this context.
Section 2 – ECAs and Multilaterals
2.1 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.
Many export credit agencies provide trade financing for exporters to Myanmar including the Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (Nexi), Export-Import Bank of Korea and ExIm Bank. Significant international financial institutions present in Myanmar include the International Finance Corporation (IFC), Asian Development Bank (ADB), World Bank and Asian Infrastructure Investment Bank.
These institutions have also helped support legal reform in Myanmar. The ADB is supporting the development of Myanmar's new companies and insolvency laws, while the IFC supported the development of the Myanmar Investment Law (which was passed in 2016) and the regulations under that law, as well as providing trade financing and loans to businesses in Myanmar.
Section 3 – Public-private partnerships
3.1 Is there a public-private partnership (PPP) act or similar statute authorising PPPs, and are both greenfield and brownfield PPP projects permitted?
No. PPPs are negotiated individually and there are no standardised bidding processes or documents, and therefore no standardised approach. Each ministry has its own approach and rules.
The Japan International Cooperation Agency (JICA) and Myanmar's Directorate of Investment and Company Administration (DICA) have been discussing the standardisation of English language bidding and PPP documents.
3.2 May a concessionaire grant security interest in the project to its lenders and if so is the consent of the government or contracting authority required?
In practice, the Myanmar government sometimes enters into concessions or PPP agreements in the context of PPP projects. In general, consent is required to create security over those contracts or shares of the project company.
Section 4 – Foreign investment and ownership restrictions
4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?
Under the Myanmar Investment Law, certain large-scale projects require approval in the form of a permit from the Myanmar Investment Commission (MIC); in addition, projects which may have a significant impact on the security, economic conditions, environment or social benefit of Myanmar or its citizens will be referred by the MIC to the Myanmar parliament for approval. These large-scale projects include investments that are strategically important, large capital intensive investment projects, investments which have a large potential impact on the natural environment or the local community, investments which use state-owned land and also designated investments. It is likely that many if not all future project financed developments in Myanmar will require MIC approval, and the specific sectors where approval will be required will be published in a notification by the MIC (publication is expected prior to April 2017).
In relation to land, foreign investors face two main restrictions in Myanmar. First, the Transfer of Immovable Property Restriction Act of 1987 prohibits the transfer of immovable property to, and the acquisition of immovable property by, a foreign citizen or a company with foreign shareholding, including creation of and transfer following enforcement of a mortgage (refer to questions 8.1 and 9.3 in relation to mortgages). Note also that Section 228(b) of the draft Myanmar Companies Law, which is expected to come into force by April 2017, provides that neither the grant of a mortgage or charge or its execution shall be restricted by the Transfer of Immovable Property Restrictions Act or any other law – however this provision has not yet become law and its effect is therefore untested in practice.
Second, it also prohibits a foreign person from leasing land for more than one year.
However, a foreign investor who obtains a permit or endorsement under the Myanmar Investment Law may obtain a lease over immovable property with an initial term of up to 50 years. In addition, the Myanmar government has proposed to liberalise the definition of a Myanmar company under the draft Myanmar Companies Law to include a company with up to the prescribed level of foreign shareholding (expected to be 35%, but this has not been officially confirmed and can only be considered as a possibility at this stage). Such a company would not face any restrictions in leasing or owning land.
In terms of fees and taxes, stamp duty is payable under the Burma Stamp Act of 1899 on execution of instruments, including lease agreements. As of October 1 2016, following the amendments to stamp duty under Notification 146/2016, the stamp duty payable on a share transfer is 0.1% of the value of the shares, a loan agreement is 0.5% of the loan amount, and the stamp duty payable on a lease agreement with a term greater than three years is two per cent of the average annual rent.
4.2 Can a government authority block or unwind a transaction after closing for strategic, national security or other reasons?
Section 52 of the Myanmar Investment Law provides that the Myanmar Government may expropriate investments if:
it is necessary for Myanmar and its citizens;
the measures are non-discriminatory;
the measures are in accordance with existing law; and
there is payment of prompt, fair and adequate compensation.
However, expropriation without compensation is possible in the case of non-discriminatory measures of general application which governments normally take for the purposes of regulating economic or social activity, as set out in Chapter 21 (broadly, regulations applicable to the economy as a whole) and Chapter 22 (broadly, measures relating to national security) of the Myanmar Investment Law.
However, section 91 of the Myanmar Investment Law provides that Myanmar's international treaties prevail over that law if they are inconsistent, and some of those treaties give foreign investors additional rights in relation to expropriation.
Section 5 – Foreign exchange, remittances and repatriation
5.1 What, if any, are the restrictions, controls, fees or taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?
Although the right of foreign investors to transfer funds within certain categories is guaranteed under the Myanmar Investment Law, it is generally understood in practice that all remittances of funds from outside Myanmar to inside Myanmar (and vice versa) are governed by the Foreign Exchange Management Law of 2012 (FEML) and prior approval from the Central Bank of Myanmar (CBM) must be obtained if required under the FEML.
Under the FEML, fund remittances are classified into ordinary transactions and capital transactions. As a general rule, prior approval must be obtained from the CBM for any capital transaction but approval is not required for an ordinary transaction. However, the definitions of both categories in the FEML are unclear and the practice of the CBM is inconsistent, so in practice it is necessary to confirm with the CBM how to deal with each foreign remittance on a case-by-case basis.
With respect to the foreign exchange remittances in connection with a loan from outside Myanmar, it has been expressly provided in the rules under the FEML that the CBM's approval is required prior to the disbursement and, after obtaining such prior approval from the CBM, it is not necessary to obtain the CBM's approval for each remittance for repayment of principal and interest. Based on the announcement issued by the CBM in July 2016, it has been understood that, in relation to such approval, the CBM will take into consideration matters relevant to the borrower including the capital amount already brought into Myanmar, the terms of the loan agreement and the debt/equity ratio.
Withholding tax will apply for remittances. Subject to the applicability of a double tax treaty, the withholding tax on a non-resident foreigner for interest income is 15% and it is zero per cent for dividend income.
5.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Under the FEML and Notification 7/2014, Myanmar residents (including Myanmar incorporated companies) can open offshore foreign currency accounts with the approval of the CBM, provided they file monthly bank statements with the CBM. In practice, we understand the CBM has recently been willing to approve Myanmar companies using offshore foreign currency accounts for the purpose of obtaining foreign currency-denominated loans for project financing. The funds from these loans are then transferred into Myanmar by the Myanmar company itself.
Myanmar residents can open onshore foreign currency accounts without permission, and non-residents (for example foreign corporations) may open such accounts with the CBM's permission.
Section 6 – Insurance
6.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
No foreign insurer has been awarded a licence under the Insurance Business Law of 1996 to undertake an insurance business in Myanmar and may conduct such business through Myanma Insurance, the state-owned insurer. The Special Economic Zones Law of 2014 provides that a foreign insurance business may operate an insurance business within a special economic zone (SEZ) with a permit, and a few insurers have received licences to operate an insurance business in the Thilawa SEZ.
6.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?
Only Myanma Insurance (which is guaranteed by the Myanmar government) is permitted to offer reinsurance within Myanmar under the Myanma Insurance Law of 1993. According to the Ministry of Finance, Myanma Insurance has taken out reinsurance outside Myanmar with foreign insurers in relation to a number of insurance policies. Cut-through clauses are permitted in Myanmar and we are aware of at least one occasion on which Myanma Insurance has agreed to such a clause in a contract for re-insurance of insurance it provided to a business in Myanmar.
Section 7 – Choice of law and jurisdiction
7.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
Under the Code of Civil Procedure, the judgment of a foreign court is binding on parties that submit to its jurisdiction. A waiver of sovereign immunity clause is generally taken by market participants (including in the context of project finance) to be effective in Myanmar.
7.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?
By law parties are free in principle to choose any foreign law as the governing law, subject to the operation of any applicable mandatory rules. In practice, state-owned enterprises and Myanmar government agencies will rarely agree to a foreign choice of governing law.
7.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?
Myanmar is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the Arbitration Law of 2016 provides for the enforcement of foreign arbitral awards in the same manner as court judgments.
A party seeking to enforce a foreign arbitral award must present to the court the original or duly authenticated copy of the award and the original or duly certified copy of the agreement for arbitration together with evidence that the award is a foreign arbitral award.
An arbitral award may be refused recognition only for certain prescribed procedural flaws (these grounds for refusal are broadly speaking in line with the UNCITRAL model law):
a party was under an incapacity;
the arbitration agreement was invalid;
proper notice of arbitration was not given;
the arbitral award was ultra vires;
the arbitral tribunal was not properly constituted; or
arbitral award is not final.
Enforcement may be refused only if the subject matter was not capable of arbitration under Myanmar law or for public policy reasons.
A foreign judgment can be enforced in Myanmar by presenting the pleading set out in the Code of Civil Procedure of 1909, unless one of the exceptions set out in section 13 of the Code of Civil Procedure apply (these exceptions are similar to those relating to the enforcement of arbitration awards, but also include that the court made an error of international law or refused to recognise Myanmar law when it was applicable, or that the claim was based on a breach of Myanmar law).
Section 8 – Security
8.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?
Security can be created through a mortgage or charge over a project company's immovable property or a pledge can be created over its movable property, including its shares. A sponsor of a project company may grant a security interest over its shares under Myanmar law. If the project company is a company with an MIC permit or endorsement, it must give the MIC notice of a mortgage or a transfer of shares. In addition, equitable mortgages have been created as part of the security package for some loans.
8.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?
Subordination agreements can be made and enforced in Myanmar. In theory, subordination trusts would also be recognised in the context of bankruptcy or insolvency proceedings. Note, however, that neither of these conclusions has been confirmed in practice.
Section 9 – Perfection, priority and enforcement
9.1 How is a security interest in each type of security perfected and how is its priority established?
For mortgages of immovable property, other than a mortgage by deposit of title documents, a written instrument signed by the mortgagor and attested by at least two witnesses must be executed. For movable property, a pledge requires possession of the property in question by the creditor.
Any security instrument must be registered under the Myanmar Companies Act within 21 days with DICA if it relates to a security over company assets or it will not be enforceable if the company becomes insolvent (the draft Myanmar Companies Law contains similar provisions, and also does in relation to all other provisions of the Myanmar Companies Act discussed in this note). Mortgages over immovable property must be registered with the Registration Office under the Registration Act 1909 in order to be enforceable.
As noted above, notice must be given to the MIC of mortgages or transfers of shares in a company with an MIC permit or endorsement.
9.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?
Stamp duty must be paid prior to registration. The stamp duty payable on a mortgage over immovable property is 0.5% of the loan amount. For a pledge, the stamp duty is an amount in Myanmar kyats set out in paragraph 6 of Schedule 1 of the Burma Stamp Act, and is calculated based on the duration of the loan and its value.
9.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?
Yes. There are examples of offshore lenders using onshore security agents to hold security on their behalf. This has been used in a few transactions to attempt to circumvent the restriction in the Transfer of Immovable Property Restriction Act on transfer of immovable property, but appears to be untested in practice.
Section 10 – Bankruptcy proceedings and enforcement
10.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?
The effect of the bankruptcy of a project company on the lender's enforcement of its rights as a secured party is unclear. Based on common law principles, we would expect that the powers of any receiver appointed by the lenders would be suspended, but in general the rights of secured creditors to take priority over those of unsecured creditors. However, under Section 230 of the Myanmar Companies Act, debts relating to preferential payments (which include tax liabilities and certain salaries payable to employees) take priority over all other debts.
10.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the security?
For security over immovable property, under the Transfer of Property Act of 1882, a security may be enforced by foreclosure by the mortgagee and sale of the collateral property. Foreclosures and sales of collateral property can be effected by court decree.
A pledge can be enforced through sale of the goods over which the pledge acts as security.
10.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?
A receiver can be appointed under Section 69A of the Transfer of Property Act. Under Section 118 of the Myanmar Companies Act any receiver appointed in relation to a company must be registered with DICA.
Section 129 of the Myanmar Companies Act also provides that when a receiver is appointed under a floating charge, if the company is not being wound up at that time, debts relating to preferential payments should be paid by the receiver in priority to any claim under the charge.
About the author
Co-representative partner, MHM Yangon
Yangon and Singapore
Takeshi Mukawa is the co-representative partner of MHM Yangon. He is qualified in Japan and California. He has advised on many finance and corporate transactions, including the first aircraft financing in Myanmar, which created a mortgage over aircraft operating in Myanmar, the acquisition by Kirin of Myanmar Brewery (which is the biggest M&A transaction to date in Myanmar) and the establishment of the Yangon Stock Exchange. He has also assisted the Myanmar government in making new laws and regulations, including the Securities and Exchange Law and the amendment of the Special Economic Zone Law.
About the author
Senior legal adviser, MHM Yangon
Ben Swift qualified as an English lawyer in 1999 and has over 15 years of post-qualification experience in cross-border transactions and projects. He has worked in China, Singapore, London, Dubai and Qatar. He has a wide range of knowledge and experience relating to international corporate transactions, particularly in relation to acquisitions and disposals, shareholder agreements, long-term offtake agreements and oil trading contracts and project financing and development.