Strike a balance in foreign investment and local content

Striking the right relationship with foreign investors is a perennial question in the energy business. In light of all the political changes under way within Myanmar today, three elements of that relationship are particularly important. First is clarity about goals. The new National Energy Management Committee (NEMC) can play a major role in herding the interests of the six ministries and three state energy companies that presently dominate the country’s energy policy and investment system. Myanmar and foreign investors, alike, should expect that these goals will shift a lot as the country opens up and as the economy grows, creating new opportunities for the population to move from traditional agriculture to higher value-added activities. Shifting goals are not new; making those shifts predictable so that foreign investors can anticipate and adjust is crucial.

Second is the need to separate goals and means. One of Myanmar’s central goals is the creation of national industries, such as those that use the country’s huge potential supplies of natural gas. Many other countries have had similar goals, and one lesson from the experiences worldwide is that requiring foreign investors to play central roles in building national industries is usually inefficient. Let the foreign investors do what they do best – such as find and produce natural gas, oil and other hydrocarbons – and create separate enterprises to deliver other goals.

Instead of requiring local content and linkages upstream and downstream to local industries, a better approach may be to set aside revenues from new investment in hydrocarbons to finance national economic development. A national development authority – focused on goals such as local content and value added – would be better placed than foreign investors to actually deliver these goals. That authority might create special export zones and invest in infrastructure needed to support clusters of related industries, much as the PRC and Korea did in the early stages of their economic development. The government of Myanmar would be wise, as well, to resist the temptation to require investors in oil, gas, electricity and coal to shunt some of their production into local industries and perhaps even ban exports. That approach is often self-defeating over the long term since it creates industries that depend too much on cheap energy and are not competitive globally; it also reduces potential revenues from sales that could be channelled back into national development.

Third, it is hard to make any surge in investment in the country’s energy infrastructure sustainable unless energy prices start to reflect market realities. Today, Myanmar faces a problem similar to that of many countries: energy prices are kept low, a policy that is politically attractive and thus hard to modify. But the spiral of low prices has impoverished the state and especially the electricity companies that face massive underinvestment in new supplies and grid infrastructure. The country will not take off economically if it does not have a reliable energy supply system. My sense is that the government thinks electricity subsidies (and other subsidies as well, such as for motor fuels) are politically untouchable. That might be right. If so, there are ways to keep the subsidy in place without causing much financial harm to the country’s vital electricity system. Examples might include the creation of separate accounts that compensate electricity suppliers for revenues lost due to a subsidy, as some states in India have done quite successfully.