China: Investing in Myanmar – Risks and Strategies for Chinese Entities

Last Updated: 12 August 2013
Article by Monique Carroll, Ariel Ye, Max Bonnell and Jonathan Kelp

Myanmar's incumbent president U Thein Sein took office on March 2011 and since then the new government has become quasi-civilian, bringing an end to military rule. The new government has also undertaken economic and political reforms to encourage Western countries to suspend economic sanctions and to attract foreign investment. 2

Currently, China is the largest investor in Myanmar, providing US$20 billion in foreign direct investment according to the Directorate of Investment and Company Administration of Myanmar. Over many years China, and Chinese investors, have established good relationships with Myanmar's government and obtained a 'head-start' in this regard over many other foreign investors who until recently, were prohibited from investing in Myanmar. However, with the changing political, social and regulatory environment in Myanmar, Chinese investors must consider new strategies to ensure the long-term success of their investments.

1.Demand for 'corporate social responsibility'

The New York Times recently reported 3 that projects in Myanmar are 'challenged more than ever by activists energized by Myanmar's democratic opening' providing the following examples:

  • the Shew Gas Movement is pressing for higher compensation for land taken for gas pipelines and for better paying jobs along the pipelines' route;
  • monks have joined with ancestral landholders to stop a Chinese-led conglomerate from 'leveling' a fabled mountain embedded with copper;
  • violent protests were held against a mining project involving a Chinese company which promoted a government-established inquiry into the project.

Community challenges to foreign investment can have serious, even devastating, effects on the investment. One Chinese hydropower company operating in Myanmar was asked to close operations because of concerns over practices that lead to fighting between the national army and Kachin rebels. The company was asked to leave Myanmar even though it initially invested with the approval of the Government.

These examples illustrate the increasing importance of 'Western-style' corporate social responsibility practices (CSR) for Chinese outbound investors. This is because adopting CSR is an important step in strengthening the relationship between Chinese investors on the one hand, and foreign governments and local communities on the other. In this way, CSR can satisfy local communities and governments as well prevent a situation where an investor is effectively forced to abandon their investment. This is sometimes referred to as maintaining a 'social licence' to operate.

2.Corporate social responsibility

CSR often requires companies to go beyond complying with local laws. For example, outbound investors need to consider the impact of extra-territorial regulation from their home jurisdiction, as well as the adoption of voluntary CSR codes and principles. In addition, investors should be sensitive to local expectations regarding labor relations and corporate activity, even if those expectations are not strictly enshrined in local law.

2.1 Extra-territorial regulation

Chinese companies are now subject to greater extra-territorial regulation from their home jurisdiction when investing abroad. This year, the Ministry of Commerce (MOFCOM) has published three new sets of rules to govern the extra-territorial conduct of Chinese companies:

  1. Guidelines on the Environmental Protection in Outbound Investment and Cooperation (《对外投资合作环境保护指南》). Pursuant to these Guidelines, which were issued on 18 February 2013, Chinese companies are encouraged to fulfill their responsibilities to support sustainable development and protect the environment in host countries. The Guidelines state that Chinese companies should comply with local environmental laws, and adopt practices that protect the environment in host countries. Companies are also encouraged to adopt a broader range of social values including respecting local cultural traditions and workers' rights.
  2. Key Working Points on Regulating the Conduct of Enterprises Engaged in Overseas Business and Preventing Overseas Commercial Bribery (《2013年商务部规范企业境外经营行为,防治境外商业贿赂工作要点》). The Key Working Points, which were issued on 27 February 2013, extend MOFCOM's oversight of commercial bribery by Chinese companies operating abroad, including the adoption of best practice features of Western legal systems. The Key Working Points will increase regulation of Chinese companies' employment of foreign workers. MOFCOM aims to promote the development of corporate culture within Chinese companies that engage in international business, and will look to publicise positive examples of business behavior.
  3. Provisions on Regulating Competitive Conduct in Outbound Investment and Cooperation (《规范对外投资合作领域竞争行为的规定》). These Provisions came into force on 17 April 2013 and are aimed at encouraging fair competition and upholding the orderly process of Chinese foreign investment.

China's enactment of extra-territorial rules governing outbound investors reflects similar developments in Australia, the UK and the US, and follows the extension in 2011 of the PRC Criminal Law to prohibit Chinese citizens and companies from bribing foreign officials.

2.2 Voluntary codes and practices

'Western-style' CSR also involves a series of voluntary initiatives and codes that companies can adopt. For example, companies from Australia, the UK and the US often align their overseas operations with the following standards:

  1. UN Guiding Principles on Business and Human Rights: Implementing the 'Protect, Respect, Remedy' Framework. The 'Protect, Respect, Remedy' Framework, endorsed by the UN Human Rights Council, states that companies are responsible for the direct social impacts caused by their activities, as well as indirect social impacts linked to their operations, products or services through business relationships. The Guiding Principles recommend that companies publish a policy commitment to CSR, undertake due diligence on the social impacts of their operations, and develop remediation mechanisms for addressing adverse impacts.
  2. Voluntary Principles on Security and Human Rights. The Voluntary Principles were developed by companies, governments and non-government organizations to assist the extractive sector with security operations. These Principles are not legally binding, but participating companies are expected to deal responsibly with public and private security forces and to consult openly with local communities.
  3. Equator Principles. The Equator Principles are used by many of the world's largest export credit agencies and financial institutions, including for example Industrial Bank Co., Ltd, to assess environmental and social risk in projects that they finance. Borrowers from these institutions are required to covenant in the financing documents that they will comply with the relevant requirements, as well as environmental and social laws in the project's host country.

By identifying which voluntary initiatives are appropriate, and aligning their overseas operations as appropriate, Chinese outbound investors in Myanmar can help to meet the expectations of Government and the business community in the counties in which they are investing, and maintain their 'social licence' to operate.

3.Investment treaty protection

3.1 Introduction

As well as contributing to the expectation that companies will demonstrate their commitment to various CSR standards, the events described above, can also be described as 'political risk' events. 'Political risk' in foreign investment is the risk that an investment will be adversely affected by a host country's political or regulatory decisions, or, the risk that the host country fails to provide a stable legal and regulatory environment and therefore significantly harms your investment.

Investment treaties provide protection against 'political risk' events by giving investors the right to seek compensation from a foreign government for harm caused to foreign investments or suffered by foreign investors.

Without investment treaty protection, you take the risk of investing in a foreign country with no protections beyond those offered by that country's domestic legal system. This can be a real concern in countries without stable, political environments and sophisticated legal systems. Accordingly, if you are investing in Myanmar (or another foreign jurisdiction), we recommend that you also obtain investment treaty protection.

3.2 China's investment treaty with Myanmar

China and Myanmar have entered into an investment treaty called 'the Agreement on the Promotion and Protection of Investments between China and Myanmar' (China-Myanmar BIT). This treaty provides broad protection to Chinese investors in Myanmar including:

  1. Full Protection and Security (FPS). This requires the Myanmar Government to exercise due diligence in ensuring a basic level of protection to Chinese investments. It might be breached if, for example, the Myanmar Government did not take adequate steps to protect protestors from causing physical damage to investments.
  2. Fair and Equitable Treatment (FET). This protection is very broad and generally provides protection from court, tribunal or administrative decisions which do not afford the investor due process or are tainted with bias, fraud, dishonesty, or lack of impartiality, as well as, against 'arbitrary' treatment and significant alterations to the legal and business environment in which it invested. It could be relied upon by a Chinese investor in Myanmar if the Myanmar Government revoked the investor's business licence or undermined the investor's expectation that its investment would be supported by the Government, generally, or in a particular manner.
  3. Protection from unreasonable or discriminatory measures which harm the management, maintenance, use, enjoyment and disposal of the investments. This protection might be breached if the Myanmar government introduced regulations which severely restricted the management and operation of foreign investment in Myanmar.
  4. Compensation for Expropriation or Nationalisation of investments without adequate compensation. This protection will also protect against acts or government measures which, over time, have the effect of nationalising or destroying the value of your investment.
  5. Compensation for Damages and Losses. The treaty also gives Chinese investors rights to compensation equal to that provided to local investors or investors from any other state, when their investment suffers damages or losses from war, a state of national emergency, insurrection, riot or other similar events.
  6. Repatriation of Investments and Returns. The treaty guarantees the ability of Chinese investors to transfer to China returns from their investment including profits, dividends, interests and other legitimate income, proceeds obtained from the total or partial sale or liquidation of investment and royalties in relation to intellectual property rights.

3.3 How to obtain protection

Each investment treaty defines the investors and investments which will be protected, the protections provided and the rights of investors to seek redress for breach of these protections. The China-Myanmar BIT protects 'every kind of asset' invested by Chinese nationals (including corporate and other economic entities) in Myanmar, in accordance with Myanmar laws and procedures. Whilst this provides broad protection, Chinese investors need to ensure that their investments meet the legal definition of 'investment' and, if a corporate or economic entity, that they have a sufficient connection with China.

4.Conclusion and next steps

There are pro-active steps Chinese investors can take to protect their foreign investments from social unrest and political risks. We recommend that Chinese investors adopt this pro-active approach, and thereby build stronger Government and community relationships. We also recommend that Chinese investors obtain investment-treaty protection as a last resort guarantee for their investments.

Footnotes

1With thanks to Daniel Allman and Li Li.

2For example, in June 2013 the new government announced that it would accept tenders from foreign companies for its "mega city" project in northern Yangon.

318 May 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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