Investment in Myanmar s Power Sector

Investment in Myanmar’s Power Sector January 2015 Highlight: Sector Cumulative FDI approved amount as of Dec 2014, USD mn Power 19,324.542 Oil an...
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Investment in Myanmar’s Power Sector January 2015

Highlight: Sector

Cumulative FDI approved amount as of Dec 2014, USD mn

Power

19,324.542

Oil and Gas

16,992.578

Manufacturing

5158.155

Mining

2,868.683



Total FDI inflows in the power sector have reached USD19.32 billion, accounting for 36.57 percent of the total cumulative FDI. China is the largest foreign investor in Myanmar’s power sector (mostly in hydropower) with total investment amount of over USD13 billion.



According to the Ministry of Electricity Power’s forecast, demand for power will increase rapidly to around 20 GW in 2031.



The current capacity is struggling to meet the rising demand. At the end of 2012, the total installed power capacity of the country was only 3,896 MW and part of that is exported. The available capacity in dry season was actually much lower due to inadequate transmission and distribution infrastructure.



Myanmar has outlined a 15-year plan to 2030-2031, in which the government plans to set up 41 new power plants, boosting the power generation capacity to over 29 GW by 2031 and expanding its power sources to thermal and green energy.



Foreign investors who want to invest in the power sector in Myanmar need to obtain the concession of the Government, an investment license from MIC and company registration with the DICA.



By obtaining an MIC permit, foreign investors in power sector can enjoy many incentives, such as tax relief, tax holiday and land use of up to 70 years.



Investors in Myanmar’s power sector face several risks and challenges, including: regulatory uncertainty, political risk, low electricity prices and poor transmission and distribution facilities.

Sources of Power (%)

3.1% Hydropower

25.6%

Natural Gas

71.4%

Coal

Source: MEPE Forecasted demand to 2031 (MW)

20,000

Slowly Growth Rapid Growth

Regular Growth

16,000 12,000 8,000 4,000 0

Source: MEPE

Resources Hydropower

100,000 MW

Natural gas

283 cubic meters

Coal

491.84 million tons

* Please see the important disclosure at the end of this report

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Contents Power sector - the most attractive sector................................................................................................................................ 3 Resources ............................................................................................................................................................................. 4 Demand and supply .................................................................................................................................................................. 4 Low access to power ............................................................................................................................................................ 4 Forecasted demand .............................................................................................................................................................. 4 Installed capacity .................................................................................................................................................................. 5 Plan to 2031.............................................................................................................................................................................. 5 Regulatory structure................................................................................................................................................................. 6 Entry conditions and Investment procedures .......................................................................................................................... 7 Entry conditions.................................................................................................................................................................... 7 Investment procedures ........................................................................................................................................................ 7 Incentives ................................................................................................................................................................................. 8 Risks and challenges ................................................................................................................................................................. 8 Conclusion ................................................................................................................................................................................ 8 CONTACT INFORMATION ......................................................................................................................................................... 9

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Power sector - the most attractive sector Myanmar’s power sector has been the most attractive sector for international investors. Although the number of projects has been small, the investment amount is quite large. According to Myanmar’s Directorate of Investment and Company Administration (DICA), since the release of Foreign Investment Law in 1988 through the end of 2014, total FDI inflows into the power sector have reached USD19.32 billion, accounting for 36.57 percent of the total cumulative FDI. China is the largest foreign investor in Myanmar’s power sector (mostly in hydropower) with total investment amount of over USD13 billion. Thailand ranked second with total FDI recorded at around USD6 billion. Recently, other countries such as, South Korea, Japanese, Singapore and the U.S also showed interest in the sector. -

Singaporean Asiatech Energy Private Limited will work with Myanmar lighting IPP Co in a 230 MW gas-fired power plant in Mawlamyaing Township, Mon State. Another Singaporean company, UPP holdings, will cooperate with Myan Shwe Pyi Tractors on a 52 MW gas-fired power project in Yangon.

-

At the beginning of 2014, U.S-headquartered APR Energy PLC has become the first U.S. power firm to win a tender. It will build a 100 MW gas-fired power plant in the central Mandalay region.

-

Toyo – Thai Corporation, one of the active investors in Myanmar’s power sector, has signed a PPA with the Myanmar Electric Power Enterprise to invest in a 120 MW gas power plant in Ahlone, Yangon. The organization has recently made plans to invest USD2.7 billion in a 1,280 MW coal-fired power plant in Mon state.

Cumulative Foreign Direct Investment by Sector (As of December 31, 2014) Sector

Power

Permitted Enterprises

Approved amount (USD mn)

%

8

19,324.542

36.57

Oil and Gas Manufacturing Mining

140 449 70

16,992.578 5158.155 2,868.683

32.16 9.76 5.43

Transport & Communication

28

3,033.442

5.74

Hotel and Tourism Real Estate Other sectors

57 28 79

2,157.970 2,120.146 1,185.878

4.08 4.01 2.25

52,841.394

100

Total

859

Source: DICA, VPBS collected

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Resources Myanmar has abundant natural resources which are very important for the development of the power sector. According to the Asia Development Bank (ADB), the country has huge hydropower potential of more than 100,000 MW, which mostly comes from the country’s four main rivers - Ayeyarwaddy, Chindwin, Thanlwin and Sittaung. According to ADB, the total proven, probable and potential coal reserves of the country could reach 491.84 million tons. British Petroleum’s Statistical Review of World Energy, which was released in June 2014, shows that Myanmar has 283 million cubic meters of proven natural gas reserves as at the end of 2013. Myanmar official data also shows that the country’s oil reserves are estimated at 3.2 billion barrels.

Demand and supply Low access to power Although the untapped market could bring numerous opportunities for investment, lack of electricity is one of the main challenges in any industry. The electricity consumption per capital in Myanmar is only 110 kWh per year, which is one of the lowest in ASEAN, and is far below that of Malaysia, Thailand and Vietnam. Currently, around 70 percent of Myanmar’s population has NO access to electricity, the highest rate among ASEAN countries. In rural areas the rate soars to more than 90 percent. Yangon and other major cities also experience rolling power cuts. Many enterprises have to use expensive onsite electric power generators, resulting in high costs, low productivity and thus low asset utilization. Forecasted demand Demand for power is expected to grow significantly as the economic structure is moving from agriculture to industry and services. In 2013, the Ministry of Electric Power released its forecast for demand to 2031. According to the forecast, under a rapid growth scenario, demand for power could reach nearly 20 GW by 2031. Electricity use in selected ASEAN Countries, 2011 (kWh/capita)

Forecasted demand to 2031 (MW) Slowly Growth

4246

4,500

Regular Growth

Rapid Growth

4,000

20,000

3,500 3,000

16,000 2316

2,500

12,000

2,000 1,500

1073

1,000 500

110

164

402

647

8,000

680 4,000

0 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31

0

Source: ADB

Source: MEPE

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Installed capacity At the end of 2012, the total installed power capacity of the country was only 3,896 MW (versus 26,500 MW in Vietnam) and part of that is exported. The available capacity is much lower than the installed capacity in the dry season due to inadequate transmission and distribution infrastructure. The current capacity is struggling to meet the rising demand. Over 70 percent of Myanmar‘s electricity comes from 20 hydropower projects (2,780 MW), versus 10 percent in South East Asia. 25 percent (approximately 1,000 MW) comes from 14 gas-fired power projects. The remaining 120 MW comes from the Takyit coal-fired power plant. 2015-2016 Total installed capacity No

Description

Power capacity – 2013 (MW)

During 2015-2016, Installed Capacity (MW)

Total Installed Capacity (MW)

1

Hydro

501

2,760

2

Coal

300

420

3

Gas

2,878.15

3,593.05

4

Solar

50

50

3,729.15

6,823.05

4500 4000 3500 3000 2500 2000 1500

Total

Source: MEPE

1000 500 0 Avalable in Dry Avalable in Wet

Installed capacity Source: MEPE

Plan to 2031 Myanmar plans to expand its power sources to thermal and green energy because hydropower output is unstable due to the large difference in rainfall levels between the rainy and dry seasons. According to plans released in 2013, the Ministry of Electric Power planned to increase the total power installed capacity by March 2016 to 6,823 MW. Of this, the Ministry planned to install 2,878 MW of gas power, making gas the main source of power in Myanmar. In order to meet the rapid growth in demand, the country has outlined a 15-year plan for the period from the fiscal year 2016-2017 to 2030-2031, in which the government plans to set up 41 new power plants and boost the power generation capacity to over 29 GW by 2031. New coal-fired and gas-fired power plants with advanced technology which can reduce environmental impacts and require short construction time will be built in areas where demand is highest. 12 coal-fired power plants with total capacity of 12,780 MW are planned. Four will be located in Yangon; four in Tanintharyi; two in Ayeyawady; one in Sagaing and one in Shan – East. Although the government will expand fossil-based power for a capacity boost in short-term, it will not neglect the development of hydropower. They will continue to focus on building small-size hydropower plants that have less impact on the environment. 20 hydropower plants with total capacity of 6,270 MW are planned to be built in Mandalay region and three states including Kachin, Kayin and Shan.

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Regulatory structure Myanmar’s Ministry of Electric Power (MOEP) is responsible for all management and operating activities relating to power generation, transmission and distribution. The MOEP has three main departments, including: (1) The Department of Electricity Power (DEP), which is responsible for policy matters for MEPE, ESE, YESB and gas-fired power projects; of which: 

 

The Myanmar Electric Power Enterprise (MEPE) – a public company, which is in charge of implementation of thermal projects and power transmission projects. The MEPE purchases power from public and private power producers, including BOT project companies. The MEPE then sells electricity to other organizations such as the ESE and the YESB. In addition, the MEPE controls all transmission lines and substations. The Electricity Supply Enterprise (ESE) is responsible for power distribution in the states and regions. The YESB is responsible for supplying electricity in Yangon.

(2) The Department of Hydropower Planning (DHPP), which sets the policy and planning for hydro and coal-fired projects; (3) The Department of Hydropower Implementation (DHPI), which is in charge of implementing hydro and coal-fired power projects. Another sub-body is the HPGE, which is the government partner for all hydrogeneration BOT projects. The HPGE also operates and maintains all large-scale public sector hydro-generation facilities. Organization Chart of the Ministry of Electric Power Ministry of Electric Power (MOEP) Ministry with overall responsibility Department of Hydropower Planning (DHPP) In charge of policy & planning matters on hydro & thermal (coal)

Department of Hydropower Implementation (DHPI) In charge of implementation of hydro & thermal (coal)

Hydropower Generation Enterprise (HPGE) Power generation by hydro and thermal (coal)

Department of Electric Power (DEP) In charge of policy matters for MEPE, ESE, YESB and gas fired projects

Sign on dispatches

Myanmar Electric Power Enterprise (MEPE) In charge of implementation of gas fired projects + own and control power grid

Electricity Supply Enterprise (ESE) Distribution in states and regions

Power System Department (PSD) Calculates on dispatches

Yangon Electricity Supply Board (YESB) Distribution in Yangon region

Source: VDB - Loi

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Entry conditions and Investment procedures Entry conditions Under the Foreign Investment Law, most business activities, including power generation, allow 100 percent foreign ownership. However, administration of the electric power system is prohibited for foreign investors. Foreign investment in hydropower and coal power plants is possible only as a joint venture with the government or on a BOT basis. Foreign investors may hold up to 80 percent shares of joint venture. Small power projects below 10 MW are also restricted to foreign investors and can only be accomplished through a JV with a local company with the government’s approval. Investment procedures Foreign investors who want to invest in the power sector in Myanmar need to obtain the concession of the government, an investment license from MIC and a company registration with the DICA. 1. Obtaining the concession: - For power projects with capacity of 30 MW or higher, investors need to submit an Expression of Interest to the MOEP. The investor will then be invited to sign a non-binding memorandum of understanding (MOU). At the same time, investors will be required to conduct technical and financial feasibility studies. If they are found to be feasible, foreign investors will bid on the projects or have them awarded privately. Once the bidding is successful, parties will sign a memorandum of agreement (MOA), which is a framework agreement for a BOT agreement. Parties will need to conclude a series of contracts, such as a power purchase agreement and a land lease. - For power projects with capacity of less than 30 MW, investors can negotiate with the Ministry of Electricity and Industry of each state and region with the support of MOEP. 2. Obtaining investment license from MIC Investors need to submit a proposal to MIC through MOEP. Submitting directly to MIC is not allowed. The proposal is required to focus on the project’s financial plan, such as cash flow, capital expenditure, revenue and profit. The process takes around 90 days. Power Project Investment Licensing Step-By-Step Steps 1 2

Actions Submit proposal through the DEP of the MOEP to the MIC or DHPP Intake meeting at the MIC; submit proposal to the MIC

3

Project assessment team meeting

4

Feedback from the MOF, states/regions, UAGO and Internal Revenue Department (IRD)

5

MIC Member Meeting approval: MIC Permit is issued

Timing

Within 2-4 weeks following the submission of the proposal Within 4-8 weeks after submission of proposal Within 2 weeks of completing or amending the proposal as per the project assessment team’s request Immediately after the feedback from the states/regions, UAGO, IRD, and MOF has been received Source: VDB - Loi

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Incentives By obtaining an MIC permit, investors in the power sector can enjoy many incentives, including: five years tax holiday; Customs duty-free import of machinery and equipment during the construction period plus raw materials for three years; Exemption from income tax on profit that is reinvested within one year; Exemption from commercial tax (CT) on goods produced for export; Exemption from customs duty for machinery and equipment if the investment amount is increased and the original business is expanded; and land use of 50 years, plus two consecutive 10-year extensions.

Risks and challenges Besides some regular challenges for investing in the power sector such as high capital requirements and seasonal change factors for hydropower, other potential risks and challenges include: -

-

-

Regulatory uncertainty: regulatory uncertainty is one of the main issues for investors in all industries. There are few detailed regulations for tariffs, legal terms and environmental aspects (VDB-Loi). Political risk: Myanmar’s political and religious risks are notable issues as they could affect the business operating environment. A secured environment is required in order to attract foreign investment. Low electricity price: the country’s low electricity price is one of the obstacles when investing in the country’s power sector. Poor transmission and distribution facilities: According to Myanmar’s Electricity Supply Enterprise, poor quality of transmission and distribution facilities are the main factor causing 25 percent losses of the power system.

In addition to the above risks and challenges, investors should also take into account the social and environmental impacts of the projects. The most well-known project from Chinese investors is the Myitsone Dam on the Ayeyawady river with the planned installed capacity of 6,000 MW. However, the project has been suspended since 2011 due to public opposition on the social and environmental impacts of the dam. Such negative impacts of a project could bring long delays, resulting in high cost and other damages to the investors.

Conclusion Power shortage is one of the main concerns in Myanmar as it can limit the expansion of the economy. Therefore, the power sector will remain the top priority investment for the government. Despite many foreign companies already investing in this sector and many others on the waiting list, the increasing domestic demand and strong demand for power from neighboring countries such as Thailand and China will continue to attract foreign investors investing in Myanmar’s power sector.

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Nguyen Thi Thuy Linh Director – Macro and Financials [email protected]

Hoang Thuy Luong Research Analyst [email protected]

Nguyen Thi Ngoc Anh Research Assistant [email protected]

For any questions regarding your account, please contact the following: Marc Djandji, CFA Head of Institutional Sales and Brokerage [email protected] +848 3823 8608 Ext: 158

Nguyen Thanh Ha Managing Director - Investment Banking (Origination) [email protected] +844 3974 3655 Ext: 231

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