Study on Economic Partnership Projects in Developing Countries in FY2013

Study on the Myawaddy – Hpa-an SEZ PPP Project in the Union of

Final Report

【SUMMARY】

February 2014

Prepared for: The Ministry of Economy, Trade and Industry Ernst & Young ShinNihon LLC Japan External Trade Organization

Prepared by: Japan Development Institute Ltd. Nippon Steel & Sumikin Bussan Corporation (1) Background and Necessities of the Project

1) Background a) Myanmar While Myanmar attracts the world’s attention to its rapid economic development, liberalization, and democratization as Asia’s “last frontier,” the effects of the country having suffered through 50 years of economic sanctions and numerous internal ethnic group conflicts have become equally pronounced. The West’s economic sanctions prevented not only the development of the country but also any Foreign Direct Investment (FDI). Chronic unemployment and national poverty grip the country. In addition, due to the government’s neglect in providing basic infrastructure to the nation, Myanmar has a great shortage of power supply -arguably the most important component of its or any other countries’ industrial development. The issue of power supply is one of the most pressing to the country. b) A Thai domestic industry has grown along with the nation’s economic growth in recent years, labor-intensive, low-cost industry has been forced to operate in low-cost areas remote from the capital city, . Due to a 300 baht/d minimum wage, introduced in 2013, labor-intensive industries began to plan low-cost operations by relocating manufacturing facilities in the neighboring countries outside of Thailand to take advantage of those countries’ cheap labor. Currently, the Thailand Board of Investment (BOI) is considering a policy that would encourage the transfer of labor-intensive industries to neighboring countries through a new BOI to be enacted in 2015.

2) Necessities a) Construction of an Industrial Zone (IZ) on the border with Thailand Understanding the movement of political decision-making on the Thai side, the , sharing a border with Thailand, has decided to construct an IZ in the , Myawaddy, in order to create local employment and comply with the demand of its neighbor, Thailand. b) Adopting international standards to attract Japanese investment Kayin State’s original development plan for the envisaged IZ is not sufficiently unique to attract FDI, due to its deficient infrastructure facilities, power supply, water supply, and sewerage treatment system, and solid waste disposal system. This project aims to establish an IZ meeting international standards for both in Myawaddy and Hpa-an. For the development of Myawaddy IZ, Japanese developers also seek to participate in the operation of the IZ.

Figure 1 Background of Project

Source: Study Team

(2) Basic policies that determine the details of project

1) The purpose of this project This project aims to create jobs in Myanmar by developing Myawaddy industrial zone with international standard types of facilities to invite not only DDI (Domestic Direct Investment) but also FDI (Foreign Direct Investment). Hpa-an industrial zone, already in operation, ; aims to achieve international standards in its facility provisions. 2) Comprehensive long-term project development plan “Kayin State Job Creation Development Plan for 100,000 people (~2030)”

Figure 2 Kayin State Job Creation Development Plan

Source: Study Team

In comprehensive long-term project development plan, the project team is determined to create jobs for 100,000 people in Kayin state. According to data available in Thailand, the average nunmber of employees in a labor-intensive factory in an industrial zone is 200 people/ha. Therefore, roughly 500 ha. of land is required to accommodate 100,000 jobs created in the industrial zone.

The project of this scale will be able to meet requirements for Special Economic Zone (SEZ), resulting in createing 100,000 jobs for people in Kayin state as the long-term goal. The project also plans to breed a new middle class as one of its long term targets. In this respect, training suitable candidates to comprise a managers class as a part of this project objectives will be necessary for bringing up the next generation of managers in Myanmar.

3) Medium-term project development plan (2025) Figure 3 Myawaddy～Hpa-an～ Economy Triangle Concept

Source: Study Team

Figure 4 Requirements for SEZ

Source: Study Team

a) Electric power To supplement the deficiency in electric power, the Independent Power Producer (IPP) is planning to build a power plant in Mawlamyain in Mon state. That plant will be partly completed in 2014, and will generate and transmit 230 MW of power by the year 2015. Plans call for that plant to supply the power to Hpa-an IZ as well.

b) Establishment of a road network To improve the distribution networks between Myawaddy and Hpa-an, Kayin State has investigated the present status of road networks and transportation systems in the region. It is expected that new traffic networks utilizing Official Development Assistance (ODA) will be established to realize efficient traffic flows.

c) Promotion of Myawaddy industrial zone to an SEZ After Myawaddy industrial zone expands its activities, and develops trade relationships with Thai-based companies with its operation as a Duty Free Zone (DFZ) maturing over a certain time, a Special Purpose Company (SPC), a joint operator of the IZ private developers and public sectors, will apply to the relevant authorities to realize Myawaddy industrial zone as a regional SEZ, so that IZ operations may enjoy a variety of privileges in the process of their business activities.

4) Short-term development plan (2018) Figure 5 Globalization of Hpa-an and Myawaddy industrial zone

Source: Study Team a) Myawaddy industrial zone The project developers will establish a Special Purpose Company (SPC) and will purchase the land in Myawaddy industrial zone after a local contractor finalizes the Phase 1 development works, and SPC provides the very necessary infrastructure facilities to meet the prevailing international standard. Myawaddy industrial zone grants some privileges to tenant companies in the Duty Free Zone, because it straddles the border with Thailand, and as a matter of course they will promote processing trades through export and import businesses.

b) Hpa-an industrial zone The Project will promote Domestic Foreign Investment (DFI) and Foreign Direct Investment (FDI) for Hpa-an industrial park, which is already completed and in operation. Then the Project especially need to focus on meeting a international standard with attractiveness of an industrial zone, by providing infrastructure such as water supply and water treatment equipment as part of the project.

c) Duty Free Zone in Myawaddy Myawaddy industrial zone will establish Duty Free Zone (DFZ) by utilizing the customs house facilities in existing Myawaddy Trade Zone next to it, after acquisition of the permit by Myanmar Investment Committee (MIC). A tenant companies can enjoy exemption of the import tax on materials, intermediate-processed goods through transporting, processing, and goods in bond in the DFZ, even though sales tax is to be charged upon their products delivery.

The DFZ system in Myawaddy IZ is basically referred to one in Thailand. The flow of this system is as follows:

Figure 6 Flowchart of distribution in Duty Free Zone (DFZ)

Source: Rojana Distribution Center

(3) Outline of Project

Development plan of Myawaddy industrial zone is shown as follows: 1) Districts of Myawaddy industrial zone Myawaddy industrial zone is mainly developed to accommodate labor intensive industry, and consists of a north district and a south district.

Figure7 Myawaddy SEZ Development Area Plan

Source: Study Team

2) Land use of Myawaddy industrial zone The area and land use of the north district and the south district in Myawaddy industrial zone are separated as follows:  Industrial use: Profit center of the Industrial park business;  Housing use: Accommodation facilities for the employees and their family of tenant companies, accommodation facilities for those whose works in the service sectors from distant regions and other ancillary facilities;

 Commercial/service use: the provision of services and other commercial services for the factory workers, trading partners, and external workers;  Administration and One-stop service use: the provision of administrative services to the employees and tenant companies operating in the IZ, the provision of administrative consistency services to the existing and prospective tenant companies;  Park/ Open space use: Reserve land for environmental protection and future expansion of business;  Dry port use: The dry port is not planned to install as there is already “Myawaddy Trade Zone” established next to each other. Therefore it aims to be linked with the “Myawaddy Trade Zone” for the purpose of such port functions as cargo traffic in bond, customs clearance, and container freight station.

Table 1 Myawaddy IZ application of land use area (ha)

Phase Area

Area item North District South District Total Ratio （％） 1 2 2N 2S 3 The entire IZ land 57.4 23.9 49.9 73.1 122.2 326.5 100.0

Factory lot 48.8 0.0 26.8 35.3 85.0 195.9 60.0 Same as above, by 75.6 120.3 0.0 district

Non-Factory Land 8.6 23.9 23.1 37.8 37.2 130.6 40.0

Same as above, by 55.6 75.0 0.0 district Breakdown of the non-industrial land area Roads 8.6 3.6 9.8 11.8 33.8 10.4

Discharge Drains 5.4 0.8 1.6 7.8 2.4

Retarding pond 6.8 3.5 1.9 12.2 3.7

Housing, parks, education and 20.7 11.3 10.1 42.1 12.9 training center Business, Service 4.2 2.5 6.7 2.1

Management. OSS 2.2 2.2 0.7

Public facilities 2.5 2.5 0.8

Water purification 2.3 2.3 0.7 plant Wastewater 3.0 3.0 0.9 treatment plant Future reserve land 6.0 2.5 9.5 18.0 5.5

Source: Study Team

3) Layout plan for land use in Myawaddy industrial zone Layout plan for land use in Myawaddy industrial zone is as follows: Figure 8 Layout plan for land use in Myawaddy industrial zone

Source: Study Team

【North district】 Industrial area, Commercial area, Public facilities, Housing area, Management office, Wastewater treatment area, Retarding pond 【South district】 Industrial area, Commercial area, Public facilities, Housing area, Wastewater treatment area, Water supply, Retarding pond 【Duty Free Zone】Customs house (Import, Export), Bonded warehouse, Bonded factory

4）Ground elevation map in Myawaddy industrial zone Ground elevation map in Myawaddy industrial zone is as follows; Due to the hilly nature of the land, the ground elevation of the industrial zone and its vicinity are depicted in the topographical map obtained by the study team.

Figure 9 Ground elevation map in Myawaddy industrial zone

Source: Study Team

5）Myawaddy IZ Development Cost The table below represents the project cost for the Myawaddy IZ project. It is to be noted that a potential Phase 4 is excluded here as the project site is not yet determined. Table 2 Myawaddy IZ Development Cost (Unit: Million US$) No. Name Summary Phase1 Phase2 Phase3 1 Civil engineering infrastructure 1.67 1.01 1.56 Land Development 2.44 5.33 7.59 In-site road 3.25 1.96 3.03 Drainage 2.44 1.77 1.71 Retarding basin 9.80 10.08 13.89

Direct construction cost total 1.96 2.02 2.78 Indirect construction cost total 1.18 1.21 1.67 General and administrative cost 12.94 13.30 18.33 total Civil infrastructure costs total 0.00 0.00 0.00 2 Power supply Power company burden 1.65 0.57 1.85 3 Water supply Deep well supply 3.90 1.60 2.34

4 Sewerage treatment Aerated Lagoon System 0.40 0.18 0.45

Includes commission fees to 5 Solid waste processing 0.00 0.00 0.00 Myawaddy city Telecommunications 6 Telecommunications 1.16 0.00 0.00 company burden Administration and One stop 7 Office furniture 20.04 15.65 22.97 service 8 Total construction cost 0.00 0.00 0.00 9 Interest during construction 2% of construction cost 0.00 0.00 0.00 SPC establishment preparation 10 PS 0.33 0.26 0.26 expense Research, survey and design 11 PS costs 12 Tax and duties 3.01 2.35 3.44 13 Contingency 10% of construction cost 23.35 18.26 25.57 Total project cost

Item Phase1 Phase2 Phase3 Total IZ area (ha) 131.2 73.1 122.2 Project cost for total IZ area 17.8 25.0 21.8 (US$/ m²) Source: Study Team

6）PPP scheme Figure 10 PPP scheme of Myawaddy industrial zone

Source: Study Team

(4) Implementation schedule

The short-term implementation schedule of Myawadi IZ is as follow:

Figure11 The short-term implementation schedule of Myawaddy IZ Item 2015 2016 2017 2018 2019 2020 2021 Milestone Bypass Road Open ( beginning of 2015), IPP 98MW completion @ Mawlamyine end of 2015) Establishment of SPC Design survey (Common) Government agencies related work Dry port facility Phase1 (131.2ha)

Detailed design Land development Road, drainage Water supply and sewerage, other infrastructure facility Administration and One Stop Service office Phase2 (73.1ha) Detailed engineering design Land development Road, Drainage Water supply and sewerage

Administration and One stop service office Phase3 (122.2ha) Detailed engineering design Land development Road, drainage Water supply and sewerage, other

infrastructure facility Administration, One stop service office Phase4 (173.5ha) Detailed engineering design Land development Road, drainage Water supply and sewerage, other infrastructure Administration and One stop service office 2015 2016 2017 2018 2019 2020 2021 Source: Study Team

(5) Feasibility for implementation

1) Financial analysis Assumptions: The revenue of the IZ is generated primarily; i) land lease income, ii) water supply charge, iii) wastewater treatment income, and iv) administration service fees. The following are the assumptions relevant to the conduct of a financial analysis. a) Premise 1: To obtain the land for Phase 1 (57.4ha) and Phase 2 (49.4 ha excluding the housing facility, business, and other service areas facilities) for the first year, of the above lands - with saleable industrial lots fixed at 77.9ha.). b) Premise 2: the table below indicates the revenue price. Table 3 Premises for the financial analysis Land price Phase1: US$45/ m² Phase2: US$50/ m² Phase3: US$55/ m² Water supply charge US$0.80/ m² Wastewater treatment charge US$0.43/ m² Services fee Phase1: US$0.03/m² Phase2: US$0.04/ m² Phase3: US$0.04/m² Source: Study Team c) Premise 3: No leverage (loan) basis, but rather the use of fully owned equity capital. d) Presume 4: Construction cost for each phases are as follows: Table 4 Construction cost Phase 1 Phase 2 Phase 3 Total area (ha) 131.2 73.1 122.2 Construction cost per unit area (US$/m²) 17.8 25.0 21.8 Source: Study Team

2) The results of the financial analysis The results of the financial analysis are as follows. ① Financial Internal Rate of Return (FIRR) Based on the cost estimations and assumptions described above, the internal rate of return (IRR) for the project period of 20 years is calculated. The FIRR of 13.91% for the total costs was obtained on the Net Cash Flow basis as a result.

② Economic Internal Rate of Return (EIRR) This EIRR has been calculated from the development costs against the total net income of the tenants in the industrial park in order to evaluate economic effects in Kayin state. If the tenant companies of Myawaddy industrial park are assumed to be garment enterprises primarily having business relationships with a variety of Japanese companies, a net profit of US$1.2 billion could be achieved over a 20 year period - representing an EIRR of 32.1%.

Reaching this projected net profit of US$1.2 billion will produce many jobs that will, contribute greatly to the Kayin State economy as a result. Therefore, this project is considered to have a significant economic impact to the State.

(6) Advantages of Japanese Companies’ Involvement

The advantages of Japanese companies compared with other foreign companies for Myawaddy Industrial Zone project are as follows: a) Regarding the design, construction and management of the industrial zone and SEZ developments in Southeast Asia, and the other developing countries, Japanese companies have extensive experience in contributing to national economic growth. b) Japanese companies have established advanced supply chain systems between manufacturers and logistics service providers who collaborate in utilizing horizontal international specialization, and consequently have resulted in efficient business performance.. c) Japanese companies have developed BCP (Business Continuity Planning) systems to minimize and even prevent devastating losses caused by the frequent occurrence of natural disasters, thereby increasing the safety and reliability of their supply chain. In addition, they have entered into operative stages to verify the BCP system against actual natural disasters. d) Japanese companies have much experience in the fields of global warming countermeasures through Clean Development Mechanisms (CDM) and the bilateral credit projects, which help reduce the greenhouse gas emissions that cause global warming. e) Japanese companies possess advanced technology and systems that achieve energy savings. f) Japanese companies lead foreign companies over the world in renewable energy technology. g) Japanese companies are remarkably advantageous in the reliability of their product/service delivery and their high quality construction ventures. In particular, Japanese companies excel in dealing with maintenance issues after completion of construction. h) Japanese companies possess soundness in diagnostic and restoration technologies relative to conventional infrastructure requiring rehabilitation - thereby helping to increase the functional life of that infrastructure in the world. Such technologies will be able to contribute greatly to the rehabilitation of Myanmar’s dilapidated infrastructure, due to its lack of regular maintenance, as the realization of the much-needed development of Myanmar moves ahead in response to the recent opening of the economy to foreign investment.

(7) Local area maps of project implementation

Map 1 Local area map (Myawaddy industrial zone, Hpa-an industrial zone)

Hpa-an IZ Myawaddy IZ

Yangon-Myawaddy : 455km Myawaddy – Bangkok : 490km

Source: Study Team

Map 2 local area map (Myawaddy industrial zone)

Myanmar Thailand

Myawaddy Industrial Zone

Asian Highway ← Hpa-an

Source: Study Team