INVESTORS TRAPPED IN DECREPIT INDUSTRIAL ZONES

UNCLAS SECTION 01 OF 04 RANGOON 000817 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS, EB/TRA PACOM FOR FPA TREASURY FOR OASIA:SCHUN E.O. 12958:N/A TAGS: ECON ETRD EINV PREL BM SUBJECT: INVESTORS TRAPPED IN DECREPIT INDUSTRIAL ZONES RANGOON 00000817 001.2 OF 004 ¶1. (SBU) Summary. The GOB established industrial zones in 2002 to promote the development of Burma's industrial sector. Currently, more than 9,500 factories operate in 18 industrial zones, employing almost 180,000 people. Many factory owners complain that business conditions in the industrial zones have worsened, rather than improved. All 18 industrial zones face serious challenges, including lack electricity and basic infrastructure, which make it difficult for companies to meet production demands. The only benefit investors receive is a 30-year lease on land, which, if necessary, can be sold at high prices. Although investors are unhappy with the work conditions, they do not complain to the government for fear of retribution. Instead, they find themselves trapped, unable to obtain licenses for factories outside of industrial areas and unwilling to abandon their investment. End Summary. If You Build It, They Will Come -------------- ¶2. (SBU) In 2002, the GOB established industrial zones in Rangoon and Mandalay, and declared that factories operating in nine sectors -- textile and garments, engineering work, metal and mineral products, foodstuff, chemicals, wood-based products, ceramic items, weaving, and packaging -- should relocate operations to these areas. It later opened industrial zones in other states and divisions throughout Burma. The reasons behind the industrial zones were two-fold: The GOB wanted to promote the development of Burma's industrial sector while consolidating factories in areas apart from residential zones. There may be another reason, however. Several factory owners revealed that by establishing industrial zones in the outskirts of large cities, the GOB could better prevent the outbreak of mass labor strikes mobilizing other people. ¶3. (SBU) According to the Ministry of Industry (1),there are currently 18 industrial zones throughout Burma, with more than 9,500 factories located in these zones. The Burmese Department of Labor reports that, as of August 2007, these factories employ a total 179,966 workers. Under Burmese labor laws, these factory employees are considered to be skilled workers (despite their actual skill levels),and thus they must work 48 hour/6 day work weeks. Workers in these factories receive an average salary of 30,000 kyat ($23) per month. -------------- -------------- Industrial Zones in Burma 2007 -------------- -------------- Name Location Number of Factories -------------- -------------- Mandalay Mandalay Division 1,109 Myingyan Mandalay Division 336 Meikhtila Mandalay Division 394 No.1 South Dagon Eastern Rangoon 133 No.2 South Dagon Eastern Rangoon 529 No.3 South Dagon Eastern Rangoon 139 Dagon Myothit Seikkan Eastern Rangoon 62 Dagon Myothit (East) Eastern Rangoon 9 North Okkalapa Eastern Rangoon 66 South Okkalapa Eastern Rangoon 118 Thekata Eastern Rangoon 55 Yangon Western Western Rangoon 1,003 Yangon Southern Southern Rangoon 896 Hlaing Thayar Northern Rangoon 351 Shwepyi Thar Northern Rangoon 170 Mingalardon Northern Rangoon 131 Shwe Pauk Kan Northern Rangoon 128 RANGOON 00000817 002.2 OF 004 ¶1. (SBU) Summary. The GOB established industrial zones in 2002 to promote the development of Burma's industrial sector. Currently, more than 9,500 factories operate in 18 industrial zones, employing almost 180,000 people. Many factory owners complain that business conditions in the industrial zones have worsened, rather than improved. All 18 industrial zones face serious challenges, including lack electricity and basic infrastructure, which make it difficult for companies to meet production demands. The only benefit investors receive is a 30-year lease on land, which, if necessary, can be sold at high prices. Although investors are unhappy with the work conditions, they do not complain to the government for fear of retribution. Instead, they find themselves trapped, unable to obtain licenses for factories outside of industrial areas and unwilling to abandon their investment. End Summary. Myaungmya Irrawaddy Division 410 Hinthata Irrawaddy Division 489 Pathein Irrawaddy Division 332 Monywar Mandalay Division 1,006 Kalay Sagaing Division 284 Pyay Pegu Division 181 Yanangyaung Magway Division 85 Pakokku Magway Division 251 Mawlamyine Mon State 177 Taunggyi Shan State 720 Myeik Thaninthayi Division 20 -------------- -------------- Total Number of Factories 9,584 -------------- -------------- Why Make the Move? -------------- ¶4. (SBU) Although not all factories working in the nine sectors relocated operations to the industrial zones, many factories made the move. A garment factory manager informed us that many companies thought the move would bring long-term benefits. Some companies sought to expand operations. By moving to a newly built industrial zone, they could acquire large plots of land where they could build large factories. Others wanted to acquire land at cheap rates. Investors in the industrial zones obtained a 30-year lease for an empty plot of land; they were responsible for constructing buildings and infrastructure. Investors erected factories, installed lights and generators, and helped pave the roads in the area. The government required that the companies pay a land tax of between 2,000-3,000 kyat/acre annually (between $1.50-$2.30). ¶5. (SBU) Factory owners acknowledged that the 30-year land leases were the real reason they invested in the industrial zones. In 2002, they believed that the land was undervalued, and expected that prices would rise in the following years. They were right: when the zones opened in 2002, land in these areas was valued at 4.5 million kyat/acre ($3,450). As of August 2007, the industrial zone lands were valued at 70 million/acre ($53,800),an increase of 1455 percent over a five year period. While the companies do not own the land, they are able to sell their land leases for high values. Many companies with failing businesses have taken advantage of rising land prices, selling their leases for between 30-50 million kyat (between $23,000-38,500). ¶6. (SBU) More often than not, these prices do not cover the cost of the company's investment. U Zaw Min Oo, Managing Director of Crocodile Trading, noted his luck when he sold his 2.71 acre garment factory in Hlaing Thayar in 2003. Crocodile Trading invested more than $225,000 in this factory, only to be forced to sell during the 2003 banking crisis. He received 300 million kyat ($231,000), RANGOON 00000817 003.2 OF 004 ¶1. (SBU) Summary. The GOB established industrial zones in 2002 to promote the development of Burma's industrial sector. Currently, more than 9,500 factories operate in 18 industrial zones, employing almost 180,000 people. Many factory owners complain that business conditions in the industrial zones have worsened, rather than improved. All 18 industrial zones face serious challenges, including lack electricity and basic infrastructure, which make it difficult for companies to meet production demands. The only benefit investors receive is a 30-year lease on land, which, if necessary, can be sold at high prices. Although investors are unhappy with the work conditions, they do not complain to the government for fear of retribution. Instead, they find themselves trapped, unable to obtain licenses for factories outside of industrial areas and unwilling to abandon their investment. End Summary. breaking even. He lamented, however, that if he could have kept his factory, the factory and the land would be worth approximately 1 billion kyat ($769,000) in the current market. But the Power is Off... -------------- ¶7. (SBU) Industrial zone investors informed us that factories located in these zones face real challenges. The most egregious problem, they noted, is unreliable electricity flows. Although factories paid for the installation of electricity lines, neither the Myanmar Investment Development Committee (MIDC),which oversees the industrial zones, nor the Myanmar Electric Power Enterprise (MEPE),which controls electricity supply, provides sufficient electricity to the factories to maintain normal operations. U Zaw Min Oo divulged that factories are forced to run on diesel generators, which costs between 10 million to 15 million kyat (between $7,700 and $11,500) a month. This additional cost cuts heavily into profits. With the doubling of fuel prices in mid-August (reftel A),factory owners expect that not only will their electricity costs double, but workers may strike in an effort to elicit higher wages. ¶8. (SBU) When asked why companies stay in these zones, factory owners lamented that the GOB will not approve licenses to build factories outside of designated zones. Residential areas are for living, not small or medium enterprises, the GOB claims. Thus, companies are tied to their investment in the industrial parks. Factory owners also noted that they could not complain to the GOB about the poor work conditions for fear of retribution. Instead, they only raise the issue when Burmese Government dignitaries visit the zones for photo opportunities. Ways To Maximize Profits -------------- ¶9. (SBU) Because the factories must deal with these infrastructure problems on their own, profits have greatly diminished. Some companies, particularly those which are underwritten by foreign investors, attempt to circumvent the strict and archaic Burmese investment laws in order to make a profit. U Kyaw Win, Managing Director of Tri-Diamond Trading Company, told us that of the 185 garment factories in Rangoon, approximately 20 factories are owned by companies from Japan and Korea. Under Burmese law, these companies, which are 100 percent foreign-owned, must pay taxes and all bills, including electricity and telephone, in foreign currency, converted at the official rate of 6 kyat to $1. These companies face significant profit loss, as the archaic exchange rate (the market rate is now over 1300 kyat to the $1) acts as a tax on foreign companies. In order to circumvent this law, approximately 80 garment factories, financed by foreign companies from Taiwan and RANGOON 00000817 004.2 OF 004 ¶1. (SBU) Summary. The GOB established industrial zones in 2002 to promote the development of Burma's industrial sector. Currently, more than 9,500 factories operate in 18 industrial zones, employing almost 180,000 people. Many factory owners complain that business conditions in the industrial zones have worsened, rather than improved. All 18 industrial zones face serious challenges, including lack electricity and basic infrastructure, which make it difficult for companies to meet production demands. The only benefit investors receive is a 30-year lease on land, which, if necessary, can be sold at high prices. Although investors are unhappy with the work conditions, they do not complain to the government for fear of retribution. Instead, they find themselves trapped, unable to obtain licenses for factories outside of industrial areas and unwilling to abandon their investment. End Summary. Korea, obtain licenses under the names of Burmese citizens. Because these companies are de-facto Burmese companies, they pay taxes and bills in kyat (at the market rate). A garment factory owner explained that while government officials were aware of this practice, they condoned it because they did not want to scare off foreign investors. ¶10. (SBU) Another way these companies maximize profits is by not paying taxes. Although the GOB is aware that companies evade taxes, officials do not always enforce the law in exchange for a well-timed bribe. If a company does something to draw attention to itself, such as complain about the lack of electricity, the GOB will scrutinize tax payments. Thus, companies keep a low profile, and avoid talking to the press or foreigners about their problems. Comment -------------- ¶11. (SBU) The Burmese Government plans on establishing new industrial zones, showing how out of touch officials are with the reality of the situation. Ignoring the lack of basic infrastructure and electrical power during working hours, high level officials tout the "success" of the industrial zones to attract new foreign investment. The government needs to open its eyes to reality, improve the investment climate, and eliminate the archaic investment laws that penalize foreign investors before it will be able to attract any investment. VILLAROSA