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.

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Industrial Zones in Burma
2007
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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