Those in Cambodia, by contrast, are generally seen as underperforming, with high logistics costs and average to poor SEZ management a common complaint of survey respondents, despite improved transport connectivity. A lack of industrial diversity is perhaps one culprit: Cambodia’s preferential access to EU markets has skewed investment towards the textiles sector, with higher value-added industries yet to invest substantially, in part due to labour issues (examined in the next section).
Laos, by contrast, has already seen some high-tech investment in the Savan-Seno SEZ, based on logistics advantages from the East-West Economic Corridor. Low and stable utilities costs, competitive labour rates, and tax holidays and exemptions were also cited as key attractive factors (although security management was identified as an issue).
Meanwhile in Myanmar, while the quality of SEZs varies, the Japanese-run Thilawa SEZ (which became operational in 2015) is already gathering plaudits for its efficient management, modern and green infrastructure, and one-stop shop investor approach. However, whether regulations within the zone will be streamlined sufficiently to take investment to the next level is still uncertain.
REGULATIONS, TALENT AND OTHER REMAINING CHALLENGES
If frontier economies hope to follow Vietnam in becoming FDI magnets and producing more sophisticated goods, addressing bureaucratic complexity and regulatory uncertainty is of paramount importance. While the ANZ survey showed that tax incentives, efficient customs clearance and consistent government policy were among the most important factors in luring investment to Vietnam initially, the ongoing success of its industrial zones is related both to the infrastructure that they provide (transport, reliable power supply and so on) as well as the streamlining of regulations, rather than these initial “carrots”.
Solving the software issue
Across the GMR, in the assessment of experts at the ANZ panel discussion, actual utilisation of “hardware”, in the form of new roads, railways, bridges and ports, remains lower than had been hoped when these investments were approved. This is because issues remain with the “software” necessary to run these facilities efficiently, and many are beset by administrative and legal burdens.7
In theory SEZs can help mitigate these problems; indeed it is part of their raison d’être. But in practice investors in the region are still challenged by entrenched bureaucracies and the sometimes uncertain application of rules.
Some uncertainty is understandable in places like Myanmar, which is grappling with the herculean task of creating new investment legislation en bloc. But while new labour and companies laws might resolve some issues, the approach to other regulations within SEZs requires further streamlining: in ANZ’s research one firm shared an example where architectural drawings of a plant to be built had to undergo revisions and re-submissions almost 60 times before obtaining final government approval.
More broadly, for the region’s economic corridors to achieve their potential, better intra-governmental co-operation is also required, especially when it comes to customs procedures and other cross-border regulation. Despite efforts to streamline processes, border arrangements often remain time-consuming and are subject to approval by local officials. And while progress has been made in reducing tariffs to ease cross-border commerce, both through regional trade initiatives under the auspices of ASEAN and bilateral deals, non-tariff barriers to trade (such as varying safety standards) remain a problem.
A labour tipping point?
Regulatory grey areas can often be navigated, provided investors obtain reliable partners and do thorough on-the-ground research before committing to a project. Talent shortages, though, may prove a less tractable issue.
For one thing, a skills gap means SEZ investors feel they put too much time into micro-managing staff. Some companies are attempting to address these gaps by investing heavily in training. In Myanmar’s Thilawa SEZ, for example, one firm surveyed by ANZ often sends local workers to Vietnam for month-long periods to study things like welding, customs procedures and human resources. In Laos, another has tie-ups with universities and vocational education institutions to provide formal training.
One potential issue with such an approach is that the investment becomes a sunk cost should newly skilled workers leave to pursue other opportunities. Moreover, even at this relatively early stage in their economic development, frontier GMR economies face a labour tipping point wherein spillover effects from the kind of “+1” training strategies mentioned above will raise the cost of skilled labour, lessening the advantage of setting up in these markets in the first place.
ANZ research found that the skills tipping point to higher salaries is surprisingly low and is dictated by just two factors: a basic knowledge of English and a basic knowledge of manufacturing and production line processes. “Upgrades” in one or both of these areas can lead to high labour turnover as well as rising costs for semi-skilled labour. This effect has already been noted in Cambodia, with some firms in SEZ increasingly offering higher wages to try to retain staff, and is becoming apparent in other GMR economies.
CONCLUSION: CARPE DIEM
Such is the region’s dynamism and potential that the issues outlined in this report are far from deal-breakers for companies considering investing in GMR economies. Cambodia, Laos and particularly Myanmar have taken dramatic steps in recent years to improve their investment environments, and are reaping the rewards, meaning further progress is likely in the years ahead. Indeed, by some measures Myanmar is already evolving beyond a “frontier” market to join Vietnam as one of the world’s most promising emerging economies.
With many “hardware”-related connectivity problems on their way to being resolved through the region’s transport corridors, the race is on for GMR nations to address some of their more persistent “software” issues and labour market constraints. This requires the ongoing collaboration of public and private sector actors: governments need to put in place consistent and transparent regulations and education policies that deliver trainable workforces, as well as collaborate to reduce the complications of cross-border commerce.
Investors, for their part, need to invest in training and forge links with vocational institutions to offer students workplace experience and embed skills at a younger age. There is also significant potential in “train the trainer” initiatives that are already emerging in places like Myanmar and Cambodia, where local SEZ workers are increasingly learning from their Vietnamese counterparts. The transfer of skills from Vietnam to other Mekong economies is a clear regional dynamic that suggests the region can address its own capacity issues. Given the experience many investors have in international markets, there is also a role for the private sector to play in sharing views and best practices in investment and infrastructure with regional governments, and in bringing its expertise to bear in the development of local industry clusters.
While much ground remains to be covered, there is little doubt a critical mass now exists for the resolution of both the GMR’s “hardware” and “software” related issues, and that the region is about to assume a more prominent position in the Asian investment landscape. As always, the investors who move early to seize on this opportunity – by finding the right partners, forging local relationships and making positive contributions to the development of the region’s economy and labour market – are those who will benefit most when the GMR hits full stride.
1. Source: ANZ Greater Mekong Outlook, 1 November 2016
2. Source: ANZ Greater Mekong Outlook, 1 November 2016
3. Source: FDI forecast warily brightens
4. As noted in the 2016 ASEAN Investment Report
5. Source: Keep an Eye Open on the Future of Vietnam FMCG Industry
6. Source: Vietnam’s Middle Class Set to Double by 2020: BCG
7. It must be noted that hardware-related connectivity issues are still an issue as well. If goods are exported from Vietnam from Cambodia by rail, for example, different axle gauges require offloading and reloading of cargo, greatly increasing the time taken. A recent review of Mekong region transport plans notes that most progress has been in the road sector, although the formation of the Greater Mekong Railway Association in 2013 promises to improve co-ordination in rail transport. ADB, GMS Secretariat, “Initial Review of the Greater Mekong Subregion Transport Sector Strategy , 2006-2015”.