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MYANMAR TO REORGANIZE RULES ON GOVERNMENT DEBT AND GUARANTEES

Highlights of this note Myanmar Government prepares a

new law in relation to Government loans and bonds

Only the Minister of Finance can borrow money

States and regions may also borrow money but with Union Government and National Assembly approval

State owned enterprises may borrow money only from Myanmar state owned banks

The Union Government may or may not be liable for debts of SOEs depending on the case

The Government may issue a guarantee for a project only with National Assembly approval

Can states and regions borrow money from external sources? Can they too issue Government bonds? How about state-owned enterprises? For which projects can the Government issue guarantees, and what is the role of the National Assembly and the annual Union Budget laws? A first look at Myanmar’s new draft law on the subject.

Client briefing note | 7 August 2015

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A new draft of the Public Debt Management Law (the Draft Law), which is not yet in force, is aimed at restating and clarifying some of the existing rules with respect to Government loans, bonds and guarantees. The Draft Law replaces the practically irrelevant (but strictly speaking still operative) Government Securities Act of 1920. The Draft Law sets forth who within the Government has the authority to borrow money and what for. A section is reserved for Government bonds, which seems to have been one of the main reasons to prepare this law. The Draft Law also restates the rules with respect to borrowing by divisions, municipalities and state-owned enterprises (SOE).

We take a first look at the new rules, and ask ourselves how investors and lenders may be impacted.

Which Government organization may borrow money?

The Union Government Law 2010 placed the authority to “negotiate, decide and conclude” financing squarely with the Union Government, which comprises (i) the President of the Union; (ii) the Vice Presidents of the Union, (iii) the Union Ministers and (iv) the Attorney General of the Union. This is confirmed on a more specific basis in the annual Union Budget Laws (UBL) which typically provide in a chapter

on external financing. However, Pyidaungsu Hluttaw (the bicameral National Assembly). approval is normally required for the budget itself, including its entries for external financing (see below).

In reality, the Government’s authority to obtain financing is delegated to the Ministry of Finance (formerly, Ministry of Finance and Revenue) (MOF). This is specifically provided in the SBLs. The Minister of Finance and the Deputy Ministers of Finance play a major role in approving any type of finance or guarantee. Download the Myanmar finance report here!

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One of the departments of the MOF, the Union Budget Office (UBO) or also referred to as the Budget Department compiles, analyzes and administers the budgets from the various organizations.The SBO has ten sections, three of which follow a line of organizations which produce budgets, notably the Ministries and Departments Budget Section, the State Economic Enterprises Budget Section and the Municipalities Budget Section

The Draft Law does not really change that. S. 3 Draft Law now states explicitly that “the Minister of Finance is the only person authorized to borrow money domestically or overseas or to issue Government bonds”. The Draft Law also states that such authority is, as was previously provided under each yearly Union Budget Law, subject to that Union Budget Law. Hat has changed is that now there is a legal basis separate from the yearly Union Budget Law, which in theory could provide differently on the subject each year, for the Government’s authority to borrow money with approval by the National Assembly.

Can states and regions obtain external financing by themselves?

The Constitution 2008 provides that Myanmar’s states and regions have their own budgets which are approved by their respective state or region legislatures. Nevertheless, “the Union Government will include and verify the budgets from Ministries and organizations at a state or region level” (s. 230 Constitution). The state and region budgets are in fact wholly integrated into the Union budgets, which is not surprising since nearly all tax revenue collected nationwide goes into the national treasury and not directly to the states or regions. Only the land revenue tax and a few other minor local taxes are not paid into the national budget (Schedule 5 of the Constitution 2008).

The Draft Law now states clearly in s. 30 that states and regions may indeed raise finance themselves,

but only in accordance with the Union Budget Law as approved by the National Assembly, and after permission from the Government. Other sections of the Draft Law, notably s. 20 and 21 Draft Law, raise the possibility that instead of states and regions borrowing externally with Government permission and National Assembly sanction, the Union would raise money itself and on-lend this to the states and regions. This might be a more likely scenario given the fact that the Union also controls the outlays made to the states and regions.

Anyway, the crux is that, yes, states and regions may indeed borrow money. There is no mention of any “state or region bonds”, in the Draft Law though. This seems to be the exclusive domain of the Union. In all cases, the state and region concerned is legally bound to (1) obtain union Government approval and (2) to include the loan and the project for which the money was raised in the Union Budget, which requires National Assembly approval.

Can state owned enterprises borrow money by themselves?

The Draft Law aims to solidifies the annual practice of the UBL, and provides explicitly that “if the funds of state economic organizations are not adequate to carry out the functions of the organizations, they may borrow from state-owned banks in Myanmar” (s. 33 Draft Law). There is no mention of SOEs borrowing from overseas, or from institutions which are not state-owned Myanmar banks. It is our view however, that since all loans to SOEs must be provided for in the UBL, it is legally possible for any UBL of a later date to deviate from the Draft Law, and to for example allow a foreign bank loan to an SOE.

Until now, it is customary for the UBL’s to specifically address the financing needs of state owned enterprises (SOEs). SOEs such as the Myanma Electric Power Enterprise (MEPE) and the Hydropower Generation Enterprise (HPGE) may also obtain financing, but they need to do so with permission of and subject to the restrictions from the Union Government (s. 10 UBLs). For example, the UBL 2012 states that SOEs may indeed borrow from Myanmar state banks, but only up to certain thresholds which are set by the Union Government (s. 16 c) UBL 2012).

Commercial Disputes in Myanmar: Debt Recovery, Enforcement, Arbitration, Litigation (13 August 2015)VDB Loi hosts a briefing entitled “Commercial Disputes in Myanmar: Debt Recovery, Enforcement, Arbitration, Litigation” organized in conjunction with specialist litigation firm U Aye Kyaw & Associates, which joined VDB Loi last year and Shook Lin & Bok LLP - leading Singapore law firm. The briefing will take place in Yangon on 13 August 2015 from 9am – 11.15am.

As you know, an effective strategy for managing disputes is an important part of the risk management of every commercial enterprise. In this briefing me, Sarjit Singh Gill - partner with Shook Lin & Bok LLP and U Aye Kyaw of U Aye Kyaw & Associates will update you on the following.

Highlights covered:

• What is the cost and time needed torecover debts and invoices with the help of Myanmar court proceedings?

• Which assets can a bank or other lenderseize and sell without court intervention?

• Disputes between joint venture partners:what is the company law context?

• HowdoMyanmarcourtscalculatedamagesand other remedies?

• WhatistheprocedureforMyanmarcourtsto enforce foreign money judgments?

• How to best prepare for a Singaporearbitration procedure?

• Canyouenforceawardsandinterimawardsfrom Singapore or the UK in Myanmar?

• Practical aspects: comparing filingfees, costs and administration between arbitration and courts in Singapore and other jurisdictions

Attendance is by invitation only. The registration is free of charge. Places are limited so booking in advance is required. To reserve and request invitation, contact Mar Lar Thin (marlar.thin@vdb-loi.com) or call (+95) (0)9250364580.

Registration

SpeakersEDWIN VANDERBRUGGENSenior Partner VDB Loiedwin@vdb-loi.com

U AYE KYAWSenior Counsel VDB Loiaye.kyaw@vdb-loi.com

SARJIT SINGH GILL, SCSenior PartnerShook Lin & Bok sarjit.gill@shooklin.com

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Budget Laws. Projects and expenditures for which loans may be obtained are those which are included in the Union budget, as approved by the Pyidaungsu Hluttaw S. 8 of the UBL 2012 states, for example:

“For the purpose of projects or for expenditures shown in the Union Budget, the Government may take loans by issuing security bonds guaranteed by the Union or debentures and by other means, within the country or from abroad. Reasonable rates of interest may be prescribed for such loans. Conditions for repayment, redemption or provision otherwise may also be stipulated”.

Must the National Assembly approve individual loans or bonds?

With each UBL, the National Assembly authorizes the Union Government to “obtain loans” or “issue bonds”. The National Assembly need not be involved with negotiating the terms and conditions, as this matter is also authorized to the Government. The UBL does refer that the Union Government may agree to “reasonable interest rates” which raises some doubt on the how this may be determined. In practice, the National Assembly does not interfere with interest rates. The Draft Law provides that nevertheless, the agreement may only be signed “after such agreement has been approved by the Government” (s. 16 Draft Law).

However, the National Assembly is involved insofar it needs to discuss and approve the State budget in relation to which the loans pertain. The Constitution provides that the Union Government drafts the budget and prepares a bill on that basis each year (s. 221 Constitution), after coordinating with the Financial Commission. The Financial Commission is chaired by the President of the Union, and the two vice-chairman are two Vice Presidents. The Financial

The Union Government will include and verify the budgets from the different Union Ministries, including the Ministry of Electric Power and the budgets of other organizations which exist at Union level (s. 230 Constitution), as well as Ministries and organizations at a state or region level.

Starting from the fiscal year which ended on 31 March 2013, SOEs are in due course to be separated from the Union budget. This is gradual process which the Government tries to achieve on a step-by-step basis. The budget of SOEs are still largely are included in Union budget, but they are also expected to create and manage their own budgets.

Is the Government liable to repay loans which were obtained by state owned enterprises?

The most usual way to establish a legal obligation to the benefit of a lender to an SOE is probably a Government guarantee. In such a case there is little doubt that the Government can be liable for the SOE’s debt to the lender, at least when the proper procedures for creating Government guarantees have been followed (see below).

Without an explicit guarantee agreement, it is much less clear. SOEs are as a rule, under Myanmar law, separate juristic persons from the Government or from the Union. Of course, that is just a general position. Many SOEs are created under separate laws or by special Government decisions, often a long time ago. In each case one would have to consult the relevant constitutive documents. Nevertheless, that is the default situation. And as such, there is no reason why the Union would ipso facto be liable for the debts of an SOE.

But, if proper procedures of most of the annual UBLs were followed, the loan of the SOE was only allowed after the Government and the National Assembly approved the SOE obtained the loan. And, it was included in the Union Budget. Does that circumstance in and of itself mean that the Union is also liable for the debt in case the SOE would default? Perhaps the answer to that question depends on the facts and circumstances of each case.

For which purposes may the Union Government obtain foreign financing?

The Draft Law now sets forth a number of clear objectives which need to be kept in mind when the Government borrows money.

1. To fund the budget deficit;2. To fund projects and

investments; 3. To maintain the credit

balance of the Union budget within such limit as the Minister may prescribe;

4. To pay outstanding debts or pay debts in advance before their due date;

5. To refinance the foreign exchange reserve fund being kept by the Central Bank;

6. To meet the liabilities for outstanding government bonds;

7. To provide loans to region or state governments, municipalities and state economic organizations with the approval of the Pyidaungsu Hluttaw;

8. To immediately prevent, reduce or combat the effects of any natural or environmental disaster or any other emergency of the State;

9. To finance such required funding as may be provided in the Union Budget Law and approved by the Pyidaungsu Hluttaw;

Previously, the annual UBLs typically indicate clearly that the Union Government may obtain foreign financing for at least three different purposes: (i) projects, (ii) expenditures and (iii) to finance deficits from previous years. The Draft Law enlarges the scope in this regard.

The Draft Law maintains the connection with the yearly Union

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Edwin VanderbruggenPartner, VDB loiedwin@vdb-loi.comT: +95 137 1902 +95 137 1635www.vdb-loi.com

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but only if specifically mandated by the Minister of Finance. This means that, for example, the Ministry of Transport or the Ministry of Electric Power are unable to issue a guarantee for an infrastructure or a power project by themselves unless the Minister of Finance has granted them the specific authority to do so.

The power of the Government to issue guarantees for projects or for that matter for debts of SOEs is under the Draft Law limited to instances where the National Assembly has approved the matter. The Draft Law does not state which degree of detail is required for the National Assembly’s approval. Is an individual approval of the exact terms of the guarantee required? Presently, that is not how it’s done. The current practice has been that the National Assembly approves a project in general terms and allows the Government to provide guarantees in connection with that project. In s. 12 of the UBL 2012, for example, it is stated that:

“The Minister of the Ministry of Finance may, on behalf of the Union, furnish guarantees for taking of loans under this Chapter III”.

In other words, the reference in the UBL is made to loans or guarantees in connection with projects or expenditure identified in the Union budget, not in general. The UBL does not provide a legal basis for the Union Government to issue guarantees for projects which are not provided for in the Union budget.

Commission also counts the Attorney General, the Auditor General and the Chief Ministers of the Regions and States as members. The secretary of the Financial Commission is the Union Minister for the Ministry Finance.

The Union Government will “include and verify” the budgets from the different Union Ministries and the budgets of other organizations which exist at Union level (s. 230 Constitution), as well as Ministries and organizations at a state or region level. All these budgets are submitted to the Financial Commission which will issue a recommendation including on the permitting of loans (s. 230 c) i) Constitution).

A budget bill is then submitted by the President for approval to the National Assembly in accord with the provisions of the Constitution (s. 103 Constitution).

How can the Government issue a guarantee for a project?

The Draft Law contains a special chapter dedicated to guarantees. It provides that “the Minister of Finance may issue guarantees and other forms of guarantee for loans to any person, association of persons or projects in accordance with such stipulations as may be approved by the Government and the Pyidaungsu Hluttaw” (s. 23 Draft Law). Ministers of other ministries may also give guarantee,