Asia Times: COUNTRY REPORT: The Lao People's Democratic Republic


	September 27, 2000	atimes.com

Special Reports

COUNTRY REPORT
The Lao People's Democratic Republic

1. Basic facts
2. Government
3. Economy
4. Business associations
5. Investment environment
6. Sectors and opportunities
Energy
Mining
Agribusiness
Forestry
Light industry
Transport and infrastructure
Tourism
Government contracts
Financing
7. Import and export
8. Intellectual property rights
9. Investment law

1. Basic facts

Area: Total: 236,800 sq km - land 230,800 sq km, water: 6,000 sq km, no coastline - the country is landlocked.
Climate: Tropical monsoon; rainy season (May to November); dry season (December to April)
Terrain: Mostly rugged mountains; some plains and plateaus. The Mekong River provides a major transport artery between north and south Laos, as well as irrigating the fertile flood plains. The country is rich in flora and fauna. About 50 percent primary forest cover in hard wood timber.
Natural resources: Timber, hydro-electric power, gypsum, tin, gold, gemstones
Land use: Arable land: three percent, forests and woodland 54 percent
Population: 5,116,959 (July 1997 est.) Growth rate: 2.78 percent)
Ethnic groups: Lao Loum (lowland) 68 percent, Lao Theung (upland) 22 percent, Lao Soung (highland) including the Hmong ("Meo") and the Yao (Mien) nine percent, ethnic Vietnamese/Chinese one percent.
Religions: Buddhist 60 percent, animist and other 40 percent
Languages: Lao (official), French, English, and various ethnic languages.

2. Government

Government type: Communist state
National capital: Vientiane
Independence: 19 July 1949 (from France)
Branches: Executive President (head of state); Chairman, Council of Ministers (Prime Minister and head of government); nine-member Politburo; 49-member Central Committee.
Legislative - 99-seat National Assembly.
Judicial - district, provincial, and a national Supreme Court.
Political parties: Lao People's Revolutionary Party (LPRP)
Administrative subdivisions: 16 provinces, one special region, and Vientiane prefecture.

The only legal political party is the LPRP. Government policies are determined by the party through the all-powerful nine-member Politburo and the 49 member Central Committee. Important government decisions are vetted by the Council of Ministers. Laos adopted a constitution in 1991. The following year, elections were held for a new 85-seat National Assembly with members elected by secret ballot to five-year terms. This National Assembly, expanded in 1997 elections to 99 members, approves all new laws, although the executive branch retains authority to issue binding decrees.

In the most recent elections, which took place in December 1997, all but one of the candidates elected was a member of the LPRP. The National Assembly elects the president on the recommendation of the NA standing committee. The NA also elects the prime minister and the cabinet on the recommendation of the president. The next National Assembly elections are scheduled for December 2002. The legal system is a mixture of traditional customary law, French legal norms, and socialist practices with the 1991 Constitution as its foundation.

3. Economy

Following its accession to power in 1975, the communist government imposed a harsh, Soviet-style command economy system, replacing the private sector with state enterprises and cooperatives; centralizing investment, production, trade, and pricing; and creating barriers to internal and foreign trade. Domestic savings are low, so Laos relies heavily on foreign assistance and concessional loans as investment sources for economic development. Laos is classified as a "least developed country", a tag it aims to lose by 2020. Per capita income was under US$300 in 1998.

In 1986 the government announced its "new economic mechanism" (NEM). Initially limited, the NEM was expanded to include a range of reforms designed to create conditions conducive to private sector activity. Prices set by market forces replaced government-determined prices. Farmers were permitted to own land and sell crops on the open market. State firms were granted increased decision-making authority and lost most of their subsidies and pricing advantages.

The government set the exchange rate close to real market levels, lifted trade barriers, replaced import barriers with tariffs, and gave private sector firms direct access to imports and credit. In 1989, the government reached agreement with the World Bank and the International Monetary Fund on additional reforms. The government agreed to expand fiscal and monetary reform, promote private enterprise and foreign investment, privatize or close state firms, and strengthen banking. The government also agreed to maintain a market exchange rate, reduce tariffs, and eliminate unneeded trade regulations.

The government also enacted a liberal foreign investment code. Since the beginning of economic reform in 1988, approximately 90 percent of state-owned enterprises have been converted to another system of management (many via leases) or liquidated. The government still sets production targets for the agricultural sector, as well as for some industries, and controls the price on a few essential goods, such as cement and gasoline.

Public investment is largely directed toward infrastructure development (road construction, irrigation, electrification, water service installation), industry, and agriculture. In a further move toward openess and to stimulate trade with its big neighbor, the government accepted Australian aid to build a bridge across the Mekong River to Thailand. The Friendship Bridge, between Vientiane prefecture and Nong Khai, Thailand, was inaugurated in April 1994.

This was the first step in the government's plan to transform the geographical disadvantage of its landlocked position into an advantage by becoming a centrally-located land bridge connecting the large markets of Thailand, Vietnam and southern China. These reforms led to a growing economy and an increased availability of goods. However, following eight years of sustained growth, the economy began to slow in 1996, culminating in soaring inflation, during which the consumer price index jumped by more than 300 percent from June 1997 to June 1999, and a sharp depreciation of the kip, which lost 87 percent of its value against the dollar over the same time frame.

The economy continues to be dominated by an unproductive agricultural sector operating largely outside the money economy and in which the public sector continues to play a dominant role. A major hinderance to development is the landlocked country's primitive infrastructure. It has no railroads, a rudimentary road system, and limited external and internal telecommunications. Only about 20 percent of the population enjoys electricity. Telephone service to the general public is limited but improving, with over 28,000 telephones currently in service and an additional 48,000 expected by 2001.

Subsistence agriculture accounts for half of GDP and provides 80 percent of total employment. The predominant crop is rice. In non-drought years, Laos is self-sufficient overall in food, but each year flood, pests, and localized drought cause shortages in various parts of the country. Leading industries include tin and gypsum mining, timber, electric power, agricultural processing, and construction. In the agriculture secror, the main products are sweet potatoes, vegetables, corn, coffee, sugarcane, cotton; water buffalo, pigs, cattle, poultry.

In an effort to reduce Laos' import dependency, the government has targeted key sectors, including light industry and agriculture, for growth. Manufactured wood products, hydropower, agribusiness, light industry, handicrafts and the tourism sector offer attractive opportunities.

4. Business associations

Under the 1994 foreign investment law, a business cooperation contract (similar to a partnership) provides for the division of profits and liabilities between partners. In this case, the partners assume full liability as no separate legal entity is formed.

In joint ventures/licensing arrangements, which are recognized by the investment law, the foreign partner must contribute at least 30 percent of total equity in the investment. Foreign partners' equity may be foreign currency, plant and equipment, capital goods, technology, and/or skills and management. The Lao partners (including the Lao government) may contribute money, land, water rights, natural resources, and/or capital goods. The value of the inputs and assets of each side are assessed at international market rates and converted into local currency at theprevailing exchange rate on the date of equity payment. The incorporation of joint ventures must comply with the business law of the Lao PDR.

A wholly foreign-owned enterprise is a foreign investment registered under the laws and regulations of the country by one or more foreign investors without the participation of domestic Lao investors. The enterprise may be either a new company or a branch or representative office of a foreign company.

5. Investment environment

The government of Laos actively encourages private investment - both foreign and domestic. The Foreign Investment Management Committee (FIMC), located in the Prime Minister's Office (PMO), administers the foreign investment system.

The FIMC is a one-stop investor facilitation service for foreign investors. It grants foreign investment licenses and incentives and assists foreign investors in obtaining the other licenses and permits necessary to operate in Laos.

To support and encourage investment, the government offers incentives to investors in various forms including reduced corporate profit taxes, reduced duties and turnover taxes on imported capital equipment and inputs to production, and investment permissions and guarantees.

The main laws governing the promotion of investment are the Law on the Promotion and Management of Foreign Investment (1994), the Law on Domestic Investment (1995), the Business Law (1994), the Customs Law (1994), and the Tax Law (1995).

The government welcomes foreign investment in "all fields of lawful economic activity, such as agriculture and forestry, manufacturing, energy, mineral extraction, handicrafts, communications and transport, construction, tourism, trade, services, and others." Foreign investors, however, may not invest in enterprises that are "detrimental to national security, the natural environment, public health or the national culture, or which violate the laws and regulations of the Lao PDR." Laos has no free trade zone, but the Ministry of Commerce has indicated its willingness to establish some in many areas of the country as an investment incentive on a case-by-case basis.

Procedural: To apply for a foreign investment license, the foreign investor must present the following documents to the FIMC:
a) Standard application for a foreign investment license (signed by both parties if a joint venture);
b) Company bylaws and financial statement;
c) Feasibility study;
d) Articles of association.

Joint venture applications must also include an agreement on technology transfer and a joint venture agreement signed by both sides. The FIMC, the ministries concerned, and the Prime Minister's Office will screen the proposal, and are required to issue or deny the license within 60 days. (In practice the approval process can take much longer.)

Within 90 days of receipt of the license, the company must register with the Ministry of Commerce and Tourism in order to obtain a business license; register with the Tax Department at the Ministry of Finance; and receive an industrial establishment authorization from the Department of Industry, Ministry of Industry and Handicrafts.

To establish a representative office, the foreign company needs to present the first two documents mentioned above; a company profile or the foreign investors' bio data; the company's financial statement/annual report; a lease agreement for office space in Laos; verification of the representative's employment with the company; and a copy of the representative's passport (if a foreigner).

Legal: The body of commercial law in Laos is comparatively underdeveloped and few laws have been translated into English (and none have been officially translated) and the local bureaucracy can be cumbersome. As a result, many foreign businesspeople rely on a local legal representative.

6. Sectors and opportunities

Energy: Laos has substantial water resources with great potential for hydropower generation. Many tributaries of the Mekong River offer possibilities for the construction of dams and reservoirs to produce low-cost electricity for export to neighboring countries, especially Thailand, where the demand for power has been increasing substantially year after year.

Laos possesses an estimated potential of over 18,000 MW installed capacity for hydro power, of which only about two percent has been developed to date. The government promotes the development of hydropower projects through foreign Build-Operate-Own-Transfer and Build-Operate-Transfer projects in many locations throughout the country.

The government actively seeks foreign investment in the energy sector. It offers a wide range of incentives to achieve its goal of being the dominant electric power exporter in the region. In addition due to Laos' status as a least developed country, low interest rate funding is generally available for financing these major projects through international development finance institutions like the World Bank and the Asian Development Bank.

Mining: Laos has a substantial potential for mineral ore production. Minerals have been identified in many parts of the country. Deposits of gold, tin, iron, lead, zinc, precious stones, coal, lignite, limestone and gypsum have been identified. The government has awarded concession areas to foreign investors to explore and develop different minerals and hydrocarbons, such as oil, gas, lignite, gold, and gemstones.

To develop these mineral deposits, substantial financial and technological inputs are required and the government perceives that foreign investors can supply these necessary resources and welcomes foreign investment to develop these resources.

The 1997 Mining Law created a legal framework for new investors. Fiscal regulations, such as royalty rates, corporate income tax rates, and other financial incentives in the mining sector are widely recognized to be competitive by international standards.

Agribusiness: The economic growth of Lao PDR depends to a large extent on the performance of its agricultural sector as it contributes almost 50 percent of GDP. Laos has large and unexploited fertile land and favorable climatic conditions, particularly or the Boloven basaltic plateau. There are promising opportunities for land-intensive investment in the agriculture and agro-processing industries for export based on annual and perennial crops.

Coffee, cotton, sugar, fruits of different kinds, and vegetables can be grown under good soil and climatic conditions in the plateau areas of Laos. Investment in cattle, pig, and chicken operations and associated downstream processing industries also offer attractive investment opportunities for foreign investors.

Forestry: Laos has the highest ratio of forest area to total area of any country in Asia. Almost half of total land area is covered by primary forest, with large stands of tropical hardwoods including teak, mahogany and rosewood. Wood products, including lumber, are one of its main export earners. With the aim of achieving long term sustainable development and the preservation of the environment, the government has implemented a policy to strike a balance between development of the forest products industry and forest conservation.

Consequently, Laos is shifting from exports of logs and lumber towards the promotion of finished and processed wood products, such as furniture and handicrafts. Licenses are required for the export of wood products and value adding is encouraged. The government currently does not allow foreign companies to set up wood processing companies, but does allow foreign investment in the export of processed wood, including plywood, parquet flooring, and furniture. There is potential for investment in fast growing timber species, and the International Union for the Conservation of Nature (IUCN) and other multilateral and bilateral agencies are also developing commercial opportunities of non-timber based forest products.

Light industry: In the industrial sector, light manufacturing industries, such as garments, wood-based products, semifinished and finished leather products, agriculture-based and mineral- based products, and other high domestic value-added goods can be produced for export using the inexpensive electricity, a cost effective and competitive labor force, and abundant agricultural products and minerals available.

Garment manufacturing is one of the most promising growth industries in Laos, especially since the European Union reinstated GSP status for Laos from 1999 until December 31, 2001. Although the manufacturing sector grew by 10 percent in 1998, industrial production is low and generally inefficient as a result of insufficient investment, outdated plants, difficulties in the supply of raw materials, and underdeveloped access to international markets.

Transportation infrastructure: Although much progress has been made the transportation infrastructure needs further development. The state of its road system continues to be a major impediment to trade, cooperation, and the development of its rich natural resources and agricultural lands, and its many tourist sites.

The government welcomes investment in infrastructure projects. Often transportation infrastructure projects are arranged with the assistance of multilateral and bilateral assistance organizations. This situation can give investors access to low-cost financing and thereby reduce capital costs for investors.

Tourism: After being a virtually "closed" country for many years, Laos has over the past decade steadily opened up its country to foreign visitors - even individual low-budget travelers who were previously most unwelcome.

The country has a rich array of historical, cultural and natural tourist attractions. Most of these assets are largely undeveloped. Investment is needed for hotels and guesthouse construction and management, restaurants and catering, travel agencies, touring companies, in-country transport (air, ground and water-based), training, and related support services.

Foreigners are, however, specifically prohibited from opening travel agencies or tour guide services. National revenue from tourism reached almost US$80 million in 1998, bypassing garments for the first time. During 1999-2000, which the Government of Laos has designated as official tourism promotion year, the National Tourism Authority expects to increase revenues up to US$90 million and to attract 700,000 foreign tourists. Increased economic activity will generate increasing demand for banking, insurance, accounting, communications, and consulting services.

Government contracts: Since foreign assistance accounts for nearly a half of the national budget, grants and loans from foreign governments, aid agencies, multilateral organizations, and international financial institutions, account for a significant percentage of government procurement.

Opportunities in government sales exist in a variety of fields, including infrastructure development; construction; engineering services; power generation and transmission, information technology (both goods and services); medical equipment and pharmaceuticals; and agricultural tools and machinery. Contracts are often simply awarded to the lowest bidder, however, without conderation for added value or quality, which can place foreign companies at a disadvantage.

In general, successful bidders on government contracts need a reputable local representative with extensive contacts and long-standing familiarity with procurement practices at a particular agency. Bid tenders for supplying consulting services, goods, and equipment for development projects funded by the World Bank, the Asian Development Bank (ADB), and the United Nations are advertised in "Development Business" published by the UN and "Business Opportunities" by ADB. Total assistance pledges in grants and loans by these organizations for the period 1997-2000 amount to US$675.5 million: ADB $320 million, the World Bank $180.5 million, the IMF $50 million and the UN $125 million.

Financing: Financing is difficult to obtain from the local banking system, and there is no Exim Bank program in Laos. An Overseas Private Investment Cooperation (OPIC) agreement was signed in 1996, and an agreement with the Multilateral Investment Guarantee Agency (MIGA) in 1998. In 1998, the government signed an agreement with the Mekong Project Development Facility (MPDF), a multi-donor funded operation managed by the International Finance Corporation (IFC). The MPDF is designed to promote the establishment and expansion of privately owned, small and medium-sized enterprises as well as joint venture projects with significant local private participation.

7. Imports and exports

Laos imports more than twice as much as it exports, relying upon its neighbors (primarily Thailand) for even basic consumer goods, fuel and some food supplies, giving it a negative trade balance that represented 16.5 percent of GDP in 1998. The government is trying to diversify its trading and investment partners, especially among other nations in the region.

Following its admission to the Association of Southeast Asian Nations (ASEAN) in 1997, Laos applied for membership in the World Trade Organization in 1998. Lao law prohibits the imports of weapons by private citizens; illegal drugs; toxic chemicals; hazardous materials; pornography; and agricultural produce which is grown domestically in sufficient quantities (i.e., eggplant, tomatoes, bananas, chilies, lemons). Laos' leading exports, in descending order, are garments; wood and wood products; minerals, such as tin and gypsum; hydroelectricity; and coffee. Electricity exports experienced the sharpest rise in 1998, increasing by nearly 220 percent, while coffee exports grew by 150 percent.

The range of goods manufactured for export is limited primarily to garments; wood and rattan products; and handicrafts. The main export markets are Thailand, Japan, France, Germany and the Netherlands. Laos prohibits the export of weapons; antiquities; Buddha images; illegal drugs; logs; 15x80 inch size and thicker sawed wood (regardless of length); raw rattan and basic processed rattan; and wildlife.

Tariffs: The government has simplified its tariff structure, although some non-tariff barriers, such as a quota on the import of automobiles, still exist. Importing from and exporting to Laos requires authorization from several national and local authorities, which can be a laborious process. Laos uses two types of customs valuations:
- Valuation based on the transaction value of the imported item, which is usually based on the shipping invoice.
- Valuation based on the certificate of the Lao embassy or a reputable organization having expertise on price and fair market value, such as the Chamber of Commerce of the country of origin.

If the importers cannot provide such documents, the customs valuation is based on domestic price minus 15 percent. The importers must employ a certified customs specialist or certified customs clearance corporation to complete the report.

Foreign investors are required to pay a one percent import duty on imports of machinery for production, equipment, and spare parts. Raw materials and intermediate goods needed for export production are exempt from import taxes. Raw materials and intermediate goods imported for import-substituting industries can be accorded special treatment based on an incentive agreement.

There are six rates of import tariffs: five percent for promoted goods such as heavy equipment and machine tools; 10 percent for some medicines and some materials used in light industry such as fabrics and some chemicals; 20 percent for some food products, such as frozen fish; 30 percent for certain kinds of fruit and vegetables; and 40 percent for automobiles.

In addition to the import tariff, the government also imposes excise tax on a wide range of products, with the steepest assessed on autos (from 72 percent to 104 percent, depending on engine size); motorcycles, beer and cigarettes (50 percent); and alcohol (60 percent).

In addition to the excise tax, importers may also face a turnover tax of five-10 percent on most goods. Most goods are assessed at the higher 10 percent rate; goods considered essential to domestic production (such as agricultural equipment, power tools, and construction equipment; fabric and cotton thread) are assessed at five percent. Tax-exempt goods include rice; fertilizer and animal feed; fire trucks and wheelchairs. The government is expected to introduce a value-added tax, which will replace the turnover tax, by 2002.

On becoming a member of Asean in 1997 Laos committed to bringing all of its tariffs in line with its Asean Free Trade Area (AFTA) commitments by 2008. The following countries have granted Most Favored Nation status to Laos: People's Republic of China; Myanmar; Thailand; the European Union; Russia. Laos has signed trade agreements with 14 countries, including Bulgaria; Czech Republic; Slovak Republic; Hungary; Germany; Cambodia; Mongolia; and Poland.

Corporate income tax on profits is a flat 20 percent, while personal income tax is a flat 10 percent on earnings.

8. Intellectual property rights

In 1995 the government issued a decree on trademarks providing for the registration of trademarks. Laos is a member of the World Intellectual Property Organization (WIPO), which has assisted in drafting an industrial property law that addresses patents, industrial design, lay-out design, integrated circuits, specially-bred plant species, and trade secrets.

Laos is also a member of the Paris Convention on the protection of industrial property; it has not yet joined the Berne Convention on copyrights. Laos is in the process of drafting a law on copyrights modeled on WIPO standards, in harmony with TRIPS (trade related aspects of intellectual property rights).

Continued: Investment law

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