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Investment Opportunity

 

Since 1986 the Lao Government has introduced an open-door policy and has taken a number of measures to achieve a market economy by reforming its administrative structure and policy accordingly. The government’s policy has emphasized both revenue raising and expenditure containing measures. Meanwhile, structural reforms have been accentuated, notably in creating an atmosphere for investment, privatization, liberalization, decentralization, and the initiation of an appropriate regulatory framework to meet the immediate needs of the emerging private sector. Following the open-door policy, in 1988 the Lao Government adopted a code for foreign direct investment (FDI), hoping to have revenue generated and job opportunities created in the country. Since then the FDI in various fields has increasingly flowed into the country.

 

In parallel to the FDI, the government has begun to transform the centrally planned economy into the market one by fostering the private sector and reforming the public administrative machinery. The primary purpose of public sector reform in the Lao context is to facilitate a market-oriented economy by initiating more private investment, mainly for export-oriented production, and improving public sector performance. In order to make private FDI viable, the Lao Government is expected to take a number of necessary measures to tailor its administrative machinery to facilitate international business transactions as follows:

 

  • Privatizing some state-owned enterprises by sharing production in new investment with domestic and foreign private investors, allowing private investors investing on the Build-Own-Operate-Transfer (BOOT) basis, and contracting-out managerial work or services to private companies;
  • Slimming down the organizational structure: over-hauling both staffing and structuring;
  • Simplifying decision-making procedures and project appraisal, and rationalizing the potential of natural resources; and finally Strengthening the existing legal framework and adopting additional adjacent laws and regulations to protect national interests, and creating affirmative actions to give more confidence to foreign investors.

The country is also well endowed with all kinds of abundant and untapped natural resources, particularly fertile land suitable for cropping, forestry development and animal husbandry, hydro-power and mining, with deposits of numerous types of minerals. These natural resources need proper technology and capital to develop and converting them to commodities for export into the world markets.

 

As the country possesses substantial natural resources, a strategic geographic situation and the government’s policy favouring foreign direct investment, the following selected sectors are potentially attractive for investment in Laos:

  •  Selected Potentially Attractive Sectors:

Mining

 

In fact Laos has substantial potential in mineral ores where occurrences of gold, tin, iron, lead, zinc, precious stones, coal, lignite, limestone, gypsum, etc., have been identified in many parts of the country. The Lao Government so far has given some concession areas such as oil, gas, gold, lignite and gemstones to foreign investors in order to explore and develop different minerals. To develop these minerals important financial and technological inputs are required.

 

Foreign direct investment is particularly sought in the mining sector because of its capital-intensive investment combined with scarce domestic financial resources and its high potential for export. From 1988 up to the 19th August 1997 the foreign investment in this sector was ranked third in terms of aggregate value (about US$ 125,535,764). Fiscal regulations such as royalty rate, corporate income tax and other financial incentives in the mining sector are widely recognized as competitive by international standards. This indicates the firm commitment and strong support of the government to pave the way for foreign direct investment in the sector.

 

The market for fossil fuel in neighbouring countries is tremendous. This would be an area offering excellent prospects to foreign investors. Recently, an agreement was signed with private investors to implement a lignite power plant project in the northwest of Laos for exporting electricity.

 

In the short-term, other minerals having high prospect for export would be gemstones, which require simple extraction equipment and could be easily transported. Some medium and long-term investment opportunities in the mining sector would be:

 

Potash production in Vientiane Municipality. The largest known deposits in the sub-region with the estimated reserves far exceeding those in neighboring countries.

 

The significant iron ore deposits in Xiengkhuang Province, the occurrence of base metals (components needed for steel) and planned hydroelectric power development on the Nam Ngum River, both northeast of Vientiane and in Xiengkhuang Province are promising. The region could provide opportunities for both iron ore and steel exports.

 

  • Energy

 

Laos has also substantial potential from its water resources for hydropower generation. Many tributaries of the Mekong River offer possibilities for the construction of dams and reservoirs to produce low-cost electric energy for export to neighboring countries, in which the demand for power has increased abruptly year after year. It is estimated that the country possesses over 18,000 MW of hydropower installed capacity, of which only 2 percents has been so far developed. The government promotes the development of hydropower projects in many locations throughout the country.

 

With the huge resources located close to the biggest power demand country in the sub-region such as Thailand, the hydropower sector will continue to be one of the main foreign exchange earners for Laos. Without financial sources other than public investment funds and external soft loans, hydropower development would probably continue at the same slow rate as experienced in the eighties. This would lead to a loss of opportunity for foreign exchange earning badly needed for the development of other sectors.

 

On this basis and in line with the new economic policy the government has begun since the beginning of the 90s to seek the participation of foreign investors in projects beyond the financial capacity of the public sector and soft loan investments. Since 1988, when the Lao government launched public sector reform resulting from FDI by accepting private participation in hydropower generation for export, the development in the power exporting industry has been very impressive. Until now, seven projects have already reached concession agreements, of which two reached commissioning stage in 1998, one by 1999, and the remaining four reached the operation stage by the year 2000. The government signed MOUs for 18 projects and another 10 of over 100 MW capacities have been initially contracted and site investigations have been undertaken. The development period will depend on the mobilization of funding in which the private investors will be encouraged to participate actively. Assuming that the construction of all the projects on hand has been carried out as scheduled, the total annual generation is expected to reach 36,700 GWH in 2010.

 

  • Agribusiness

 

Plains and plateaus offer possibilities for development of agriculture and livestock. Coffee, cotton, sugar, fruits and vegetables can be grown under good soil and climatic conditions. The Lao Government gives special privileges to develop the agricultural sector and investors are invited to bring into the country their capital, know-how and techniques to develop agro-based production for export.

 

Agriculture: The economic growth of the Lao PDR depends to a large extent upon the performance of the agricultural sector, which contributed 51% of the GDP in 1997. Coffee is by far the most promising product for export. The Lao PDR has the most potential land/person in the Greater Mekong sub-region and has large and unexplored fertile land and favorable climatic conditions, particularly in the Bolaven basaltic plateau. This could offer promising opportunities for low-intensive investment in the agro-processing industry for export based on annual and perennial crops.

 

The on-going improvement of main national roads linking major provinces, together with the high rate of urbanization has created favorable conditions for investment in the agro-processing industries aimed at import substitution.

 

Forestry: It has been estimated that the Lao PDR has the highest ratio of forest to total area in Asia. Wood products including lumber are one of the main export earners of the Lao PDR. In view of its long term sustainable development objectives and the preservation of the environment, the government is implementing a policy of striking a balance between exploitation and conservation and shifting from export of logs and lumber towards the promotion of wood finished-product processing. Due to a shortage of capital and the technical know-how in the country, the development of the wood-processing sub-sector also needs investment and the introduction of new technology from foreign countries.

 

  • Light Industry

 

In the industrial sector, besides mining and hydro energy development, light manufacturing industries such as garments, wood-based semi and finished products, and high value-added goods can be produced for export by using cheap electric energy and local labour. Laos is a "Generalized System of Preference" (GSP) receiving country for many markets in the world.

 

  • Transport

 

In Laos, transportation infrastructure is inadequate and considered a major impediment to trade, tourism, co-operation and exploitation of rich mineral resources, particularly those located in the hinterland.

 

Further major commitments are required before minimum standards can be satisfied and most of the shortcomings could be addressed by such cooperation efforts as:

 

Priority on the improvement and rehabilitation of existing facilities and sub-regional projects on which there are already agreements among the countries directly concerned;

 

The formulation of projects should consider trade generation impacts, especially economic transportation taking place in the sub-region;

 

Transport projects should be implemented in sections and stretches in order to facilitate project implementation and provide immediate benefits.

 

Given financial constraints, criteria for project selection will need to be established, including the consideration of the sub-regional versus national character of the project and the financial resources available.

 

  • Tourism and Hostelry

 

Small-scale tourism is also being promoted. The country is endowed with many historical and natural sites. Since 1990 the number of tourist arrivals has increased rapidly from 14,400 persons in 1990 to 346,460 persons in 1996 (National Tourism Authority, 1995). Meanwhile, there are very few world-class hotels in the country. There is great potentiality for development of tourism, particularly in the hotel industry.

 

  • Service

 

In the field of services investment in banking, insurance, transportation, communications, hostelry and trade are encouraged. To respond to requirements of the emerging primary and secondary industries in the country, a tertiary industry, such as service development needs to expand.

 

ECONOMY

 

  • NATURAL RESOURCES

 

Laos has adopted the concept of its New Economic Mechanism as its policy on economic reform. The policy allows the application of a capitalistic economy in harmony with the socialistic system. The reason behind this adoption is the decision for Laos to develop its economy gradually under conditions that maintain decent living standards for its people as well as protect its national identity.

 

The following is an overview of the country’s natural resources, which are the foundation of economic development.

 

  • Agriculture, Forestry and Livestock

 

Cultivated land covers only 8.000 square kilometers of the 80.000 square kilometers of potentially cultivable land. Rice growing accounts for 85% of the area planted. About 1.65 million tones of rice were produced in 1994 and 40% of the total output came from Savannakhet, Saravane and Champasak. Another portion was produced in the Vientiane Municipality.

 

Other crops cultivated in Laos are maize, sugarcane, root crops, beans, tobacco, cotton, fruits, tea and coffee. Coffee produced in the south is among the best quality in the world. Coffee cultivation is currently being promoted in Champasack, Saravane and Sekong.

 

Agriculture is still practised predominantly by traditional means which is simple and aimed at subsistence farming. The agricultural methods have been applied and improved for utilization of planted areas. The department in charge of agricultural development has tried to solve these problems by increasingly diversifying the current mono-culture agricultural structure. Intensive farming has been encouraged to replace extensive farming.

 

Since 1987, forestry has played an important role in the country’s economic system. Forests cover 55% of the nation’s land area and are certainly a crucial resource. Business connected to forestry and forest products, however, has not effectively expanded. This is the result of policies and regulations on timber exports, difficulties of access and lack of transportation, all of which have, however, been improving.

 

Coupled with government policy to maintain the balance of nature, commercial utilization of this resource has been reduced. Operational conditions are other constraints affecting such utilization.

 

Laos is economically self-sufficient in animal husbandry, not only breeding livestock as a source of food but also as a commodity and for labour. It is therefore important to the economy.

 

With 80% of its area being pasture, animal husbandry plays a major part in the country’s economic development and is scattered throughout the north in provinces such as Huaphanh, Luangprabang and Xayabury. In 1994-1995, the Lao Government encouraged cultivation of rice in both large and small paddy fields in every province as part of its economic development plan. First priority was given to the lowlands in Vientiane Province, with emphasis on the expansion of both cereal crops and agro-industrial crops to supply manufacturers and to support the processing of agro-products. Another goal was to provide a better view of the economic structure of the province. The target set for rice production in 1995, 1.7 million tones, was achieved.  The rice-cultivated area also increased to 150,000 hectares.  Low-grade rice fields were also expanded.

 

The manufacture of goods in appropriate areas was promoted, with marketing support provided to manufacturers through the establishment of a project to plant agro-industrial crops to serve factories directly. Output of the project includes tobacco, sugar cane, wheat, cotton, kapok, cashew, pineapple, beans and white mulberry, grown to raise silkworms. The project area covered Vientiane Municipality and provinces nearby. Livestock breeding has been promoted as a viable business and the number of veterinarians in breeding areas increased to serve it. Furthermore, the number of plant seeds and animal species available was also increased and a survey of the area utilized for animal husbandry was conducted.

 

Laos has planned to end deforestation and slash-and-burn farming to conserve forests and water resources. To achieve this it seeks to survey and allocate forest resources by clear zoning as well as employing natural reforestation methods. Priority is given to previously damaged areas, in particular upstream watershed areas.

 

The Lao forestry industry originally aimed to serve the domestic market. Strict control of export of logs by the government has been enforced; and this tends to reduce the volume of exports gradually. The limited forest zones allowed to be exploited were areas to be covered following the construction of hydropower dams irrigated areas and during the construction of roads.

 

In promoting coffee growing, Lao Trade Ministry announced the establishment of the Lao Coffee Exporters Association in Champasack, Saravane, Sekong and Attapeu. The association has controlled over the distribution and export of coffee. In the south, six companies have already registered as members of the association.

 

Members of the association must abide by the terms set; for example, a member has to possess a license to trade coffee seeds and offer loans to farmers who grow coffee in Laos.

 

  • Minerals

 

Minerals are important natural resource in the future economic development of Laos. The country still has ample sources of gemstones, coal and iron ore. Plenty of iron ore has been found near Xiengkhuang; anthracite in Vientiane and Savannakhet; tin in Khammuane and gypsum in Savannakhet.

 

More than 40 types of minerals have been found in Xiengkhuang covering around 150 square kilometres. In addition, several important rivers of the northeast region as well as in the Mekong River are sites for gold prospecting. Surveys to search for oil and natural gas have been conducted in the south.

 

  • ELECTRICITY & ENERGY

 

Laos has more than thirteen tributaries that join the Mekong River, covering a distance of 1,500 kilometers. The rich soil of both mountainous and riverside areas accounts for 80% of the country’s land mass, with rainfall never falling below 2,500 millimeters a year. This provides Laos with electricity generating capacity of not less than 18,000 megawatts.

 

With such plentiful natural resources, the Government of Laos set up a master plan to develop hydropower. Projects of the tributaries of the Mekong River cover 30 dams around the country that would generate hydroelectricity.

 

These dams are expected to enhance the country’s hydroelectricity generation capacity to 8,520 megawatts. The current capacity stands at 220 megawatts only, most of which have been produced by the Nam Ngum Dam, located to the north of Vientiane, and the Se Set Dam in Saravane.

 

In addition, Laos also has thermal-powered electricity generation project in the district of Xieng Hon-Hongsa. The capacity here is 600 megawatts and distribution of electricity under this project has already started.

 

Energy is regarded by the Lao Government as a major concern and includes hydroelectric development and the strengthening of local capability in the matter with the objective of making Laos the centre for electricity export in Southeast Asia.

 

  • TRANSPORTATION

 

Transportation is a fundamental key to economic development. Lao has immense potential to develop itself as the surface transportation hub of the region, taking into account its pivotal position as the only Asian country with five borders, surrounded as it is by Thailand, Myanmar, China, Vietnam and Cambodia. As any international land transportation among other nations has to be conducted through Lao territory, and acknowledging the rapid economic growth of these countries, the future growth of the international surface transportation industry in Laos is assured.

 

  • LAND TRANSPORTATION

 

Laos recognizes that it is necessary to construct roads connecting it with surrounding countries. According to the National Statistical Centre of Laos, there are 22,321 kilometers of roads in the country. These are classified as three types: asphalt (3,502 kilometers), laterite (8,541 kilometers) and earthen (10,278 kilometers). The five major roads in Laos are:

 

Route 1, which starts from the China-Lao border and passes Luangnamtha, Oudomxay and Luangprabang before connecting with Route 6 in Huaphanh; Route 13 connects the south with the north of the country. It begins at the Cambodian border and passes through Champasack, Saravane, Savannakhet, and khammuane, Borikhamxay, Vientiane and Luangprabang before crossing through the middle of the country into Oudomxay. Route 13 is regarded as the "Trans-Asia highway", passing through Cambodia to the south of Vietnam as well as the starting point of several routes, for instance routes 7,8 and 9;

 

Route 7 starts from Route 13, linking Luangprabang and Xiengkhuang to the Lao-Vietnam border before terminating at the seaport of Vinh.

 

Route 8 begins at Route 13 at Borikhamxay before passing through Khamkeut and entering Vietnam. The route also connects to roads within Vietnam between Vinh and Ha Tinh, both of which are important ports.

 

Route 9 starts at the Khaengkabao fluvial port in Savannakhet before joining Route 13 to Vietnam at the Danang seaport. This route is regarded as the major highway linking Laos to the sea.

 

  • Water Transportation

 

In the mountainous reaches of Laos, land transportation is almost impossible or uneconomic. In such places resorting to the nation’s waterway system has solved the problem. The Mekong River is navigable for much of its 1,800 kilometers length through Laos, linking the north and south of the country. The route can be divided into three parts: Huoixai-Luangprabang, Luangprabang –Vientiane and Vientiane to Savannakhet.

 

  • Air Transportation

 

Laos has more than 8 airports. The only two international airports are in Vientiane and Luangprabang whereas the others are domestic airports in Xiengkhuang, Savannakhet, Champasack, Bokeo, Oudomxay and Huaphanh.

 

Vientiane is in practice the air travel centre of this country, serving to support most of the nation’s commercial air traffic and the development of the tourist industry. Lao Aviation flies daily from Vientiane to Luangprabang, Savannakhet, Xiengkhuang, Pakse and Oudomxai, and there are several flights a week to Luangnamtha, Xayabury, Huoixai, Xamneua, Saravane, Lakxao, Muangkhong and Attapeu.

 

  • TELECOMMUNICATIONS

 

Since 1990, postal and telecommunications services have been extended both at the local and international levels. For example, there are express mail services to France, Australia, Switzerland, Germany, China, Thailand and Vietnam; an international call service; a cooperation programme with foreign countries, and a microwave transmission system.

 

In 1993, Laos installed an advanced and modern telephone system as part of a project on the development of telecommunications systems operated by the Ministry of Communications, Transport, Posts and Construction. The objective of the project was to maintain compatibility and comparability with other countries in this region.

 

The telecommunications master plan will update the entire system to provide optimal communications with the outside world. To do this, a microwave transmission centre will be established and the number of satellite channels received by the country increased. The telecommunications mater plan covers the period from 1987 to 2010 and is divided into five phases.

 

Improvements to the existing system were made during the first phase (1987-1990) using a US $ 4.5 million loan from the World Bank. Aid from Australia totaled 1.8 million and was used for the installation of the VISTA (F3) satellite earth station. The station is capable of receiving signals from INTELSAT with connections to the United States of America, France and Australia.

 

In the second phase (1991-1993), development focused on the installation of basic equipment. Communications, both locally and internationally, become automated. This phase used a budget of US$ 43.4 million: US$ 24.5 million in the form of a World Bank loan, US$ 13.8 million was Japan’s aid and the remainder generated from foreign aid and local investment.

 

By the end of the second phase, the number of telephone lines increased from 5,675 to 18,232, all of them digital. Communications in and between Oudomxay, Luangprabang, Vientiane, Pakxanh, Thakhek, Savannakhet and Pakse that originally were accomplished by a high frequency radio system were changed to a microwave system, providing a 24 hour automatic switched telephone service for both local and international calls by way of the international gateway in Vientiane.

 

Expansion of a modern communication system network throughout the country was the objective during the third phase (1994-1997). A microwave dispatching line system was to be extended from Luangprabang to Pakse, where only 480 channels existed. This expansion plan makes possible communications with other provinces. The microwave system was also extended to cover every province, which also received a telephone public service office, telegraph and on-line information service.

 

Construction of a new satellite earth station was designed to have at least 120 telephone channels that can be expanded up to 1,920.

 

The expansion includes international radio and television broadcasting as well as personnel development. Completion of the project resulted in an additional 40,000 lines.

 

As for the fourth (1998-2000) and the fifth (2001-2010) phases, the plan has been revised to be much more in line with the country’s needs. The number of telephone lines will increase to 340,000 (5 lines per 100 persons).

 

Economic development in Laos is aimed mainly at the development of its infrastructure. Another focus is on such unique opportunities as being an electricity-exporting centre for neighbouring countries, especially Thailand and Vietnam. Thus, technological applications to help in the development of the country currently is to lean towards those areas of knowledge and management which can stimulate growth rather than having more varied and complicated machinery.

 

  • INDUSTRY AND HANDICRAFTS

 

Laos is promoting small and medium industries and handicrafts. These are processing industries, which add value to agricultural and forestry products, industries producing consumer goods using local natural resources that reduce unnecessary imports. Such goods include traditional foods, clothes, vegetable oil, sugar, household appliances and construction equipment. Other manufacturing industries are geared for exports, especially the textile industry, for which special import duty privileges have been granted for the import of raw materials and products imported specifically for exports production. Privileges also apply to the construction industry, such as for the construction of dams for electricity generation, the construction of transportation routes, communications and telecommunications-related construction and infrastructure-related industries that play a key role in the economic development of the country.

 

  • TRADE, SERVICE, AND TOURISM

 

  • Local Trade

 

Before the adoption of the "New Thinking" economic reform policy, the country’s local trade was centralized. Decisions on manufacturing, wage rates and production structure were made entirely by the government.

 

Control over production by the agricultural sector has declined since the adoption of the policy. This led to the expansion of production. For example, livestock breeding was promoted as a new type of business.

 

The economy under the local trading system was encouraged. Improvements were made to the foreign exchange rate to make it more liberal. Government support was provided for certain aspects of production, and people were entitled to possess land.

 

Today, Laos has a law on the promotion of local investment. This focuses on the promotion of local investment directly. A unit responsible for providing all Laotian investors with legal guidance was established. Soft loans, of which the interest rate is determined by the Bank of the Lao PDR, have also been provided for investment activities. In addition, tax exemption privileges have been granted to local investors for all investments made in underdeveloped areas.

 

The main objective of this law is to establish stability for local economies. Should transfers of manufacturing bases occur in the future, there will be no effect to the country because of the availability of domestic capital.

 

  • International Trade

 

Due to the present economic expansion of the country, it is necessary to import almost every category of goods, such as consumer goods, fuel, food, vehicles, capital goods, construction equipment and electrical appliances.

 

Improvements have been made to the country’s commercial fundamentals to enhance the confidence of investors. Since the beginning of the "New Thinking" policy, Laos has opened its doors to other countries, both with the same socialistic system and with the more liberalized one. Privatization has been adopted in the area of international trade. The government now follows an open policy regarding foreign economic and technological assistance and promotes foreign investments focused on export and import substitution.

 

  • Tourism

 

Laos possesses great natural beauty, with tracts of forests and mountain dotted with natural gateways and stunning waterfalls. Together with its historical, cultural and artistic heritage, gracefully embodied by the evocative period when Lao civilization was known as Lan Xang (the Land of Million Elephants), the country has a lot to offer tourists, a fact recognized by the government. Consequently, a state organization was put directly in charge of tourism promotion entitled, "The National Tourism Authority of Lao PDR".

 

Information on tourism in Laos focuses on four provinces: Vientiane Municipality, Luangprabang, Xiengkhuang and Champasack. Tourist sites include many typical Lao temples, several ancient monuments and buildings and the national museum in Luangprabang. Locations where tourists enjoy a touch of nature include Kuang Si and Khone Phapheng waterfalls. Other fine scenic locations outside Vientiane and Luangprabang are Pakse, Savannakhet, Huoixai, Xiengkhuang, Huaphanh, Oudomxay and Phongsaly.

 

Moreover, the culture and the way of life are very attractive in that they have remained very simple and close to nature. The Lao people are a kind and gentle race who are ready to befriend every traveling stranger. Their traditions and culture are, to some extent, very impressive. For example, there is the Baci, an ancient, characteristically Lao ceremony performed to ensure the return of a person’s thirty-two souls in preparation for some important occasions, like a wedding. There are also ceremonies celebrating a new home, welcoming State guests, entering the monkhood and traditional festivals like Boun Bang Fai in June, Boun Tha Luang in Vientiane, the New Year Festival and boat racing festival. Traditional fairs impress tourists with beautiful and joyful shows.