Investing in ASEAN: Laos
Laos was part of French Indochina until gaining independence in 1953. The Laos People’s Democratic Republic, as it is officially named today, is a one-party communist state, and the government maintains close ties with Vietnam, which is also its principal trading partner.
In 1986, the government began to decentralise control, encourage private enterprise and move to a market-based economy. “The results, starting from a very low base, have been quite remarkable,” says a report from PwC Thailand entitled South East Asia – Investment Opportunities, Tax & Other Incentives, adding that “growth averaged 8% per year from 1986 to 2008. However, it remains one of the poorest countries in South East Asia. A landlocked county, it has inadequate infrastructure, particularly in rural areas, and a largely unskilled labour force”.
The report says that “the government is committed to increasing the country’s profile among investors, which has included opening its first stock exchange in 2011. Reforms are increasing to liberalise the economy. The World Bank has stated that Laos’ goal of graduating from the UN Development Programme’s list of least developed nations by 2020 is achievable”.
Pros & Cons
Laos is still primarily an agricultural economy, but an important shift has been taking place for a number of years. Hydroelectric power and mining are becoming increasingly significant aspects of the economy. The country has become a rising regional player in its role as hydroelectricity supplier to its neighbours Thailand, China and Vietnam, and is one of the most resource-rich countries in Asia. Significant mineral deposits include gold, copper, zinc and lead and, since the early 2000s, there has been substantial foreign investment in the mining.
The manufacturing sector remains focused on textiles and garments. However, a venture with China to build a high-speed rail line linking China, Laos and Thailand should vastly improve the ability to bring manufactured goods to export markets.
Consumer consumption, although in no way on par with many of the other regional countries, is gradually increasing in the capital, Vientiane, and surrounding areas. The first modern shopping mall opened in Vientiane recently and a number of Thai superstore operators plan to have a presence in the country.
A report from Leopard Capital says “Laos’ economy has maintained consistently high GDP rates over the past two decades in large part due to strong growth among its main trading partners in the region, particularly China. The government’s initiatives to decentralize control of the economy and encourage private enterprise have also been a boon to economic development in recent years. Laos can expect to experience continued growth throughout the decade and beyond if it continues to capitalize on its strategic advantages”. According to Leopard, these are:
- Pro-Business Government
- Favorable Investment Climate
- Increasing Trade Integration
- Advantageous Labour Conditions
- Low-Cost Energy
- Unleveraged Financial Position
- Improving Transport Connectivity
- Untapped Natural Resources
- Underpenetrated, Growing Domestic Consumer Market
The Law on Investment Promotion 2009 was adopted by the National Assembly on 8 July 2009 and promulgated by the country’s president two weeks later. However, the law was not implemented until 2011, when the Prime Minister’s Decree on Implementation of Law on Investment Promotion No. 119 was issued.
The Law on Investment Promotion sets out the principles, regulations and measures relating to the promotion and management of both foreign and domestic investments in Laos, with the purpose of facilitating investments by making the consideration and approval process faster and more accurate, and to protect the rights and benefits of investors, the country and the public with an aim to promoting economic growth in a continuous and sustainable manner.
PwC says that “the Investment Law divides investment areas into three zones: Zone 1, Zone 2, and Zone 3, and divides investment activities into three different levels: Promoted Activity 1, Promoted Activity 2, and Promoted Activity 3. Investors investing in these zones and business activities are entitled to corporate profit tax exemptions. Under the law, both Lao and foreign investors are also granted import duty exemptions on imports of raw materials, equipment, and vehicles for direct use in production or in business operation, but, there is no VAT exemption”.
Both foreign and domestic investors can access credit at any commercial bank and financial institution properly operating in the country and abroad at their convenience.
Foreign investors who meet the following criteria will also be granted the right to purchase land-use rights for residential purposes:
- The registered capital (at least USD 500,000) is imported in cash
- The land is owned by the government and designated by local authorities
- The land area does not exceed 800 square metres
- The land is used for the purpose of residency or the building of an office for the enterprise only
- The term of land use is equal to the term of investment
Under the Law on Investment Promotion, foreign and domestic investors may invest in a special economic zone or a specific economic zone. In a special economic zone, there may be many specific economic zones, that is, Export Processing Zones, Industrial Parks, Tourism Towns, Duty Free Zones, ICT Development Zones, and Other Zones. The investors in these zones may be granted tax and import duty incentives, which vary from zone to zone.
PwC points out that “there is no need for foreign investors to go through the Ministry of Planning and Investment for their Foreign Investment Licence as was required under the 2004 Law on Promotion of Foreign Investment. Now, foreign investors who wish to invest in general business activities can submit an application directly to the Enterprise Registry Office at the Ministry of Industry and Commerce”.
After the World Bank recently released its bi-annual East Asia and Pacific Update on economies in the region, there was much talk about the diverse growth rates and the different economic standings of the more powerful and dominant nations there, but tiny landlocked Laos – the country in the heart of Southeast Asia, bordering Thailand, Vietnam, Cambodia, Myanmar and China – was overlooked by most.
The 2013 growth prediction for Laos in a report by the World Bank was 8%, the highest forecast in the region and one of the highest in the world at the time. And it was not a one-hit-wonder: growth in Laos was 8% in 2011 and 8.2% in 2012. According to the predictions published in the report, growth would fall slightly to 7.7% in 2014 but recover strongly to 8.1% in 2015.
A story in the Gulf Times at the time asked whether this makes Laos a success story worthy of a look by investors?
“On the one hand,” the paper said, “the strong growth of Laos is rooted in the country’s low level of development”. Indeed, the country has a lot of catching up to do – and it is. “Laos is now on par with Cambodia in development terms, but less advanced than Vietnam. Pros are that the country has attractive hydropower, mining, forestry, agricultural and tourism resources, but, on the other hand, a small and poorly skilled workforce, so it is hardly going to become a manufacturing centre similar to some of its neighbours”.
On the plus side, the paper noted that “investment rules have been streamlined and liberalised, and foreign investors can own 100% of an approved business. The country’s location is favourable and its economy is closely intertwined with Thailand and China. Overall, Laos is currently not a destination for large-scale investment, but still worth a look, especially in the sectors of hydropower generation and distribution, agri-business and food processing, tourism, real estate and infrastructure”.
“The attraction of Laos as an investment destination,” the story concludes, “is not that a huge amount of money can be made there in a short time span, but the combination of its whopping growth rate, its vastly untapped resources, the beginning privatisation of state-owned enterprises and the open-door policy for investors supported by a reformist government. Actually, these are enough reasons to give it a try”.
To conclude with some observations from Nomad Capitalist: “Almost every house in central Vientiane has a motorbike these days. Decent jobs have gone from paying $100 a month or less to several hundred dollars or even more. Consumers are spending more money…
“And international companies are taking notice. While Vientiane is no Bangkok, it does have the feel of a much quieter Phnom Penh. In the last couple years, Vientiane has added ATMs from Australian bank ANZ as well as local banks. It also has a wide variety of French and Italian restaurants run by real European expats who came here with a simple dream…
“Laos has a growing number of western tourists. Considering its small size and weak geography, Vientiane has a ton of westerners visiting. While not ultra-cheap, its position as a value destination and a notch on the backpacker circuit should keep that in place for some time…
“If you have any experience in the tourist space, I imagine you could run a decent business just providing information to visitors. There’s practically nothing online; one American I ran into earlier today said the only interesting information she could find was from blogs that were four years old. A lot has changed since then…
“The entrepreneur in me sees a lot of opportunity here the same way I see opportunity in Cambodia. Considering there are already tons of cafes here along with a few western brands, Laos isn’t exactly a blank slate. But it’s close”.