Opportunities for International Investors in Laos

Blessed as it is with an abundance of positive features, Lao PDR offers a fresh new range of opportunities for would-be investors.

Laos investment background information

The Lao PDR has followed a market-oriented economy since 1986, with the New Economic Mechanism giving foreign investment generous incentives, constructing the basis of a legal framework from scratch and allowing private ownership.

A liberal foreign investment law, passed in June 1994, set a flat rate corporate tax of 20% and duty of 1% on imports of means of production, spare parts and other materials used in operations. (Other imports are subject to 5-10% duty.) It also allowed 100% foreign ownership of business ventures. Since then, the detailed application of this law has been modified a number of times.

The Constitution, adopted in 1991, gives a legal basis for a market economy while retaining the monopoly power of the ruling Lao People’s Revolutionary Party. Such a system is also found in China and Vietnam.

The Lao economy was badly affected by the Asian economic crisis. This has slowed down the development of infrastructure and temporarily reduced demand for its products. The Lao PDR is therefore reliant on aid agencies for the development of infrastructure. Although foreign aid fell in the mid-1990s, the aid agencies continue to provide a valuable contribution to the long-term effectiveness of the Lao economy.

The Lao PDR has a strong potential for growth in certain areas and a strong need for development in others. Potential growth areas include power generation, mining and minerals, agri-forestry and transportation. Areas that need to be developed include telecommunications, the financial sector, and tourism.

Tourism in Laos

No other industry in the Lao PDR seems to attract as much attention these days as tourism. An interesting history, affordable costs, beautiful nature, a relaxed atmosphere, and the friendliness of the people in this exotic country make Laos a much-touted destination for both backpackers and higher-end tourists. Recently, eco-tours and other packages and services have sprouted up to cater to the various needs and desires of those who travel to this once-closed society. For information about tourist destinations and attractions, see Chapter 2 – “General Overview.”

In 2001, over 650,000 tourists visited the country. The annual number is expected to rise as the Lao PDR improves its promotional efforts abroad and as tourism infrastructure is further developed. One area of the tourism industry that has seen significant growth is accommodations. In 2000, there were approximately 2,350 guest rooms available in almost 100 establishments in Vientiane alone.

Tourists by region 1998 1999 2000 2001
Asia and Pacific 421,196 510,703 604,254 553,249
Europe 52,076 68,564 86,462 80,736
Americas 25,326 31,780 42,111 34,370
Africa and Middle East 1,602 3,231 4,381 5,468
Total (number) 500,200 614,278 737,208 673,823
Revenue (US$ million) 79.960 97.265 113.898 103.786
(Source: Lao National Tourism Authority)

Power Generation

Power generation, largely from hydropower, has the greatest potential for private sector investment in the Lao PDR. Not only does the mighty Mekong and its tributaries run through the country, but Laos also has considerable supplies of gas and coal.

Several hydropower stations are already operational, and the development plans for Laos call for continued strong expansion in this area. The stretch of the Mekong that flows through the country offers Laos the potential to generate 20,000 MW. Currently, only about 2% of that potential energy has been tapped. There are efforts under way to garner an additional 5,000 MW within the next 15 years.

The Nam Theun 2 hydroelectric project (NT2) will be the largest of its kind in Laos so far. It will have the capability to produce 920 MW and generate US$235 million in gross revenues from yearly sales of electricity to Thailand.

The Theun-Hinboun Power Company Ltd holds a unique position in this market, as it is the first independent power project (IPP) in the hydropower sector in Laos. The company is jointly owned by the Government and foreign investors. Turn the newly minted 20,000 kip note over, and you will see a picture of the THPC power station.

The vast majority of the power generated from hydropower is sold to Thailand. Laos depends on continued demand from Thailand to maintain its sales market and its current pricing. However, having many neighboring countries as potential customers may serve the country well if the Thai market wanes.

Textiles production in Laos

The Lao PDR has made a name for itself around the world as both a location for cost-effective manufacture of garments and high-end woven fabrics.

The primary markets for the wholesale distribution of Lao garments are Thailand and Europe. Lao exports enter the EU duty-free due to its status in the Quota-Free Generalized Preferential System.

When the Asian Art Museum in San Francisco re-opened in March 2003, among the most costly items in its gift shop were Lao textiles. Demand for quality fabrics remains very high, and the overseas market is largely untapped.

Mining and Minerals

Though mining was a major draw for foreign investors into the Lao PDR in the mid-1990s, the Asian economic crisis beginning in 1997 reduced Thailand’s demand for fossil fuels, weakening this industry in Laos. Around the same time, the Government issued an amendment to the Investment Law, requiring that all applications for investments involving natural resources have to be approved by the Prime Minister. No foreign investment license has been given in the mining sector since 1999.

The Lao PDR has a plentiful supply of the following natural resources: coal, natural gas, tin, iron ore, gold, and precious stones.

As transportation routes improve and Thailand recovers from the economic downturn, the mining sector looks to be an enticing prospect for foreign investment.

Agri-forestry

This is the engine of the economy, contributing over 50% of the GDP and employing over 80% of the workforce. The economic development of the Lao PDR will largely depend on this sector for the foreseeable future and there are significant opportunities for investors.

More than 11 million ha of the Lao PDRÂ’s total land area (47%) are covered by forests. As a result, wood products are the country’s major export. The lack of in-depth technical knowledge currently within the country would appear to give investors a favourable entry to this market. However, powerful domestic interests are heavily involved in forestry and they have exerted pressure to control the extent of foreign involvement.

Coffee exports also contribute greatly to the agricultural sector. Most of this coffee is produced in the south of the country.

Telecommunications

The percentage of the Lao population with a telephone service is low (less than 2%) but increasing. There is a great need for telecommunications infrastructure and recent investment has seen a rapid increase in the mobile phone network. Whilst there are now four telephone companies in the country, there remains a need for increased investment in the national infrastructure. The government is especially keen to see the network extended to the rural and remote areas.

Lao PDR has attempted to improve its communication abilities by providing access to the Internet. More recently, Internet service providers such as Planet Computers and Laotel have been providing Internet access and IT network services. The development of e-commerce, however, has been limited as the implementation strategy for the country’s Domain Name code (.la) has yet to be finalized.

Internet access is available in Vientiane at the Lao Hotel Plaza, Parkview Apartments, and several other hotels. Internet cafes, such as the one at Planet Computers or one outside the main post office in Vientiane, provide access for under US$1 per hour. Internet cafes can now be found in other cities and towns around the country. In fact, an Internet cafe set up by Planet Computers in Luang Namtha is believed to be the first solar-powered Internet cafe in the world and is seeking inclusion in the Guinness Book of World Records.

Other servers are at various stages of development or application for business licences. Internet has only just begun to make an impact on the Lao PDR. It will take many years for its full implications to be realised.

Transportation

Cross-country land routes offer the potential to make the Lao PDR a key hub of Asian trade. The country is neighbor to China, Myanmar, Thailand, Cambodia, and Vietnam. Of particular interest is the newly sanctioned Savan-Seno Special Economic Zone (SSEZ) in the south of Laos, which sits on the East-West Corridor linking Myanmar and Thailand in the west with Vietnam in the east. The SSEZ also serves lies on the north-south route linking China in the north with Cambodia and Thailand in the south. For more information on the SSEZ, see Chapter 4 – “Savan-Seno Special Economic Zone.”

Steady air traffic through Wattay International Airport in the capital city of Vientiane points to another area of transit growth.

The Greater Mekong sub-region (comprising the Lao PDR and its neighbours) generally lacks adequate transportation infrastructure. The Lao PDR does not currently have a railway system; this hinders trade and the exploitation of minerals. Moreover, of the 23,000 kilometres of road in the country, 13,000 kilometres are unmetalled. In 1994 the Friendship Bridge was opened as a link across the Mekong River between Laos and Thailand.

The Government plans to develop the following roads:

South

• From each province of Savannakhet, Khammoun, Attapeu, Sekong and Salavanh to the border with Vietnam;
• The road from Savannakhet to Pakse is currently under construction; the Japan International Co-operation Agency has agreed to fund a bridge near Pakse over the Mekong River to link this road with Thailand.

North

• From Vientiane to Muang Nganh, via Salakham, Paklai, Sayaburi and Hongsa;
• From Udomxay to the Chinese border via Boten;
• From Bokeo to the Chinese border via Namtha.

The Government also plans to develop railways on three routes: from Nongkhai (Thailand) to Vientiane; from Vientiane to Vietnam via Thakhek; from Vientiane to China via Luang Prabang and Boten. However, it is having difficulty in finding a foreign partner willing to invest in the project.

Other Industries and Opportunities

Foreign investors may be interested in the various untapped or specialized markets in the Lao PDR, such as telecommunications or IT. Additionally, a sizeable increase in the popularity of post-secondary schools, as well as the opening up of the market (with the enticement of private sector jobs) has created a pool of energetic skilled workers, many of whom speak English and other languages. Relatively low operation costs, payroll, and tax make Laos an attractive place for business.

Economic Profile of Laos

Growth and inflation 1998 1999 2000 2001
Inflation rate per annum 87.4% 134% 27% 35%
Economic growth rate 4.0% 7.3% 5.9% 5.5%
Source: Asian Development Bank

Economic indicators 1998 1999 2000 2001
GDP at current prices (kip billion) 4.240 10.303 13.482 13.700
Real GDP growth (%) 4.0 7.3 5.7 5.5
Consumer price inflation (%) 91.0 128.5 25.1 7.8
Population (million) 5.2 5.3 5.5 5.5
Exports fob (US$ million) 342 363 393 425
Imports cif (US$ million) 507 528 591 –
Current account (US$ million) -150.1 -121.1 — -7.2
Reserves excl gold (US$ million) 116.8 101.2 139.0 –
Total external debt (US$ million) — – — –
Debt-service ratio (%) — – — 10.5
Average exchange rate (kip/US$1) 3,298 7,102 7,887 –
Source: Economist Intelligence Unit & Bank of Lao PDR
Origins of gross domestic product % of total 1998 1999 2000 2001
First sector: agriculture and forestry 57.6 53.6 52.8 52.2
Second sector: industry (including construction) 18.1 24.5 25.6 26.1
Third sector: services 24.3 27.6 28.5 28.2
Source: Economist Intelligence Unit & Bank of Lao PDR
Principal exports (US$ million) 1998 1999 2000 2001
Timber and wood products 40.7 62.2 71.2 80.2
Textiles and garments 76.7 80.5 94.4 100.1
Coffee 49.3 31.1 29.0 15.3
Electricity 32.7 57.1 107.0 91.3
Animal and agricultural products 14.9 9.5 5.0 5.7
Handicrafts 1.6 3.0 5.1 3.9
Gypsum and other mineral 0.6 0.8 6.0 5.0
Benszoin 1.0 1.0 — –
Source: Ministry of Commerce and Tourism
Principal imports (US$ million) 1998 1999 2000 2001
Food products 50.3 35.9 19.7 17.0
Construction materials 169.2 86.0 30.8 29.9
Materials for garment industry 28.3 48.8 17.4 10.4
Vehicle parts 122.3 111.5 21.2 19.3
Animal and agricultural products 26.9 22.6 25.0 18.0
Fuel and gas 90.2 70.0 77.2 98.8
Office and sport equipment 8.6 6.4 6.8 2.0
Electronic and spare parts 65.3 61.0 7.2 2.7
Medicine and equipment 20.2 32.9 3.5 4.2
Luxury products 11.4 15.5 — 741.5
Source: Ministry of Commerce and Tourism
Main destinations of exports (US$ million) 1998 1999 2000 2001
Thailand 28.8 29.1 136.0 146.7
Germany 21.4 26.7 5.8 12.1
France 23.3 19.0 9.0 22.0
Belgium 12.7 14.1 2.7 5.0
USA 20.0 12.6 1.7 5.6
UK 7.7 12.5 5.3 9.8
Japan 398.3 12.3 2.3 3.4
Italy 9.5 9.3 9.4 14.5
China 7.2 9.0 7.1 13.8
Vietnam 0.2 0.2 23.2 19.4
Source: Asian Development Bank
Main origins of imports (US$ million) 1998 1999 2000 2001
Thailand 411.3 414.9 91.5 82.3
Singapore 22.1 36.5 — 2.0
Vietnam 28.6 28.8 24.0 33.7
Japan 21.2 26.1 79.1 423.1
China 19.6 22.5 18.7 35.4
Hong Kong 8.7 10.8 — –
Germany 15.4 10.1 582.4 128.6
South Korea 5.7 5.7 — 2.0
France 6.2 5.4 — 794.0
Russia 3.0 4.9 — 71.4
Source: Asian Development Bank
Foreign investment (US$ million) 1998 1999 2000 2001
Thailand 65.9 2.4 2.9 1.1
Japan 1.8 — 2.4 –
Malaysia 3.1 2.5 3.0 –
Singapore 0.5 0.3 0.4 0.1
China 7.0 24.4 5.3 0.6
USA 1.3 0.9 — 0.1
Australia 1.2 1.5 0.2 –
France 2.4 1.2 2.1 0.05
South Korea 7.8 0.8 4.4 0.8
UK 0.2 0.7 — 0.06
Other 7.9 49.2 6.4 –
Total 99.1 83.9 27.1 2.8
Source: Department of Domestic and Foreign Investment (DDFI)
Investments by sector (US$ million) 1998 1999 2000 2001
Agribusiness 3.3 44.7 5.9 –
Banking/insurance — 5.0 — –
Consultancy 1.8 0.4 0.3 0.2
Construction 3.5 — – –
Electric power — – — –
Garments 6.5 0.2 4.4 0.8
Hotel/tourism 1.8 1.1 0.9 0.8
Industry/handicraft 4.2 26.1 10.7 3.4
Mining/oil 6.7 — – –
Services 10.5 1.9 4.7 2.1
Telecom/transport 56.5 0.5 — –
Trading 1.2 4.0 0.3 0.8
Wood 3.1 — – –
Total 99.1 83.9 27.1 8.1
Source: Department of Domestic and Foreign Investment (DDFI)