Cut off from the ocean by the Annamite Range with rolling mountains that
stretch as far as the eye can see, life has always happened at a languid pace
in Laos. While stunningly beautiful, the mountainous terrain means going
anywhere or moving anything takes time, but populated by a friendly, easy going
people nobody really seems to be in a great rush.
The country is often viewed by outsiders as some kind
of rural Shangri-la that time passed by, but as Asia becomes the engine of
global growth the pace of life is quickening, even in rural Laos. China’s
unquenchable demand for resources has seen the seeds of growth spread south.
The road networks are rolling out as rubber and banana farms proliferate, while
mobile and television signal is expanding rapidly and with it outside cultural
influences are spreading north.
Looming on the horizon is the next big change, with
the Asean Economic Community (AEC) coming into force at the end of 2015, in a
little over two years' time. Ostensibly the onset of AEC will bring into being
a single market and production base, enabling a free flow of goods and services
throughout the entire region.
Some pundits are skeptical that such a monumental
change can actually take place in 2015, given the political considerations and
all the vested interests at stake, but whilst it may happen a bit slower than
that change will come nonetheless.
Political considerations aside, it is obvious that
intra-regional trade will continue to gather a momentum of its own. The
question for Laos is how to extract the maximum benefits and not let
opportunities pass it by.
Connecting Asean
With increased revenues flowing from hydropower
projects and the mining sector in recent years, the Lao government is
determined to see the country become a land bridge between Thailand, Vietnam
and China.
It is investing large sums of money to upgrade major
transport routes including its sections of the Asean highway network and other
strategic roads, aiming to facilitate greater regional trade and reap the flow
of benefits from that.
It is also connected to the Asean power grid via Nam
Thuen II- Roi Et and Thuen Hinboun-Thakek-Sakhon Nakhon. More connections are
set to follow, feeding electricity into the regional grid from Hongsa, Nabong,
Xe Pian, Xe Namnoy and Xayaburi.
Numerous big dam projects are in the pipeline and even
more are under study. The government has given the go ahead for a Malaysian
company to invest in a US$5-billion rail project to link Savannakhet with the
Vietnamese border, over a distance of 220km.
It is also determined to push ahead with the US$7-
billion rail link from Vientiane to the Chinese border to form the Asean-China
rail link, a monumental engineering feat. For a country with a national GDP of
just $10 billion, the Lao government is definitely thinking big when it comes
to integration.
But the question for Laos is how to extract maximum
value from the increasing trade and build the domestic industry base. This
conundrum is something the Lao government is well aware of. It is moving
actively to establish special economic zones at strategic locations to attract
more trade, investment and industry.
The government has now approved nine special economic
zones along the Mekong opposite major highways in neighbouring Thailand and one
in Luang Namtha bordering China.
Numerous large companies have expressed interest in
setting up operations in Laos of late. Japanese camera manufacturers Nikon
recently concluded an agreement to set up an assembly factory at the
Savanh-Seno industrial zone, while global giant Coca-Cola will open a bottling
plant in Laos.
Given the numerous investment incentives on offer,
including generous concessions, tax holidays and cheap labour costs, Laos
stands poised to entice some manufacturers to relocate from Thailand, given the
recent minimum wage increase and problems with low lying industrial estates.
This is of course the idea of the single market. It
allows larger manufacturers to create new efficiencies by leveraging lower wage
costs in less developed countries, vertically integrating region-wide supply
chains which might include a factory in one of the CLMV countries, assembly or
value adding in Thailand or Malaysia and customer service and marketing in the
English-speaking Philippines.
The potential benefits it offers larger businesses
aiming to establish regional operations are immediately evident; what it will
mean for the thousands upon thousands of smaller businesses, many of them
family operations, is another question altogether.
The little fish
Back in Vientiane, a Lao fish farmer gazes across the
Mekong from where he farms tilapia. His is a relatively simple life and he makes
a modest living feeding his fish but a growing number of illegal farms operated
by immigrants on the Nam Ngum River to the north are making things more
difficult.
Already facing cost pressures, fishermen are wondering
what will happen if full scale competition floods in from Thailand as well. In
the gulf of Thailand they also breed Asian bass or pa kapong, which is a
cannibalistic species that will eat its smaller kin. Many Lao people fear that
with the onset of AEC, business may become a case of "pa ngai kin ba noy
pa soi kin pa xeo", the big fish eating the smaller ones.
Large numbers of pork and chicken farms in and around
Vientiane look over to neighbouring Nong Khai with similar concerns. Profit
margins for livestock and poultry breeders are already tight due to oversupply
and Vientiane meat markets are reportedly afflicted by distortions, with pork
and chicken being shipped over the border at Savannakhet before being trucked
to Vientiane for sale in the capital.
Phouvong Phongphansay heads the Lao Chicken Farmers’
Group. He is very concerned that when the borders are fully opened, many local
egg producers and broiler farms may go bankrupt, unable to compete with Thai
operators who have more business experience, greater cost efficiencies and
economies of scale.
Banks in Thailand and Vietnam charge about 3-5 per
cent interest annually on loans issued to farmers, Phouvong explained, but
banks in Laos impose a rate of 13-15 percent per annum, meaning Lao farmers
cannot afford to borrow or expand.
Meanwhile Thai chicken and pork conglomerate CP has
already established a presence in Laos, operating under a model where farmers
build only the pigsties and chicken sheds and the company provides brood stock
and guaranteed markets for the pigs, broiler chickens and eggs produced. The
contracted farmers will make less money than an independent operation would but
their lack of access to finance makes it an attractive option for some.
Lack of access to finance is reported to be one of the
main market barriers faced by local SMEs which now make up a very significant
proportion of the Lao economy, experiencing considerable growth since the early
1990s when reforms commenced under the New Economic Mechanism started to take
effect.
However detailed data for this sector of the economy
is lacking. A 1995 study found that the number of SMEs was expanding at around
10 per cent per annum, while the latest comprehensive economic census was
undertaken back in 2006.
It found that about 127,000 enterprises were in
operation, of which 93 per cent were micro-enterprises with fewer than five
employees. Numbers are likely to be higher now, but nevertheless, the study
illustrates the fact that the vast majority of SMEs in Laos remain largely
family operations and that the country still lacks a real manufacturing base.
Family business
Only a small proportion of business-operating
households engage paid employees, at around 15 per cent, with the majority
either self-employed or relying on unpaid family labour. Despite the fact that
Laos has a number of large garment factories, average employment in the
manufacturing sector was still only 4.3 persons per enterprise at the time of
the study.
President of the Lao Young Entrepreneurs Association
Valy Vetsaphong admits that most small businesses in Laos are likely to face
more challenges than opportunities when AEC comes into force. She says the
country’s production base is simply too small while poor infrastructure and
lack of education remains significant impediments to growth.
Majority of business operators have no formal training
and learn pretty much everything from their families. Most operators are
concerned largely with day-to-day operations rather than long term planning,
and rely on methods passed down from previous generations.
“We do business whilst learning from our mistakes,”
Valy says, admitting that most people aren’t ready for competition. Many Lao
businesses will cease trading immediately if their ventures are not profitable,
while “Chinese and Vietnamese traders will spare no efforts to stay in business
despite not turning a profit”.
Culturally speaking, many immigrant traders appear to
have a more hardnosed attitude to business than most Lao people do. Commercial
roads in Vientiane such as Rue Dong Palane are covered with confetti and
dancing dragons during Chinese and Vietnamese New Year celebrations, giving
some indication of the extent to which foreign businesses already dominate
commercial trade in the capital.
With the advent of AEC though, Thais are likely to be
among the first to take increasing advantage of emerging business
opportunities, with cultural and language similarities likely to give them
advantages over other prospective operators.
It begs the question as to how local businesses will
fare when the doors are flung fully open, but the extent to which small traders
will lose out no one really knows for sure. Associate professor Phouphet
Kyophilavong from the National University of Laos' Faculty of Economics and
Business Management admitted recently that it will probably take 10 years
before Laos sees concrete benefits from trade liberalisation and WTO membership
as it gradually becomes more attractive to foreign investment.
The-long-term view
Lao government policymakers though, are adamant that
integration is the best and perhaps only option for the country over the longer
term. They point to previous growth under the new policy of renovation as proof
poverty can be alleviated.
The Ministry of Industry and Commerce statistics show
that foreign investment in Laos stood at barely $51 million in the early 2000s,
but the figure had ballooned to $2.9 billion in 2012, with more revenues
starting to flow from big mining and hydropower projects.
In the early 2000s, trade volume was only about $865
million including exports of $324 million, but the figure more than quadrupled
to $4 billion in 2012 including exports of $1.6 billion. Meanwhile tourist
arrivals blossomed from a mere 100,000 arrivals in 2000 to more than 3 million
visitors last year.
Over the same period, average income per capita grew
from a little over $300 in 2000, to almost $1,400 in 2013 as the Lao population
hit 6.5 million people. They are considerable numbers. “This growth was made
possible because of integration,” stresses Deputy Director General of the MIC’s
Foreign Trade Policy Department Saysana Sayakone.
The Ministry of Industry and Commerce is also heading
the efforts to mitigate the negative effects of integration on SMEs, providing
management training and facilitating access to markets and finance. As part of
its three-pronged strategy, the ministry has established a dedicated fund for
SMEs which will provide low interest loans to eligible businesses.
It will not be available for everyone though and the
size of the funding pool is not clear. “Not all SME operators will have access
to the loans, only those whose business proposals are poised to be profitable
and convince the fund’s executive board,” Saysana said.
The bigger fish
Sectors traditionally dominated by state-owned
enterprises like telecommunications, aviation, cement, and oil and gas should
fare better under integration than SMEs due to their prominent position in the
market and well-established connections. However, they too will be subject to
greater competition from outside interests looking to expand their operations
to Laos.
Thailand’s oil and gas conglomerate PTT Plc recently
announced plans to spend 2.45 billion baht ($76 million) to expand its retail
oil business before AEC takes effect. Laos is among the countries where it has
expansion plans, attractive due to its proximity to existing depots in Issaan
and its rapidly growing vehicle fleet. Fuel consumption in Laos is increasing
faster than GDP, at 8-9 per-cent per year.
Almost 1 billion litres of fuel is imported to Laos
annually, of which around 250 million litres is imported by the Lao State Fuel
Enterprise. Deputy Director Phayboun Phomphaphi admits they will have to
partner with other regional companies to enhance financial capacity and remain
competitive.
Thailand’s PTT envisions 60 sites in Laos, up from the
current 20. It also plans 45 petrol stations in Cambodia, up from 15 at
present, 60 pumps in Myanmar, up from one, and 135 in the Philippines, up from
50.
In contrast to PTT, Lao State Fuel doesn’t have any
regional expansion plans and will concentrate on shoring up its share of the
domestic market first. “Of course, we will improve our services and study how
we can deal with market liberalisation,” Phayboun said.
The cement industry is another that will face
increased competition and given the myriad of road construction and hydropower
projects being planned it is a very attractive market indeed, one which
domestic interests would be keen to protect.
Lao Cement Company has traditionally enjoyed a
monopoly with import restrictions in place but will now have to face
competition from Siam Cement among others, which also has regional expansion
plans.
“If we can keep our costs competitive we are confident
that we can continue to dominate the Lao market,” asserts company director
Thongpon Kingkhamphet, who doesn’t fear market liberalisation.
Domestic demand still exceeds current supply in Laos,
which can produce only 1.5-1.6 million tonnes per annum while the demand stands
at 1.8-2 million tonnes per year and is growing between 10 and 20 per cent
annually.
Vangvieng Cement Plants I and II currently produce
240,000 tonnes and 80,000 tonnes per annum respectively. A much larger third
plant is scheduled to commence operations next year, with a capacity of around
1 million tonnes per annum.
One of the main challenges for Lao Cement is
fluctuations of the price of coal imported from neighbouring countries. Soon
this will no longer be the case as the enterprise is planning coal mining
operations in nearby Hinheup and Feuang districts, which are currently
undergoing feasibility studies.
Meanwhile under the Asean open skies policy, Lao
Airlines will face increased competition on international routes, with Bangkok
Airways, Air Asia and other airlines having already opened flights to Laos.
However the surge in business travel is opening up more opportunities as well.
Lao Airlines plans to open more direct flights not only to Asean countries but
also to China, Korea and Japan as part of preparations for AEC.
It just commenced daily flights between Vientiane and
Incheon, South Korea at the end of last month, up from three times a week due
to rising demand. The airline also announced recently that it will reopen
direct flights from Vientiane to Phnom Penh after previously cancelling the
route back in 2008. In 2015, Lao Airlines plans to buy two more Airbus A321s to
grow its aircraft fleet.
Of all the larger enterprises in Laos, perhaps it is
the producer of the national lager which is best poised to benefit from
regional integration and the new markets it will offer. Known throughout the
world to be one of the best beers in Asia, Beerlao will sell very well in
neighbouring countries if prohibitive taxes are removed.
In anticipation of AEC, Lao Brewery Company has
already opened agencies in Thailand, Singapore, Myanmar, Cambodia and Vietnam.
They are yet to open in Brunei, Indonesia and Malaysia, those being Muslim
countries.
Beerlao aside though, most state enterprises and many
domestically focused SMEs will be primarily concerned with preserving their Lao
market interests as AEC looms large on the horizon.
Shoring up revenues
In addition to pressure on local enterprises,
government regulators will also have to deal with a significant hit to revenues
when tariffs are reduced or abolished.
This will be a particular problem for Laos and the
other newer members of Asean, those being Cambodia, Myanmar and Vietnam. Large
sections of their populations remain impoverished and exist largely outside the
cash economy, meaning they have much smaller tax bases from which to draw and
yet greater need for infrastructure.
This has been recognised by Asean and CLMV countries
will be granted special dispensation, with some tariffs allowed to remain in
place until 2018, allowing regulators and businesses more time to adjust.
For its part, Laos has already reduced tariff rates to
zero for 79 per cent of all products listed under the region-wide Common
Effective Preferential Tariff (CEPT). By 2015, some 8,879 listed products will
have zero tariffs, but an extension until 2018 has been granted for 326
products for which it is considered necessary.
In addition, tariffs of up to 5 per cent will be
allowed to remain in place for 266 products listed in the sensitive category,
those being mostly agricultural commodities. Under the CEPT, there is also a
general exemption category for products considered of national strategic or
cultural value. Laos has nominated 87 product categories for exemption, with
tariffs of between 5 and 40 per cent to apply as per usual.
The Lao government is also in the process of
implementing a value added tax in order to compensate for the lost tariff
revenues, VAT being the most widely used consumption tax both in OECD countries
and other Asean nations as well.
This will pose problems in terms of collection as
rather than being levied at the border as a single fee it applies to every
product transaction. Naturally this will be very difficult to implement in a
country where many businesses exist in the informal economy, not even having
bank accounts let alone accurate bookkeeping records.
However, there are revenue leakage problems at the
borders and the structure of the VAT may entice more businesses to declare
their business transactions. Unlike a sales tax, VAT is only levied on the
value-added component in the supply chain, with businesses eligible for a
refund on the component they paid at purchase once they sell the goods.
Depending on their sales volumes and the level at
which the VAT is set, it should entice more businesses to join the formal
economy. In Vietnam, for instance, when turnover tax was replaced by VAT, tax
revenue grew from around 11 per cent of GDP to more than 17 per cent in the
matter of a couple of years, but it has a larger manufacturing base.
Drawing more small businesses into the formal economy
has other advantages. It will drive them to keep modern accounting systems
which will allow for better business planning and greater competitiveness over
time.
Barriers to broadening
However the country must still do more to broaden its
industry base for the smaller businesses to supply. Among the most common
complaints have been the long delays at customs processing, up to 10 days
reportedly, and also the rising cost of electricity.
Laos has made significant progress towards the
implementation of its national single window, scheduled to commence operations
in 2014, forming part of the Asean Single Window which alongside tariff
reductions, is the central plank of reforms to facilitate the free flow of
goods and create the common market.
Meanwhile, with Laos aiming to become the ‘battery of
Asean’, local manufacturers are frustrated about the high cost of domestic
electricity. This is largely because, to date, most hydropower projects are
foreign-funded and power purchase agreements concluded with outside investors
dictating the price of electricity, which is something the country needs to
address.
However, Laos cannot afford to rely solely on trying
to attract more manufacturing. According to the World Bank’s Investment Climate
Assessment 2011, labour productivity is lower than most comparator countries.
Meanwhile some estimates suggest the country could face a labour shortage of up
to 500,000 workers by 2015, mostly in the agriculture and garment sectors.
Director General of the National Economic Research
Institute, Dr Leeber Leebouapao warns that while the country has a shortage of
labourers, most of the management level positions may go to more highly
qualified graduates from other countries if the education system is not rapidly
improved.
Concerted efforts are being made in this regard.
Private institutes have been prohibited from opening new tertiary courses until
standards are improved while young people are being encouraged to undertake
vocational training to fill the skills shortage instead.
According to the World Bank, relying on labour
intensive export industries may constrain the diversification required to
ensure more equitable growth. Last year, the ADB warned that whilst developing
Asia has reduced poverty faster than any other region in the world, it has come
with rising inequality.
This is in contrast to the ‘growth with equity’ story
that marked the transformation of the newly industrialised economies in the
1960s and 70s and more recent trends in Latin America. If left unchecked it
could undermine the momentum for economic growth and the quality of life for
all Asians, according to the bank.
A question of time
Many observers believe that AEC is a very ambitious
project that will take longer to implement than the time frame set out, even
with political will from all member countries. Reducing tariffs is only the
first step and addressing pervasive non-tariff barriers will be much more
difficult, while assessing progress is hard due to bureaucratic opacity and the
vagaries of the scorecard system.
Charged with overseeing the transition to a $1.8
trillion common market, the Asean Secretariat had a paltry budget of around $15
million in 2011, and a professional staff of just 200 or so. The fact that it
is equally funded by the 10 member states limits the Secretariat budget to the
financial capacity of the weakest members like Laos.
Despite repeated urging to reform the funding
structure, national leaders have been reticent to do so. Add to this the fact
that AEC has already been put back by a year due to complications with visas
and concerns over issues like drug trafficking, it appears that it may take
some time to fully implement and the changes to really come into effect.
With its small economy, relative isolation and the
enduring reality that things happen a little slower in Laos, the country should
be sheltered from the most dramatic changes that will come with the inception
of AEC, at least at first anyway.
The question for Laos, like the other newer members,
will be whether it can learn from the regional experience and ready itself in
time; whether it can use its abundant natural assets wisely, diversify its
economy and spread the benefits of rapid growth among the wider population or
whether the money will flow to the big fish alone while small farmers are left
watching the trucks rumble past and local businesses floundering.
Somsack Pongkhao
Asia News Network
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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