Investment Reform Map for Lao PDR A Foundation for a New Investment Policy and Promotion Strategy Lao PDR Investment Climate Reform Project IN PARTNERSHIP WITH INTERNATIONAL FINANCE CORPORATION Vientiane, Lao PDR Printed in January 2021 IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2020, we invested $22 billion in private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org. This report is a product of the World Bank Group’s Equitable Growth, Finance, and Institutions (EFI) Practice as part of the Lao PDR Investment Climate Reform advisory project implemented by IFC. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily reflect the views of, IFC or its Board of Directors or the World Bank or its Executive Directors , or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequences of their use. Investment Reform Map for Lao PDR A Foundation for a New Investment Policy and Promotion Strategy Lao PDR Investment Climate Reform Project TABLE OF CONTENTS Foreword........................................................................................................................................ v Acknowledgements...................................................................................................................... viii List of Acronyms............................................................................................................................ix Executive Summary........................................................................................................................xi Introduction.................................................................................................................................xiii Chapter I: Assessing the FDI Performance of Lao PD......................................................................1 1.1. FDI is a growing source of investment and external finance for Lao PDR................................2 1.2 Evolution and volatility of FDI in Lao PDR..............................................................................3 1.3 Benchmarking Lao PDR’s FDI performance against its regional neighbors................................4 1.4 Type of FDI entering Lao PDR..................................................................................................5 1.5 Linking Lao PDR’s FDI performance to the economic complexity analysis...............................8 Chapter II: Assessing the Investment Environment of Lao PDR.....................................................10 2.1 Overall investment climate of Lao PDR..................................................................................11 2.2 Logistical challenges impede Lao PDR’s FDI attractiveness.....................................................13 2.3 Human capital challenges........................................................................................................14 2.4 Lao PDR’s investment competitiveness....................................................................................15 2.5 FDI vision and strategy in Lao PDR........................................................................................16 2.6 Entry and establishment of investments...................................................................................17 2.6.i Investing in a general business...............................................................................................21 2.6.ii Controlled business and concession business........................................................................21 2.6.iii Possible reforms to investment entry...................................................................................22 2.7 Investment entry recommendations.........................................................................................24 2.8 Investment protection..............................................................................................................25 2.8.i How investment protection is organized in Lao PDR............................................................26 2.8.ii Domestic legislation.............................................................................................................26 2.8.iii International investment agreements...................................................................................28 2.9. Recommendations for increased investor protection in Lao PDR...........................................29 Chapter III: Incentives Regime of Lao PDR...................................................................................31 3.1 Incentives offered in Lao PDR.................................................................................................32 3.2 Eligibility based on magnitude of Investment..........................................................................34 3.3 Incentives based on certain zones or locations.........................................................................34 3.4 Private sector perspectives and WBG comments......................................................................36 3.5 Recommendations for Lao PDR’s Incentives Framework........................................................38 i Chapter IV: Investment Promotion and Facilitation......................................................................41 Chapter V: Conclusion and Investment Reform Action Plan for Lao PDR.....................................48 5.1 Investment Policy Statement....................................................................................................49 5.2 Timeline of Proposed Reform Action Plan...............................................................................49 Annex 1: Investment Competitiveness Benchmarking Results.......................................................51 Annex 2: Investment Competitiveness Benchmarking Methodology..............................................53 Annex 3: Financial Times Sector and Activity Classifications........................................................59 Annex 4: Investor Grievance Management mechanism.................................................................62 Annex 5: Tax Incentives................................................................................................................64 ii LIST OF FIGURES Figure 1: FDI Inflows, Lao PDR (2000-2017)........................................................................................... 2 Figure 2: Foreign vs. Domestic Investment, Lao PDR (2000-2017)........................................................... 2 Figure 3: FDI vs. Domestic Savings, Lao PDR (2000-2017)....................................................................... 2 Figure 4: Sources of External Financing, Lao PDR (1990-2017)............................................................... 2 Figure 5: Inward FDI Trends in Lao PDR (1990-2017)............................................................................. 3 Figure 6: Inward FDI Stock, Lao PDR (1990-2017).................................................................................. 3 Figure 7: Top Sources of Greenfield FDI (number of projects, 2013-2018 August).................................... 3 Figure 8: Top Sources of Greenfield FDI (capital investment, 2013-2018 August)..................................... 3 Figure 9: Lao PDR’s Export Destinations in 2016..................................................................................... 4 Figure 10: Lao PDR’s Import Sources in 2016........................................................................................... 4 Figure 11: FDI Inflows Per Capita - Lao PDR vs. Comparators (2008-2017)............................................ 4 Figure 12: FDI Inflows (percent of GDP) - Lao PDR vs. Comparators (2008-2017).................................. 4 Figure 13: Inward FDI Stock (% of GDP) - Lao PDR vs. Comparators (2015-2017, average)................... 5 Figure 14: Inward FDI Stock (Per Capita) - Lao PDR vs. Comparators (2015-2017, average)................... 5 Figure 15: Sectoral Distribution of Greenfield FDI in Lao PDR (top sectors, project value, ...................... 5 Figure 16: Lao PDR’s Export Basket (2016).............................................................................................. 6 Figure 17: FDI Typology........................................................................................................................... 6 Figure 18: Lao PDR’s FDI Typology - Share of Greenfield FDI by Type (2012-2016, number of greenfield projects).................................................................................................................................... 7 Figure 19: Lao PDR’s FDI Typology - Share of Greenfield FDI by Type and Sector(2012-2016, number of greenfield projects).................................................................................................................... 7 Figure 20: Distribution of Greenfield FDI by Business Activity, Lao PDR (number of projects, 2003-2018 August)..................................................................................................................................... 8 Figure 21: Distribution of Greenfield FDI by Business Activity, Lao PDR (project value, 2003-2018 August)......... 8 Figure 22: Jobs Created by Greenfield FDI by Sector, Lao PDR (number of jobs reported by investors, 2003-2018 August ................................................................................................................... 8 Figure 23: Jobs Created per Million Dollars of Greenfield FDI by Sector, Lao PDR (number of jobs reported by investors, 2003-2018 August)................................................................................. 8 Figure 24: Economic Complexity Index vs GDP per capita (2017)............................................................ 9 Figure 25: Lao PDR’s Exports: Emergence of Electrical Machinery and Equipment.................................. 9 Figure 26: Global Competitiveness Performance in 2018, Lao PDR and Peer Countries......................... 11 Figure 27: Lao PDR’s 2019 Ease of Doing Business Score.......................................................................12 Figure 28: Logistics Performance Index, Lao PDR (2018)....................................................................... 13 Figure 29: Logistics Performance Index, Average Rank (2012-2018): Lao PDR vs. Regional Comparators.......................................................................................................................... 13 Figure 30: Lao PDR’s Logistics Performance Index................................................................................. 13 Figure 31: Harmonized Test Scores (2018) - Lao PDR vs. Regional Comparators................................... 14 Figure 32: Lao PDR: School Drop-Out Rates.......................................................................................... 14 Figure 33: Most Problematic Factors for Doing Business in Lao PDR (2018) ........................................ 14 Figure 34: Investment Lifecycle............................................................................................................... 16 iii Figure 35: Foreign Equity Limitations, Lao PDR..................................................................................... 17 Figure 36: FDI Equity Restrictions – Lao PDR and its Regional Peers..................................................... 17 Figure 37: Reducing FDI Entry Restrictions and Impact on FDI inflows................................................. 18 Figure 38: Investment Entry Procedure into Lao PDR ............................................................................ 19 Figure 39: Investors Seek Predictable, Transparent, and Efficient Conduct of Public Agencies................. 25 Figure 40: Definition of Investment Incentives......................................................................................... 32 Figure 41: Different Types of FDI, Investor Motivations and their Impact on Incentives.........................38 Figure 42: Common Characteristics of Best Practice IPAs.......................................................................43 Figure 43: Investment Sector Scan Scoring Matrix.................................................................................. 47 Figure 44: Food & Tobacco Sector - Investment Climate Results............................................................ 51 Figure 45: Food & Tobacco - Business Environment Results................................................................... 51 Figure 46: Alternative/Renewable Energy - Investment Climate Results.................................................. 51 Figure 47: Alternative/Renewable Energy: Business Environment Results................................................ 51 Figure 48: Financial Services - Investment Climate Results...................................................................... 52 Figure 49: Financial Services - Business Environment Results.................................................................. 52 Figure 50: Hotels & Tourism - Investment Climate Results..................................................................... 52 Figure 51: Hotels & Tourism - Business Environment Results................................................................. 52 Figure 52: Good Practice in Cost-Benefit Analysis...................................................................................65 LIST OF TABLES Table 1: Summary of Investment Competitiveness Benchmarking Categories.......................................... 15 Table 2: List of Legal Documents for General Business, Concession Business and Controlled Business... 20 Table 3: Incentive Instruments Offered by IPL........................................................................................ 33 Table 4: Duration of Tax Holidays when combining Investment by Zone and Activity/Sectors............... 34 Table 5: Duration of Rental/Concession Fee Exemption for State Land.................................................. 35 Table 6: Incentives Recommendations..................................................................................................... 40 Table 7: Distinguishing between What IPAs Can and Should Do............................................................. 44 Table 8: IPMC Members......................................................................................................................... 46 Table 9: Reform Action Plan for Lao PDR.............................................................................................. 49 Table 10: Description of Heatmap Scores................................................................................................ 53 Table 11: Investment Competitiveness Benchmarking: Pillar Indicators and Sources............................... 54 Table 12: Activity Classifications............................................................................................................. 59 Table 13: Description of Different Types of Tax Incentives Instruments.................................................. 64 Table 14: Tax Incentives: Advantages and Disadvantages of Different Instruments................................. 64 Table 15: SEZ Incentive Packages........................................................................................................... 66 LIST OF BOXES Box 1: Good Regulatory Practices for Company Registration ................................................................23 Box 2: Investment Sector Scan: Prioritizing Sectors for FDI Promotion...................................................47 iv FOREWORD With an annual average of 7 percent from 2004- 2018, Lao PDR has had strong and consistent economic growth. This can be attributed to significant investments including foreign direct investment (FDI) in extractive industries of natural resources, especially mining and hydro-energy. However, the nation has additional work to do to further inclusive economic development that creates substantial job opportunities for low-income people. Despite broader economic contribution, FDI in the natural resource sector has generated limited job opportunities. While non-resource sectors have high potential for job creation, FDI in these sectors seeks efficiency and competes on cost margins for exports or domestic consumption. Lao PDR has a comparatively low volume of FDI stock — less than 30 percent of GDP during 2008-2017, the lowest among its regional peer countries. While the high cost of business dissuades large efficiency-seeking investments, approval processes — from investment entry to business Over the last 15 years, IFC has played an important operating licenses and import-export permits — role in enhancing the investment climate in Lao remain complex and time consuming. Further, PDR. Building on these efforts, the Investment the discrepancy between policy and laws “in the Reform Map (IRM) aims to help generate new books” and actual implementation on the ground is investments, diversify the local economy, and make a major deterrent. Yet another constraint is the lack it easier to spur business in Lao PDR. To achieve of a clear vision or strategy to attract, retain, and this, the nation needs a more consistent and leverage FDI for greater socio-economic benefits. transparent regulatory environment, lower cost of entry and operation as well as better integration Moving forward, Lao PDR needs more sound of domestic firms into regional and global value investment strategy and policy framework, which chains. can derive more benefits from FDI, including v job creation, knowledge transfer, and economic Overall, this IRM is designed to help turn Lao PDR diversification. This is especially critical given into an attractive FDI destination while benefiting the COVID-19 pandemic, which upended lives its domestic firms and building a robust growth and livelihoods, altered the FDI landscape, and trajectory that is both inclusive and sustainable. drastically disrupted global value chains. The FDI IFC remains committed to support the nation’s environment, already fiercely competitive before the collective business reform agenda while helping the pandemic, is now likely to be even more aggressive. country and its people unlock their full potential. Unavoidably, a small country like Lao PDR will face significant challenges to attract new FDI in the short- to medium-terms. Therefore, it is crucial for Lao PDR to strategically rethink its FDI policy and enable a conducive business environment for private investments. Considering Lao PDR’s pre- and post-pandemic investment climate, this IRM offers an analytical and dialogue-based mechanism to help develop a new investment vision and policy to attract and retain the type of FDI which the country needs. In order to help realize this development vision, the IRM presents a thorough diagnosis to assist the Acting Regional Director, Ministry of Planning and Investment (MPI) and East Asia and Pacific, IFC overall, the government of Lao PDR, to: Randall Riopelle • Better understand the strengths and weaknesses of the current investment climate, especially the investment policy framework, • Identify the elements of a new strategic vision and policy for FDI, and • Identify priority reforms that should be undertaken over the next five years to implement the vision and policy. vi climate conditions and economic potential in light of regional and international linkages. By exploring the role of foreign direct investment (FDI) in the country - particularly its potential, optimization and challenges, the IRM provides a comprehensive analysis of the investment legal framework, policies, institutions, incentives and promotions which could be translated into an investment reform action plan to drive improvements to the Government of Lao PDR’s future investment strategy. We believe this IRM will be an important tool to enhance both domestic and foreign investment promotion policy. As such, the IRM also provides an in-depth analysis of the private investment context in Lao PDR to support policy makers in realizing investment policy improvements. A favorable investment climate will enable Lao PDR to attract and increase more investments in number and quality, contribute to national revenue generation, employment creation and improvements to socio- economic development. In addition, since early 2020, Lao PDR like most Government of Lao PDR has actively taken steps to countries around the world has suffered economic enhance the country’s business environment through consequences from the COVID-19 pandemic. a number of bold policy moves, including Prime Therefore, accelerating private investment reform is Ministerial Order No.02/PM (1 February 2018) on crucial and urgent to drive an economic recovery and build confidence for domestic and foreign the Improvement of Regulations and Coordination investors. Mechanism on Doing Business in Lao PDR, Order No.03/PM (21 January 2020) on the Improvement Finally, we would like to express our gratitude to of Services Related to the Issuance of Investment IFC for its support in developing this IRM and its and Business Licenses and Order No.12/PM (16 partnership more broadly to improve the investment October 2019) on the Facilitation of Import and climate and the ease of doing business in Lao PDR. Export, Temporary Import, Transit and Movement All readers’ comments and any recommendations of Goods in Lao PDR. These initiatives required are welcomed for investment climate improvement all relevant sectors to reduce barriers embedded in the future. in 10 indicators of World Bank Ease of Doing Business and prioritize further policy and legislation improvements. This Investment Reform Map (IRM), as an assessment paper supported by International Finance Corporation’s (IFC) Investment Climate Reform Project in Lao PDR, highlights Lao PDR’s investment Deputy Prime Minister, Minister of Planning and Investment Sonexay Siphandone vii ACKNOWLEDGMENTS This Investment Reform Map (IRM) report for Lao Mombert Hoppe, who served as peer reviewers, are PDR was prepared for the Ministry of Planning also warmly acknowledged for their valuable inputs and Investment (MPI) of Lao PDR as part of an on the incentive assessment. International Finance Corporation (IFC) advisory Several officials and officers from the MPI and project (Lao PDR Investment Climate Reform) other ministries and governmental agencies, as funded by the Government of Japan and led by well as from the private sector (investors, lawyers, Khampao Nanthavong, the Task Team Leader of and business associations) contributed data, inputs the project in the World Bank Group’s Equitable and information to this report and are hereby Growth, Finance, and Institutions (EFI) Practice and acknowledged with gratitude. IFC Advisory Services. The project team is also grateful to the World Bank Group management team for its support, in The report was prepared by the EFI’s Investment particular: Nicola Pontara (Country Manager for Policy and Promotion (IPP) team under the general Lao PDR, World Bank), Phongsavanh Phomkong guidance of Ivan Nimac, Global Product Specialist (Head of IFC Office in Lao PDR), Paramita for IPP in EFI’s Investment & Competition practice, Dasgupta (Practice Manager, Operations, EFI IFC and the direct supervision of Khampao Nanthavong. Advisory), and Christine Zhenwei Qiang (Global The IPP team conducting this IRM was led by Xavier Practice Manager, Investment & Competition, EFI). Forneris, IPP Coordinator for East Asia & West Africa, and included Maria Reinholdt Andersen, Finally, the World Bank Group would like to express Sufian Jusoh, and Yan Liu. The authors want to its gratitude to the Government of Japan for making acknowledge two colleagues, Erik von Uexkull and this report possible through its financial contribution Hania Kronfol, for their significant contributions to the Lao PDR Investment Climate Reform Project. to the incentive analysis. The authors also want to thank the following colleagues based in the World Bank Group’s Lao PDR office who provided important suggestions, inputs, data, and information throughout the process: Mombert Hoppe, Khampao Nanthavong, Konesawang Nghardsaysone and Keomanivone Phimmahasay. Jigjidmaa Dugeree and viii LIST OF ACRONYMS ACIA ASEAN Comprehensive Investment Agreement AFAS The ASEAN Framework Agreement on Services ASEAN Agreement of South East Asian Nations BCA The Business Council of Australia BIT Bilateral Investment Treaty BOI Board of Investment BOL Central Bank of Lao PDR BOP Balance of Payment CBA Costs and Benefits Analysis CIT Corporate Income Tax DB Doing Business DVA Domestic Value Addition EAP East Asia Pacific ECI Economic Complexity Index EFI Equitable Growth, Finance, and Institutions EU European Union FDI Foreign Direct Investment FET Fair and Equitable Treatment FTA Free Trade Agreement GATS General Agreement on Tariffs and Trade GCF Gross Capital Formation GDP Gross Domestic Product GoL Government of Lao PDR GVCs Global Value Chains ICB Investment Competitiveness Benchmarking ICSID International Center for the Settlement of Investment Disputes IFC International Finance Corporation IGM Investor Grievance Mechanism IIA International Investment Agreement ILO International Labour Organisation IMF International Monetary Fund IPA Investment Promotion Agency IPL Investment Promotion Law IPMC Investment Promotion and Management Committee IPP Investment Policy and Promotion IPS Investment Policy Statement IRM Investment Reform Map ix ISDS Investor-State dispute settlement ISS Investment Sector Scan IT Information Technology LPI Logistics Performance Index MFN Most Favored Nation MIGA Multilateral Investment Guarantee Agency MoIC Ministry of Industry and Commerce MPI Ministry of Planning and Investment MTI Macroeconomics, Trade and Investment M&E Monitoring and Evaluation NT National Treatment NSEDP National Social-Economic Development Plan ODA Official Development Assistance OECD Organization for the Economic Cooperation and Development OSS One-stop-shop OSSO One-Stop Service Office PCI Product Complexity Index PDR People’s Democratic Republic PPD Public-Private Dialogue PTA Preferential Trade Agreement RCEP Regional Comprehensive Economic Partnership R&D Research and Development SCM Subsidies and Countervailing Measures SEA South-East Asia SEZ Special Economic Zone SIRM Systemic Investor Response Mechanism SOE State-owned enterprise TRIMs Trade-Related Investment Measures UNCTAD United Nations Conference on Trade and Development US United States US$ United States dollar VAT Value-Added Tax WBG World Bank Group WER World Economic Forum WIR World Investment Report WTO World Trade Organization x EXECUTIVE SUMMARY A sound policy framework for investment is critical climate and business environment would enhance for foreign direct investment (FDI) to deliver a its competitiveness in attracting higher quality FDI. positive impact over the host economy. This type As Lao PDR lags in economic complexity, more FDI of external capital can facilitate the arrival of (particularly efficiency-seeking) will play a critical technology and know-how, diversification into new role in assisting the country to move up the value sectors and activities as well as foster the integration chain and upgrade its productive capabilities. of domestic firms into global value chains (GVCs), among other benefits. Yet, the likelihood of these The IRM is grounded on two analytical pillars positive effects depends on various characteristics of the investment policy framework designed by of the receiving economy, among which a policy the World Bank Group (WBG). The first is the framework conducive to investment activities is key. investment lifecycle, which sees FDI as in a dynamic relationship with the host economy, not merely a The Investment Reform Map (IRM) is a mechanism one-time transaction. This view corresponds to an for dialogue to develop the investment policy needed investment policy capable of addressing issues along to attract the transformative type of FDI to help a various stages of the relationship between foreign country realize its development vision. In the case investors and the host economy, including FDI of Lao PDR, the objective of this IRM is to present attraction, entry, retention, expansion and linkages. a rigorous diagnosis and act as an engagement tool. The second pillar is an FDI typology, which identifies This IRM strives to assist the Ministry of Planning four types of investment (natural resource-seeking, and Investment (MPI), and more broadly the efficiency-seeking, domestic market-seeking, and Government of Lao PDR (GoL), to determine the strategic asset-seeking1). This taxonomy allows for current and potential positioning of the domestic the grouping of investments across different location economy within an increasingly globalized and determinants, development effects and ultimately integrated international economy. This IRM presents types of policies. the role of FDI in Lao PDR — including FDI trends, types and country investment climate constraints, With the previous investment policy framework in while also analyzing the legal, regulatory and mind, this IRM is a tool to help the GoL capitalize institutional frameworks for investment policy and on these FDI opportunities. The analysis develops promotion. Importantly, this IRM concludes with a tailored diagnostic with the objective to enable the Investment Reform Action Plan — an action dialogue between the country’s policymakers and plan of reforms for consideration by the GoL. other relevant stakeholders to agree a plan of action. The IRM provides policymakers with the Through an assessment of Lao PDR’s FDI trends, key analysis needed to consider FDI policy reform this IRM discovers that FDI contributes to a options and priorities. In particular, the IRM entails: significant share of the country’s investments, though i) analyzing FDI trends in Lao PDR, ii) diagnosing FDI is concentrated in select sectors and mainly investment policy constraints along the investment from neighboring countries in the region. The lifecycle, iii) developing an action plan for reforms composition of Lao PDR’s FDI has historically been to realize the potential impacts of FDI in the local in natural resources — including metals, electricity economy. generation and construction, sectors that do not create highly productive jobs to fuel economic The IRM is also an example of the WBG’s strategy growth. Moreover, (greenfield, new, more recent) on private sector development. A fundamental FDI has primarily been market-seeking. As the notion in this strategy is “creating markets”, whose IRM finds, improvements in Lao PDR’s investment goal is to maximize development finance for value- 1 Strategic asset-seeking FDI is generally based on the existence of intangible assets at the level of the firm. The methodology used in this IRM for identifying investment types is based on sector FDI data, hence unable to provide any categorization based on firm-level data. For these reasons, the FDI type analysis we conduct in this IRM does not include strategic asset-seeking investments. xi adding investments, promote judicious use of scarce investment protection framework for investors, public resources, and crowd-in private capital. The which will also serve to enhance their confidence success of this strategy requires enabling policy and and therefore support promotion efforts. The regulatory environments that effectively de-risk progressive introduction of a novel mechanism to private sector participation. To do so, “creating detect and resolve investor grievances (Investor markets” is operationalized following the logic Grievance Mechanism or Systemic Investment of the cascade: if development outcomes could Response Mechanism) is also recommended. be effectively supported by the private sector and markets, the presumption is they should be. Thus, With regards entry of investment, the report the “Cascade logic” also stresses the identification recommends an effort to identify and reduce (or of institutional barriers that challenge private sector remove) de facto and de jure restrictions on FDI entry growth in contributing to development outcomes. and establishment in the country. A consolidated In all, this IRM follows these guiding notions, with Negative List of restrictions on foreign investments an analysis that emphasizes those regulatory and could be developed. Screening and approval should legal barriers that hinder the development of FDI be improved and streamlined. The institutional activity in Lao PDR. framework for investment should be enhanced and simplified with better intra-governmental Key recommendations are summarized below: coordination and exchanges of information between all institutions. Lao PDR’s FDI is highly concentrated in natural resource-seeking investments and market-seeking This report provides a roadmap to improve incentive investments. The new vision or strategy should regimes and the promotion framework based on attempt to attract efficiency-seeking investments, best practices and lessons from experiences of other which are precisely the type of FDI that can help the countries. economy enter knowledge-intensive industries. The IRM concludes with a Reform Action Plan Lao PDR does not have a clear, explicit and that defines the reform priorities and sets forth consolidated investment policy. Several development recommendations for concrete short and medium- plans and multiple pieces of legislation have been term action items. This Reform Action Plan should enacted to attract private investment and FDI, in be coordinated with stakeholders to initiate reforms particular. But these various plans, laws and policies implemented within national political calendars remain unconsolidated. Thus, even with significant and evaluated against a set of performance time spent on due diligence, foreign investors lack indicators. In addition, the IRM provides high-level credible information to support operations in the recommendations on an IPS for Lao PDR. country. A new vision, articulated in an Investment Policy Statement (IPS), will be extremely valuable to It is important to keep in mind that multiple and not only guide and provide confidence to investors, severe challenges in Lao PDR’s business environment but also guide government officials in ministries, conspire to hinder private sector development. These regulatory agencies, and sub-national authorities constraints will necessarily inhibit the prospects for on the government’s strategy vis-à-vis private foreign investment to act as a catalyst for economic investment and FDI. diversification and upgrading. Ongoing efforts to improve the investment climate should not only During the investment regime review, several continue, but be accelerated with fresh impetus. important legal issues were identified that could impact investment. This report provides specific recommendations on how to strengthen the xii INTRODUCTION 1. A sound policy framework for investment is development effects and, subsequently, types of critical for FDI to deliver a positive impact on the policies. host economy. This type of external capital can facilitate the transfer of technology and know-how, 3. As a tool, this IRM can support the GoL to while also upgrading the country’s workforce and capitalize on FDI opportunities. The analysis firms through linkages and spillovers, diversification develops a tailored diagnostic to enable and underpin into new sectors, activities and integration of dialogue between the country’s policymakers and domestic firms into GVCs, amongst other benefits. relevant stakeholders. The output would lead to Yet, the likelihood of these positive effects depends an agreed Reform Action Plan. The IRM provides on various characteristics of the receiving economy, policymakers with key analysis to consider FDI among which a policy framework conducive to policy reform options and priorities. To this end, investment activities is key. Moreover, the IRM this IRM report is structured as follows: Chapter exemplifies the WBG’s strategy on private sector 1 assesses Lao PDR’s FDI trends and performance, development. A fundamental notion in this strategy while Chapter 2 evaluates opportunities and is that of “creating markets”, with the goal to constraints in its overall investment climate and maximize development finance for value-adding specific investment policy. Chapter 3 discusses investments, promotion of judicious use of scarce the incentives regime and Chapter 4 outlines public resources and crowding-in of private capital. investment promotion strategies and sectors for The success of this strategy requires enabling policy priority selection. The IRM concludes with Chapter and regulatory environments that effectively de-risk 5, which presents a draft Reform Action Plan for private sector participation. consideration by the GoL. 2. The IRM is an analytical exercise and a client engagement product, aimed at developing a country’s investment policy. An IRM objective is attracting the type of FDI that can help a nation fulfil its development vision. In the case of Lao PDR, this goal is closely linked to FDI’s ability to facilitate the upgrading and diversification of the productive structure of the country. The IRM is grounded in two analytical concepts of the investment policy framework designed by the WBG. The first, the investment lifecycle, sees FDI as in a dynamic relationship with the host economy and not merely a one-time transaction. This view corresponds to an investment policy capable of addressing issues along various stages of the relationship between foreign investors and the host economy, including FDI attraction, entry, retention and expansion, and linkages. Second, this framework sees FDI as a heterogenous phenomenon, which can be broadly categorized into four types: natural resource-seeking, efficiency-seeking, domestic market-seeking, and strategic asset-seeking. This taxonomy groups investments across different location determinants, xiii CHAPTER 1 Assessing the FDI performance of Lao PDR Investment Reform Map (IRM) for Lao PDR | 1 1.1 FDI is a growing source of investment and external finance for Lao PDR 4. FDI is a key source of investment in Lao PDR. FDI accounted for 48 percent of gross fixed Balance of payments data show that net FDI inflows capital formation by the private sector (Figure into Lao PDR have increased by more than 40- 2). FDI also surpassed both remittances and fold in the last 17 years (Figure 1). While aggregate Official Development Assistance (ODA) in private investment has been stable since 2015, net 2012, becoming the largest external financial FDI inflows have continued to increase. In 2017, source (Figure 4). Figure 1 FDI Inflows, Lao PDR (2000-2017) Figure 2 Foreign vs. Domestic Investment, Lao PDR (2000-2017) Source: IMF BOP and UNCTAD. Figure 3 FDI vs. Domestic Savings, Lao Figure 4 Sources of External Financing, PDR (2000-2017) Lao PDR (1990-2017) Source: World Bank (WDI), UNCTAD, and IMF BOP. 2 1.2 Evolution and volatility of FDI in Lao PDR 5. Though FDI has historically been volatile, in the 6. Most FDI into Lao PDR originates from last decade inflows into Lao PDR have accumulated neighboring countries in East Asia & Pacific. rapidly. FDI inflows peaked in 1996, before the Asian Between 2013-2018, the top five sources of FDI financial crisis, and continued declining until 2005. (in number of greenfield projects) were all Asian During this period, GDP growth outpaced inward economies: Thailand, Japan, Vietnam, China, and FDI, with inflows as a share of GDP dropping sharply Cambodia (Figure 7). When FDI is measured by from 8 percent in 1996 to less than 1 percent in the project value, however, the United States enters as early 2000s. In 2006, FDI rebounded to 7 percent, the fourth biggest source country (Figure 8). To dipped after the global recession, and climbed since summarize, Lao PDR’s FDI is highly concentrated 2012 (Figure 5). with respect to source countries. Figure 5 Inward FDI Trends in Lao Figure 7 Top Sources of Greenfield FDI PDR (1990-2017) (number of projects, 2013-2018 August) 1200 9 30 8 1000 7 25 800 6 Current mn US$ 20 # of projects 5 600 4 15 400 3 2 10 200 1 5 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 FDI Inflow % of GDP Thail and Japan Vietnam China Cambodia Figure 8 Top Sources of Greenfield FDI Figure 6 Inward FDI Stock, Lao PDR (capital investment, 2013-2018 August) (1990-2017) 7000 45 4500 6000 40 4000 35 5 000 3500 Current mn US$ 30 3000 current mn US $ 4000 25 % 20 2500 3000 15 2000 2000 10 1500 1000 5 1000 0 0 500 1995 2005 2015 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 Inward FDI Stock % of GDP 0 Thail and China Vietnam United States Japan Source: UNCTAD. Sources: Financial Times fDi Markets database. Investment Reform Map (IRM) for Lao PDR | 3 1.3. Benchmarking Lao PDR’s FDI performance against its regional neighbors 7. Research shows a clear link between Lao PDR’s 8. FDI growth in Lao PDR gained momentum main source countries for FDI and its trade structure. relative to peer countries before 2015 but tapered Lao PDR is landlocked and the least populated afterwards. During 2012-2015, Lao PDR surpassed country in South-East Asia. As reflected in Figures Thailand, Vietnam and Cambodia in terms of FDI 9 and 10, the economy heavily depends on trade inflows per capita, and ranked only lower than and investment with regional neighbors, primarily Cambodia when FDI is measured as a percentage of Thailand, Vietnam, China, and Cambodia. In 2016, GDP. However, FDI inflows to Lao PDR have fallen Thailand accounted for 66 percent of Lao PDR’s during the past three years, while most other peer total imports and 44 percent of total exports, while countries saw rises (Figure 11). The relative decline Lao PDR’s second largest trading partner, China, of FDI inflows in Lao PDR is concerning. provided 17 percent of its imports and absorbed 30 percent of its exports. Figure 9 Lao PDR’s Export Figure 11 FDI Inflows Per Capita - Lao Destinations in 2016 PDR vs. Comparators (2008-2017) Japan Other 2.6% 11.8% 450 India 400 3.1% 350 300 Current US $ Vietnam Thailand 250 8.2% 44.4% 200 150 100 50 0 -50 China 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 30.0% Cambodia Lao Peopl e's Dem. Rep. Myanmar Malaysia Thail and Viet Nam Figure 10 Lao PDR’s Import Sources in Figure 12 FDI Inflows (percent of 2016 GDP) - Lao PDR vs. Comparators (2008-2017) South Korea Japan 2.1% 1.9% Other Vietnam 5.8% 18 7.7% 16 14 12 10 8 % China 6 16.5% 4 2 Thailand 0 66.0% -2 2008 2009 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 Cambodia Lao Peopl e's Dem. Rep. Myanmar Malaysia Thail and Viet Nam Sources: Atlas of Economic Complexity, Harvard University. 2 Whaen assessing a country’s FDI performance, it is important to see how the country is faring vis-à-vis other countries. For our analysis, five countries in South-East Asia were selected, some of which are at a similar level of development as Lao PDR. Others, more advanced, can serve as aspirational models. 4 1.4 Type of FDI entering Lao PDR 9. Despite the significant increase of inward FDI over 10. As not all investment is the same or brings the the past decade, Lao PDR’s FDI performance falls same benefits to a host economy, it is important to short relative to regional peers. Between 2015-2017, examine the type of FDI entering Lao PDR. Between Lao PDR’s average FDI stock (as a share of GDP) 2003-2018, FDI in Lao PDR was concentrated in was only 36 percent, the lowest among regional peer hydropower, construction and mining: roughly 30 countries (Figure 13). When measured by inward percent of all greenfield FDI was in renewable energy, FDI stock per capita, Lao PDR registered US$ 840 followed by real estate (16 percent) and financial million on average, just one-fifth of Malaysia’s level services (10 percent). Specifically, hydroelectric and only slightly higher than Myanmar, a country power made up 79 percent of renewable energy that only recently joined the regional competition investment. FDI in natural resources (metals, coal, oil for FDI after the lifting of international sanctions in and natural gas, and minerals) represented 15 percent 2012 (Figure 14). of capital investment (Figure 15). Capitalization of resources promoted the expansion of construction and real estate investment. Investment in hospitality (hotels) and tourism has received much attention Figure 13 Inward FDI Stock (percent of GDP) from foreign investors in recent years, attracting - Lao PDR vs. Comparators (2015-2017, 7 percent of greenfield FDI. Knowledge-intensive average) sectors (such as industrial machinery, software 100 and IT services) accounted for a negligible share of 90 foreign investment in Lao PDR. 80 70 % 60 50 40 30 Cambodia Viet Nam Thail and Malaysia Myanmar Lao Peopl e's Figure 15 Sectoral Distribution of Dem. Rep. Greenfield FDI in Lao PDR (top sectors, project value, 2003-2018 Figure 14 Inward FDI Stock (Per Capita) August) - Lao PDR vs. Comparators (2015-2017, Top Sectors of Greenfield FDI average) (Project value, 2003-2018 Aug) Food & Tobacco Other 4500 2% 12% 4000 Minerals 3% 3500 3000 Current US $ Paper, Printing & Packaging 2500 4% 2000 Alternative/Renewable energy 1500 Rubber 30% 4% 1000 500 Coal, Oil and Natural Gas 4% 0 Malaysia Thail and Viet Nam Cambodia Lao Peopl e's Myanmar Dem. Rep. Hotels & Tourism 7% Source: UNCTAD. Real Estate Metals 16% 8% Financial Services 10% Sources: Financial Times fDi Markets database. Investment Reform Map (IRM) for Lao PDR | 5 11. The composition of FDI in Lao PDR is largely 12. Another way to assess the composition of shaped by its natural resource endowment and inward FDI to any economy is to use the Dunning human capital status. Lao PDR is known for its typology (Figure 17), which considers four types abundant mineral resources, notably coal, gold, of investment based on the dominant motivation copper and other valuable metals. Reflecting of the investor: market-seeking, natural resource- this mineral wealth, its top exports in 2015 were seeking, efficiency-seeking and strategic asset- copper ore, rubber, gold and wood (Figure 16). seeking. When this typology is applied to the case Plentiful water resources and mountainous terrain of Lao PDR and considering the total greenfield FDI the country received between 2012-2016, our research finds that market-seeking FDI is the Figure 16 Lao PDR’s Export Basket3 (2016) Source: The Observatory of Economic Complexity. enable it to produce and export large quantities of largest category (85 percent), followed by natural hydroelectric energy. Total natural resource rent resource-seeking FDI (10 percent), while efficiency- exceeded 10 percent of Lao PDR’s GDP during the seeking FDI only accounts for less than 3 percent of past decade. Tourism is emerging as another main total investment value. The high degree of market- economic activity and monopolized 86 percent of seeking FDI could imply that since 2012, Lao PDR service exports in 2017. Thus, it is not surprising has increased investment diversification away that natural resources are a primary motivation of from natural resources. For Lao PDR, market- foreign investors interested in Lao PDR. seeking FDI has traditionally been market-seeking. Additionally, this could also be a response to high Figure 17 FDI Typology domestic consumption demand and a rising middle- income population, as its imports stand at greater than 80 percent. Source: World Bank. 2018. Global Investment Competitiveness Report 3 By HS-4 product category 6 13. The small share of efficiency-seeking FDI suggests 14. Importantly, Lao PDR is not attracting the type that Lao PDR has not fully leveraged regional and of FDI that promotes skills upgrading, generates global value chains to access external markets. In knowledge spillovers and creates ample job other words, its economy is not well integrated opportunities. The “lion’s share” of FDI is channeled into regional and global economies. Our analysis into electricity, construction and extractives5, yet shows that Lao PDR receives very little efficiency- these sectors create inadequate jobs to fuel inclusive seeking FDI. This is a source of concern for its future growth. Software and IT services, consumer products, development, as this type of FDI, with its export focus and industrial machinery are examples of sectors and thus imperative to be competitive internationally, that create many jobs per dollar invested and have is known to be the most transformative form among higher technology and skill intensity. However, these the four types4. The main efficiency-seeking FDI sectors only occupy a marginal presence in Lao’s FDI projects identified in our analysis are in the sugar and portfolio (Figure 20). Moreover, competitiveness beverages sector (Figure 19). The analysis also shows outside resource sectors remains limited. Growth in significant levels of FDI in construction, a sector that the non-agricultural sector, largely driven by natural creates many jobs but where imports are low. As resources, did not result in a commensurate increase it formulates a new FDI strategy, Lao PDR should in jobs. Only 160,000 non-agricultural wage jobs try to attract more efficiency-seeking investments. in the private sector were created between 2002- Market-seeking FDI presents some limitations with 2012. Growth in manufacturing is stagnant, the respect to its transformative abilities, and there sector is small and dominated by garments and food the potential for more market-seeking FDI in Lao processing. Overall, structural transformation in PDR seems limited: how many foreign banks and Lao PDR is sluggish compared with regional peers. producers or producers of consumer goods can a small economy such as Lao PDR accommodate to serve its limited and slow-growing consumer base. Figure 18 Lao PDR’s FDI Typology - Figure 19 Lao PDR’s FDI Typology - Share of Share of Greenfield FDI by Type (2012- Greenfield FDI by Type and Sector (2012-2016, 2016, number of greenfield projects) number of greenfield projects) Natural Resource- Seeking 10.01% Efficiency- Seeking… Market-Seeking Tourism 85.47% 1.96% Source: World Bank. 2018. Global Investment Competitiveness Report 4 Morrissey, O. (2012). FDI in sub-Saharan Africa: Few linkages, fewer spillovers. The European Journal of Development Research, 24(1), pp.26-31. Fruman C. (2016). Why does efficiency-seeking FDI matter? World Bank blog 5 Measured by project value. Investment Reform Map (IRM) for Lao PDR | 7 Figure 20 Distribution of Greenfield Figure 21 Distribution of Greenfield FDI by Business Activity, Lao PDR FDI by Business Activity, Lao PDR (number of projects, 2003-2018 (project value, 2003-2018 August) August) Sales, Marketing & Support, 26 Electricity, 14 Business Services, Manufacturing, 4400.15 1803.45 Construction, 11 Extraction, 14 Sales, ICT He ICT Marketin & Logistic adq & Retail g & … In… s, … uar Int , te… er… E Educati Electricity, 5898.29 Construction, 4688.6 Extraction, 1489.8 507.3 Logi… H… Business Services, 65 Manufacturing, 59 Retail, 13 on & … M… R… Figure 22 Jobs Created by Greenfield Figure 23 Jobs Created per Million Dollars of FDI by Sector, Lao PDR (number of jobs Greenfield FDI by Sector, Lao PDR (number of reported by investors, 2003-2018 August) jobs reported by investors, 2003-2018 August) Hotels & Wood Tourism, Products, Minerals, 352 278 271 Industrial Machinery, Equipment & Tools, Building & Medic Leisur Consumer Products, 34.94 32.41 Paper, Printing & Construction Consumer Rubber, al e& Metals, Devi… Ente… Packaging, 1168 Materials, 729 Products, 195 Automo Electr Auto 243 Food & 632 tive onic motiv Tobacco, Consu Electr… Auto… Comp… Com… e… Food & 11.36 mer… Tobacco, Medic Build… Che… 229 Coal, Hea Tr… Fin… Textiles, Non- al… Non- Oil… lt… 19.32 Automotive Plas Rub Re Automotive Software B… B… C Transport … Paper, tic… b… a… Transport OEM, & IT Industr Alte Print… Real Estate, 1109 682 Textiles, 485 service… ial… rn… P… A… C Consumer M… F… M… Electronics, Healthcare, L C Software & IT services, 173.08 13.09 10.11 Busi… Be… H… Source: World Bank. 2018. Global Investment Competitiveness Report 1.5 Linking Lao PDR’s FDI performance to the economic complexity analysis 15. With respect to economic complexity, Lao competitiveness. Lao PDR’s economic complexity is PDR lags relative to countries at the same income found to be among the lowest globally, with an ECI level. Economic complexity reflects the amount of of -1.25 in 2017 (Figure 24). knowledge embedded in the productive structure of an economy. Measured by the Economic Complexity Index (ECI), economic complexity is proven to predict a country’s economic growth and 8 Figure 24 Economic Complexity Index vs GDP per capita (2017) Source: The Observatory of Economic Complexity. 16. Lao PDR’s economic complexity has decreased upgrades productive capabilities to increase its by 71 places over the past three decades. Driven product complexity. Attracting efficiency-seeking by increasing demand from neighboring countries, FDI has a paramount role to play in this regard. A Lao PDR embraced the commodity boom and nascent electronics industry is emerging in Lao PDR encouraged resource-related investments and and expanded its export mix to include telephones exports. However, high growth fueled by exploiting and radio parts (Figure 25). This could be a good and exhausting resource endowments is not starting point to promote and diversify FDI in sustainable. To avoid the “resource curse6” , it is higher-end manufacturing. important Lao PDR moves up the value chain and Figure 25 Lao PDR’s Exports: Emergence of Source: Atlas of Economic Complexity, Harvard Electrical Machinery and Equipment University. 6 The “resource curse” is a condition in which countries that are abundant in natural resources tend towards less growth, development, and poor democracy. Research by Jeffrey Sachs and Andrew Warner found a strong negative correlation between economic growth and high natural resources. Investment Reform Map (IRM) for Lao PDR | 9 CHAPTER 2 Assessing the Investment Environment of Lao PDR 10 2.1 Overall investment climate of Lao PDR 17. Investment climate refers to the general business protracted and costly, while protection of property environment that affects private sector operations, rights is insufficient. All of these elements contribute including foreign and domestic investment. Our to jeopardizing the country’s ability to create a research7 finds that as Lao PDR transitions into a dynamic private sector. market economy, its investment climate is improving while remaining poor in many regards (Figure 26). Rule of law is weak, business procedures are Figure 26: Global Competitiveness Performance in 2018, Lao PDR and Peer Countries Lao PDR Viet nam Malaysia Thailand Cambodia 1st pillar: Institutions 7 12th pillar: Innovation 2nd pillar: Infrastructure 6 5 11th pillar: Business sophistication 3rd pillar: Macroeconomic environment 4 3 10t h pillar: Market size 2 4th pillar: Health and primary education 9th pillar: Technological readiness 5th pillar: Higher education and training 8th pillar: Financial market development 6th pillar: Goods market efficiency 7th pillar: Labor market efficiency Source: World Economic Forum Global Competitiveness Index. 7 Evaluating an investment climate is usually done through using enterprise surveys and standard indicators measuring the difficulty of doing business in a given country. This report used both methods and sources of information. 8 Importantly, World Bank Ease of Doing Business data for Lao PDR only covers domestic investors. As such, these results serve merely as a proxy to also describe the investment environment for foreign investors. Investment Reform Map (IRM) for Lao PDR | 11 18. Burdensome procedures, unpredictable law businesses, any additional steps or requirements enforcement and discriminatory regulatory faced by foreign investors are not counted in reports. environment conspire to hamper investment. Lao Lao PDR is among the most challenging countries PDR has a relatively low ease of doing business to invest and operate a business, as investors must score of 50.8 out of 100 in the 2020 World Bank obtain numerous permits from various agencies, go Ease of Doing Business report8, trailing far behind through cumbersome and complicated procedures, the regional average of 63.3 and peer countries. and bear huge risks. To appeal to notoriously fickle A closer investigation reveals a grim picture of and sensitive efficiency-seeking investors, Lao PDR the business environment on multiple dimensions should urgently prioritize removal of these perceived (Figure 27). Starting a business requires as many obstacles. Protecting minority investors’ rights, as 173 days, while the regional average is only 26. streamlining and simplifying business procedures, Getting electricity is another major challenge that improving contract enforcement and reducing the takes 87 days and costs 705 percent of income costs and risks related to resolving insolvencies are per capita. Protection of minority investors is the first steps toward a more conducive business inadequate, enforcing contracts and resolving environment that nourishes investment. insolvency are extremely slow and costly. Doing Business reports are measured against domestic Figure 27: Lao PDR’s 2020 Ease of Doing Business Score Source: World Bank, Doing Business. 12 2.2 Logistical challenges impede Lao PDR’s Figure 28: Logistics Performance Index, Lao PDR (2018) FDI attractiveness Lao PDR Cambodia Myanmar Thailand Vietnam Malaysia 19. Our research finds that Lao PDR’s poor logistics Customs impedes private investment and disincentivizes 160 efficiency-seeking investment. As markets in the 140 120 global economy are increasingly linked, logistics 100 remains a core enabler for development. Indeed, Timeliness 80 Infrastructure transport costs were recently found to be higher 60 in Lao PDR than neighboring countries, a result 40 20 of a thin transport sector with low productivity 0 levels and underutilization of weight capacity in the sector9. Between 2012-2018, Lao PDR’s average Logistics Performance Index (LPI) ranking was 120th out of 190 countries, significantly worse Tracking and tracing International shipments than most peer countries10 (Figure 28). The LPI quantifies how easy or difficult it is in a country to transport general merchandise. It comprises Logistics quality and competence an array of activities beyond transportation, including warehousing, brokerage, express delivery, Source: Logistics Performance Index. terminal operations, related data and information management. In a world where connectivity is pivotal to competitiveness and prosperity, huge gaps Figure 29: Logistics Performance Index, Average Rank in logistics in Lao PDR undermines its investment (2012-2018): Lao PDR vs. Regional Comparators attractiveness and development potential. The LPI 150 thus goes beyond Customs procedures, for which Lao PDR’s performance is relatively satisfactory11. 130 110 20. While Lao PDR has made great strides in Rank 90 logistics in the past two years, improvements in 70 timeliness were modest and even worse than 10 years prior. Timeliness measures the efficiency 50 of shipments in reaching destinations within the 30 Thail and Malaysia Vietnam Cambodia Lao PDR Myanmar scheduled or expected delivery time, key to supply chain reliability. The low “timeliness” rating severely crimps business operations and can keep efficiency- Figure 30: Lao PDR’s Logistics Performance seeking FDI at bay. As explained earlier, efficiency- Index seeking FDI is precisely the type of FDI that Lao PDR is not receiving but should strive to attract due to its transformative effect. Efficiency-seeking 160 investors are firms that produce in a host economy 140 and then export outputs to third countries. This 120 makes efficient, economical and timely logistics Rank even more critical for this type of investor than for 100 other types. 80 60 2007 2010 2012 2014 2016 2018 Customs Infrastructure Source: Logistics Performance Index. International shipments Logistics quality and competence Tracking and tracing Timeliness 9 See World Bank Group. 2018. “Transport Costs and Prices in Lap PDR. Unlocking the Potential of an Idle Fleet.” Notably, due to data consistency issues with LPI, Lao PDR’s performance has moved up and down in recent years, without 10 any clear underlying reforms underpinning the results. In addition, LPI data is only collected from non-Lao transport providers. 11 As measured by the Doing Business Trading Across Borders indicator. Investment Reform Map (IRM) for Lao PDR | 13 2.3 Human capital challenges Figure 31: Harmonized Test Scores (2018): Lao PDR vs. Regional Comparators 550 21. Low educational attainment has stymied Lao PDR’s inclusive growth path through industry 500 upgrading. Standardized tests have confirmed that Lao students learn very little from the basic 450 Score education system (Figure 31). Lao children also 400 spend fewer years in schooling in relation to peer countries. Despite the officially high enrollment 350 figures in primary education, drop-out rates are high 300 and completion rates are low. Only 77.5 percent of Vietnam Malaysia Cambodia Thail and Myanmar Lao PDR pupils starting in Grade 1 make it to the last year of primary school, and a mere 44.7 percent of children Figure 32: Lao PDR: School Drop-Out Rates are enrolled in secondary school (Figure 32). Indeed, the World Bank Human Capital Project found that when years of schooling were adjusted for quality 30 of learning in Lao PDR, children received the 25 equivalent of 6.4 years of schooling. The 2014 Lao PDR Development Report found that many workers 20 lacked foundational skills, such as the ability to 15 % read. Natural resource sectors are capital-intensive 10 and offer relatively few job opportunities. The main 5 engine of inclusive employment – manufacturing – 0 is underdeveloped in Lao PDR and concentrated in 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 activities that process raw materials. Adolescents out of school (% of lower secondary school age) Children out of school (% of primary school age) 22. Human capital remains a binding constraint Source: World Development Indicators. for Lao PDR to tap into broader benefits of industrialization and achieve inclusive growth. In 2017, the agricultural sector employed more Lao PDR. Moreover, the country is impacted by an than 60 percent of the country’s labor12, while ongoing “brain-drain”, with a skilled emigration wage employment only constituted 16 percent of rate of 37.4 percent in 2013. More recent data total employment. Among all factors in the World shows that brain drain remains an important issue: Economic Forum’s firm survey113, foreign investors for instance, The Global Economy 2020 places Lao pointed to an inadequately educated workforce as PDR as the 37th most affected country in the world the most problematic factor for doing business in (out of 176 included in the analysis)14. Inadequately educated workforce Tax rates Access to financing Tax regulations Figure 33: Most Problematic Factors Inadequate supply of infrastructure for Doing Business in Lao PDR Corruption Poor work ethic in national labor force (2018) Foreign currency regulations Inflation Inefficient government bureaucracy Restrictive labor regulations Insufficient capacity to innovate Source: WEF Global Competitiveness Report, 2017-2018. Poor public health Policy instability Crime and theft Government instability/coups 0 2 4 6 8 10 12 14 16 Score 12 According to ILO estimates. 13 Global Competitiveness Report 2017–2018, World Economic Forum. 14 Data retrieved at https://www.theglobaleconomy.com/rankings/human_flight_brain_drain_ 14 index/ 2.4 Lao PDR’s investment competitiveness 23. Numerous aspects of investment climate and business activity (see Annex 1 for a comprehensive business environment, ranging from available skills review of the ICB methodology). Again, the to the quality of the country’s business environment, purpose of this analysis is not to select sectors influence an investor’s decision-making and for prioritization, but rather to assess Lao PDR’s attractiveness to a given country’s economic sectors. overall investment competitiveness. As such, the The Investment Competitiveness Benchmarking ICB analysis is conducted for sectors found to have (ICB) analysis diagnoses sector-specific constraints attracted large amounts of greenfield FDI in recent in Lao PDR, and thus identifies potential benefits years or highlighted in the country’s 2018 National and challenges for its FDI attraction. In short, the Socio-Economic Development Plan. These sectors ICB completes this exercise by benchmarking Lao include agriculture (proxied by food and tobacco)15, PDR’s performance on any given indicator (Table energy (proxied by alternative and renewable 1) to the performance of all other countries that energy), financial services, transportation, and have successfully attracted FDI to a given sector or tourism (proxied by hotels and tourism)16. Source: Investment & Competition unit, Macroeconomics, Trade Table 1: Summary of Investment and Investment Global Practice, World Bank Group. Competitiveness Benchmarking Categories Investment Climate Area Pillar Description Demand Demand Domestic and foreign market size; national GDP per capita and growth; regional GDP per capita and growth. Production Factors Labor & Skills Total size of labor force and labor force participation rate; literacy rates and primary, secondary, tertiary education enrollment rates; quality of education systems and training schools; labor practices (hiring and firing, pay and productivity); country capacity to attract and retain talent. Geography & Natural Access to land; percent of land area is arable; renewable water Resource Endowment resource availability; urban population and population density. Existing Capabilities Capital and value-added per worker; production and business sophistication; measures of supplier quality and quantity; capacity for innovation, research and development (R&D) spending; availability of latest technologies and firm-level technology absorption; and licensing and certifications. Key Inputs Energy Electricity production; access and cost of electricity. Transport & Quality of air transport, railroad, port, and road infrastructure; Infrastructure timeliness and tracking of international shipments; logistical competence; and fixed broadband internet subscriptions. Finance Access to credits and loans, availability and affordability of financial services, soundness of banking system. Institutions Regulatory Barriers Burden of government regulation; bureaucracy quality; tax rates; cost required to register property, start a business, and receive a construction permit. Rule of Law & Government effectiveness; extent of bribery; corruption and Property Rights policy measures; legal proceedings and efficiency of legal system; strength of insolvency. Market Contestability Anti-monopoly policy; extent and intensity of competition; prevalence of trade barriers and tariffs. Macroeconomic & Economic and political risk; debt and inflation measures; Political Stability current account balance; political stability and risk; voice and accountability; conflict and ethnic tensions; cost of crime. 15 Agribusiness was proxied using the food and tobacco sector in fDiMarkets. The fDiMarkets sector definition follows the classification developed by the Financial Times. As such, this sector’s classification includes a variety of sub-sectors, ranging from raw crop products to manufactured food products. 16 See Annex 3 descriptions of the ascribed Financial Times’ fDiMarkets sector classification. Investment Reform Map (IRM) for Lao PDR | 15 24. With respect to Lao PDR’s investment aspects of doing business have managed to attract competitiveness, the ICB analysis found that Lao PDR foreign investors to these sectors in recent years. faces constraints in attracting FDI to higher value- Of the priority sectors assessed, the ICB found added activities within its key sectors. The results of the investment competitiveness of the alternative/ the ICB analysis are presented in Annex 1. It finds renewable energy sector presented the relatively best that Lao PDR’s investment climate demonstrates performance. that it is currently competitive in attracting FDI towards basic activities across all priority sectors. 27. For Lao PDR to improve its overall investment As an example, for the alternative/renewable energy competitiveness, it remains critical these economic, sector, it is presently only competitive in welcoming business environment, and institutional constraints FDI towards electricity-generating activities (Annex that deter FDI are addressed. Increased FDI inflows, 1, Figure 43) and construction activities within especially to include a significant share of efficiency- hotels and tourism (Annex 1, Figure 47). seeking investments, have the potential of setting Lao PDR on a sustainable and inclusive development 25. In the long run, to attract FDI to more path. Efficiency-seeking FDI could bring advanced sophisticated activities higher up the value chain, the technology and know-how, upgrade skill sets of the ICB finds that Lao PDR needs to make significant domestic labor force and diversify its economy in improvements across its investment climate. As favor of high value-added activities. To maximize mentioned, the country struggles with the quantity these benefits, a holistic approach is required. Sound and quality of its human capital, a finding that is investment policies that remove legal, regulatory supported by ICB. Technological readiness and and administrative impediments must be bundled innovative capacity are unsurprisingly low given with efforts to fill gaps in infrastructure and human the poorly educated workforce. Access to finance capital. adds a significant barrier for investors, particularly to smaller businesses. Market contestability presents further constraints for FDI attraction in 2.5 FDI vision and strategy in Lao PDR key sectors. In fact, a small number of State-owned entities dominate key sectors like financial services, 28. The investment vision refers to the national transportation and utilities. Lastly, macroeconomic economy’s position on foreign investment and how risks are elevated as external debt rose to 98 it sees the role of investment in the overall national percent of GDP by 2016. Fiscal accounts face development strategy. For Lao PDR to see a beneficial large imbalances as the government funded huge role of FDI towards its development objectives, investments in infrastructure, despite its inability it is critical the country’s development vision and to collect a fair share of revenues from the natural strategy (Figure 34) is translated into clear short- resource sector. and medium-term agendas. For some countries, the vision takes the form of an IPS. In the case of Lao 26. Regarding Lao PDR’s business environment, PDR, our research has not found an official and significant improvements are critical to attract publicly available document (resembling an IPS), in foreign investors. As outputs of the ICB analysis which the GoL has articulated its FDI vision. show (Annex 1), Lao PDR faces binding constraints to woo FDI across its priority sectors. Specifically, Figure 34: Investment Lifecycle Lao PDR’s comparative costs required to obtain construction permits, register property as well as poor border compliance and total tax rates were the top binding constraints to the business environment. In other words, very few to no countries in the world with Lao PDR’s level of performance in these Source: Investment & Competition unit, Macroeconomics, 16 Trade and Investment Global Practice. 2.6 Entry and establishment of investments 29. To an extent, the 8th National Social-Economic articulated in an IPS. Development Plan (NSEDP) 2016-2020 provides insight into national FDI objectives. The 8th NSEDP, 30. De jure statutory restrictions or obstacles can five-year plans, promotes foreign investment and a prevent the entry and participation of foreign favorable business environment as key objectives investors in the Lao PDR economy. Our analysis and explicitly characterize FDI as an important considers one form of FDI entry restrictions out contributor to economic growth. The 8th NSEDP of four tracked by the OECD FDI Regulatory assigns a target contribution of up to 30 percent of Restrictiveness Index, namely foreign equity FDI to Lao PDR’s GDP. Additionally, the 8th NSEDP limitations and screening for investment approval17. acknowledges Lao PDR’s fragile economic base, As Figure 35 shows, Lao PDR maintains a relatively which sees undeveloped undiversified commercial high number of foreign equity limitations in several goods production and an economy vulnerable sectors and activities, particularly services (business to external factors. In the 8th NSEDP, the GoL services, media, engineering, wholesale distribution). essentially acknowledges that to ensure sustained Moreover, relative to its Asian peers, Lao PDR is and inclusive economic growth, it needs to provide the third most restricted country in the panel, strategies for investment attraction supported by only behind the Philippines and Malaysia (Figure transparent enforcement of legislation, rules and 36). It is more restricted than all other regional regulations. The document identifies several priority peers highlighted, and significantly more closed investment areas: industrial processing, handicrafts, than Mongolia or Cambodia, the latter the most energy, mining and infrastructure development, open economy of the panel in terms of FDI equity tourism, wholesale and retail, logistic services, limitations. Some sectors with high FDI restrictions finance and banking. Though these are valid (transport, distribution and business services) objectives, experts would agree the handful of direct are key towards increasing Lao PDR’s economic and indirect references to FDI in the 8th NSEDP do activities and competitiveness. not amount to a clear and comprehensive investment policy or vision. Moreover, the 8th NSEDP’s objective to increase Lao PDR’s competitiveness can Figure 35: Foreign Equity Limitations, Lao PDR be actualized through investment promotion policies and industrialization strategies. Consequentially, the first recommendation of this IRM is the GoL formulate a clear and distinct investment policy, Figure 36: FDI Equity Restrictions – Lao PDR and its Regional Peers 0.4 0.374 0.35 0.3 0.252 0.25 0.19 0.2 0.13 0.15 0.117 0.1 0.054 0.072 0.05 0 Lao PDR Cambodia Malaysia Mongolia Myanmar Vietnam Philippines Source: OECD Restrictiveness Index. Sources: OECD FDI Index; World Bank Source: OECD. IPP research (March 2019). 17 The OECD FDI Regulatory Restrictiveness Index (FDI Index) measures statutory restrictions on FDI across 22 economic sectors. It gauges the restrictiveness of a country’s FDI rules by looking at the four main types of restrictions on FDI: 1) Foreign equity limitations, 2) Discriminatory screening or approval mechanisms, 3) Restrictions on the employment of foreigners as key personnel and 4) Other operational restrictions, (restrictions on branching, capital repatriation or land ownership by foreign-owned enterprises). Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is the average of sectoral scores. The discriminatory nature of measures, i.e. when they apply to foreign investors only, is the central criterion for scoring a measure. State ownership and State monopolies, to the extent they are not discriminatory towards foreigners, are not scored. Investment Reform Map (IRM) for Lao PDR | 17 31. Additionally, there is a correlation between the these economies have since registered a significant impact of easing entry restrictions in a country and increase in FDI inflows (as measured in percentages its ability to attract higher levels of FDI. Brazil, of GDP). This underlines the importance of removal Republic of Korea, the Philippines and Vietnam or reductions in restrictions to entry. As a result, the are examples of economies that have reduced opening of more sectors and activities to foreign restrictions on FDI entry18. As Figure 37 shows, participation, is key for a country that aspires to improve its FDI performance. Figure 37: Reducing FDI Entry Restrictions and Impact on FDI inflows Sources: OECD FDI Index; WB IPP research (March 2019). 18 As measured by the OECD Restrictiveness Index 18 32. Investment entry into Lao PDR is not Lao PDR must identify destination sector(s) before straightforward. The Investment Promotion Law approaching the relevant agencies and whether 2016 (IPL 2016), which replaced the Investment their investments fall within the General Business Promotion Law 2009 (IPL 2009), and its relevant which is divided into “Uncontrolled General decrees open all investment sectors and areas in Business”, “Controlled General Business” or Lao PDR except in “the sectors prohibited by “Concession Business” categories. This is because Law, such as those areas considered detrimental to the IPL (Articles 32-33) divides investment into national security, the natural environment, public three categories that each determine the investment health and national culture and subject to the list entry process. The first category is General Business of controlled businesses”. Lao PDR does not have which includes “opened” activities and those under a complete list of entry restrictions. The language the Controlled Business and Concession Business used in the IPL provides the GoL with significant lists. Investment in opened activities can go directly room for discretion in determining sectors or areas to enterprise registration at the Ministry of Industry detrimental to national security, the environment, and Commerce (MoIC), possibly complemented public health or culture. This type of language does by sectoral operating licensing and depending on not provide foreign investors with certainty. The the activity. Investments in controlled businesses IPL 2016 also lists “promoted” sectors (agriculture, undergo prior screening through the One-Stop agro-processing industry, handicrafts and services) Service Office for Investment at the MPI or where 100 percent foreign ownership is allowed. provincial center, depending on the sector, then to company registration complemented by sectoral 33. Furthermore, the investment approval process licensing. Investments in Concession Business is complicated (divided into three categories), as undergo screening and approval by the MPI (if not illustrated in Figure 38. Prospective investors in a legal entity, they first go to enterprise registration). Figure 38: Investment Entry Procedure into Lao PDR Procedure for Investment Approval 1. General Business 1. Concession Business Investment in Specific and Special 2. Branch of Foreign Business 2. Controlled Business Economic Zone 3. Representative Office Developer Investor Ministry of Industry and Commerce Ministry of Planning and Investment NC-SEZ via OSU in each S-NC SEZ SEZ Enterprise Registration 1. Concession License 2. Investment License for Controlled Business Enterprise SEZ Concession Registration 3. Representative Office License License License Sectoral License of Required Enterprise Registration/ Sectoral License if Required Sectoral License of Required Source: Authors’ own interpretation of the process flow based on information from the MPI and MoIC. Investment Reform Map (IRM) for Lao PDR | 19 34. The list of required legal documents for investors At this stage, the investor is required to provide interested in investing in General Business, Branch of financial statement or source of funding certified by Foreign Company, Concession Business, Controlled domestic or international financial institutions and Business and Representative Office categories are show evidence of registered capital, not less than shown in Table 2. It clearly shows fragmented legal 30 percent of total capital in such a project. Upon framework for investment entry into Lao PDR, obtaining Controlled Business approval, the investor where investors are required to refer to different must undergo enterprise registration and gain an types of legal documents depending on the type of operating permit under the Law on Tourism, No. business invested in. 32/NA (24 July 2013). Article 78, Law on Tourism makes a cross reference to the Law on Enterprise 35. In addition, some investors may face investment and Law on Investment Promotion. entry approval, permits and licenses after obtaining investment entry approval. For example, at entry 36. Businesses located within special economic zones level into a four-star or more hotel business, an (SEZs), such as the Savan Seno Special Economic investor must comply with at least three different Zone, are permitted 100 percent foreign ownership. procedures. The investor must submit an application Investors in one of the many SEZs must deal directly to invest under the Controlled Business category. with authorities of the respective SEZ. Table 2: List of Legal Documents for General Business, Concession Business and Controlled Business 1. General Business 1. Concession Business Investment in Specific and Special 2. Branch of Foreign Business 2. Controlled Business Economic Zones 3. Representative Office • Negative List (List of Conditional • Prime Minister’s Decree on • General Investment: Developers and Types for Foreign Investors, List Endorsement of Business Activities investors can invest in all sectors D02-2015). List of business types, under the Controlled Business List in a SEZ, except for government business sizes, enterprise types and Concession List of Lao PDR, prohibitive activities. General and company forms reserved by No. 3/2019. investments will not receive any ministries for consideration before • Articles 55 and 56 of the Investment promotional policy from SEZ. approval of enterprise registration. Promotion Law (2016). • Promotional Investment: • Instruction on Establishment of Promotional investments, according Foreign Enterprise Branches (legal to a SEZ Administrative Committee entity), No. 1619/IC.ERM (dated or Economic Administrative Board 28/08/2013). regulation, are mainly electronic • Ministerial Decision No.0023/2019 industries, scientific and new on Enterprise Registration technological research in the determining the list of activities production of modern construction requiring operating licenses after equipment, tourist precincts registering a company. infrastructure, production and processing of hygienic agricultural products, organic products, production for export, forestation, schools and hospitals. Source: Authors’ own interpretation of the process flow based on the information from the MPI and MoIC. 20 2.6.i Investing in a general business 2.6.ii Controlled business and concession business 37. As discussed, there are two types of General 41. Controlled Business and Concession Business Business under the IPL: Uncontrolled General investors are subject to IPL 2016 procedures under Business and Controlled General Business as per the MPI jurisdiction. Controlled and Concession Controlled Business list determined in Decree No. Business lists are contained in the Decree on 03/PM (10 January 2019). Uncontrolled General Endorsement of the [Business Activities under] Business investors shall refer applications to the the controlled business and concession lists MoIC under the Enterprise Law. The MoIC issued of Lao PDR, No. 03/PM, (10 January 2019). three different types of lists under the Enterprise Decree No. 03/PM (2019) lists 43 Controlled Law, namely restrictions to FDI in areas reserved Businesses (compared to 62 sub-sectors in 2016) for Lao people only in the Notification on reserved and 22 Concession Businesses. Those investing in business category list for Lao people No. 1328 (13 Controlled Businesses and Concession Businesses July 2015) (Reserved List), the conditional business may apply to register an enterprise at the MoIC only category for Foreign Investors in the Notification upon obtaining necessary investment approval(s). on conditional business category list for Foreign Investors (Conditional List) No. 1327 (13 July 42. IPL 2016 defines Controlled Business activities 2015) and the list of prohibited sectors namely the as “businesses that have an impact on the stability Notification on Prohibited Business Category List of national security, public order, national traditions No. 1592 (26 August 2015) (Prohibited List). and environment, society and nature” (Article 34). This article states these business activities will be 38. The three lists are generally market access determined by relevant sector authorities and/ documents that link access to domestic investors or the Investment Promotion and Management only or foreign investors meeting certain conditions. Committee (IPMC). It further adds the government The reserved list gives foreign investors access to the will periodically set the Controlled Business list. sector in the Reserved List subject to issuance of the The definition is further expanded by Decree No. enterprise registration certificate(s) and necessary 03/PM (10 January 2019) as “business activities operational licenses from the relevant line ministry. affecting national security, social order, good The Conditional List states minimum capitalization and beautiful national tradition and culture and requirements for foreigners in each sector. The environment; society and nature to ensure stable Reserved List and Conditional List contain foreign growth of socio-economic development (Article equity restrictions in each designated sector. The 2)”. Decree No. 03/PM in Annex A provides a list of prohibited list generally closes the listed sectors to 43 activities. Controlled Business investors require private investors. recommendations from relevant governmental agencies and will be subject to IPMC approval. 39. Those investing in General Businesses may register enterprises under the Enterprise Law upon 43. An investor planning to invest in a Controlled ascertaining they are not subject to restrictions. Lao Business must submit an application to the One- PDR has abolished registered capital requirements Stop Service Office (OSSO) at central and provincial for foreign investors as implemented through IPL levels in accordance with division of administrative 2016 and Notification No. 2770/Cabinet/MoIC (17 levels. Investors in possession of an enterprise November 2017). registration certificate, under the Enterprise Law, intending to invest in a new or additional Controlled 40. SEZ investors shall refer investment proposals Business must submit the application to the OSSO to the relevant SEZs. Each SEZ has a one-stop shop directly. The OSSO shall coordinate with relevant which handles all investment applications, enterprise governmental agencies at central and local levels to registration and incentive applications. review and submit the application to the IPMC to Investment Reform Map (IRM) for Lao PDR | 21 consider and approve no later than 25 working days However similar committees exist at provincial from the date which the OSSO received all complete level, which could lead to duplication of functions documents in the application. After receiving the between central agency and provincial agencies. approved investment license, the individual or legal Unlike investment authorities in ASEAN member entity can proceed with the investment in accordance states, the IPMC does not include private sector with the law. If business activities are required by representation. For example, the Chairman of the laws or regulations of relevant sectors to obtain a Thai Chamber of Commerce sits on the Board of specific license prior to operating such business Investment (BOI) of Thailand, at least six of 14 activities, the enterprise shall apply for the business members of the Board of the Malaysian Investment operating license in accordance with the legislation. Development Authority are from the private sector and eight of 14 EDB Singapore Board members 44. Decree No. 03/PM, 2019 lists a Concession are from the private sector. These are examples of Business as “a business activity requiring practice among more developed ASEAN member government concession such as land concession, states in setting-up investment-related authorities. development of SEZ and industrial processing zones Private sector representation in the investment for export, mining, development of energy sources, committee would add credibility to the body aviation concession and telecommunication (Article and ensure business perspectives and interests 2).” Domestic and foreign legal entities wishing to are taken into account. According to the OECD invest in business activities under the concession (2019), having a private sector representative on list are required to submit an application through the board is a positive initiative, as it ensures the the OSSO at central or provincial levels. Upon views and interests of businesses are taken on board review, the application is sent to the IPMC, either in investment promotion agencies’ (IPAs) broad at central or provincial levels, to consider no later strategic directions19. The IPL 2016 established a than 65 days from the date the OSSO received One-Stop Shop (OSS) for investors which, on paper, all complete documentation. The IPL still retains was a reasonable idea. However, the concept of “one- some discretionary measures in the award of a stop” shop for investment has been undermined by Concession Business. For example, in the selection the existence of two OSS models, one under MPI of investors, the IPL provides for “negotiations” of and another under SEZs. initial agreements (Article 32), broad content of the concession agreement (Article 34) and subjectivity 46. Secondly, the form of entry process for each of terms of investment (Article 36). type of investment is equivalent to what is called “screening and approval”, a mode of entry far from today’s best practices. The IPL and Enterprise Law 2.6.iii Possible reforms to investment provide for numerous activities subject to different entry levels of screening and approval. A potentially long list of Controlled Business, Concession Business and General Business included in the Reserved and 45. Our analysis highlights several shortcomings Conditional Lists subject to screening goes against in the existing investment entry framework. A first international best practices, which encourage series of issues pertain to the institutional framework reduced entry screening of investments. Investment for investment entry, which seems overly complex entry screening is seen as a bottleneck that could and confusing. Numerous governmental agencies negate investment promotional activities, whilst at central and provincial levels are involved in one adding to investor costs that together could be way or another, with overlapping competences, considered an investment constraint. Investors are duties and functions. For instance, the IPL 2016 normally concerned with the speed, predictability and establishes the IPSC as the central investment body. transparency of approval processes and subsequent OECD (2019), Mapping of Investment Promotion Agencies: Middle East and North Africa, Paris. 19 22 issuance of permits and licenses. Lao PDR could steps to speed-up the approval process and in move from investment screening by encouraging some circumstances, may even introduce automatic free entry screening. Within ASEAN, Thailand has approval or mere registration of investments. Many limited investment entry screening where foreign activities on the lists seem relatively straightforward investors are required to obtain necessary sectoral and could undergo enterprise registration and permits from line ministries or agencies. In addition, line ministry for licensing (crop farming, cement investors are required to seek approvals from the manufacturing, air transport, luxury hotels, legal BOI sub-committee for investment projects valued services) without screening. Not having a finite 200-750 million baht (US$ 6.1-23 million) and list of activities under control, but relatively broad export-led projects exceeding 750 million baht (US$ criteria, leaves ample room for discretion. Any 23 million) in investment value. The sub-committee sector could affect national security, public order, is also responsible for screening projects with an cultural traditions, society and nature, and could be investment value exceeding 750 million baht (US$ added to the list. Best practice is to make investment 23 million) prior to BOI Board consideration and entry automatic or as automatic as possible, using approval. Malaysia and Singapore do not generally company registration (Box 1) as the main process screen foreign investments on entry. Nevertheless, to register domestic and foreign investments. If investors may be required to seek sectoral regulatory screening is used, it should be selectively, maybe in approval from relevant agencies. In addition, a handful of sectors the government finds strategic Myanmar’s Investment Law 2016 outlines specific or sensitive. Outside these few “special” cases, entry types of investments requiring investment permits into most economic sectors should be as automatic from the Myanmar Investment Commission. as possible, and subject to simple registration. In Lao PDR, however, screening seems to be pervasive 47. To avoid undesirable investments, Lao PDR may to the point it has become the default mode of entry. provide a list of prohibited or restricted investments The form and extent of screening differs: there is in the National Negative List, thus providing “special screening” for businesses in the Controlled advance information to potential investors on Business and Concession Business; and “simplified types of investments subject to advance screening screening” for businesses under General Business. when entering the country. Lao PDR may take Box 1: Good Regulatory Practices for Company Registration Business registration is the gateway through which businesses enter the formal economy. Legal recognition and the ability to conduct business as a legal entity provides businesses with rights to government services, fair treatment under the law, limited liability, less uncertainty, and greater access to credit and markets, thus enabling the businesses to thrive, grow, invest, and employ20. A system of efficient and effective business regulations can support firm creation and increased productivity. At the outset of the business lifecycle, it is important that business establishment processes are clear, simple and fast. Countries that have efficient business registration processes tend to have a greater number of new firms entering the market and a larger number of businesses per population (business density)21. At the same time, higher entry costs are associated with a larger informal sector and a smaller number of legally registered firms22. Ultimately, higher compliance costs negatively affect firm profits and discourage entrepreneurs, which in turn reduces job creation in the economy23. In order to establish a business and commence operations, in many countries a business (either foreign or domestic) typically needs to undertake a number of steps involving approvals or acknowledgments from one or more institutions. First, it needs to be registered as a legal entity (for example, a limited liability company, a sole proprietorship or a joint stock company). Often, that is followed (or done simultaneously) with registration at the tax authority and with the social security institution. In many countries, there are additional registrations and licenses that are needed in order to be fully recognized as a legal entity before it can conduct business activity. However, these are not in compliance with good international practice to streamline the requirements and processes for business establishment. Better practice is that sector licenses can be acquired after registration as a legal entity. 20 “Reforming Business Registration: A Toolkit for Practitioners”, 2013, World Bank Group. 21 Klapper, Leora, Anat Lewin and Juan Manuel Quesada Delgado. 2009. “The Impact of the Business Environment on the Business Creation Process.” Policy Research Working Paper 4937, World Bank, Washington, DC. 22 Barseghyan, Levon, and Riccardo DiCecio. 2009. “Entry Costs, Industry Structure and Cross-Country Income and TFP Differences.” Working Paper 2009-005C, Federal Reserve Bank of St. Louis. 23 Fonseca, Raquel, Paloma Lopez-Garcia and Christopher Pissarides. 2001. “Entrepreneurship, Start-Up Costs and Employment.” European Economic Review 45 (4–6): 692–705. Investment Reform Map (IRM) for Lao PDR | 23 Registration as a legal entity has an entirely different public policy objective from obtaining a sectoral license. Good practice countries, including Singapore, New Zealand, the United States and many countries in the European Union, do not link registration as a legal entity with conducting business in a specific sector and getting a license. In fact, there is an increasing trend to allow applicants for company registration to just state that they will “engage in all legally permitted business activities”. After registration, the LLC, sole proprietorship or joint stock company can decide what licenses are needed to conduct business if they want to operate in a particular sector. Sectoral licenses should be imposed only in cases where there is a demonstrated policy purpose (such as protection of the health and safety of the population), where there is a legal basis (there is a specific law or regulation that requires a license or permit), and where it imposes minimum burdens on businesses to achieve the government’s policy purposes. Since licenses are a strong command-and-control regulatory instrument, they should be used sparingly. Licenses are often linked to on-site inspections, for example for health or workplace safety. Inspections are a means to control compliance with requirements and can be conducted: (1) before a license is issued to ensure that the applicant meets all necessary prerequisites or (2) after receiving the license to ensure that the company remains in compliance with their obligations. It is usually difficult to inspect all business entities, so a better practice is using risk assessment. This means that government is adapting its regulatory control to need. For example, businesses with a good compliance record (they have not been previously penalized) or engaging in a low risk activity (which is unlikely to harm public health, safety or property) should have less frequent inspections, lighter requirements, and lower penalties. For businesses with a poor compliance record or engaging in a high-risk activity (such as having many employees in a factory or having potentially polluting activities), then the level of control should be higher. Proper use of risk assessment in inspections will lead to a monitoring and enforcement system that creates lower burdens for the majority of low risk businesses, better achievement of government’s policy objectives, and lower costs for government because it is targeting its scarce government resources where they will have the most impact. Source: Business Regulation team, World Bank Group (2019). 2.7 Investment entry recommendations 48. Based on the above description and analysis, our where investors are subject to screening as well recommendations for Lao PDR are to: as a small number of sectors subject to national security or strategic interest screening, such as Revise the institutional framework for investment telecommunications, mining or banking; with a view to simplifying it, by: • clarifying that investments in all other sectors can enter automatically, without screening and • reducing the number of entities involved in the by proceeding directly to company registration investment entry process. Optimally, the investor (possibly complemented by sectoral licensing should only engage one authority, such as the that may be required in certain sectors). Lao PDR one-stop shop. Alternatively, the investor should needs to rely more on these processes (enterprise just deal with the authority issuing permits and registration, sectoral licensing and permitting) licenses; to regulate investment, rather than relying in ex- • consolidating all investment entry regimes and ante screening; processes under one ministry; • reducing the room for discretion and ad hoc • improving intra-governmental coordination and actions. Laws and regulations should clearly exchanges of information to further streamline identify specific criteria for issuing approvals entry processes; for investment licenses or for operating permits • clarifying the roles and responsibilities of each and licenses. Approvals must only be issued institution involved in the investment entry based on applicants meeting criteria. In addition, process. operational guidelines for investment approval are needed to guide implementation of laws and Reform the entry process and particularly seek to regulations, monitoring and reporting. reduce the extent of screening by: Consolidate all restrictions to entry of foreign • identifying a small number of strategic sectors investment in a Negative List under the IPL. The list should: 24 • be as short as possible (long negative lists mean 50. A key area of concern for foreign investors in numerous restrictions or prohibitions to foreign the ASEAN24 region is inconsistency and frequent investment participation which would not be changes in investment regulations. This is evidenced consistent with the objective of attracting more in numerous surveys and publications, such as FDI into the economy); the A.T. Kearney Investor Confidence Index25, • be revised on a regular basis (every one or Economist Corporate Network26 as well as by two years) with a view to considering further participants and panel members at the ACIA27 liberalization (reductions to the negative list); Forum in Kuala Lumpur, 201328. These and other • use standard classifications to designate sectors surveys underline that investors are concerned at and activities in the negative list. uncertain legal environments in ASEAN member states, with respondents concerned governments To conclude this entry section, it is important to may change their minds over policy and legal issues note the above analysis focused mostly on de jure with little or no warning and that court decisions restrictions, that is how entry restrictions and could be highly arbitrary. According to the survey, approval processes are defined under various laws the most consistent and standardized rules and and regulations. As a final recommendation on regulations in ASEAN were in the following entry, we recommend the GoL commission a study sectors, with the most consistent listed first: hotel or project to identify and reduce (or even eliminate and leisure; professional services; telecoms, IT and where possible) de facto restrictions that can delay or software; financial services; transport and logistics; prevent entry and participation of foreign investors agriculture; chemicals; manufacturing; healthcare in Lao PDR. and pharmaceuticals; consumer goods; commodities and energy; and property and construction. 2.8 Investment protection 51. The Economist Corporate Network survey found the largest impediments to business in Asia- 49. The importance of investment protection 10 countries were laws governing the establishment for foreign investors is well-known and well- of a commercial presence and those restricting documented. The 2017 Global Investor Survey, movement of labor – skilled and unskilled. Most conducted by the World Bank’s Investment Policy ASEAN member states impose foreign equity limits and Promotion team, clearly showed that foreign on certain sectors or activities. Use of a foreign investors in developing economies were extremely equity limit varies significantly between countries, concerned about political risks and investment with some legal and administrative instruments protection. According to this survey, 81 percent requiring foreign investors to obtain government of respondent investors considered investment approvals for almost all investments, even in non- protection important or critically important (Figure sensitive sectors. 39). 52. The Business Council of Australia found that other investment laws were applied beyond-the- border once an investor had approval to invest, but before a local entity could operate29. For Figure 39: Investors Seek Predictable, Transparent, and Efficient Conduct of Public Agencies Source: World Bank. 2018. Global Investment Competitiveness Report. Investment Reform Map (IRM) for Lao PDR | 25 example, licensing and authorization requirements the Constitution, to tax and commercial laws, and restrictions on employment of personnel may and sectoral legislation), Lao PDR’s investment be included in laws that apply equally to local legislation is reviewed in this section for one essential businesses, but discriminate against a foreign reason. This reason is even if rights and guarantees business. The result of ACIA Forum discussions may exist in other laws of the land, investment underlined the critical need for ASEAN member legislation that does not sufficiently include the six states to increase the efficiency of investment core guarantees would not be considered in line facilitation, whilst enhancing good governance and with best practice. As investment legislation is often ease of doing business and transparency in rules and the only piece of legislation that potential foreign regulations. investors will review, the damage to the economy in terms of investment lost even before investors enter Lao PDR will never be known. As investment 2.8.i How investment protection is law should be a primary tool in the arsenal of the organized in Lao PDR country and institutions in charge of investment promotion and regulation to market Lao PDR as a destination for FDI, it is imperative that no effort be 53. Our team conducted an in-depth analysis of spared to align investment law with best practice. investor protection in Lao PDR. Firstly, we defined investor protection based on six core guarantees 55. Obviously, how the law is implemented and that should form part of a robust investor enforced is equally important. As such, the IPP team protection framework. These guarantees are: 1) advises the order of actions to be: 1) strengthen the National Treatment (NT), 2) Most Favored Nation investment regime, on a de jure basis, and then 2) (MFN) treatment, 3) Fair and Equitable Treatment improve its implementation. Lao PDR’s investment (FET), 4) protection against expropriation, 5) law is enshrined in the IPL, as amended in 2016. profit convertibility and transfer and 6) access to The law applies to domestic and foreign investment Investor-State Dispute Settlement (ISDS) methods. and investors (Article 1). Secondly, this IRM reviewed Lao PDR’s domestic legislation and international investment agreements 56. The IPL does not specifically incorporate the to determine the extent to which these guarantees principle of National Treatment nor Most Favored are recognized. The results of this analysis are Nation treatment. Article 22 provides that: “The presented below. While this is an assessment of de State protects legitimate rights, interests and jure protection, the level of protection as defined equality of all domestic and foreign parties of the under law, we also recommend the government economy who invest under Lao PDR laws, treaties, extends this analysis to de facto protection in how agreements to which Lao PDR is a party”. This is guarantees are enforced in practice. a weak affirmation and cannot be considered as meeting NT or MFN standards. These standards are defined in a specific way in best practice legislation 2.8.ii Domestic legislation as well as in IIAs, including those applicable to foreign investment in Lao PDR (as will be shown in Section 2.8). The fact these standards are not 54. Lao PDR’s investment legislation can provide present in domestic laws, but are incorporated in an example of best practice for investor rights some IIAs, means these two core guarantees are and guarantees. The legislation is by no means the only available to foreign investors from countries only aspect of law applicable to foreign investors, that have signed such IIAs with Lao PDR (directly let alone all private investors. However, since the or through membership of ASEAN or other entire domestic framework is applicable (from regional organizations). We take the view these core 24 Association of Southeast Asian Nations. 25 A.T Kearney, Back to Business: Optimism amid Uncertainty, Foreign Direct Investment Confidence Index, 2013. 26 The Economist, “Riding the ASEAN Elephant – How business is responding to the unusual animal,” February 2013. 27 ASEAN Comprehensive Investment Agreement. 28 An ASEAN Project funded by AADCP II. Forum on the ASEAN Comprehensive Investment Agreement (ACIA Forum) conducted in Kual Lumpur, 21 March 2013, attended by about 200 participants mainly from the business and investing sectors. 29 Business Council of Australia, Australia’s Trade and Investment with Asia, 2011. 26 guarantees and indeed all six, should be extended of the enterprise or assets the day before the to all foreign investors through domestic legislation expropriation took place. to make Lao PDR a more attractive and safer investment destination. Similarly, Article 22 cannot Overall, the expropriation clause in the IPL is not in be interpreted as extending “Fair and Equitable line with best practice investment regimes. Treatment” to investors. This provision is vague compared to best practice investment legislation or 58. Transfer of funds is addressed in Article 71 of even to ACIA, which covers FET in its Article 11. At the IPL. It states: “Foreign investors have the rights its core, FET relates to transparency and due process. to repatriate capital, assets and income, such as profits from investment, personal cash and assets, 57. The IPL includes a weak guarantee against or assets of the enterprise through banks located in expropriation. Article 23 provides that: “The the Lao PDR after full payment of duties, taxes and government fully acknowledges and protects the other fees in accordance with laws and regulations.” lawful investment of investors against government The provision does not guarantee, as it should, that seizure, confiscation or nationalization by investors have the right to transfer in a freely usable administrative means.” It adds that: “In case the currency, and that they have the right to a prompt government has the needs to utilize the facilities for transfer (without undue delay). public interests, the investors shall be compensated with actual invested value at the prevailing market 59. The IPL could be improved with coverage price at the time of transfer using payment methods of situations when transfers can be temporarily as agreed by both sides.” This falls short of the best suspended. As an example, in 2013, the Central practice standard in several ways: Bank of Lao PDR (BOL) used the IPL to impose daily limits on currency conversions (not on • The term “expropriation” is not used transfers), in response to low currency reserves. • The term “indirect expropriation” is not used, This type of restriction should be mentioned as a meaning that indirect expropriation is not possible, temporary exception if permitted under covered by the guarantee. Indirect expropriation agreement with the International Monetary Fund is a growing form of expropriation and one that (IMF). Also, best practice investment laws (and increasingly worries investors IIAs) typically include more categories of funds and • The IPL does not fully include four criteria financial transfers in this clause. internationally recognized and used to consider an expropriation lawful, namely: public interest, 60. The IPL includes a dispute settlement mechanism absence of discrimination, due process and provision. Under Article 95, there is an option for compensation. Only two of these criteria are administrative dispute resolutions through the one- included (public interest and compensation) stop shop. Investor-state dispute resolution is also • The best practice elements of compensation, available through the Office for Economic Dispute “adequate, prompt and effective”, are not Resolution, People’s Court and an international included in the clause court, to which Lao PDR is a party. Awards of • The IPL provides that the method to compute international arbitration are enforceable under the compensation must be mutually agreed between New York Convention of 1958. This is not in any the State and investor. It is unlikely both parties way a clause in line with best practices, as can be would agree a method once an expropriation has seen in the analysis of IIAs in the next section. The taken place or in advance, through a contract for fact that Lao PDR signed the New York Convention instance. Not all investors have a contract with is a positive element. However, the country is not a the State. Best practice is to provide in domestic member of the International Centre for the Settlement law that fair market value will be applied and of Investment Disputes (ICSID Convention), unlike the value will be assessed based on the value many Asian economies. To become a more attractive Investment Reform Map (IRM) for Lao PDR | 27 2.8. iii International investment agreements destination, Lao PDR could consider membership. • In the event civil or criminal legal action is taken by the ASEAN member state against an investor, 61. A second level of protection for foreign investors the latter shall have the right to defend itself, and investment is found in International Investment including the right to access legal representation. Agreements that Lao PDR has signed and ratified. The investor will also have the right to appeal They include numerous Bilateral Investment any adverse decisions or outcomes. Treaties (BITs), ASEAN Comprehensive Investment Agreement (ACIA) and ASEAN plus Policy Dialogue 64. Article 11 of ACIA, also provides that a host Partners Preferential Trade Agreement (PTA) with ASEAN member state must provide full protection investment chapters. As a member of the World and security to an ASEAN investor’s covered Trade Organization (WTO) and ASEAN, Lao PDR investment. Full protection and security complements is also bound by relevant investment commitments FET and refers to physical protection of ASEAN in the services sector under the General Agreement investors’ property from use of force during riots on Trade in Services (GATS) of the WTO and or insurgency occurring in the territory of that ASEAN Framework Agreement on Services (AFAS). ASEAN member state. In the event of any losses suffered by the investment as a result such events, 62. An important IIA for Lao PDR is ACIA, which the ASEAN member state is required by Article 12 applies to foreign investment from any of the nine of ACIA to compensate ASEAN investors affected other ASEAN member states. ACIA provides six by such incidents. Compensation or restitution must core investor protection guarantees to all covered be made on a non-discriminatory basis. investors and their investments: 65. Freedom to manage capital and funds: Article 13 • Protection against discrimination (and its two of ACIA guarantees that every ASEAN investor may guarantees: NT and MFN) freely and without delay conduct transfers relating to • Fair and Equitable Treatment and full protection its investments into and out of the ASEAN member and security state where its investment is located. Such transfers • Protection against direct and indirect can be made in a freely usable currency at the market expropriation rate of exchange at the time of transfer. The term • Guaranteed transfer of funds ‘freely usable currency’ simply means the currency • Access to ISDS. is widely used to make payments for international transactions, and widely traded in main exchange 63. For instance, under Article 11 of ACIA, ASEAN markets. member states have agreed to extend Fair and Equitable Treatment to covered investments. This 66. Protection comes with limited exceptions that means: allow ASEAN member states to prevent or delay transfers of funds. Such action must be done in • A host ASEAN country is not allowed to an equitable, non-discriminatory and good faith make arbitrary decisions and must respect the application of laws and regulations. A host ASEAN legitimate expectations of investors. member state may also impose temporary measures • If the host ASEAN member state makes any to restrict transfers of funds if there is any need to decision against the interests of investors and safeguard the country’s balance of payments. Article their investments, the investors will have access 13 (4) ACIA provides that ASEAN member states to judicial or administrative tribunals, including may impose restrictions on any capital transactions the right to review decisions of the host ASEAN as a temporary measure on a non-discriminatory member state. 28 2.9. Recommendations for increased investor protection in Lao PDR basis at the request of the IMF, where the measure is settlement of investor-state disputes, after a prior taken to safeguard the balance of payments (Article attempt at an amicable settlement. 16, ACIA) or in exceptional circumstances where capital movement causes or threatens to cause 69. Firstly, the GoL could consider using a serious economic or financial disturbance in the forthcoming revision of the IPL to improve the ASEAN member state concerned. level of de jure protection extended to investors. At present, there are gaps in protection granted through 67. Protection against expropriation: ACIA protects domestic legislation and IIAs, as the protection investors against unlawful expropriation in a strong framework is not in line with international or even manner. Under Article 14 of ACIA, a ASEAN regional best practices member state that expropriates, either directly . or indirectly, an investment is required to provide The following guarantees should be added or proper compensation to affected investors. To be strengthened: lawful, any expropriation of an investment must meet the following criteria: • Include guarantees of National Treatment (NT) and Most Favored Nation (MFN) treatment, in • Expropriation or nationalization is for public line with best practices. purposes • Introduce the concept of Fair and Equitable • It is carried out in accordance with the law (due Treatment (FET) in a well-defined and specific process) way that does not create excessively broad • Expropriation must be made in a non- obligations for Lao PDR. discriminatory manner • Amend the expropriation clause: • The investor is provided with prompt, adequate »» Include indirect expropriation to the and effective compensation. guarantee, using ACIA as an example »» Fully include the four conditions that 68. These are the four standard criteria, yet they are need to be met for an expropriation to not all incorporated in the IPL to the extent they be considered lawful should be. ACIA adds that any compensation for »» Clarify that compensation must be expropriation must be: adequate, prompt and effective as well as computed using the fair market value • Paid without delay method in the event of expropriation. • Equivalent to the fair market value of the • Strengthen the profit transfer guarantee to expropriated investment immediately before or provide investors with the right to transfer profits at the time when the expropriation was publicly and other funds to any country of their choice, announced or occurred in any freely usable currency, and without undue • Not reflecting any change in value because the delay. intended expropriation had become known • Strengthen the dispute settlement clause in earlier directions mentioned in our analysis. • Fully realizable and freely transferable between ASEAN member states. Secondly, as part of efforts to increase de jure investor ACIA also includes a comprehensive clause for the protection, Lao PDR could consider membership Investment Reform Map (IRM) for Lao PDR | 29 of the International Centre for Settlement of Investment Disputes (ICSID). In the region, Myanmar and Vietnam are currently considering joining ICSID. China has been a member since the early 1990s, Republic of Korea since the mid 1960s, while Cambodia, Indonesia and Malaysia are also members. Thirdly, to complement and give full effect to de jure investor protection, it is recommended and imperative that the GoL initiate an analysis of de facto investor protection: that is how investor guarantees are applied and enforced in practice. The study would consider (for instance) how expropriation is conducted in practice, what is the process to hear investors expropriated or to compute compensation in the event of expropriation, how profits and funds are transferred in and out of the country and how arbitral decisions are enforced in Lao PDR. The study would then recommend actions to improve de facto investor protection. At the end of the day, both de jure and de facto investor protection should be enhanced. If statutory guarantees are improved through revisions to the law, but then undermined by inefficient processes that prevent investors for using or enforcing these rights and guarantees, the overall situation will not be deemed improved in reality. Finally, the team also recommends implementing an investor grievance management (IGM or SIRM) mechanism into Lao PDR in a phased manner, starting with a simple tool to record and analyze investor grievances and gradually move to a fully- fledged grievance management mechanism as a tool to help retain investment and prevent investor-state disputes. The basic elements on an IGM mechanism are found in Annex 4. 30 CHAPTER 3 Incentives Regime of Lao PDR Investment Reform Map (IRM) for Lao PDR | 31 Figure 40: Definition of Investment Incentives 70. Investment incentives can play an important role in a country’s investment policy and promotion framework, with far-reaching implications on tax revenue, governance and market competition. The definition of investment incentives used by the IPP team is summarized in Figure 40. 71. In addition to incentive instruments, so-called “information incentives” can provide quick and reliable information on investment conditions. These types of conditions should be normal practice and a standard service offered by government agencies and line ministries dealing with investors. Making these two standard operations in most countries a non-fiscal incentive can raise alarms or concerns with investors about the investment environment of Source: Investment & Competition unit, Macroeconomics, Trade and Investment the country. Global Practice. 3.1 Incentives offered in Lao PDR 72. The main provisions on investment incentives 3. Environmentally-friendly agro-processing, in Lao PDR are laid out in the 2016 Investment handicrafts Promotion Law, as amended, but several other 4. Environmentally-friendly and sustainable norms are relevant to the incentive regime, including ecotourism and cultural tourism the 2016 Tax Law and regulations on SEZs. The 5. Education and sports, human resources and IPL references four avenues or categories of criteria skills development, vocational training for investors (domestic or foreign) to receive 6. Modern hospitals, pharmaceutical and medical incentives: a) investments in certain business sectors equipment factories, traditional medicine or activities, b) investments of a certain magnitude, production and treatment c) investments in certain zones and d) concession 7. Public infrastructure addressing urban traffic investments. congestion and over-populated residential areas, infrastructure supporting agriculture 73. Based on government priorities, nine categories and industry, cargo transportation, transit and of business sectors (or activities) are eligible for international linkage services incentives according to Article 9 of the IPL. In 8. Policy banks and micro-finance institutions summary, they are investments in: focusing on poverty reduction and communities with limited access to finance 1. Modern technology, scientific research, R&D, 9. Modern commercial centers promoting innovation, environmental-friendly and efficient domestic products and world-renowned brands, use of natural resources and energy exhibition centers and fairs for domestic 2. Clean, toxic-free agriculture, seed products. production, animal breeding, forestry development,environment protection, activities promoting rural development and poverty reduction 32 74. There are fiscal and non-fiscal incentive commercial banks and other financial institutions in instruments to consider. The key incentive Lao PDR or overseas is really an incentive, as it is instruments offered in Lao PDR are tax holidays actually a part of the normal business environment and indirect tax exemptions (VAT and Customs). in most countries. An incentive would be reduced- The government also provides land at reduced rates, rated loans for certain investors or types of primarily through concession investments, but also investments, for instance. the SEZ scheme. In terms of their objectives, most incentives seem to be of a “locational” nature, in 76. According to Article 41 of the IPL, a “concession that they are aimed at bringing investment into the investment” sees an investor authorized by the country or a particular region. Some “behavioral” government in accordance with relevant laws and incentives have started to emerge to encourage regulations to develop and operate a business investors to reinvest profits, expand operations, notably a land concession, to develop a SEZ create local jobs or help protect the environment. or zones for industrial processing for export, The IPL provides for the following incentives mining, electric energy development, aviation instruments outlined in Table 3. and telecommunications. Many such concessions appear to be negotiated and awarded to large 75. The GoL has the right (Article 19, IPL) to firms (usually by MPI and relevant line ministry propose, to the Standing Committee of the National and/or local authorities). Concessions have been Assembly, any additional “special incentive” as may awarded to investors in mining, power (hydro), be deemed necessary for a given project. Further, one telecommunications and infrastructure, amongst can argue whether the right to borrow money from sectors30. Table 3: Incentive Instruments Offered by IPL Fiscal Instruments Non-Fiscal Instruments • Exemption and reduced rate of profit tax (CIT) • Land use-related incentives (Article16): right to lease or have a concession over State land to conduct investment activities, right to transfer land use rights under certain conditions • Exemption of Customs duties for imports of • Access to finance incentives (Article 13) certain inputs (material, raw material, machinery and equipment) Non-Fiscal Instruments • Zero-rated VAT for these imports (materials, raw • Government commendation for investors to materials, machinery and equipment) have fulfilled tax obligations in a timely manner, contributed to community development or to Lao society, to skills-building or resolving environmental issues • Zero-rated VAT for use of certain domestic raw materials • Exemption of export duties/taxes for export of raw materials 30 See Annex 5: Concession Activities of Decree on the Implementation of the Investment Law. 31 About US$ 138,566 at 27 March 2019. Investment Reform Map (IRM) for Lao PDR | 33 77. The IPL states that agreement terms depend kip31 or more, or on the type, size, value and feasibility study of the • Employ at least 30 Lao technical staff, or investment project, but cannot exceed 50 years • Employ 50 or more Lao workers with (unless extended by the National Assembly). There employment contracts of at least one year. is a review process involving relevant agencies, National Assembly and case-by-case negotiations The above “intensity” criteria are cumulative rather with the investor. This constitutes a special regime than alternative. If the investment capital is not for concession investments, not only for incentives of 1.2 billion kip, the project can still qualify if it but also for approval and other conditions. created 30 technical jobs or more for Lao citizens (for instance). 78. The types of incentives and benefits conferred to such investors with concessions vary from contract- 3.3 Incentives based on certain zones or to-contract and may include direct and indirect locations tax incentives as well as land at reduced prices. In addition, some stakeholders interviewed by the mission team reported that provincial authorities in 80. Three zones, identified in the IPL (Article 10), some cases granted tax incentives on an ad hoc basis determine the duration of incentives for eligible without a legal basis. Given the opacity of these investors: Zone 1: poor and remote areas with types of investments, negotiated on a case-by-case socio-economic infrastructure unfavorable to basis, it is difficult to formulate more observations investment, Zone 2: areas with socio-economic or recommendations, except to caution against the infrastructure favorable to investment and Zone 3: case-by-case approach and the risks entailed in SEZs. Table 4 summarizes the duration of incentives terms of governance, but also tax expenditures. when investment in eligible activities or sectors is combined with certain geographic zones. The same duration extension system applies to the incentive 3.2 Eligibility based on magnitude of rental or concession fee exemptions for State land of Investment (Table 5). 79. Criteria (a and b) are cumulative, which means investments must be in one of the nine categories of business sectors under Article 9. Then, they must be Table 4: Duration of Tax Holidays when of a certain magnitude: financial value or number combining Investment by Zone and Activity/ of local jobs created. To be eligible, the investment Sectors must: Source: Investment & Competition unit, • Have minimum investment capital of 1.2 billion Macroeconomics, Trade and Investment Global Practice. Duration Zone Normal Duration Extension for Priority Maximum Sectors (Sections 2, 3, 5 and 6 of Article 9 of IPL) Zone 1: Poor and remote 10 years 5 years 15 years areas (unfavorable conditions for investment) Zone 1: Poor and remote 4 years 3 years 7 years areas (unfavorable conditions for investment) Zone 3: Special Economic Undefined in the IPL Undefined in the IPL Undefined in the IPL Zones 34 Table 5: Duration of Rental/Concession Fee Exemption for State Land Duration Zone Normal Duration Extension for Priority Maximum Sectors (Sections 2, 3, 5 and 6 of Article 9 of IPL) Zone 1: Poor and remote 10 years 5 years 15 years areas (unfavorable conditions for investment) Zone 1: Poor and remote 5 years 3 years 8 years areas (unfavorable conditions for investment) Zone 3: Special Economic Undefined in the IPL Undefined in the IPL Undefined in the IPL Zones Source: Investment & Competition unit, Macroeconomics, Trade and Investment Global Practice. 81. Given that activities in Sections 2, 3, 5 and 6 objective to attract investments to lesser developed of Article 9, of the IPL, receive incentive period regions. SEZ incentives are left undefined in the IPL extensions (tax holidays and rental fee exemptions), and will be covered in the following sub-section. As it reveals a policy objective to prioritize investments will be explained, the experience with geography- in eco-friendly agriculture and agribusiness, health, based incentives is negative. education and skills development. The attempt to be targeted in incentives usage, through linking 83. As the IPL does not define SEZ incentives, incentives to specific sectors where GoL prioritizes “applicable regulations” were referenced to determine more investment, is a step in the right direction. such incentives. According to our research, the main However, tax holidays can be distortive and become applicable norm is “Decree on Special Economic redundant to investors, particularly in countries Zones No. 188” (7 June 2018) (Decree 188). It with weak investment climates like Lao PDR. Thus, provides for three types of incentives: fiscal, non- a preferred approach to tax holidays would be fiscal and others, for two categories of beneficiaries: through offering performance-based incentives. It is SEZ developers and investors. Table 15 in Annex 5 important the GoL ensures there are no commending summarizes the various SEZ incentives available. profit-based incentives, particularly generous tax Since there are no specific eligibility requirements holidays. (sector of investment, exports) for an investor to locate in an SEZ, this essentially creates a parallel 82. As investments in Zone 1 are extended the incentives regime without differentiated objectives. longest period of tax holidays and rental/concession 84. SEZs, however, offer a range of benefits beyond fee exemptions (up to 15 years), it suggests a policy incentives that include facilitated investor licensing, Investment Reform Map (IRM) for Lao PDR | 35 registration and access to infrastructure and 87. Current incentive regime costs (and benefits) government land (used as collateral by investors are unclear. In Lao PDR, revenue administration for loans in some cases). SEZs are managed by the and Customs interviewees reported regular tax private sector, government and under private-public expenditure calculations to inform superiors of arrangements. More than 500 firms have invested in foregone revenue. While a copy of these calculations SEZs, the majority in the services sector, followed by was unavailable since our mission on incentives in industry and trade. Firms are primarily foreign, with 2016, this is a positive finding. However, it appears most investments originating from China. calculations are made at a relatively high level, not shared with the public and currently not used in a systematic way to assess the cost effectiveness of 3.4 Private sector perspectives and incentives. Tax expenditure assessments are a good start, but a broader assessment of the costs and WBG comments benefits of the incentive regime is needed, as further explained in the recommendations. 85. In the following section, we assess the Lao PDR 88. The process to receive incentives is lengthy incentive regime based on several factors, including and cumbersome. While in-principle granting our experience with incentives worldwide, what of incentives to eligible firms should be almost works and does not work, our knowledge of best automatic, businesses reported in practice international practices and concerns expressed negotiations with revenue administration were often by private sector representatives interviewed in required to actually obtain them. For Customs and Vientiane. It is also important for the GoL to VAT incentives on imports, clearance of a master list remember that investment incentives are a policy of products to be imported is required annually. instrument of limited use. Not every development objective can be accomplished through incentives. 89. Inadequate implementation and enforcement of Studies show that incentives are generally only incentives is apparent. Rules appear to lack the level effective in countries where the investment climate of detail required for implementation and associated is already attractive. implementing guidelines. Regulations are presented in a piece-meal manner. There is an investor 86. The incentives regime lacks transparency. Private perception the lack of transparency around the tax investors believe incentives are granted on an ad hoc system and different political interests created an basis with different processes or outcomes depending uneven playing field for investment projects. on personal relationships and vested interests. The general sentiment of the business community 90. Incentives are linked to multiple and sometimes is there is a significant gap between de jure and conflicting policy objectives. Efficient incentive de facto. Our IPL analysis echoes this concern in programs are clearly connected to specific policy the sense that it provides for ample discretion and objectives and focus on the types of investment, interpretation. Policies frequently change and the firms and instruments that can best deliver them. legal framework for incentives remains ambiguous. Having a clear policy objective is also key for Firms consider the framework for incentives as monitoring and evaluation (M&E). Lao PDR uncertain and incoherent, with changes introduced has many, often conflicting, objectives unlikely without private sector consultation. The legislation to be achieved through incentives. For instance, itself overlaps with conflicting provisions. The lack an important policy objective is the promotion of clarity fuels investor uncertainty and hinders the of remote, less developed regions. Unfortunately, long-term planning of companies. 36 international experiences of incentives aimed at over domestically produced ones. While access to encouraging investors to locate in specific regions imported inputs is an important determinant of firms’ are unfavorable. Investors choose locations based on competitiveness, it is better achieved through overall other more important considerations (proximity to low tariff rates on goods that serve as inputs than by main suppliers/customers or capital city, availability exemptions for some firms. Finally, while VAT and of infrastructure, labor and other inputs). At the Customs exemptions may generally be attractive to same time, the SEZ regime offers a generous package the beneficiary, like income tax holidays, they are of incentives to investors. While some SEZs are not directly linked to a given policy objective, but located in remote areas, most SEZ activity occurs in based on an upfront approval. already developed areas. And the concessions regime provides another avenue for investors to circumvent 93. On the other hand, merit-based instruments the geographical targeting regime. such as investment tax credits, allowances and accelerated depreciation are directly linked to the 91. Choice of incentive instruments is problematic. level of investment that a company undertakes (see Lao PDR currently relies heavily on tax holidays Annex 5 for a brief description of different types of and exemptions to Customs duty and VAT for its tax instruments and their respective pros and cons). investment incentives. As discussed in Annex 5, tax These incentives tend to be more effective and less holidays are considered a weak instrument to deliver distortive when the purpose of an incentive is to incentives as they are based on an upfront award, promote investment. For other policy objectives – rather than actual investor performance against a such as job creation, training provision and R&D policy objective. Once an approval is obtained, it – the incentives can be directly linked to measurable is difficult for the government to effectively control actions by the investor vis-à-vis the objective, rather and enforce compliance of the promises made to than an ex-ante promise or agreement. obtain the tax break. Tax holidays also tend to favor firms with relatively high upfront profits and 94. When incentives are used to attract FDI a limited time horizon in the country. A long-term (location incentives), it is key to understand the investor willing to accept losses in the first years investor’s motivation and target incentives for of operation, with the prospect of recovering them optimal outcomes. Global experience suggests over a long cycle, benefits less from tax holidays. the effectiveness of incentives strongly depends on the motivation of the investor undertaking the 92. In theory, VAT and Customs duty exemptions investment in the first place. As presented earlier, the can be justified for export-oriented firms on the Dunning investment typology (1993) differentiates grounds that, once the final product is exported, four types of FDI based on the investor’s motivation: VAT credit and Customs duties on inputs would be natural resource-seeking, market-seeking, strategic reimbursable in any case. While a reimbursement asset-seeking, and efficiency-seeking investments. system is preferable in terms of potential abuse, All four can have important benefits for the host an ex-ante exemption can help export-oriented economy. Efficiency-seeking investment is often firms avoid cash-flow problems while waiting for seen as the most transformative: it brings the most reimbursements. For non-exporting firms, VAT opportunities for job creation with higher skills, exemptions are more difficult to justify: the VAT technology transfers and integration of the country burden is ultimately passed onto the final consumer. into GVCs. Leaving aside strategic-asset seeking Customs duties can also distort competition and (not relevant for Lao PDR), Figure 41 illustrates implicitly incentivize the use of imported inputs how three types of foreign investment respond to Investment Reform Map (IRM) for Lao PDR | 37 3.5 Recommendations for Lao PDR’s Incentives Framework incentives, but also the quality of the investment case (given the high share of market- and natural climate a host country offers. Efficiency-seeking resource-seeking investors). investors – whose investment decisions are primarily driven by the motive to save costs – are more likely 95. Based on our assessment and the above context, to be responsive to tax and financial incentives. the key issues and recommendations are as follows However, such investors also tend to be the most and can be summarized in Table 6: demanding and concerned about investment climate quality and particularly first-rate logistics to connect Preliminary steps (to reform the current incentive with global markets. In Lao PDR, most incentives regime and design a new one): are available to investors regardless of motivation for entering the country. Sectoral priorities under • Identify critical constraints and market failures the IPL seem to mainly follow the government’s facing the private sector and determine whether development priorities, yet do not appear based they can be addressed or mitigated through on an assessment of the type(s) of FDI needed to incentives or other more appropriate or effective transform the nation’s economy (efficiency-seeking). ways. The constraint identification is a valuable It is possible that many incentives offered to input in itself as it can give fresh impetus investors are ‘redundant’ in the sense they are given to improving the overall investment climate to investors who would enter the country in any (including, but going beyond, Doing Business reforms). Figure 41: Different Types of FDI, Investor Motivations and their Impact on Incentives Source: Investment & Competition unit, Macroeconomics, Trade and Investment Global Practice. 38 • Identify and prioritize a limited number of clear through concession agreements) and move development objectives and results the incentive towards a system where all available incentives regime should pursue. Incentives should not be and conditions for firms eligible to receive them designed without specific objectives in mind. are clearly laid out in the applicable law and Future incentive regime impacts cannot be easily apply to all qualifying firms. assessed if clear objectives and results are not • Procedures for granting tax incentives should adopted ex-ante. be analyzed and clarified, possibly through a • Establish a robust consultative process involving detailed process mapping exercise. Moving the government, legislature and private sector to forward, a clear and automatic approval system define policy objectives for the incentive regime, for tax incentives should be designed and discuss the pros and cons (costs and benefits implemented. of the current regime) and expectations of the • Reconsider the current approval system for new regime. Public-private dialogues (PPDs) and import incentives. In the short run, a system consultative processes should become standard could be introduced where certain types of operating procedures in all areas of reforms. goods that are clearly production equipment or inputs can be imported without advance Designing reforms for the incentive regime: clearance or controls by exempt companies and further approval is only required for ‘dual use’ • Align incentives with the new FDI policy/ goods that could also be used for consumption vision that should be formulated by the GoL purposes (such as vehicles and fuel). A broader (as recommended by this Diagnostic study) and reform effort could aim to replace the current link them to specific development objectives and system of tariffs and exemptions with a much results mentioned in the preliminary steps above. simpler approach. This would see all goods • Consolidate all tax incentives currently scattered clearly identifiable as production equipment or in various laws and regulations into the Tax inputs subject to zero tariffs and exemptions Law. All incentives available to investors are removed. This would greatly enhance the should be clearly laid out in the law rather ease of Customs administration and procedures than referring to implementing regulations or for investors, government and create a more decrees. Inconsistencies or formulations open to business-friendly environment. In particular, this interpretation should be avoided in the legal text will support efficiency-seeking investors who to avoid uncertainty and discretion. depend on the ability to quickly import and • Clarify the respective roles of the IPL and SEZ export within global production networks. A regime. SEZs can be used as a more targeted useful analytical exercise to inform these reform vehicle to deliver incentives to priority clusters options could be carried out by looking at of firms, but can only fulfill this role if access is detailed transaction level export data to identify restricted. If not the case, aligning tax incentives products, which under the current system, have offered in SEZs to the general system under the been routinely approved as exemption imports IPL would be the preferable option. (and put under a zero tariff), those for which • Replace current incentives instruments with exemptions are routinely declined and those incentives that are more targeted and less harmful where more case-by-case scrutiny is exercised. and expensive than tax exemptions. Consider • Adopt M&E systems for all incentives granted. using non-fiscal incentives (targeted means that Such systems would be based on clear policy incentives should be designed to realize certain objectives and track performance of beneficiaries objectives and types of investments, address versus non-beneficiaries. certain market failures or incite behaviors the GoL wants to promote). Parallel and complementary reforms: • Discontinue the practice of negotiating individual incentives packages (for instance, • Implement significant and parallel improvements Investment Reform Map (IRM) for Lao PDR | 39 Table 6: Incentives Recommendations KEY ISSUES RECOMMENDED ACTIONS Lack of clarity on whether the current Step 1: Identify through an investor perception survey or PPD process: (a) the critical incentive regime adequately responds to constraints facing the private sector and (b) what investors think of the current incentive constraints facing private investors in regime. Lao PDR. Step 2: Assess whether the key constraints identified in Step 1 can be addressed or mitigated through investment incentives or better ways to “fix” these constraints. Link this to the broader, more comprehensive effort to improve the overall investment climate. Current incentive regime is not targeted, Step 1: Assess the cost-effectiveness of the current regime: lacks transparency, and there is a lack of clarity on the current costs but also • Conduct a robust costs and benefits analysis (CBA) of the current incentive regime, benefits of the current incentive regime. beyond a simple tax expenditures assessment. • Make the CBA a regular assessment (every two years for instance) under law. • Publish the results of the CBA. Step 2: Initiate a process to reform and redesign the incentives regime. In particular, the reform should: • Define clear development objectives and specific results that the incentive regime should achieve. • Design a “SMART” incentive regime aligned with the new FDI strategy, with clearly defined development objectives or results, that is more cost-effective and transparent with more targeted and non-fiscal incentives. • Consolidate incentive regimes into the Tax Law • Clarify the respective roles of IPL and SEZ regime. • Discontinue the practice of negotiating individual incentive packages (concession agreements). • Streamline procedures for granting tax incentives, relying on objective criteria. • Adopt an M&E system for incentives. to the investment climate as a condition for basis (annual or biennially). Incentives incentives and investment promotion to be have real costs to the government in terms effective. The constraint identification process, of foregone revenue, as well as indirect recommended above, will be a critical tool to costs (distortion costs, compliance costs this. The SEZ incentive program can be used as for taxpayers, administrative costs a vehicle to deliver investment climate reforms for government). Policy makers lack more quickly in a limited geographical space as awareness of the real costs of incentives. a starting point to broader reforms. It is, therefore, important to carefully • Establish a broader and more systematic monitor and publish the costs of quantitative and qualitative assessment of the incentives in terms of foregone revenue. incentive regime. Costs should be measured not »» Make the assessment public: a growing just economy-wide, but individually for each number of countries publish cost- sector and incentive program—so they can be benefit (or at least the tax expenditure) clearly linked to the broader program’s benefits assessments as an annex to annual and policy makers can take informed decisions on budget laws. its performance. The specific recommendations »» Further strengthen the analysis by are: differentiating revenue losses under »» Expand from a simple tax expenditure the general investment law from those evaluation to a more comprehensive under SEZ exemptions and concessions, assessment of costs and benefits of the as well as by economic sector. incentive regime. »» Mandate that the costs/benefits assessment be conducted on a regular 40 CHAPTER 4 Investment Promotion and Facilitation Investment Reform Map (IRM) for Lao PDR | 41 96. Investment facilitation and transparency for investment attraction using multiple approaches are important for businesses. Companies need could be built by Lao PDR. However, institutional information on government measures within the frameworks delivering stellar results share numerous location of their investments, particularly with common characteristics32. Notably, political regards to investment measures (new restrictions, commitment plays a key role in initiating and liberalization or licensing requirements). Investors ensuring sustainability in long-term coordination, interviewed for this report in Lao PDR confirmed collaboration and efforts to align initiatives of that transparency and facilitation ranked high in different institutions. Any initiative involving priorities when making investment decisions. different government agencies must be clearly supported by high-level political will and authorities. 97. It is important Lao PDR instills proper institutional arrangements that support investment policy and 100. Lao PDR needs a strategic FDI framework promotion. International experience reveals a wide with a clear action plan. Clear alignment with a range of possible institutional frameworks and the national level strategy stating key shared objectives need for robust coordination. Worldwide, a wide and measurable progress towards desirable FDI range of public-private institutions are tasked with attraction and retention is essential. Organizations attracting and/or facilitating investment. Investment part of the collaborative framework for investment promotion functions are typically undertaken by policy and promotion must share and endorse the separate bodies within government, often called (foreign) investment strategy that should include investment promotion agencies (IPAs). Even in tactical and operational instruments to facilitate countries with specialized IPAs, it is not unusual to FDI attraction. A clear implementation action plan see certain sectoral ministries or agencies, at local is required to guide day-to-day actions. or provincial levels, and SEZs also undertaking investment promotion. In some cases, these 101. Adequate resources are necessary to undertake additional agencies have strong coordination with these promotion efforts, with a strong lead the IPA. In others, poor cross-agency coordination institution to deliver the agreed strategy. This entails results in duplicative efforts. sufficient staff, operating budget and resources to deliver activities agreed in the action plan. A 98. Lao PDR’s promotion landscape should be national institution must take the initiative for the grounded in clear national strategies and well- successful implementation of an effective cooperative coordinated actions across government. A complex framework to deliver coherent signals to potential promotion structure can lead to wasteful overlaps, investors. One agency in charge of getting the ball stakeholder conflicts, investor confusion and rolling is essential, in other words a lead agency. frustration, and service gaps. A good national FDI Strong lead agencies embody the following aspects: attraction strategy, if well implemented, should shape the institutional landscape to ensure promotional • Political or legal empowerment (preferably both) and regulatory objectives are balanced and various • Strong commitment to fostering and coordinating promoting institutions operate in a complementary close cooperation across the network of way. The national IPA normally plays a coordination organizations, and a clear understanding of its role to ensure national consistency in promotion benefits for the country messaging and services that investors receive. To • Committed leaders supported by committed this end, it is pertinent that investment policy and public officers in the institution promotion institutional arrangements are coherent, • Mandated authority over investment promotion- effective and private sector-focused. Different related issues participating agencies should be complementary, • Appropriate communication and information capitalize on any synergies, and have clear and sharing with all involved organizations aligned messages for potential investors. • Sufficient right human and financial resources as well as technical and managerial capacity 99. A coordinated, efficient institutional framework • A strong customer-focus aimed at satisfying potential and established investors’ needs. Premkumar 2000; Weiss 1987; Herzberg and Wright 2006; Serrano 2003, Ilias, Shayerah, Charles E. Hanrahan, M. Angeles Villarreal. 32 2013. 42 102. Accountability and measurement of practice characteristics of best practice IPAs. performance. Any institutional arrangement needs to design and implement a relevant M&E 104. A key question for any IPA is its core framework (output, outcome and impact metrics) functions. Often IPAs carry “add-on” mandates, to provide robust quantitative information enabling such as OSS or investment-related regulatory and assessment of its overall performance. administrative functions (incentives). However, one of the most fundamental best practice principles in 103. A variety of lead agency models can be effective. investment policy is the separation of regulatory Lead agencies can be large or more modestly and promotional functions. Even the most investor- sized, depending on available resources and FDI friendly regulatory environment requires regulators market size. Countries must designate the lead and administrators to implement government agency in a way that is appropriate to their specific policies that impose requirements on investors or circumstances. Successful practices show the need define what an investor can do. for a lead agency to be a governmental body and for its leadership role to be accepted and fully supported 105. A combined promoter-regulator agency by the institutional landscape and key government potentially faces a conflict of interest, when its departments to ensure adequate funding and performance is judged on how many investors it capacity. In other words, it is recognized as carrying attracts and how well it prevents the “wrong kind” the national mandate as the lead or coordinating of investments. Similarly, investors are likely to body for investment promotion. The lead agency question the motives of such an institution if it acts may take the form of a single quasi-independent as a promoter. Consequently, a promoter-regulator agency given specific ‘lead’ responsibilities, or may find it challenging to get the access it needs to indeed be a separate unit within an agency with effectively promote investment opportunities and wider investment functions. Figure 42 lists the best provide aftercare. Figure 42: Common Characteristics of Best Practice IPAs • Attached or linked to a high-level Government office (such as that of the President or Prime Minister) with central Government granting a high level of priority to investment (or FDI). • Institutional and financial autonomy (or semi-autonomy) to emulate private sector-like flexibility to execute the strategy and avoid undue political influences. • Strong collaboration and information flows with private sector. • Clear mandate focused on: »» Attracting investors, facilitating their entry, securing retention and expansion, and translating activities into more and more benefits for the local economy through the professional, proactive, and persistent provision of well-designed services and excellent customer services »» Advocating reforms for a better the investment climate. • Regulatory functions (including the One-Stop Shop) are performed by a separate Governmental institution to ensure proper delivery of these essential functions without compromising IPA’s equally essential promotion role. • Focused investment promotion efforts on strategic sectors/industries having the best competitive opportunities to yield the highest benefits to cost. • Mix of employees with public and private sector experience that ensures the IPA is relevant to both its public sector stakeholders and private sector clients. • Sufficient and sustained funding to perform their mandates, without having to struggle every year or charge fees, providing continuity of strategic efforts and direction. Source: Adapted from “Best Practices for Investment Promotion,” Robert Whyte and Armando Heilbron, World Bank Group. Investment Reform Map (IRM) for Lao PDR | 43 106. This argues against IPAs acting as statutory 108. Another challenge is the relationship between OSSs with the authority to issue licenses and the IPA and country’s OSS. This depends on the permits, although it leaves room for IPAs to provide nature of the OSS, but great care is needed to define facilitation services to assist investors through this relationship. For many governments, the IPA entry and operations processes. While Figure 42 appears an obvious place to locate the OSS. However, clearly indicated that the most effective investment if the latter is a centralized approval and permitting promotion agencies are those that are fully dedicated body then it runs the same risks as described above to promotion and do not have regulatory functions, (paragraph 101). In general, investors reported Table 7 confirms this point (areas highlighted in being wary of investment agencies or authorities red) while indicating what are the most important that simultaneously facilitated entry into the country functions of an effective IPA (highlighted in green). and reviewed applications for registration, permits Any mandate should clearly establish the IPA as and incentives. Agencies that carry both functions, a tightly focused marketing body to attract FDI facilitation and reviews of application forms, tend into the country and as a good service provider to to focus more attention and resources on the OSS. investors. As a result, promotion effectiveness suffers. As such, the World Bank’s advice is that such an OSS in Lao 107. Core investment promotion functions are PDR should be placed at arm’s length from the IPA, focused on the attraction, retention and growth of preferably reporting to another government body. foreign investors (including joint ventures). They do not include domestic investment, SME development 109. WBG experience indicates that the account or business start-ups (unless foreign-owned). These manager model is the OSS model most likely to functions consist of sector targeting and outreach be successfully implemented by an IPA. Even in for FDI (including joint ventures), foreign investor weak investment climates, where government facilitation and aftercare, investment policy procedures are presumably most burdensome, IPAs advocacy and creating linkages between foreign and have demonstrated making important differences in domestic firms. Table 7: Distinguishing between What IPAs Can and Should Do 44 investor attraction and retention through application transfers of shares, changes to company objectives of the account manager model. and use of concession and/or investment rights as guarantees. The IPMC has authority to suspend 110. IPAs have an important role to play in the design or cancel investment licenses if requirements of and implementation of FDI linkages programs. Since the investment licenses are not met. Additionally, IPAs tend to be the main contact point for foreign the central-level committee can organize meetings investors in a host economy, they are best placed to with domestic and international investors to inform understand the localization and sourcing needs of them of new regulations or policies that may impact investors. As such, investor feedback is critical and to the local investment climate, and discuss obstacles better target linkages support services in becoming encountered by investors to seek solutions to more efficient and sustainable. accommodate investments in Lao PDR. 111. A recent survey33 conducted by the WBG 114. The committee must meet at least twice a shows that three services are offered, in particular, month and may be convened as deemed necessary. by a substantial share of “high-performing IPAs” The decree provides that a quorum is met when at receiving higher levels of FDI. These services are least half of the committee members join the meeting designed to link: (i) foreign companies to domestic and when members who represent the relevant suppliers, (ii) domestic companies to foreign government agency or have expertise in issues to technologies and (iii) foreign companies to domestic be considered during the meeting, are present. To technical, vocational or educational institutions. avoid absences, the decree provides members with The IPL 2016 establishes the Investment Promotion the possibility to appoint a representative or proxy and Management Committee (IPMC) as the central to attend IPMC meetings at the provincial levels, investment body. However, similar committees exist depending on the nature and amount of investment. at provincial level. Moreover, the committee does Compositions of the central-level and provincial- not include private sector representation, contrary to level members are outlined in Table 8. good practice, that would add credibility to the body and ensure business perspectives and interests are 115. The IPMC also supports central and local accounted. The IPL 2016 adopts recommendations governments in various investment promotion to establish an OSS for investors. However, the duties. Firstly, assisting researching and drafting of nature of the OSS or one-stop service for investment policies, strategic plans or regulations to support is diluted as there are three different types of OSS, and manage private sector investment. Secondly, one each for the MPI, MoIC, SEZs, and Specific proposing amendments to laws and regulations to Economic Zones. central or local government. Thirdly, monitoring adoption and implementation of policies, plans and 112. To promote investment, the GoL established resolutions by central and local governments. In the IPMC as the main investment promotion and terms of foregone revenue researching and drafting approval authority. The IPMC was established policies, strategic plans and regulations to promote through the Decree on the Establishment and further private sector investment, before submitting Operation of the Investment Promotion and to central and/or local government for consideration. Management Committee No. 05/PMO on 5 January Lastly, seeking arbitration from central government 2018. There are two levels of IPMC: the IPMC at on issues or projects the committee cannot reach central level and provincial level. consensus on. 113. However, approval for Controlled Business 116. To further promote investment, Lao PDR and Concession Business may have adverse established the OSSO at the MPI and Lao Services impacts on the country. Furthermore, approval Portal at the MoIC. The OSSO was set up at central for SEZ development remains under the IPMC at and provincial levels and includes representatives central level. The IPMC is required to approve any of various relevant government agencies. The one- modifications to initial investment projects, such as stop service for investment has several functions, Conclusion and Investment Reform Action Plan for 33 Lao PDR Investment Reform Map (IRM) for Lao PDR | 45 including dissemination of investment information. coherence, are not easily digestible for investors Although it is not clearly provided for in the IPL, it nor meet ACIA standards for streamlined and can be assumed the one-stop service for investment simplified procedures in investment applications is also responsible for providing advisory services to and approvals. In addition, investors are required to investors. first identify the type of investment, the respective ministry, agency and processes at each one-stop 117. However, the nature of the OSS or one-stop service for investment. service for investment is diluted when there are three different types of one-stop service, one each for the MPI for Concession Businesses, MoIC for General Businesses, and the SEZs and Specific Economic Zones. This infers the process and procedures lack Table 8: IPMC Members Central-level members Provincial-level members 1. Deputy Prime Minister: serving as the committee 1. Governor, serving as the president president 2. Minister of Planning and Investment: serving as the 2. Deputy governor, serving as the vice president committee vice president and permanent committee member 3. Minister of Industry and Commerce: serving as the 3. Head of the Department of Investment Promotion, serving as a committee vice president permanent committee member 4. Vice Minister of Planning and Investment 4. Head of the Department of Industry and Commerce, serving as the committee vice president 5. Vice Minister of Finance 5. Head of the Department of Finance 6. Vice Minister of Natural Resources and Environment 6. Head of the Department of Natural Resources and Environment 7. Vice Minister of Energy and Mines 7. Head of the Department of Energy and Mines 8. Vice Minister of Agriculture and Forestry 8. Head of the Department of Agriculture and Forestry 9. Vice Minister of Labor and Social Welfare 9. Head of the Department of Labor and Social Welfare 10. Vice Minister of Public Works and Transport 10. Head of the Department of Public Works and Transport 11. Vice Minister of Information, Culture and Tourism 11. Head of the Department of Information, Culture and Tourism 12. Vice Minister of Public Security 12. Head of the Department of Public Security 46 Box 2: Investment Sector Scan: Prioritizing Sectors for FDI Promotion The World Bank Group’s Investment Sector Scan (ISS) aims to identify high-potential sectors for FDI promotion and areas for possible investment climate reforms. A dynamic private sector which invests, innovates and creates jobs is critical to the achievement of Lao PDR’s development objectives. Investment, including FDI, can facilitate the entry of capital, technology and know-how, diversification into new sectors and activities, foster the integration of domestic firms into GVCs, among other benefits. Yet, the likelihood of these positive effects depends on the ability of the host country to anticipate and ensure supply-side conditions are commensurate with the needs and demands of investors. Thus, a sound policy framework for investment is critical to deliver positive impacts over the host economy. A country needs to be competitive in terms of various capabilities, including aspects of the investment climate, to successfully attract investment to a given sector or business activity. To assist with this task, the ISS maps sectors by both their ability to contribute to a country’s national development objectives, as well as their potential for investment attraction. The purpose of the ISS is not to ‘pick winners’, but rather to identify opportunities and challenges across sectors, facilitate discussion with stakeholders on investment policy prioritization as well as more effective policy implementation and enhanced investor targeting and mobilization, considering a country’s national development goals. While some types of reforms might be horizontal in nature, for example improvements in infrastructure or public institutions, they may also contribute to specific needs of such priority sectors. As such, the flexibility of the ISS makes it useful for both supporting targeted investment promotion in ‘Ready to Go’ sectors, and for sequencing of priority sectors by identifying ‘Aspirational’ sectors, which are those that have high potential but need targeted policy reforms to transform their potential into reality (Figure 43). The result would be sharpened investment targeting by sector and sub-sector, thereby improving allocation of limited resources available at the IPA and a list of priority areas for investment policy reform and strategy implementation. Figure 43: Investment Sector Scan Scoring Matrix Source: Investment & Competition Unit, MTI Global Practice Investment Reform Map (IRM) for Lao PDR | 47 CHAPTER 5 Conclusion and Investment Reform Action Plan for Lao PDR 48 5.1 Investment Policy Statement 5.2 Timeline of Proposed Reform Action Plan 118. The Investment Policy Statement is a critical timeline. Specifically, this plan addresses the ‘how’ document for the GoL to adopt as soon as possible. question along the five stages of the Investment Importantly, the IPS signals a shift in policy through Lifecycle. It achieves this end by outlining the its new proposed strategies. Specifically, the IPS is a responsible entities and resources needed within strong signal that Lao PDR is pursuing a new drive short-, medium- and long-term timelines. The to attract FDI. The IPS is aimed at assuring investors reform action plan is a powerful tool for the GoL to and guiding GoL agencies (national and local build consensus around numerous policies, legal or levels) on the new national FDI strategy. This high- institutional changes. Importantly, the reform plan level document is typically followed by investment is an iterative process, with follow-ups to ensure legislation used to operationalize and implement that reforms are being implemented and responsible investment policies. entities are held accountable to assigned tasks. 119. A reform action plan is a document that 120. Table 9 presents the reform priorities and captures the recommendations for reforms and outlines recommendations into a specific action organizes them by order of priority, relative to a plan for Lao PDR: Table 9: Reform Action Plan for Lao PDR Stage of Investment Reform Action Timeline34 Lifecycle Vision and Strategy Develop an official Investment Policy Statement that articulates the new FDI vision and strategy for Lao PDR. Entry and Initiate a program to identify and reduce (or eliminate Establishment when possible) the main de jure and de facto restrictions that prevent the entry and participation of foreign investors in Lao PDR. Revisit the institutional framework for investment with a view to simplifying it, by: • Reducing the number of entities involved in the investment process and consider consolidating all investment entry regimes and processes under one ministry (possibly MPI) • Improving intra-governmental coordination and exchanges of information to further streamline the entry processes • Clarifying the role and responsibility of each institution involved in the process. Revisit the entry process and in particular seek to reduce the extent of screening by: • Identifying a small number of strategic sectors where investors will be subject to screening • Clarifying that investments in all other sectors can enter automatically, without screening and by proceeding directly to enterprise registration • Reducing the room for discretion and ad hoc actions. Consolidate all the statutory restrictions to entry of foreign investment and liberalize equity restrictions in a Negative List under the IPL. Use standard classifications to designate sectors and activities in the negative list. Investment Reform Map (IRM) for Lao PDR | 49 Protection A forthcoming revision of the IPL needs to improve the statutory or de jure protection extended to investors (aligning them with best practices and high-standard IIAs), in particular: • Add or strengthen real guarantees of National Treatment (NT) and Most Favored Nation (MFN) • Introduce the concept of Fair and Equitable Treatment (FET) in a well-defined and specific way that does not create excessively broad obligations for Lao PDR • Amend the expropriation clause to include indirect expropriation to the guarantee (using ACIA as an example) • Strengthen the profit transfer guarantee • Strengthen the dispute settlement clause. Initiate a study of the de facto investor protection that: a. Reviews how these guarantees work in practice (for instance how expropriation is conducted, how compensation is computed, how profits/ funds are transferred in and out of the country, how arbitral awards are enforced) and b. Recommends changes to the processes, procedures or practices to enforce the guarantees. Consider joining ICSID, as many countries have in the region. Implement an Investor grievance mechanism in a phased manner, starting with a tool to identify grievances and their typology and progressively move towards a full-fledged grievance management mechanism. Incentives Identify through an investor perception survey or use of a public-private dialogue process: (a) what are the critical constraints facing the private sector and (b) what investors think of the current incentive regime. Assess whether the key constraints identified in the survey can be addressed or mitigated through investment incentives or if there are other and better ways to “fix” these constraints. Link this to the broader, more comprehensive effort to improve the overall investment climate. Assess the cost-effectiveness of the current regime through a costs and benefit assessment of the current incentive regime. Initiate a process to reform or redesign the incentives regime, with reforms focused on clear objectives, transparency and in accordance with the Tax Law and Investment Promotion Law that include targeted and non-fiscal incentives. Promotion and Formulate a clear investment promotion strategy aligned Facilitation with the broader Investment Policy/Vision that also needs to be developed. Build the capacity of the investment promotion institution and its staff in certain critical areas. Focus promotion efforts on two sectors with real potential for more FDI. Tackle key constraints to FDI in the two priority sectors. 34 This column is left intentionally blank as this question should be discussed during the dissemination and consultation process 50 of the draft Report in Lao PDR. Annex 1: Investment Competitiveness Benchmarking Results This annex presents the heatmap results produced presents results of Lao PDR’s current country by the ICB analysis. All heatmaps follow the legend performance relative to successful countries by described in Table 10 of Annex 2. Each heatmap activity and sector. Figure 44: Food & Tobacco Sector - Investment Climate Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 45: Food & Tobacco - Business Environment Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 46: Alternative/Renewable Energy - Investment Climate Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 47: Alternative/Renewable Energy: Business Environment Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Investment Reform Map (IRM) for Lao PDR | 51 Figure 48: Financial Services - Investment Climate Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 49: Financial Services - Business Environment Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 50: Hotels & Tourism - Investment Climate Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. Figure 51: Hotels & Tourism - Business Environment Results Source: Author’s own calculations, based on various global indicator sources & Financial Times fDi Markets database, 2017. 52 Annex 2: Investment Competitiveness Benchmarking Methodology 1. The ICB is a tool that aims to identify sector- 2. Results are reported in the form of heatmaps by specific constraints in a country, by comparing sector and business activity, using classifications the country’s performance on any given indicator defined by the Financial Times’ fDi Markets to the performance of all other countries that database. To construct the heatmaps by country, have attracted FDI to a given sector and business sector, and business activity for a given indicator, activity. The underlying intuition is that if a given first the data on the number of FDI projects by sector indicator (eg: electricity supply) is relevant for and business activity is analyzed, and countries are a sector (eg: business services), only countries defined as successful in a sector and activity if they with good electricity supply will see successful exhibited at least three investment projects from foreign investment in business services and thus, 2011 to 2016. Second, a set of 136 country-level the benchmark will be relatively high. For other indicators are used to determine a country’s range of sectors that depend less on electricity supply, such performance on a given indicator. Heatmaps follow as agriculture, countries with poor electricity supply the reverse ordinal scale as the ISS, from 0 (best) to may nevertheless see successful foreign investment, 5 (worst). and thus, the benchmark will be lower. Table 10: Description of Heatmap Scores Score Color Description 0 Dark Lao PDR ranks above the 30th percentile of all countries in the world that have green successfully attracted FDI in each sector. The characteristic measured by this indicator would likely be seen by investors as a strength in the country’s value proposition for investors in this sector. 1 Light Lao PDR ranks above the 10th, but below the 30th percentile of all countries in the green world that have successfully attracted FDI in each sector. The characteristic measured by this indicator would likely not be a strength, but does not represent a significant obstacle to investment in this sector either as other countries in the world with the same level performance have still been able to attract FDI in the sector. 2 Yellow Lao PDR ranks below the 10th percentile of all countries in the world that have successfully attracted FDI in this sector, but above the 90th percentile of unsuccessful countries that fall below the minimum performance of successful countries on this indicator. The characteristic measured by this indicator may be a weakness by investors in this sector, but even relatively small improvements could address this shortcoming. 3 Light red Lao PDR ranks below the 90th percentile, but above the 70th percentile of unsuccessful countries that fall below the minimum performance of successful countries on this indicator. The characteristic measured by this indicator is likely to be a weakness by investors in this sector, and significant improvements would be needed to address this shortcoming. 4+ Dark red Lao PDR ranks below the 70th percentile of unsuccessful countries that fall below the minimum performance of successful countries on this indicator. The characteristic measured by this indicator is very likely to be seen as a strong weakness by investors in this sector, and very significant improvements would be needed to address this shortcoming. Investment Reform Map (IRM) for Lao PDR | 53 Table 11: Investment Competitiveness Benchmarking: Pillar Indicators and Sources INDICATOR SOURCE Domestic market size index, 1-7 (best) World Economic Forum Global Competitiveness Index GDP per capita (current US$) World Development Indicators GDP growth (annual percent) World Development Indicators GDP growth - 5Y forecast IMF WEO DEMAND Foreign market size index, 1-7 (best) World Economic Forum Global Competitiveness Index regional GDP per capita (countries within 1000k of World Development Indicators capital, current US$) regional GDP growth (countries within 1,000k of World Development Indicators capital, annual percent) GDP, PPP (bln current international $) distance World Development Indicators weighted Labor force, total World Development Indicators Labor force participation rate, female (percent of modeled ILO estimate female population ages 15+) Adult literacy rate, population 15+ years, both World Development Indicators sexes (percent) Primary education enrollment, net percent World Economic Forum Global Competitiveness Index Secondary education enrollment, gross percent World Economic Forum Global Competitiveness Index Tertiary education enrollment, gross percent World Economic Forum Global Competitiveness Index Quality of educational system, 1-7 (best) WEF: Global Information Technology Report Quality of management schools, 1-7 (best) WEF: Global Information Technology Report Quality of math & science education, 1-7 (best) WEF: Global Information Technology Report Extent of staff training, 1-7 (best) WEF: Global Information Technology Report PRODUCTION FACTORS Availability of scientists and engineers, 1-7 (best) World Economic Forum Global Competitiveness Labor and skills Index Country capacity to attract talent, 1-7 (best) World Economic Forum Global Competitiveness Index Country capacity to retain talent, 1-7 (best) World Economic Forum Global Competitiveness Index Ratio of the minimum wage to the average value Doing Business added per worker Pay and productivity, 1-7 (best) World Economic Forum Global Competitiveness Index Annual labor productivity growth (percent) ES PERFORMANCE Cooperation in labor-employer relations, 1-7 World Economic Forum Global Competitiveness (best) Index Flexibility of wage determination, 1-7 (best) World Economic Forum Global Competitiveness Index Hiring and firing practices, 1-7 (best) World Economic Forum Global Competitiveness Index Redundancy costs, weeks of salary World Economic Forum Global Competitiveness Index Labor tax and contributions (percent of profit) Doing Business 54 Arable land (percent of land area) World Development Indicators natural resources Geography and Access to land World Bank Enterprise Surveys Total internal renewable water resources per FAO Aquasta capita (m3/inhab/year) Urban population (percent of total) World Development Indicators Population density (people per sq. km of land World Development Indicators area) Manufacturing Value Added per capita Competitive Industrial Performance Index Capital per worker (in 2011 US$) Penn World Tables Medium- and High-Tech Manufactured Exports Competitive Industrial Performance Index share in total manufactured exports Production process sophistication, 1-7 (best) World Economic Forum Global Competitiveness Index State of cluster development, 1-7 (best) World Economic Forum Global Competitiveness Index Local supplier quality, 1-7 (best) World Economic Forum Global Competitiveness Index Local supplier quantity, 1-7 (best) World Economic Forum Global Competitiveness Existing capabilities Index Prevalence of foreign ownership, 1-7 (best) World Economic Forum Global Competitiveness Index Availability of latest technologies, 1-7 (best) WEF: Global Information Technology Report Capacity for innovation, 1-7 (best) WEF: Global Information Technology Report Business Sophistication World Economic Forum Global Competitiveness Index Company spending on R&D, 1-7 (best) World Economic Forum Global Competitiveness Index PCT patents, applications/million pop. WEF: Global Information Technology Report Firm-level technology absorption, 1-7 (best) World Economic Forum Global Competitiveness Index Percent of firms with an internationally- World Bank Enterprise Surveys recognized quality certification Percent of firms using technology licensed from World Bank Enterprise Surveys foreign companies Electricity production, kWh/capita WEF: Global Information Technology Report Access to electricity (percent of population) World Development Indicators Number of electrical outages in a typical month World Bank Enterprise Surveys Duration of a typical electrical outage (hours) World Bank Enterprise Surveys Losses due to electrical outages (percent of World Bank Enterprise Surveys Energy annual sales) INPUTS Quality of electricity supply, 1-7 (best) WEF: Global Competitiveness Index Cost (percent of income per capita) required to Doing Business get electricity Procedures (#) required to get electricity Doing Business Time (days) required to get electricity Doing Business Quality of air transport infrastructure, 1-7 (best) World Economic Forum Global Competitiveness Trans port Index Investment Reform Map (IRM) for Lao PDR | 55 Quality of port infrastructure World Economic Forum Global Competitiveness Index Quality of railroad infrastructure, 1-7 (best) World Economic Forum Global Competitiveness Index Quality of roads, 1-7 (best) World Economic Forum Global Competitiveness Index Fixed broadband Internet subscriptions/100 pop World Economic Forum Global Competitiveness Index Logistics competence Logistics Performance Index Timeliness of international shipments Logistics Performance Index Tracking and tracing of shipments Logistics Performance Index Domestic credit provided by financial sector World Development Indicators (percent of GDP) Bank non-performing loans to total gross loans World Development Indicators (percent) Commercial bank branches (per 100,000 adults) World Development Indicators Getting Credit Doing Business Availability of financial services, 1-7 (best) World Economic Forum Global Competitiveness Finance Index Ease of access to loans, 1-7 (best) World Economic Forum Global Competitiveness Index Financing through local equity market, 1-7 (best) World Economic Forum Global Competitiveness Index Affordability of financial services, 1-7 (best) World Economic Forum Global Competitiveness Index Soundness of banks, 1-7 (best) World Economic Forum Global Competitiveness Index Burden of government regulation, 1-7 (best) World Economic Forum Global Competitiveness Index Bureaucracy Quality (L) ICRG Senior management time spent dealing with the World Bank Enterprise Surveys requirements of government regulation (percent) Regulatory barriers and taxation Cost to start a business (percent of income per Doing Business capita) Cost required to receive a construction permit Doing Business (percent of warehouse value) Cost required to register property (percent of Doing Business INSTITUTIONS property value) Quality of the land administration index (0-30) Doing Business Time to export: Border compliance (hrs) Doing Business Time to import: Border compliance (hrs) Doing Business Profit tax (percent of profit) Doing Business Time to pay taxes (hrs/year) Doing Business Total tax rate (percent of profit) Doing Business Government effectiveness score (-2.5 to 2.5) Worldwide Governance Indicators and property Rule of law Corruption (F) ICRG rights Bribery incidence (percent of firms experiencing World Bank Enterprise Surveys at least one bribe payment request) 56 Bribery depth (percent of public transactions World Bank Enterprise Surveys where a gift or informal payment was requested) Law & Order (I) ICRG Reliability of police services, 1-7 (best) World Economic Forum Global Competitiveness Index Commencement of proceedings to resolve Doing Business insolvency index (0-3) Cost to resolve insolvency (percent of estate) Doing Business Strength of insolvency framework index (0-16) Doing Business Cost to enforce contracts (percent of claim) Doing Business Recovery rate (cents on the dollar) Doing Business Efficiency of legal system in settling disputes, 1-7 WEF: Global Information Technology Report (best) Judicial independence, 1-7 (best) World Economic Forum Global Competitiveness Index Strength of legal credit rights index (0-12) Doing Business Efficiency of legal system in challenging regs, 1-7 WEF: Global Information Technology Report (best) Intellectual property protection, 1-7 (best) World Economic Forum Global Competitiveness Index Strength of investor protection, 0-10 (best) World Economic Forum Global Competitiveness Index Anti-monopoly policy Bertelsmann Transformation Index Market-based competition Bertelsmann Transformation Index Private enterprise Bertelsmann Transformation Index Effectiveness of anti-monopoly policy, 1-7 (best) World Economic Forum Global Competitiveness Index Market contestability Extent of market dominance, 1-7 (best) World Economic Forum Global Competitiveness Index Intensity of local competition, 1-7 (best) World Economic Forum Global Competitiveness Index Prevalence of trade barriers, 1-7 (best) World Economic Forum Global Competitiveness Index Tariff rate, applied, simple mean, all products World Development Indicators (percent) Business impact of rules on FDI, 1-7 (best) World Economic Forum Global Competitiveness Index General government final consumption World Development Indicators expenditure (percent of GDP) Economic Risk Rating ICRG Macroeconomic and political stability Financial Risk Rating ICRG External debt stocks (percent of exports of goods, World Development Indicators services and primary income) General government gross debt (percent of GDP) World Economic Outlook Risk for Debt Service ICRG Current account balance (percent of GDP) World Development Indicators Total reserves in months of imports World Development Indicators Inflation WEO Risk for Inflation ICRG Investment Reform Map (IRM) for Lao PDR | 57 Political stability score (-2.5 to 2.5) Worldwide Governance Indicators Voice & accountability score (-2.5 to 2.5) Worldwide Governance Indicators Political Risk Rating ICRG Government Stability (A) ICRG Public trust in politicians, 1-7 (best) World Economic Forum Global Competitiveness Index Business costs of crime and violence, 1-7 (best) World Economic Forum Global Competitiveness Index Ethnic Tensions (J) ICRG External Conflict (E) ICRG Internal Conflict (D) ICRG Military in Politics (G) ICRG Religious Tensions (H) ICRG 58 Annex 3: Financial Times Sector and Activity Classifications Table 12: Activity Classifications Sector Definition notes Aerospace Aerospace (except space/defense). Goes under transport equipment cluster. Alternative/Renewable energy Solar/fuel cells for energy Alternative Fuels, Wind energy, Nuclear, Bio-fuels, etc. Goes in Environmental Technologies Cluster. Automotive Components All automotive components (except auto electronics may go into electronics sectors (with cluster = transport 73). Goes in Transport Equipment Cluster. Automotive OEM Passenger cars, sports cars, trucks, buses, etc. Goes in Transport Equipment cluster. Engines go into Engines & Turbines sector, TE cluster. Beverages All beverage products. Goes in Food, Beverage & Tobacco cluster. Biotechnology Drug discovery, bio-agricultural, bio-engineering, genomics, etc. (except bioin-formatics which is Software & IT sector). Goes in Life Sciences cluster. Building & Construction Materials Cement, concrete, bricks, plaster, etc. Goes in Construction Cluster. Business Machines & Equipment Disks/drives, PC's, printers, servers, etc. Goes in ICT Cluster. Business Services Advertising, BPO, consultancy, education, legal, recruitment. Typically, prof ser-vices go in prof services cluster and advertising and education go in creative industries cluster. Ceramics & Glass Ceramics, tiles and glass products Chemicals Agrochemicals, paints, soaps, etc. Typically, physical sciences. Petrochemicals go in Energy cluster. Coal, Oil & Gas Coal, petroleum and gas products. Note that transmission and pipelines and anything transportation related should go into transportation sector and storage, distribution, terminals into warehousing & storage sector (and cluster should be energy) and support activities for energy should most go into Business Services sector. Typically, energy cluster. Communications Telecom services + Telecom equipment + radio and TV broadcasting services. Generally, telecom companies R&D projects are most software development, but they should be entered under this sector, not software and IT. Sat/Nav pro-jects go into Space & Defense sector. multi-media related projects go to Creative Industries cluster. Typically, ICT cluster. Consumer Electronics Audio/video electronics, cameras, home entertainment, etc. Typically go in con-sumer goods cluster. Consumer Products Accessories, cutlery, DIY, jewelry, toys, etc. Electronic Components ATMS, batteries, imaging, home appliances, LCD, wires, etc. Typically go in ICT & Electronics cluster ATMs, credit cards go in FS cluster. Financial Services Brokerage, financing, mortgages, insurance, VC, etc. Typically go under financial services cluster. Food & Tobacco Agriculture, bread, coffee, fish, meat, etc. Typically go in Food, Beverages and Tobacco cluster. Healthcare Hospitals, dentists, labs, vets, etc. Typically, in life sciences cluster. Engines & Turbines Industrial as well as transport engines and turbines. Transports goes under transport equipment cluster. Industrial goes under industrial cluster. Investment Reform Map (IRM) for Lao PDR | 59 Industrial Machinery, Equipment & Tools Agricultural machinery, boilers, compressors, machine tools, power tools, etc. Typically go under Industrial cluster. Turbines for wind farms go in Env Tech clus-ter. Leisure & Entertainment Amusement parks, casino, media, museums, restaurants, theatres, etc. Typically, in the creative industries cluster. Medical Devices Medical equipment supplies. Typically, in the Life Sciences cluster. Metals Aluminum products, copper alloys, gemstones, metal ore mining, etc. Mfg. of products goes into relevant clusters. Mining goes into physical sciences cluster. Minerals Minerals. Typically go in physical sciences cluster. Non-Automotive Transport OEM Motorcycles, trains, watercraft, etc. Typically go in transport equipment cluster. Paper, Printing & Packaging Packaging, labelling, printing, paper bags, etc. Typically goes in wood, apparel and related goods cluster. Pharmaceuticals Cardiovascular, clinical research, generics, infections, nutrition, respiratory, etc. Typically go in the Life Sciences cluster. Plastics Plastic compounds, film/coatings, containers/packaging, etc. Many packaging plastics projects are related to Food cluster, Consumer products cluster and industrial cluster. Windows/doors go in Construction cluster. Some plastics pro-jects go in wood, apparel & related cluster when they are for textiles sectors. Real Estate Department stores, offices, residential, etc. Typically go under real estate clus-ter. Rubber Rubber, resin/synthetic rubber and tires, etc. Tires typically go under transport equipment cluster. Rest of the projects are typically physical sciences. Semiconductors Capacitors, chip design, microchip, wafers, etc. Most projects in ICT cluster. Some in Creative Industries (e.g. multimedia chips). Software & IT services Enterprise application software, software infrastructure, information manage-ment software, etc. Note that all digital media projects should go under creative industries cluster, all FS/ banking projects go under Financial services cluster; all Enterprise Application Software (industrial, supply chain) should be entered under relevant cluster - mainly Transportation, Warehousing, Industrial, and Transport Equipment. Space & Defense Space/defense and satellite/navigation. Space & defense should go into Transport Equipment or ICT cluster depending on the project Textiles Leather, furnishings, footwear, artificial/ synthetic fibers, etc. Typically go under wood, apparel and related goods cluster Hotels & Tourism Hotels, tourism/travel services, etc. Typically goes in Tourism cluster. Transportation Air express, freight, port, trans-shipment, etc. Typically goes in Transportation, Warehousing & Storage cluster. Warehousing & Storage Logistics/distribution center, warehouse, etc. Typically go in Transportation, Warehousing & Storage cluster. Gas terminals entered in this sector, with cluster Energy. Wood Products Chipboard, flooring/panels, houses, furniture, pulp mill, etc. Typically go in Transportation, Warehousing & Storage cluster. Source: Henry Loewendahl, Financial Times, “fDi Markets Database”, 2017. 60 Business Activity Definition Research & Development The discovery, design, or development of a product- technical design center Business Service When the sector is business or financial services and the project is opening an office, the business activity is Business Services Construction Building of a hotel, business park, or residential property. Does NOT include building of a manufacturing plant Customer Contact Center Call center, contact center, telemarketing center, customer help desk, cus-tomer care center, enquiries center, customer advice center, CRM center Design, Development & Testing Project which is involved in designing, developing or testing a product. Soft-ware companies opening development center normally under this as are in-volved in testing. To be included as R&D it must involve applied or pure re-search Education & Training A facility providing training services or education courses. Includes internal training services for company and outsourced staff Electricity A utility generating electricity- wind/solar/hydro/coal-fired/gas- fired power plant Extraction An operation that is extracting any substance from the earth (mining oil or gas). Does NOT include the processing of the substance Headquarters A divisional, national or regional HQ for the company. ICT & Internet Infrastructure Providing the infrastructure for the ICT sector-broadband infrastructure, in-ternet data centers, data recovery centers, etc. Logistics, Distribution & Transportation Operation providing transportation and/or storage of goods- logistics hub, warehouse, distribution center, cargo terminal, etc. Maintenance & Servicing Providing maintenance, repair and servicing of products- automobile and air-craft maintenance, watch repair, etc. Manufacturing Production or processing of any good- manufacturing plant, processing plant, smelter, etc. Also, includes operations where produce is grown i.e. Fish farm, winery, forestry, etc. Recycling This is for any operation which is involved in recycling Retail Opening of a clothing store, supermarket, restaurant, opticians or any retail operation, ie: any operation where a customer physically goes into a shop to buy something. Sales, Marketing & Support An operation that will develop sales, market company's products/ services and provide customer support but does NOT include retail operations. Overseas sales office, representative offices, etc. Shared Services Center Center providing administrative/ transactional type processing services to either internal business units or external clients (outsourced)-accounts pro-cessing, claims processing, invoice processing, BPO center. MUST BE A DEDI-CATED CENTER. Technical Support Center Center providing technical support to clients or internal business units- IT support center, IT helpdesk, technical center. Source: Henry Loewendahl, Financial Times, “fDi Markets Database”, 2017 Investment Reform Map (IRM) for Lao PDR | 61 Annex 4: Investor Grievance Management mechanism The Investor Grievance Mechanism (IGM) agency, appointed directly by the president. Other essentially provides the minimum institutional countries, such as Bosnia and Herzegovina, have infrastructure that enables governments to identify, relied on a collaborative system involving multiple track and manage grievances arising between agencies at sub-national levels. investors and public agencies as early as possible. Reforms are undertaken to enable a designated »» Information Sharing: lead agency within the government to manage and implement IGM. IGM ensures that the government Information sharing should enable the lead agency responds to investor grievances in a suitable manner to coordinate the diffusion of relevant information and in accordance with the country’s international to those agencies more likely to generate or become investment agreements, laws and regulations. The involved in grievances. Information sharing may lead agency is equipped with adequate legal training involve substantive information on the contents and and authority to serve as a ‘secretariat’ of IGM, breadth of the obligations included in the different facilitating the use of international and domestic IIAs, or informing the highest possible number of investment law as a tool to persuade public agencies governmental departments about the existence and that generate investor grievances to consider purpose of the lead agency so the latter knows who whether their actions are, in fact, in conformity with to call in case of doubt regarding the consistency of the applicable investment frameworks well before their measures/actions with IIAs, or if a conflict with grievances escalates into a dispute. It should be noted a foreign investor arises. For example, in Colombia that investment aftercare is much broader than IGM a focus area of the dispute prevention strategy is in that the latter is “focused on identifying, tracking training, information sharing on IIA commitments and managing conflicts arising from the application and on what these commitments mean for a public of investment protection guarantees.” In this sense, official’s daily routine and decision making. Similarly IGM can be said to be a more focused subset of in Mexico, the Secretaries of Economic Development investment aftercare. organized training sessions and capacity-building efforts at a regional and municipal level, to create There is no ideal ‘best practice’ IGM. However, awareness of the commitments undertaken by many countries have started to establish their own Mexico with regard to foreign investors in IIAs. versions of dispute prevention and general aftercare systems, which provide the following valuable good »» Early Alert Mechanisms: practice elements for designing IGM: Early alert mechanisms enable the lead agency to »» Lead Agency: learn about the existence of a grievance as early as possible (e.g. through the private sector). In some There should be a government agency with power countries representatives of the Lead Agency make and attributions conferred by law and/or regulations, regular visits to companies to gather information responsible for implementing IGM. The lead agency on existing grievances. This is the case in Republic may be an existing government ministry/agency or of Korea and in Bosnia and Herzegovina. In other may need to be newly created. In particular, the lead countries, investors need to report a grievance to agency should be able to obtain information from the lead agency on their own. Some countries also relevant government agencies that interact with use online technology tools as early alert systems. investors/cause grievances and provide a channel for For example, Peru has designed an online tool information sharing among government ministries/ for government agencies to register grievances. agencies. The lead agency can be established at a Gradually, this tool will be made available to sectoral, sub-national or a national level, depending investors to enable them to register grievances. on the political-economy and requirements of the country. Countries like Republic of Korea have been »» Problem Solving Methods: able to appoint a fairly independent national lead 62 IGM should provide for problem-solving methods IGM is designed based on a country’s political, for the parties to seek an interest-based solution economic and legal/institutional framework. The to the grievance (fact finding, obtaining third capacity of the government and resources available party expert opinion). In most existing models, also determine the type of IGM that can be designed consultation with investor and regular follow ups for a country. In some countries, a centralized have been used to resolve investor grievances. IGM may be set up, while in others a sub-national approach is more fitting. In some countries majority »» Political Decision-Making: grievances arise in a specific sector and thus governments choose to design a sectoral IGM. Once the problem-solving process has enabled the parties to find a solution to the grievance, it is In Bosnia and Herzegovina, the aftercare initiative paramount that such solution receives the approval gradually evolved into a more targeted and effective of the adequate political authority of host State IGM. Rather than pursuing a top down approach, and the investor. To achieve this goal, alternatives a more organic approach was followed involving currently being considered in various countries representatives of the private sector and sub-national entail the establishment of political bodies, such government agencies. Bosnia and Herzegovina has as Ministerial Councils, to monitor the effective a strong federal structure with sub-national entities implementation of solutions agreed by the lead functioning fairly independently. The Collaborative agency, which will be an administrative body. High- Network, which is the lead agency, is essentially level political endorsement would guarantee that the constituted on a voluntary basis and so far does measure providing a solution to the problem would not have a single law/regulation governing it. Peer be effectively implemented. pressure from each other motivates and pushes governments to address investor grievances in Political risk and investor protection related an effective manner. The investment promotion grievances often involve multiple levels of government agency can also submit a report on pending investor and can relate to controversial government conduct. grievances to the council of ministers for their Having high level political support is thus essential consideration. for resolving such grievances. In Mongolia for example, it was decided to have an Investor A more sophisticated model is Republic of Korea’s Protection Council (IPC) under the Prime Minister’s Office of Foreign Investment Ombudsman (OFIO) office. In Bosnia and Herzegovina, problem-solving that is commissioned directly by the president and political decision making is voluntarily done by and heads the Investment Aftercare Division. The the lead agency (which is a group of representatives Investment Aftercare Division is staffed with nine from relevant government agencies). The sub- experts in the fields of taxation, labor, finance, national government agencies are very powerful accounting, law, construction, IT. The experts, also and act quite independently. The thrust for political called “Home Doctors”, provide foreign-invested decision-making to solve investor grievances is peer companies one-on-one service in investigating and pressure from other government agencies and not resolving a wide range of grievances. In the Korean one “superior” agency. model, “grievances” are very broadly defined and OFIO addresses all types of grievances, ranging from »» Enforcement of decisions: corporate management to the living environment of foreign investors. Unlike Republic of Korea’s Closely related to political decision making is the general aftercare system, typically SIRM focuses need to ensure that the consensual solution to the only on key investor protection guarantees. Having grievance agreed by representatives of governments a more targeted approach helps countries with more and investors is not ignored or disrespected by one limited resources react more effectively to investor of the many other agencies (e.g. Ministerial Councils grievances. enforce). Investment Reform Map (IRM) for Lao PDR | 63 Annex 5: Tax Incentives Table 13: Description of Different Types of Tax Incentives Instruments Source: WBG IPP Team. Table 14: Tax Incentives: Advantages and Disadvantages of Different Instruments 64 Figure 52: Good Practice in Cost-Benefit Analysis Source: WBG/IPP Team Investment Reform Map (IRM) for Lao PDR | 65 Table 15: SEZ Incentive Packages Incentives for SEZ Developers Incentives for Investors (Articles 40-42 of Decree 188) (Articles 43-45 of Decree 188) Fiscal Incentives Exemption of Import Tax On imported and exported goods (subject to On imported and exported goods (subject to and Duties provisions stipulated in the IPL) provisions stipulated in the IPL) Tax holidays on For manufacturing, services, tourism development SEZ investor investing in a promoted sector listed Corporate Income Tax industry, health service sector, education, sport, and in Article 9 of the IPL 2016 can receive 2 additional real estate development. years of tax holiday in zone 1 (10 + 2 = 12 years) and zone 2 (4 + 2 = 6 years). Granted based on location: -Zone 1 is 16 years Upon the end of tax holiday period, SEZ Investor -Zone 2 is 8 years. will pay profit tax at 35 percent of full rate for 5 years. After that investor will pay the full rate. VAT exemption For road construction, electricity and water supply Construction of manufacturing for export will installation, drainage system and waste management be granted 100 percent VAT exemption and pay system construction. Other infrastructure 50 percent of the full VAT rate for electricity and construction is granted 50 percent of VAT rate water supply consumption for construction. (under VAT Law) Construction of infrastructure supporting investment activity not for 100 percent export shall pay 50 percent of the full VAT rate. Non-fiscal incentives Land SEZ developers have the right to use land in SEZs SEZ Investor has right to use, lease, handover or and lease, hand-over and transfer the portion of land transfer the leased portion of land based on term in the SEZ to investors (based on the development and period stated in the lease contract but not more master plan endorsed by Zone Management than the period of development contract. Committee). Owner of property located in SEZ has right to ownership of land and property over the period of contract and can sell, handover, transfer or inherit. Upon the end of the contract, the land will return to the government. Foreigners who received a property right for residential building within SEZs pay upfront above US$ 100,000. Other incentives • Developers can receive other incentives as Investors in SEZs are eligible to receive any tax determined in the IPL. incentives determined in the IPL. • Developers can receive additional incentives Foreign investors who received the property right based on the negotiation/ contract (depending through leasing and have stayed in the country on location uniqueness or remoteness, and more than three months will be granted the sector with special support by the government). multiple-entry visa. The investor’s spouse and children will be granted the multiple-entry visa for 10 years and that is extendable. Also, they will be eligible for any facilitation provided by the government in each period. Source: WBG/IPP analysis. 66 Investment Reform Map (IRM) for Lao PDR | 67 January 2021 Xieng Ngeun Village, Chao Fa Ngum Road, Chanthabouly District, Vientiane Tel: (+856) 21 266 300