Preliminary Country Paper

on

Competition Scenario

in the Lao PDR  

By Dr. Leeber LeebouapaoNERI, Lao PDR

I. General Background II.            Social and Economic Policy Affecting Competition III.           Nature of Market/Competition IV.           Sectoral Policy V.             Anti-Competitive Pratices VI.           Consumer Movement VII.        Conclusion/Recommendation

Table of Content

I. GENERAL BACKGROUND

Characteristics of the Country: Landlocked and mountainous country

Economic System: 1986: Shifting from a centrally planed economy to a market oriented economy ( NEM )

Economic Integration: 1997: Member of ASEAN Currently: Preparation for Joining WTO

7 5.9

7.7 7.56.9 6.9

4

7.3

5.8 5.7 5.76

0

2

4

6

8

%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Yea

r

GDP Growth Rate 1992-2003 in %

394.58360.35

258.59284.55

332.21 328.33 328.81

361.34

0

50

100

150

200

250

300

350

400US$

1996

1997

1998

1999

2000

2001

2002

2003

GDP per capita 1996-2003 in US$

27%

24%

49%

Agriculture Industry Services

Share in GDP by Sectors in 2003

Inflation Rate 1995-2003

14.35 18.8 14.2

61.38

134

1610.67.8426.98

020406080

100120140160

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

%

Exchange Rate Kip/US$ 1995-2003

819 926 1,260

3,296

8,871

7,1037,864

10,00010,060

0

2000

4000

6000

8000

10000

1200019

95

1996

1997

1998

1999

2000

2001

2002

2003

Export and Import Value between 1992-2003 in million US$

0

100

200

300

400

500

600

700

80019

92

1994

1996

1998

2000

2002

mil

lion

US

S$

ExportImport

335.

1

347.

8

2,59

8.30

804.

9

129.

65

138.

78

122.

3

116.

8

20.4

42

493.

8

550

0

500

1000

1500

2000

2500

300019

92

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Registered FDI Capital 1992-2003 in million US$

Registered FDI Capital by Sectors 2002

12.2%

73.3%

3.3%2.8% 2.8% 2.6% 3.0%

Electricity Industry/Handicraft

Services Agriculture-Forestry

Construction Telecommunication and Transportation

Others

II. Social and Economic Policy

Affecting Competition

The New Economic Mechanism ( NEM )

Shifting from a centrally planed economy to a market oriented economy in 1986

Industry Policy

Industry Development Plan(1996-2005):

Processing industry, Cottage and handicraft industries, Power generation, Mining, Agro-forestry industry, Textiles and construction materials industry

Industry Policy(Cont.)

Priority of Industrialisation and Modernisation Strategy:

Electricity, Agro-processing industry, Tourism, Mining, Construction material industry

Trade Policy • Six Tax Rates: 5%, 10%, 15%, 20%, 30% and 40%. • Import tax exemptions: Raw materials for the manufacture of exports and import substitutes, production materials and spare parts for FDI and for the imports by Government and donor funded activities. • Excise tax rates: Range from 25-104% for automobiles, 0-24% for petroleum products, 50% for motorcycles, beer and cigarettes, 10% for electronic equipment, and 50-60% for alcoholic beverages. •Turnover tax rate: 5% for essential goods, agriculture inputs machinery and equipment, fabric and cotton thread. 10% for other products (e.g. motor vehicles and electronic equipment). Turnover tax exemption for rice fertilizer, breeding animals, forest inputs, livestock medicines etc…

Trade Policy(Cont.)

• Export taxes: electricity (20%), coffee and livestock (5%), semi-finished wood products (30%), and finished wood products such as plywood (3%). Royalties are charged on timber and other natural resources. • Export Incentives: Temporary importation, or duty exemption: no duty is paid on raw materials that are to be incorporated into exports, but the exporter must provide evidence to the customs department that the products are eventually exported.

Duty drawbacks: duty is initially paid, but the exporters can apply for a refund of duty by demonstrating that the products have been exported.

Trade Policy(Cont.)

• Export Incentive(Cont.) Free trade zones: firms located in the zones can engage in both import and export trade with foreign countries free of duty. Their sales to the domestic market are subject to customs duty, although concessional treatment is common.

• Liberalization of Export License and Simplifying of the System of Import Licensing in 2001

• AFTA Commitment by 2008: CEPT rates on IL items to 0-5 %

Foreign Direct Investment •No limitation on the percentage of foreign ownership• Incentives:

Exemption from import duties on raw materials and equipment for export oriented production. Exemption from export duties for export finish products. Freedom to employ necessary foreign expatriates. Freedom to repatriate profit and capital and individual income to their home countries or to third country after income tax has been paid.      Foreign personal income taxes at the flat rate of 10%. In other cases, income subject to graduated rate at up to 40%. There are no allowable deduction or personal allowance.      The annual profit at the flat rate of 20%. For business as operated by legal persons the profit tax rate set out in Tax Law is 35%. For business top by individuals the profit tax rate is based on graduated scale with top operated of 45% applying to annual profits in excess of 60 million kip. •

III. The Nature of Market/Competition

Nature of Market/Competition Market Based Economy: Price liberalization, privatization, private sector development support including private land ownership and open door policy

Level of Competitiveness of the Local Firm:

Comparative advantages:- - Low wages

- Low cost of domestic based raw material

- - Investment incentive in local areas, tax exemption for export and imported investment capital

Nature of Market/Competition(Cont.)

Barriers to competition: Low education and skill levels of the labor force High transport costs Small-scale of private enterprise Marketing problems Low level of urbanization Low labor productivity Poor financial services Lack of a formal property system

IV. SECTORAL POLICIES

SECTORAL POLICIES

Electric Power: Increase power supply for domestic industries and consumption

Promote power generation for export to meet Government’s revenue objectives

In 2000: 3,313 million KW In 2006: 24,468 million KW

SECTORAL POLICIES(Cont.)

Telecommunication Services: 1997: 29,626 telephone lines 1998: 35,303 telephone lines4 Mobile operators: Lao telecom, ETL,

Lao Asia Telcom (LAT, owned by the army),

and TangoThe Telecom plan 2000:   Expansion of

network,

Separation between the international and long distance exchanges, development of CSC optic

fiber project, Introduction of a service system

for subscribers, improvement of training center.

SECTORAL POLICIES(Cont.)

Telecommunication Services(Cont.):Internet Services:

Services Companies:

- Globe Communications Electronic

- Lao Telecom

Internet users have increased rapidly since 1998

Internet cafes are available in many cities

SECTORAL POLICIES(Cont.)

Transportation:

• Transport sector: road, river, and air transportation, no rail way

• Road transportation: more than 90% of freight traffic and 85 % of passenger traffic and 75 percent of freight traffic (2001)

•Domestic air transport: most remaining passenger traffic.

•Only about 18 % of the total lengths of the road system are paved.

SECTORAL POLICIES(Cont.)

Transportation(Cont.):

Investment: Largest share of public investment and ODA to the transport sector

Public Investment by Sectors2003-2004

45%

15%

14%

8%

4%3% 3%1% 7%

Infrastructure

Agriculture

Education

Health

Labor and SocialWelfaire

Information and Culture

Industry

Trade

Other AdministrationAgencies

Land Linked StrategyLand Linked Strategy

Source: National Economic Research Institute 2002

SECTORAL POLICIES(Cont.)

Financial Services:• Insurance and insurance-related services

– The insurance sector is governed by Law No. 11/90/PSA of 18 December 1990 and a related Decree No 01/PMO of 23 January 1992).

– The market is open to foreign investment and competition.

– Insurance company: the Assurance Generale de Laos (AGL), a joint venture between the Government of the Lao PDR and the AGF of France.

• Banking and Other Financial Services – Central Bank: Monetary Policy and Supervision of Commercial Banks

– Commercial Banks

SECTORAL POLICIES(Cont.)•Banking and Other Financial Services(Cont.)

- Commercial banks are authorized to mobilize deposits of different types such as demand deposits, savings deposits, and other types of deposits, including sales of Treasury Bills and Central Bank Bills to the public.

- They include acceptance of deposits in kip, US dollars and in Thai baht.

- Commercial banks may determine their own interest rates on deposits within the general guidelines issued periodically by the central bank.

SECTORAL POLICIES(Cont.)

Health Related And Social Services:

Public system of hospitals: a central university hospital and five regional hospitals, 13 provincial and 150 small district hospitals and health posts. Private investment, including foreign, is not restricted in the area of hospital services since 1998, but still no hospitals have been opened to date.

V. Anti-Competitive Practices

Anti-Competitive Practices Monopoly in some business activities

- By law and regulation(copy right, patens, concessions, economic strategy(SOE) )

Limited service suppliers by nature

Policy implementation by some officials is sometimes inconsistent

Approval procedure takes times

VI. Consumer Movement

Consumer Movement

No formal consumer movement against anti-competitive practices, but complaining and asking for opening up more competitive practices

VII. Conclusion and Recommendation

CONCLUSION

Lao PDR is moving forwards to a market based economy by promoting private sector development, however, it is still facing numerous internal challenges to market mechanism in particular to business competition in the country particularly lack of a comprehensive regulatory framework including competition law or anti-monopoly law etc. In addition, there are numerous constraints to competition namely lack of skilled human resources, poor infrastructure system, limited financial services, low purchasing power in the country due to high poverty incidences, weakness in macroeconomic management leading to relatively macroeconomic instability etc.

RECOMMENDATION Strengthen market mechanism Simplify and clarify the policy and regulatory framework for

private sector enterprise and investment Improve Productivity Strengthen competitiveness through human resource development Clarify the supportive role of government Promote and facilitate substantive dialogue with the business community Strengthen infrastructure development Strengthen macroeconomic stability Strengthen trade access to neighboring country markets Mobilize financial resources and facilitate access to credit