Preliminary Country Paper on Competition Scenario in the Lao PDR By Dr. Leeber Leebouapao NERI, Lao PDR

1. Preliminary Country PaperonCompetition Scenario in the Lao PDRBy Dr. Leeber LeebouapaoNERI, Lao PDR

2. Table of Content I. General BackgroundII.            Social and Economic Policy Affecting CompetitionIII.           Nature of Market/CompetitionIV.           Sectoral PolicyV.             Anti-Competitive PraticesVI.           Consumer MovementVII.        Conclusion/Recommendation

3. I. GENERAL BACKGROUND

4. 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

6. GDP per capita 1996-2003 in US$

7. Share in GDP by Sectors in 2003

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

13. Social and Economic Policy Affecting Competition

14. The New Economic Mechanism ( NEM )Shifting from a centrally planed economy to a market oriented economy in 1986

15. Industry Policy Industry Development Plan(1996-2005): Processing industry, Cottage and handicraft industries, Power generation, Mining, Agro-forestry industry, Textiles and construction materials industry

16. Industry Policy(Cont.) Priority of Industrialisation and Modernisation Strategy: Electricity, Agro-processing industry, Tourism, Mining, Construction material industry

17. 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…

18. 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.

19. 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 %

20. 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. ØForeign 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. ØThe 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.

21. The Nature of Market/Competition

22. 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

23. 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

24. IV. SECTORAL POLICIES

25. 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

26. SECTORAL POLICIES(Cont.) Telecommunication Services: 1997: 29,626 telephone lines 1998: 35,303 telephone lines 4 Mobile operators: Lao telecom, ETL, Lao Asia Telcom (LAT, owned by the army), and Tango The 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.

27. 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

28. 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.

29. SECTORAL POLICIES(Cont.) Transportation(Cont.): Investment: Largest share of public investment and ODA to the transport sector

30. Public Investment by Sectors2003-2004

33. 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

34. 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.

35. 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.

36. V. Anti-Competitive Practices

37. 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

38. VI. Consumer Movement

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

40. VII. Conclusion and Recommendation

41. 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.

42. 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