The National Economic Research Institute (NERI)

Systems for Promoting Private Capital Flows

for Infrastructure Development in Lao PDR

Saykham VOLADET

Mercure Hotel, Vientiane, Lao PDR

15-16th September 2014

Table of Contents

I. Overview on socio-economic development and the need for

infrastructure in Lao PDR

II. Legal, institutional and financial frameworks facilitating

private participation in infrastructure development

III. Existing pattern of PPP in infrastructure in Lao PDR

IV. Discussing on possible areas for firming up a framework to

promote private capital flow in infrastructure

development 2

- Location: in South-East Asian.

-Bordering with China, Cambodia, Vietnam, Thailand and

Myanmar.

- Total land area: 236,800 qkm.

- Number of population: 6 million.

-Socio-economic development status: LDC with GDP per

capita of USD 1,069 (2010).

- Agriculture is an important economic sector

contributing to around 30% of GDP (2009/10).

I. Overview on socio-economic status and the need for

infrastructure development in Lao PDR

- The Lao PDR is one of infrastructure poorest country

in Asian.

-Poverty incident is estimated to be about 26 percent

in 2010.

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+Road density in Lao PDR and in some Asian country

Countries Total length

of road (km)

Total land area

(,000,km)

Road density

(km/,000, km)

Per capita length

of road

(10,000 persons/

Km)

Philippine 157,300 300 524 26

Thailand 199,500 513 389 36

Vietnam 105,400 330 319 15

Lao PDR 32,625 236 138 58.2

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+From relatively low socio-economic status,

the Lao PDR want: - To eradicate poverty by 2015.

-To graduate from LDC status by 2020 (GDP per capita of over USD 1,800).

-To archive an economic growth of at least 8 percent per annum.

+Key economic sectors to stimulate economic growth

and to fight poverty include:

-Hydro power.

-Mining.

-Processing industry.

-Tourism industry.

-Agriculture industry (modern agriculture production).

-Logistics

-Focusing on rural development.

-Reducing gape between rural and urban areas.

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+Key infrastructure projects in 7th 5 Year socio-economic

development plan 2011-2015 include:

-Construction of railway from VTE to Borten International Border Gate, 421 km length,

construction is about USD 7 billion.

-Road and airport development projects including upgrading the national road number 15B

connecting Saravan province with Vietnam.

-Construction of 35 hydro power projects including Xe Khamane 3, Nam Guam 5, Nam Guam

3, Theun Hine Bune phase II hydro power project.

-Construction of the National Transmission line.

-Xe Khamane Irrigation project, etc.

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II. Legal, institutional and financial frameworks

facilitating private participation in infrastructure

development

• No specific legal, institutional and financial framework to facilitate private

domestic and foreign direct investment in infrastructure development.

• General legal, institution and financial framework facilitating private domestic

and foreign direct investment are:

+ Legal framer work:

- Business Law (1994 and final updated 2009): allows investors to establish

business enterprises in all economic sectors and ensures right and benefit of investors.

-Investment Promotion Law ( 1990 and final updated in 2009): provides a lot of investment incentives including (1) profit tax exception in early state of

investment, (2) reducing and excepting tax for import of machine, equipments,

vehicles and raw materials which are necessary for project.

- NEM (1986): is the first legal document to shift Lao PDR from central planed to

market oriented economic model making private domestic and FDI possible.

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Location of special and

specific economic zones in

Lao PDR

Investment sectors and condition

Profit

tax exception

period

(year)

Rate of profit tax

after exception

period

I. Industry sector

-Export equal to or over 70% 10 8

-Using modern technology 10 8

-Export between 30 and 70% 7 8

-Export less than 30% 5 8

II. Service sector

-Total investment cost of equal to or more than USD 2 m

illion 10 8

-Total investment cost of between USD 500,000 and 1,9

99,999 8 8

-Total investment cost of between USD 300,000 and 499

,999 6 10

-Total investment cost of between 150,000 and 299,999 4 10

-Total investment cost of between 50,000-149,999 2 10

II. Trade

-Export Lao products or products produced in the SEZ 5 10

-Border trade 3 10

-General trade 2 10

Investment incentives in Special Economic Zone SAVAN-SENO

-Decree on special and specific economic zone (6 approved and 3 under consideration)

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- Environmental Protection Law. (requiring ESIA for any investment project)

-Environmental and social impacts assessment regulation. (regulating process of

ESIA)

- Others

-Decree on competition

-Regulation on bidding

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-Public Investment Law: regulates public investment project planning, approving,

implementing and managing in details.

“….the publicity encourages private domestic and foreign direct investors to invest in public

investment projects in accordance to regulations and laws; the publicity will consider appropriate

benefits for doing that.” (Paragraph 4)

- Anti-Corruption Law

-Other concerning ministries (the Ministry of Public Work and Transportation, the

Ministry of Agriculture and Forestry, MOH, etc.).

- Administration of special and specific economic zone.

- MONRE(Former WREA): is responsible for social and environmental impact management

and obligated to consider and issue ESIA.

-The Ministry of Industry and Commerce: is key actor in facilitating, considering,

approving and managing general investment projects, i.e. investment projects which is not related

to concession and not located in a special and specific economic zone.

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-The Ministry of Planning and Investment (MPI): is key actor in facilitating, considering,

approving and managing investment projects related to concession.

+ Institutional framework

+ The Investment project planning, approving and

implementing mechanism

• Public investment project planning, approving and implementing

mechanism

- The project proposal and budget come from the concerning ministry (For example, the

road infrastructure project comes from the Ministry of Public Work and Transportation, the

irrigation system comes from MAF, etc.)

-The concerning ministry submit the project proposal and budget requirement to MPI.

-The MPI considers and put the public investment proposal in socio-economic

development plan (5 year or yearly) in case of approval;

-The MPI pass the socio-economic development plan to the National Assembly for

considering and approving;

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-Implementing large scale public investment projects goes through many phases

(feasibility study, investigating and project cosigning, construction, etc.) and takes

frequently more than one year.

-For large scale public investment project, the project management committee/team,

composing of all concerning agencies, will set up

-After the National Assembly approved, the implementation phase starts.

-The MPI allocates budget for implementation of public investment project on year basic

based on expected budget availability and priority of the project.

-The management committee/team is normally responsible for management of the

project.

-Practical work is normally concussed to domestic or foreign companies in

accordance to existing regulation and laws.

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MPI multiplies and disseminates the DIP

Investment Company (IC) drafts and submit investment proposal (DIP)

MAF studies the DIP WREA studies DIP

CPMI meeting discuses about DIP

Do not agree!

Government meeting

Agree

Do not agree

Investigating contract with the IC

Agree

IC investigates investment area and finalizes its investment proposal (FIP) with environmental certificate given by WREA and land use certificate given by MAF

MPI multiplies and disseminates FIP

MAF studies FIP WREA studies FIP

CPMI meeting discuses about FIP

Do not agree!

Government meeting

Agree

Do not agree! Investment contract with IC Agree

IC is allowed to start its business activities

Source: MPI

Other concerning GAs Land management office

Other concerning GAs Other concerning GAs

• Private domestic and foreign investment project planning, approving and

implementing mechanism

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• Brief remarks

-There are legal and institutional framework supporting public and private domestic

and foreign investment in Lao PDR

-Lack of legal and institutional framework supporting PPP in Lao PDR

-Lack of specific legal and institutional framework supporting investment in

infrastructure.

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+ Financial framework

- About 15 commercial banks.

- The most of the banks are SOE.

• Banking system

-Small-scale and operating domestically.

• Stock market

-Conditions for joining stock market includes registration capital of at least USD

250,000, total revenue of at least USD 125,000 per year and no investment loss in last

year.

-Two companies (BCEL and Lao Electricity Company) joined the stock market

-Other two companies (ETL and Indochina Group) is still in the consideration

process.

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-Domestic financial sources supporting large scale infrastructure projects seems to be limited

currently.

-However, the situation could be change quietly (increasing number of bank institutions and

foreign banks start to expand their business activity into Lao PDR.

- The Lao PDR implements market oriented economic system and open for foreign

investment. So, the foreign financial institutes can support infrastructure project in Lao PDR.

-Joining AEC by 2015.

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Num Theun 2 Hydro Power Project - Located in central part of Lao PDR, about 250 km

south-easterly from Vientiane Capital.

- The biggest hydro power project in Laos with

installed capacity of 1,070 MGW.

-Total investment value of USD 1,450 million.

-Share holder:

EDF= 35%

LHSE=25%

EGPCO (Thailand)=25%

ITD=15%

-26 international banks and financial institutes support the project

-Concession period of 25 years.

III. Existing PPP in infrastructure development sector

in Lao PDR

• Build-Operate-Transfer (BOT)

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• Build-Transfer-Operate (BTO)

-The most of care and motorcycle paring station in VTE are operated by BTO.

• Government revenue and credit guarantee

-No clear statistical data how many projects are operated by this system;

-One of these project is road connecting Mekong Bridge in Palse to Vang Tao International

Border Gate (30 km length);

-Quite similar with minimum revenue guarantee system I Korea;

-However, there is no project operation in case; the government pays whole guaranteed

revenue by its yearly budget.

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IV. Discussing on possible areas for firming up a

framework to promote private capital flow in

infrastructure development

• Proposed legal, institutional and financial framework

-Establishment of PPP Center for infrastructure development

-Enacting PPP Act for infrastructure development

- Establishment of infrastructure development fund

• Proposed idea for pilot project

-Still looking for suitable project and location;

-Prefer to do pilot project in water supply system;

-It should be small-scale project needing investment capital of less USD 1 million.

-The test should be finished within three years.

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Thanks for your

attention