Fiscal 2004 Pilot Demonstration Project for. Construction of an Advanced Trade and Investment. Environment

Transcription

1 Fiscal 2004 Pilot Demonstration Project for Construction of an Advanced Trade and Investment Environment Report on the Demonstrative Project Relative to the Development of Land Transportation Network in the Greater Mekong Sub-region (GMS) (Summary Version) March 2005 Ministry of Economy, Trade and Industry Administrator: Japan External Trade Organization (JETRO)

2 Summary Chapter 1 Background and Purpose of the Project 1. Purpose of the project This project will verify the practicality of transporting parts and products by truck, for production by Japanese firms that have established local facilities, over a land transport route that extends across Laos to connect Bangkok, Thailand with Hanoi in Vietnam, and clarify aspects for improvement. When a land transport route between Hanoi and Bangkok is established in the future, transit time will be shortened to two-thirds of the time required using existing ocean transport, and stable transport also will become possible. The production and sales operations of Japanese firms will accelerate as a result. The project also is expected to contribute to improving the investment environment in the project countries and boost the economic development of Laos. 2. Items to be demonstrated The project will implement a demonstration test by introducing an advanced Japanese logistics system that meets the following needs of Japanese firms for land route distribution by truck transport. Assured safety Prevention of damage to cargo (roads, bridges and transshipment facilities), vehicular accidents, cargo pilferage and other problems Assured punctuality Use of truck movement control systems (particularly vehicle tracking using satellite phones), and achievement of prompt, simple border customs clearance procedures Improved economy Reduction of parts and products in stock through reduced number of transit days (to two-thirds of time required in the past)

3 Chapter 2. Status of Road and Bridge Construction 1. Current status of road and bridge construction on the project route The research team conducted an on-site inspection in August The mileage, transport time and average driving speed are shown in Figure 1 (mileage was measured using the odometer in the automobile used for the survey). Figure 1 Mileage (L), transit time (H) and average driving speed per hour (km/h) based on on-site inspection

4 The team traveled the entire route, all of which is paved in asphalt. Because improvement works are being carried out on all of the routes, the network will not be closed to traffic because of weather in either the rainy season or dry season. All of the routes are made of asphalt paving, but Laos National Road No. 13 is low-cost road pavement constructed using double bituminous surface treatment (DBST). Although this highway is capable of handling current traffic volume, there is a possibility road surface damage will be severe because of the increase in traffic volume and growth in truck traffic in the future. Thailand National Highway 2 is well paved, infrastructure such as roadway facilities and rest areas have been constructed, and the quality of the road infrastructure is excellent. In Laos, on the other hand, the route has been constructed using low-cost road pavement and only the minimum necessary road facilities required for vehicle traffic, such as delineators along curves. In Vietnam, construction along National Highway 1 has been completed, but the improvement works on National Highway 9 will not be completed until 2006 (the road can be driven in its current condition, however, and the ADB budget also is approved and construction is expected to be completed nearly on schedule). As a result of this on-site inspection, we confirmed the road facilities improvements have reached a state that will enable the pilot demonstration project (trial transport) to be implemented. As an alternative route to this transport route, Laos/Vietnam National Highway 8 is a mountain highway and has not been improved with a sufficient road environment; there are no plans to improve this highway quickly in the near future. In addition, Thailand National Highway 209, 213 and 2042 have been improved, but the Second Mekong International Bridge that will connect to these routes still has not been completed. Although the river can be crossed by ferry, there also is no transshipment facility. Plans call for completing road improvements by the end of 2006 when the Second Mekong International Bridge is to be completed (as planned according to the completion period), however, and this route is likely to become an alternative land route between Hanoi and Bangkok. Issues such as construction of transshipment facilities and other logistics-related structures remain to be addressed, however. 2. Future issues for road infrastructure improvement On this inspection trip we surveyed the implementation route and were unable to discover locations that require immediate road improvement. Because budgets have been allocated and construction is currently underway even for locations where improvements are thought to be necessary, we believe the improvement works for this route will be completed in the near future (end of 2006). Considering that traffic will increase in the future, however, we believe construction

5 of even higher quality road facilities will be necessary along the route between Bangkok and Hanoi to meet increasing traffic volume, as indicated below. Upgrade surface from low-cost road pavement to asphalt concrete, to reduce road damage from increased traffic of trucks etc. (Laos National Road No. 13) Install guardrails and other traffic safety facilities and lanes for motorcycles (bicycles) like those introduced in Vietnam, to reduce conflict between various types of traffic (general daily traffic, long distance traffic, etc.). Establish procedures to ensure maintenance costs (particularly in Laos). Proceed with improvement works on Laos National Road No. 8 (from a long-term viewpoint). Construct related facilities, including rest area facilities, so drivers can recover from the exhaustion of long-distance driving.

6 Chapter 3 Ocean Transport Conditions 1. Current state of transportation by ocean transport Nearly all distribution between Thailand and Vietnam is handled by ocean transport. The main ports used for ocean transport are shown in the figure below. Figure 2 Main ports for ocean transport between survey countries Bangkok and Hanoi (1) Transport route and transit days required In Thailand, ocean freight in the vicinity of Bangkok is handled through Bangkok Port and the Port of Laem Chabang. In Vietnam, ocean freight in the vicinity of Hanoi is handled at Haiphong Port. Although some cargo also is handled at Cai Lan Port near Haiphong, which is currently being developed, the Bangkok cargo of Japanese firms still is not handled at Cai Lan. Ocean cargo between Bangkok and Hanoi is transshipped enroute at Ho Chi Minh City Port. Domestic Vietnamese companies provide transport between Ho Chi Minh City Port and Haiphong Port, and depending on the circumstances, cargo is routed through Danang Port or through Hong Kong and Singapore. Accordingly, the number of transit days in this region exhibits a broad range. Recently six-day service has become available, but frequently traffic northbound from Bangkok to Hanoi requires between ten and 13 days. Traffic in the other direction southbound from Hanoi requires between ten and 15 days, with some southbound service through Hong Kong or Singapore requiring

7 fewer days than service via Ho Chi Minh City. (2) Sailing frequency For shipping service from the Bangkok region (Bangkok Port and the Port of Laem Chabang) to the Hanoi region (Haiphong Port) there are about seven sailings per week by major shipping firms from the Bangkok side and about five sailings per week from the Hanoi side. Japanese firms in Bangkok generally think in terms of two sailings per week, however, because shipping companies have two sailings per week at most, and firms that use these services extensively have a tendency to sign an agreement with one shipping company. (3) Transport volume Although the survey team was unable to obtain ocean transport statistical data (from specific ports to specific ports), looking at the trends for transport volume and export amount for Japanese shipping companies between Thailand and Vietnam (nearly all transport between the two countries is ocean transport, and it is believed the export data also can be considered to be nearly all marine transport), both show an increasing trend. Moreover, this trade tends to be heavily one-way trade, and compared to the transport volume and export amount from Thailand to Vietnam, the transport volume and export amount from Vietnam to Thailand is smaller. Table 1 Change in container freight volume handled by one Japanese ocean transport company (Unit: TEU) Thailand to Vietnam 16,704 20,326 14,606 35,499 47,264 Vietnam to Thailand 2,152 2,493 4,425 6,038 9,671 (Source: Prepared by the research team from data provided from a Japanese ocean transport company) Table 2 Change in export amount between Thailand and Vietnam (Unit: Million baht) Thailand to Vietnam 21, , , , ,304.2 Vietnam to Thailand 8, , , , ,874.3 (Source: Thailand Impact Focus , 3rd Edition (Alpha Research Co., Ltd.); values for 2003 taken from the Thailand Customs Office website)

8 (4) Ocean transport-related facilities situation There are two international cargo ports near Bangkok, Thailand that handle containers: Bangkok Port (Bangkok), which is also called Klong Toey Port, and the Port of Laem Chabang. Both ports are already fully operational in all aspects. The Port of Laem Chabang already handles more than twice the cargo volume of Bangkok Port, and Berth D is currently under construction. This port is managed by a private-sector company, and the excellent efficiency of its operations have been evaluated very positively in shipping company surveys. Access roads have been constructed to both ports, and both are also connected to Bangkok by railway, but Bangkok Port suffers from traffic congestion because of its location in Bangkok. There are two international cargo ports in northern Vietnam to handle containers, at Haiphong Port and Cai Lan Port. Haiphong Port is already the most important port in northern Vietnam, including container shipments. Because Haiphong Port is a river port its depth is shallow, and large vessels cannot enter the port. The government therefore constructed a deepwater facility at Cai Lan Port. Currently only part of the port is in use, however. The access road to Haiphong Port is linked to National Highway 5, a two-lane vehicular road (three lanes at some points) of asphalt concrete pavement from Hanoi, which is in good condition. In addition there is also a railway link, and because the port is in Haiphong, the provincial capital, its inland areas also are adequate. There are plans for an access railway to Cai Lan Port, which is expected in the future because the Bai Chay bridge is currently under construction on the nearby national highway to connect Hanoi with the region to the east. At the present point in time, however, the condition of the access road cannot be called adequate, and the port s hinterlands are also small, so this port must still be deemed an international port for the future. As the following table illustrates, the Port of Laem Chabang handles the overwhelmingly majority of the containers handled at all three ports. Table 3 Container volume handled at each port (Unit: TEU) Bangkok Port 1,079,794 1,063,756 1,073,517 1,096,179 1,136,293 Port of Laem Chabang 1,559,112 1,828,460 2,105,262 2,312,438 2,656,651 Haiphong Port 183, , , , ,000 Note: The research team was unable to obtain data for Cai Lan Port. (Source: Containerisation International Yearbook, CSX World Terminals, ) (5) Ocean transport for Laos Because Laos is a landlocked country and does not face the ocean, to secure a route to the sea

9 Laos determines its use of ports and harbors in consultation with Vietnam s government. 2. Problems related to ocean cargo transport and future trends Direct round-trip operations are not possible because of heavily unbalanced, one-way trade issues and the problems large vessels face in entering ports, and transport between the two countries is being carried out by way of Ho Chi Minh City or via third countries. It s believed this one-way trade trend will diminish with the development of Vietnam s economy, but for the time being this trend is expected to continue in the future. Currently in Thailand, the construction of a new berth at Laem Chabang is underway, there are also plans for improvements at Bangkok Port; creation of a system for infrastructure upgrades to meet the growing demand for ocean transport in recent years is proceeding. On the other hand, because Bangkok Port is located in the city, truck freight transport has a major impact on road traffic. Thailand therefore must create a new road network or improve roadway capacity (eliminate on-street vehicle parking, etc.). In the northern region of Vietnam, where water depth is a problem and port entry by large-scale vessels is restricted, Haiphong Port, which has the capacity to handle additional cargo, is likely to remain at the center of shipping operations for some time to come in the future. Because both the Bangkok area and the northern region of Vietnam boost two large international ports, we believe clarifying the roles of these international ports and studying ways to use them effectively, then implementing improvements to the required related facilities and introducing the necessary systems will contribute substantially to the development of the ocean transport industry in the future in both countries. In Laos, given that the country is landlocked, we believe the government should study ocean freight transport measures, such as bonded transport through Thailand, and strengthen its economic cooperation and relationship with Thailand in the future, while ensuring a route to the sea through Vietnam, as it does currently.

10 Chapter 4 Trial Transport (Truck) Pilot Demonstration Project 1. Verification details of the pilot demonstration project As shown in the table below, the pilot demonstration project confirmed it is possible to reduce the number of transit days required for ocean transport (about days at sea), ensure safety and ensure set schedules for ocean transport in tests involving both Thailand shipments bound for Hanoi and Hanoi shipments bound for Thailand. Table 4 Pilot demonstration project results Number of transit days Safety Set schedule Transportation method Thailand shipment 4 days By making consistent Can control operations Consistent transport bound for Hanoi (delivery base 5 transport possible, there with satellite phone, with 20-foot days) was no damage, simple border customs containers pilferage, etc. clearance possible. procedure Hanoi shipment 4 days Implemented Can control operations Consistent transport, bound for (delivery base 5 transshipment at the with satellite phone, including Thailand days Tanaleng terminal; no simple border customs transshipment of damage, pilferage, etc. clearance procedure cargo from 20-foot possible. containers to 5t trucks 2. Status of creation of border customs clearance system (1) Container agreement and TIR Carnet The desired objective is promotion of international land route transport using containers, which offer excellent advantages for ensuring safety. The smooth international transport of containers has been made possible by two international agreements enacted through international cooperation: a container customs clearance agreement that stipulates containers as vessels, and the TIR Carnet, which provides for cargo loaded into containers. On the other hand, at this point in time, Thailand, Laos and Vietnam still have not signed either agreement, and the time required to sign these treaties is seen as an issue. Nevertheless, the GMS (Greater Mekong Sub-region) Cross Border Agreement to which the three countries are signatories seeks to accelerate and standardize customs clearance procedures across all three countries, and establishment of the detailed provisions of this agreement in a form similar to the provisions of the

11 container customs clearance agreement and TIR Carnet, and implementation at an early stage, are expected in order to promote land route transport of containerized cargo. (2) Creation of a transit customs clearance system For this pilot demonstration project, given the current situation in which there are no rules for transit customs clearance, special agreements in writing will be exchanged between Lao P.D.R Customs and businesses and implemented according to special rules. We hope to see the early introduction of a standardized border customs clearance system when this arrangement is put to practical use in the future. 3. Construction of transshipment facilities Because Thailand, Laos and Vietnam have not concluded transport agreements, neither Vietnam nor Thailand recognizes mutual carriage by commercial vehicles from the other country, and therefore transshipment of freight is always required. One future issue is whether a system can be constructed for safely and efficiently handling freight such as these freight transshipments in Laos. 4. Stimulation of international transport centered on Laos For Laos, the major issue is how to attract investment to the Savannakhet region, which includes the Savan-Seno Special Economic Zone project (a JICA survey will be implemented; positioned as one of ADB s GMS development plans) where the Second Mekong International Bridge is under construction. The development of logistics after the international transport hard infrastructure construction is completed, which is scheduled to be finished in fiscal 2006, will be important and we believe the assistance of Japan s Government, including implementation of the special economic zone concept, also will be requested. 5. Issues for establishment of an efficient land transport route (1) Comparison between ocean transport and truck transport As the comparison in the following table between truck transport and other forms of conveyance shows, proving through this pilot demonstration project that the advantages of truck transport will (a) enable goods to be shipped at any desired time and (b) make it possible to shorten required transit time (compared with ocean transport, the normal transport method) can be hailed as a major success.

12 Table 5 Comparison of conveyance modes Physical volume: 20m 3 Scope: Door-to-Door (Bangkok door Hanoi door) MODE VOLUME TRANSIT TIME COST Ocean transport (FCL) TEU days US$ 1,000.- Air transport 3,334 kg - days US$ 4,000.- Truck transport (FCL) TEU days US$ 2,500.- * Does not include import and export customs clearance costs in the shipping region and receiving region. (2) Improvement in transport cost competitiveness With regard to the high transport cost compared with ocean transport we believe it is possible, through means such as this pilot demonstration project, to visualize the uncertain aspects such as border procedures, lay the groundwork from a legal perspective including the customs clearance system, improve the transport utilization environment and make specific improvements that will generate freight demand. Moreover, the construction of a new land transport route for handling parts and products for production by Japanese firms can be expected after expansion of transport facilities is achieved with completion of the Second Mekong International Bridge linking Laos and Thailand by the end of Table 6 Comparison between the pilot demonstration project route and new land transport route Transshipment point Transport distance Transit days Pilot demonstration project route Tanaleng 2,000km 4 days New land route transportation route Savannakhet or Seno 1,500km 3 days

13 Pilot demonstration project route New land route transportation route Figure 3 Land route between Bangkok and Hanoi (3) Orientation of preferred future transport in Laos Adopting a hub-and-spoke system, providing cranes and forklifts and creating indoor warehouse facilities based on expected future growth in transit goods demand and transshipments, and expanding customs area bonded warehouses and other border transshipment facilities, will be required in Laos, the country of transit for freight being transported from the country of embarkation to country of destination. Expanding high value-added logistics functions such as cross docking and logistics processing, and clarifying the presence of Laos in the Greater Mekong Sub-region (GMS), can also be anticipated.

14 Chapter 5 Social and Economic Trends in the Subject Countries 1. Economic trends (1) Economic trends in Vietnam After achieving growth in excess of 10% annually in the mid-1990s during the so-called Vietnam boom, Vietnam was plunged into a temporary recession caused by the effects of the Asian monetary crisis and other factors. Since then, however, Vietnam has achieved steady economic growth. Over the past ten years, the country s secondary industries have enjoyed 11% annual growth and have been the driver for Vietnam s economic growth. The proportion of total industrial output accounted for by production by foreign firms has been increasing every year, and the procurement logistics and product logistics by foreign firms, which are believed to have a higher import rate and higher re-export rate than domestic firms, has led to an increase in international transport volume. The contribution of Hanoi s GRDP (Gross Regional Domestic Product) to Vietnam s GDP increased from 23.2% in 1990 to 26.8% in Since the 1990s, Hanoi s GRDP has continued to grow by 10% or more annually, well in excess of Vietnam s 2-3% average annual growth. Secondary industries are expanding rapidly in Hanoi as well, and according to Hanoi s estimated calculations are projected to grow at an annual rate of 14-15% in the future, centered on manufacturing. As a result of privatization and the introduction of foreign capital after the transition to a market economy, approximately 18,000 private companies are estimated to exist already in Hanoi. Japanese manufacturing firms in recent years are seen to be developing through an approach that regards the northern area of Vietnam as a new territory for business while expanding existing offices in Ho Chi Minh City. (2) Economic trends in Laos The economy of Laos, which achieved official membership in ASEAN in 1997, suffered from a currency devaluation and high rate of inflation during the Asian economic crisis. Since 2000, however, economic growth has been driven by manufacturing industries such as the clothing industry, motorcycle assembly and construction, and the economy continues to grow at an annual rate of around 5%. Statistically, the area with the most firms is the capital Vientiane, followed by Savannakhet Province. When viewed by industrial composition, for both Laos as a whole and Savannakhet Province, the largest industries are agriculture and forestry, followed by services and then manufacturing and construction, but both manufacturing and the construction industry are growing rapidly.

15 (3) Economic trends in Thailand Industrialization continues to advance in Thailand, which has fulfilled the role of driving the economies of the Indochina peninsula and ASEAN. In 2002, the manufacturing and construction industry sectors accounted for 45% of the economy. The gap in economic scale on the Indo-China peninsula between the so-called CLMV nations and Thailand continues to expand, and Thailand s per capita GDP is now more than five times larger than the per capita GDP in Laos or Vietnam. Promotion of the GMS expansion and cooperation program proposed under the ADB s initiative has attracted attention from the standpoint of both eliminating this disparity with neighboring countries and its significance for shared development. The land route linking Thailand, Laos and Vietnam has been positioned as a policy tied to economic development and the eradication of poverty in the region, based on the creation of an economic corridor through investment aimed at promoting transportation and trade and through industrial growth and the development of tourism. (4) Comparison among Vietnam, Laos and Thailand Looking at the GDP for each country as a whole, Thailand has the overwhelmingly largest amount. In terms of growth rate, however, Vietnam shows the fastest growth rate because it has the highest per capita GDP, and since 1980 its economy has expanded by roughly 8.9 times, the largest growth among the three countries. In recent years other differences can also be noted, such as the varying approaches to business development by country. For example, efforts by foreign manufacturers including Japanese firms to shift manufacturing bases from other countries in the ASEAN region to Vietnam have been noted, and many firms that are expanding their production facilities and offices have located their sales offices in Hong Kong and Singapore, set up high value-added manufacturing bases in Thailand and built production bases in Vietnam to expand their sales of goods. 2. Transport and trade trends among Vietnam, Laos and Thailand (1) Structure of trade between Thailand and Vietnam Looking at the movement of goods from Vietnam to Thailand, machinery and mineral production goods account for the largest share, and total trade volume has increased since When the movement of goods to Vietnam from Thailand is examined, minerals, machinery, chemical products and metals and metal products account for a comparatively large share of trade. (2) Structure of land trade among the three countries passing through Laos There are a number of land routes connecting Thailand and Vietnam via Laos, with all of the

16 major routes pass through Savannakhet Province, which has become a relay point in Laos. The transit freight from distribution in this region moving over the land route connecting these three countries is almost identical in both directions, and totals more than US$6.0 million annually each direction, respectively. When import and export freight having a shipment and destination point in Laos are added to these shipments, freight with a total value of roughly US$40.0 million annually from the Vietnam border side, and freight with a value ranging between US$40-US$60 million from the Thailand border side, passes through Savannakhet.

17 The figure below has been prepared as a concept diagram showing the pilot demonstration project land transport route connecting Bangkok and Hanoi and the location of firms in Hanoi (Vietnam). Mekong transport Establish land route (Issues) Supporting industries are weak Skilled worker shortage No electrical products or machinery industries Extensive procurement of semi-finished goods from abroad, which runs up the cost (Hanoi location characteristics) Excellent, low-cost manpower Many higher education institutions, strong language abilities Personnel costs 20% lower than in Ho Chi Minh City Geographic center of ASEAN About 1,500km to Bangkok, Ho Chi Minh City and Hong Kong Nearest to southern China as a production base for exports to China Firms that procure parts from Thailand can shift to procurement from southern China in the future Has grown as a second base for firms moving into Ho Chi Minh City Safe location, expatriates and their families can live comfortably (Vietnam s advantages) Abundant labor force Personnel costs 30% less than in southern China Labor relations are stable, workforce stability is high Domestic market of 78 million also attractive Politically and socially stable (Characteristics of Ho Chi Minh City Twice the number of firms, triple the production volume of Hanoi Access to Saigon Port, the largest in Vietnam Access to ASEAN countries Figure 4 Conception of how the Mekong land transport route will contribute to firms located in Vietnam (Hanoi)

18 Chapter 6 Development Plans and Trends at Japanese Firms in the Subject Region 1. Development plans in the subject region (1) Greater Mekong Sub-Region (GMS) Program The Greater Mekong Sub-Region Program is a program to promote economic integration in the Indochina region and create a single economic region composed of Laos, Cambodia, Myanmar, Thailand, Vietnam and Yunnan Province in China. The program encompasses the following three efforts. Form transportation and traffic, telecommunications and energy networks, and construct closer linkage among the six countries and region Integrate GMS markets, to promote trade and investment Increase opportunities for policy dialogue among the GMS member countries, and promote cooperation on international infrastructure construction and management, labor force mobility, and trade and investment rules and regulations. Indochina east-west corridor construction plan The Indo-China east-west corridor, including National Highway 9, is part of the pilot demonstration project route and was positioned as the main transportation corridor by the GMS nations in National Road No. 9, the main trunk line in Laos, was completed in 2004 with financial assistance from Japan and the ADB, and the Second Mekong International Bridge is scheduled to open to traffic at the end of Accessibility by land route among Thailand, Laos and Vietnam will be improved with the construction of the corridor, and some amount of the trade goods currently moved by ocean transport is expected to shift to land conveyance because of its comparative advantages, such as a reduced number of transit days. Mukdahan development plan (Thailand) Mukdahan is located at the entrance to Laos and Vietnam through the Indochina east-west corridor. Development as a special economic zone forming a logistics and industrial base to take advantage of the development potential offered by the Second Mekong International Bridge was proposed in JICA s Comprehensive Development Plan Survey for Thailand s Northeastern Border Region, completed in 2001.There is little specific activity at this time, however. Savannakhet Economic Development Zone (Laos) With the opening created when Laos became a member of ASEAN in 1997, a concept for the creation of a special economic zone that could grow into a production base at the river crossing at

19 Savannakhet and Mukdahan was drafted in conjunction with construction of the Second Mekong International Bridge. During 2001 JICA s Development Plan Survey for the Laotian Border Region was implemented, and a study of the development potential at four special economic zone locations in Savannakhet Province that had been studied by the Laotian government was conducted and a development plan for two zones with strong potential was prepared. Purchases of the sites to be used are now being made. In particular, site purchases in Seno where the distribution facilities will be established is expected to be completed in fiscal Lao Bao Economic Development Zone (Vietnam) After being authorized by Vietnam s government, this development zone was established on November 12, 1998 as the Lao Bao Commercial and Economic Development Encouragement Area. This development zone is composed of two cities (Lao Bao, Khe Sanh) and the five towns of Tan Thanh, Tan Long, Tan Lap, Tan Lien, Tan Hop and Huong Hoa, all of which are located along National Highway 9 about 60km west of Dong Ha, the provincial capital in Quang Tri Province, along the border with Laos. There is partial use of a bus terminal, and construction of the facilities is moving ahead. 2. Trend in foreign direct investment in the subject region (1) Investment trend in ASEAN The top investing countries in terms of foreign direct investment amount received by ASEAN countries from 1995 to 2002, on a balance of international payments basis, were the United States (18.2% of the total), Japan (15.0% share) and Great Britain (10.3% share). The latest information indicates that investment within the ASEAN region over the past few years has been increasing rapidly; direct inward investment for the first six months of fiscal 2004 (April-September) totaled US$20,317 million, 2.4 times the amount in the same period of the previous year, while foreign direct investment was US$18,470 million dollars, 14.1% lower than in the same period of the previous year. (2) Investment trend in Vietnam A sharp increase in foreign direct investment (FDI) in Vietnam begin in 1992 and expanded steadily until 1995, but then fell substantially between 1997 and 1999 because of the Asian financial crisis. Although the amount of investment has slumped since 2000 because of the global economic slowdown, the number of cases of investment has been increasing, and small and medium- scale direct investment is growing. By country, investment from Japan is the third largest on a total authorization basis amount, but on an investment execution basis Japan remains in the number one position. The investment from

20 Japan is concentrated in the leading industrial sectors, and is characterized by its support of investment in basic industries for country building. According to JETRO s estimate (article on trade relations dated June 17, 2004), new investment in the northern part of Vietnam (Hanoi, Haiphong, etc.) has grown to over four times the amount of investment in southern Vietnam (Ho Chi Minh City, Binh Duong Province, Dong Nai, etc.). This has occurred because of the trend in Japanese firms with a base in southern Vietnam establishing a second foothold in the north. (3) Investment trend in Thailand Japan s cumulative direct investment in Thailand (from 1985 to 2002, registered basis) makes Japan the largest investor nation in that country, accounting for 44.3% of total investment, followed by the U.S. (9.6%), Taiwan (7.3%), the Netherlands (4.3%) and Singapore (4.2%). Japan was the largest investor nation in 2003 as well, accounting for 46% of all investment. The main industries in which Japanese firms invest have been metal products, machinery, electrical and electronic goods, chemical products and paper. (4) Investment trend to Laos Based on the cumulative amount of authorized direct investment in Laos (from 1988 to 2000, balance of international payments basis), Thailand is the largest investor nation in Laos, accounting for 50.7% of total investment (US$2.93 billion). The next largest investors in order of amount are the United States (US$1.49 billion), South Korea (US$630 million), Malaysia (US$290 million), China (US$87 million) and Great Britain (US$70 million). By the way, in ODA Japan is the largest donor country, but ranks 13th in total direct investment with US$19 million. A total of 33 Japanese firms have established operations in Laos, of which 11 firms have made investments in the service sector, eight are in industries and handicrafts, six are in agriculture and four are in lumber (as of September 2002). 3. Future investment trends at Japanese firms According to the results of a questionnaire survey conducted by JETRO (Business Conditions for Japanese Manufacturers in Asian Countries, implemented in January 2004) and covering Japanese manufacturers with operations in Asian countries, ASEAN is very much in the spotlight currently. Few of the firms with operations in Thailand and Vietnam that responded to the survey plan to reduce or close their operations, and many intend to expand their business. As in the prior year s survey, when examined by country China remained the Number One country in fiscal 2003 where firms hope to establish a presence, followed by Thailand and the United States. Vietnam improved its rank, moving up to fourth place. By industry as well, the top

21 targets for every industry in order were China, Thailand and the U.S. Vietnam won support for fourth place in chemicals, general machinery, and electrical and home appliances, and ranked sixth in the automobile industry. The evaluation of Vietnam has risen every year, and the number of firms that hope to move into Vietnam is increasing rapidly as well, increasing from 35 companies out of 372 companies in 2000 to 62 of 418 companies in 2002, and 88 companies out of 490 in The main reasons for firms moving into Thailand and Vietnam are as follows. Reasons for advancing into Thailand Low-cost manpower, potential as a future market (Greater Mekong Sub-region), supply base for final processing, political and social stability and as an export base to third countries. Reasons for advancing into Vietnam Potential as a future market (80 million people), low-cost manpower, high-quality workforce and reduce risk through diversification. Concerning the concentration of supporting industries, procurement of raw materials and parts and procurement logistics, 28% of all firms cited these as an issue in Vietnam, the highest percentage among the ten countries considered by the survey. Moreover, looking just at Vietnam, the matters enumerated most frequently as issues are inadequate infrastructure and the lack of transport functions as industrial infrastructure. We believe this pilot demonstration project offers the possibility of a logistics function as industrial infrastructure that will precisely address the issues of immature supporting industries and the procurement logistics problems originating in this condition, which were indicated particularly for Hanoi, by linking Hanoi and Bangkok with a land route. 4. Results of the questionnaire survey concerning transportation JETRO conducted a questionnaire survey of Japanese firms that have set up operations in Thailand and northern Vietnam, in order to understand the transportation situation for raw materials and products between Thailand and northern Vietnam and prepare a proposal for improvements concerning the land route distribution over this new route. Although the number of responses was small, many of the responding firms indicated regularity and transit time are critical issues. There also are firms planning to establish a presence in Hanoi or procure parts from Thailand, and we believe there is a possibility these firms can move into this market if land route distribution and transport between Hanoi and Bangkok produces positive results, including safety.

22 Chapter 7 Proposal to the Laos Government Concerning Promotion of Land Route Transport 1. Current conditions and problems in Laos (1) Summary of the economic and social characteristics of Laos When considered as a target for investment, along with its small total population and small size as a market Laos also has a small labor force. Because manufacturing is underdeveloped, Laos has a small industrial base as well. Under present conditions there is little demand for transportation, and a phased industrial promotion program will be necessary in the future. Investment in electric power and roads is returning, and investment continues to grow in commerce, agriculture and forestry, mining and manufacturing, and tourism. (2) Transportation in Laos According to the LFFA (Lao Freight Forwarder Association), a transportation industry organization that covers all 17 provinces in Laos, overall the volume of freight shows a marginal rising trend, even though volume has repeatedly risen and fallen since the Asian financial crisis in The bulk of goods handled as imports is machinery and parts for construction projects, while textile goods being shipped to Europe via Thailand account for a large percentage of exports. In volume handled, Thailand s share of total volume handled is about 90%, with Vietnam accounting for the remaining 10%. (3) Issues pertaining to investment in Laos The following factors can be given as reasons investment is weak. Unattractive because the total market population is only 5.35 million people; small work force; wage levels are high considering the fact labor quality is not always very good; transportation infrastructure (roads, transshipment facilities and equipment, freezer and refrigeration facilities) is incomplete; because the country is landlocked (enclosed by five neighboring countries), customs duties are assessed on imports and exports and transport costs to port are expensive; the Laotian government is ardent about attracting investment, but follow-up with firms establishing a presence is insufficient; The Laotian government s investment policies are in flux, and policies are inconsistent or contradictory. 2. Laos vision for future development of Mekong land route transportation (1) Direction of future development in Laos A full 80% of Laos population works in agriculture. Consequently, agriculture and forestry are key industries. Based on these industries, the Laotian government is promoting modernization and

23 industrialization by 2010, with the goal of shrinking or eliminating the poorest segment of the population, and is seeking to convert the economy from an agricultural-led economy to an industrial-led economy by The following items can be considered as factors giving Laos a high, short-term potential for development of local industries. Laos has abundant primary commodities (rice, lumber, mineral resources) that can be used to foster agricultural product processing industries using these commodities as raw materials Promotion of agricultural product processing industries that use Laos ample tourism resources, beginning with Luang Prabang, which is registered as a UNESCO World Heritage site ( one village one product, souvenirs) As goods and people are stimulated through the integration of markets in the Greater Mekong Sub-region (GMS), and as the construction of transport infrastructure utilizing the east-west corridor development plan moves ahead and a structure of mutual parts procurement in the Mekong and ASEAN region is developed centered on Thailand, where foreign investment by Japanese firms and others is concentrated, and on Vietnam, where investment will grow in the future, there will be possibilities for strengthening industrial cooperation between Thailand and Vietnam and the Japanese firms establishing operations in these countries. When the above is taken into consideration, construction of a production base that unifies the Greater Mekong Sub-region (GMS) and creation of a product transport network will become possible. Given such an environment, Laos possesses the following industrial development potential over the medium to long-term. Pursue participation in the processing industries (lumber, mineral and agricultural products) of Thai and Vietnamese firms, and promote quality improvements Achieve quality improvements, and foster the agricultural products processing industries in the form already developed as export products using Laos domestic capital, through promotion of the agricultural products processing industries indicated above. Value-added processing (gold work etc.) of Laos abundant mineral resources (gold, tin, etc.), followed by expansion to domestic capital beginning with foreign capital as described above Begin parts manufacturing for Thai and Vietnamese firms Promote manufacturing as a secondary supply base through cooperation with Japanese firms establishing operations in Thailand, Vietnam and other countries

24 (2) Promotion of manufacturing from medium to long-term perspective As described above, Laos must seek to promote the phased introduction of manufacturing as a secondary production base in the future according to the degree of industrialization. Furthermore, development as a secondary production base using foreign capital, including Japanese firms setting up operations in the subject region, will also become important. To promote and support these efforts it will be necessary to promote development and expansion of the Savan-Seno Special Economic Zone (SSEZ), disseminate investment-related information through the DDFI (Domestic and Direct Foreign Investment Promotion and Administration Bureau) and undertake efforts such as simplification of investment laws and expansion of the preferential treatment system. Vientiane, situated at the intermediate position along the south-north corridor (Thailand-Vientiane-Yunnan Province), also has potential for development of an industrial zone, and it will be necessary to push an industrial promotion plan for Laos as a whole, including these efforts. 3. Proposal for a transport-related customs clearance system and facilities improvement plan (1) Improvements to the customs clearance system Thailand, Laos and Vietnam still have not concluded customs clearance agreements concerning containers or agreements concerning international transport related to international highways (TIR Carnet). The GMS cross-border agreement to which the three countries are parties, however, promotes consultations among all concerned parties to develop the detailed provisions of this agreement along the lines of both of the former agreements with the aim of acceleration and standardization of the customs clearance procedures extending across national borders. Accordingly, establishment of the detailed provisions of this agreement and their early implementation is expected, in order to promote land route transport to handle containerized cargo. The Laos Custom Bureau also is matching the pace of the discussions over the detailed provisions for this agreement, and is giving top priority to promotion of road use and studying the introduction of tariffs or tolls to assess tariffs at some percent of the freight product price, as a measure to prevent leaks from import duty assessments, which are a source of national income, and as a source of income to cover the national highway management and maintenance costs that attend over-the-road transport. The 13th Ministerial Conference on Subregional Economic Cooperation in the Greater Mekong Sub-region was held in Vientiane on January 4, Laos and Vietnam signed a traffic agreement at the conference, which will enable the countries to implement customs procedures based on one-stop service for cargo from Vietnam at Dan Savan on the Laotian side of the border and for cargo from Laos at Lao Bao on the Vietnam side of the border, respectively. Moreover, the goal is to conclude a traffic agreement with Thailand at the end of 2006, but this will require promoting the

25 conclusion of a traffic agreement with both neighboring countries in the future. At some point, it will be necessary to realize smoother distribution by standardization and simplification achieved through the introduction of a computerized customs clearance system. (2) Transport-related Facilities Improvement Plan (Border Transshipment Terminal Construction Plan) JETRO will propose construction of a border transshipment terminal at Savannakhet Economic Development Zone District B (a priority project in conjunction with opening the Second Mekong International Bridge to traffic), which will become a logistics base in the future, to achieve border customs clearance in line with construction and enhancement of distribution infrastructure. (3) Promote and strengthen the transport industry For freight arriving in and departing from Laos it will be necessary to plan for the promotion and enhancement of international logistics companies, beginning with promotion of the domestic transport industry. This will mean strengthening competitiveness in response to growing transport demand based on the diversification of local industry as industrialization progresses. Strategically, we propose working to promote transport businesses that can support manufacturing-related logistics, together with promotion of the local industries and construction of logistics and processing zones at the special economic zones by foreign investors. (4) Other infrastructure construction plans to support transport (a) Enhancement of port facilities in Vietnam To open Laos, a landlocked country, to ocean traffic, concluding a ports use agreement to maintain access to ports in Vietnam and development of ports as a gateway to the sea in Vietnam will be critically important. (b) Expansion of the Savannakhet International Airport We propose a study for upgrades to Savannakhet Airport, because expansion of the airport can be expected to enhance its function as the main entry into Laos and attract investment in inland industrial development and tourism through direct flights to Bangkok Airport, which is located in the heart of the Greater Mekong Sub-region.

26 Chapter 8 Proposal For Improvements to the Subject Route The improvements to the land transport pilot demonstration project route connecting Bangkok and Hanoi that have been highlighted in each chapter are summarized below. (1) Road facilities upgrades Road pavement improvements: The road burden will increase as traffic volume including trucks grows. The highways in Thailand and Vietnam are paved with asphalt concrete, but because the road pavement in Laos is paved with low-cost DBST, it will be necessary to monitor how traffic volume increases and upgrade the pavement to asphalt concrete in the future. Road infrastructure improvements: We believe installation of guardrails, creation of dedicated motorcycle and bicycle lanes and construction of by-pass roads will be necessary as measures to prevent conflicts between local daily traffic and long-distance traffic as traffic volume increases. Establishment of procedure to ensure maintenance costs: It is important not only to build the highways but also to maintain the quality of the road infrastructure. Laos in particular is weak from the perspective of maintenance and management capital, and relies on sources such as ADB capital. Driver rest areas etc.: Establishing highway rest facilities, including the addition of roadside station functions in the future, will be studied from the standpoint of driver health and traffic safety. Enhancement of land route network: Once the number of alternative routes in Greater Mekong Sub-region increases and a larger network is developed, new transport potential can be anticipated along with the mitigation of traffic interruption risk. Over the long term, we hope to see progress in improvement work on National Road 8 in Laos as an alternative to this route. (2) Customs clearance-related issues Improvements to the border customs clearance system at the Laos border: When the route is put to practical use in the future, the introduction of a standardized border customs clearance system in the Greater Mekong Sub-region as early as possible will be a positive step. At some point in the future it will be necessary to make transport even smoother by introducing a computerized customs clearance system. One-stop inspections:

27 Reducing customs clearance time is a critical issue for transportation; currently each country is studying how and when to implement one-stop inspections and simplification of inspections is desired. (3) Distribution facilities-related issues The construction of a border transshipment terminal will be proposed in order to upgrade and consolidate the logistics infrastructure at the Savannakhet Economic Development Zone District B (a priority project in conjunction with the opening of the Second Mekong International Bridge to traffic), which will become the logistics base for promoting this project. Bonded warehouse operation in Free Trade Zone Respond to various import/export cargo needs, including Inland container terminal Reduce transport costs by achieving smooth positioning parts and products for production, through creation of bonded warehouse storage of freight Transshipment terminal Achieve efficient, safe freight transshipment utilizing the most advanced loading equipment Trailer terminal yard Plan, implement and manage flexible, reliable truck operation plans Customs office, standardization and simplification of border customs clearance procedures Reduce lead time through smooth border customs clearance procedures Figure 5 Artist s conception of the border transshipment terminal (4) Promotion of transport businesses Training to acquire technology and management technology through foreign logistics businesses Dispatch of specialists to assist provision of advanced logistics services (private Japanese firms) Training for computerization of information in conjunction with computerization of customs clearance (training system) Active use of customs officer training programs (Japan)