Proposal for Improving the Business Environment in Lao PDR - Based on a JETRO survey on business needs - July 4, 2015 Japan External Trade Organization (JETRO)
Promote Good Connectivity with Neighboring Countries Recommendation 1: Lower costs (time and money) and simplify the procedures for transporting freight to and from neighboring countries Construct an advanced logistics environment (soft and hard). Speedily develop the Vientiane Logistics Park Promote the implementation and usage of the Cross-border Transport Agreement(CBTA) Speedily implement and commence operating the National Single Window. Deregulate restriction on foreign investment in the transportation sector. Train logistics personnel up to international standards. (USD) 3,000 2,500 2,000 1,500 1,000 500 0 Shenzhen Cost of Shipping a 40Ft Container to Yokohama-Port, Japan Hong Kong Taipei Singapore Kuala lumpur Jakarta Source: The Survey of Investment Related Costs in Asia (January 2015) conducted by JETRO Manila Bangkok Hanoi Ho Chi Minh City Vientiane Phnom Penh Yangon New Delhi Comments from Japanese companies and local industry Because many containers are returned unloaded, it costs a lot to shift freight between Lao PDR and neighboring countries. I want the Vientiane Logistics Park to open soon so that we can pick up freight there. (Logistics company) Customs office opening hours are shorter than officially stated and we have to pay a special fee on holidays. (Manufacturer) The restrictions on foreign capital participation (49% or below) in the transportation sector puts off a new investment. It is also difficult to find partners on the Lao side. (Thailand-based logistics company) Logistics lead times are long and it costs to maintain a lot of stock in Lao factory. It makes us be unable to handle high value added raw materials. (Manufacturer) Customs clearance costs are twice as high as in Thailand. It also takes a long time to clear customs, sometimes up to a whole day. (Logistics company) 2
Strengthen the Competitiveness of the Business Environment Recommendation 2: Strengthen the value chain Liberalize the rules regarding FDI in the retail and wholesale sectors, the finance and insurance sectors, transportation, construction and tourism. Develop and attract supporting industries. Develop human resources for industrial sectors. Total (n=4,731) Cambodia (n=39) Direction of Business Development in the Next One or Two Years (by country or region) Vietnam (n=457) Myanmar (n=51) Thailand (n=644) China (n=970) Lao PDR (n=13) Expansion Remaining the same Reduction 46.5 46.2 56.3 66.1 64.7 60.9 79.5 46.0 39.3 53.9 32.4 33.3 36.5 20.5 Transferring to a third country/region or withdrawal from current local markets 3.7 1.3 2.0 2.0 6.51.0 Comments from Japanese companies and local industry Japanese companies are very interested in participating in the transportation, retail and wholesale sectors. We request for a relaxation or abolishment of foreign capital restrictions. (Japanese Chamber of Commerce and Industry, Vientiane) Capital participation in the wholesale and retail sectors is essential to strengthen the after-sales service. (Thailandbased consumer electronics manufacturer/seller) We cannot purchase raw materials from within Lao PDR, so we need to import material from China and Thailand and sewing machines and needles from Thailand. (Garment manufacturer) Productivity is around 70% that of China. Workers lack staying power and just give up. Some of them hate overtime work and walk out and go home. (Garment manufacturer) Source: Survey of Japanese-Affiliated Firms in Asia and Oceania (FY2014 Survey) conducted by JETRO 3
Establishing Governance Recommendation 3: Eliminate inconsistency between laws(regulations) and implementation Enhance the capabilities of administrators(staff level) in order to shorten inspection times and improve transparency with regards to issue permissions and licenses. Use the Official Gazette to give prior notification when newly-introducing or revising laws or regulations. Improve the situation with regards to unclear service fee and charge by the governmental offices. 1 Lack of thorough information of laws and regulations (n=11) (%) 72.7 2 Difficulty in quality control (n=6) 66.7 3 Wage increase (n=13) 61.5 4 4 Business Issues Faced by Japanese Companies in Lao PDR Difficulty in recruiting middle management staff (n=13) Cash flow shortage for expansion of business scale (n=13) 53.9 53.9 Source: Survey of Japanese-Affiliated Firms in Asia and Oceania (FY2014 Survey) conducted by JETRO Comments from Japanese companies and local industry Tax officials are often ignorant of reforms to tax laws or VAT laws and often interpret laws in their own way. This causes a lot of confusion. (Japanese Chamber of Commerce and Industry, Vientiane) VAT refunds are often late and this has an undeniable impact on cash flow. (Japanese Chamber of Commerce and Industry, Vientiane) When deliveries are late because of mistakes on the administrative side, we complain by sending letters to the relevant department, but nothing is ever done to improve the situation. (Logistics company) Rules on overloading are hardly every followed. Companies who follow the rules lose out and vital industrial roads are also damaged. (Logistics company) 4
Promising Businesses in Lao PDR Recommendation 4: Improve the business environment and attract more Japanese companies Attract high-value-added industries and diverse services by developing more supporting industries and pushing forward with deregulation. Manufacturing: Develop more supporting industries and shift to high-value-added manufacturing Food processing: Produce safe agricultural products and shift to high-value-added food processing Services: Deregulate and attract diverse services Business Improvements (1) Manufacturing Utilize cheap electricity costs to attract capital-intensive industry as well as labor-intensive industry. Develop the highly-skilled technical staff and other human resources needed for advanced manufacturing. (2) Agriculture & food processing Build up and promote Lao PDR coffee and other brands through the use of organic farming method. Build up Cold-Chain networks needed for the manufacture and export of high-value-added food products. Innovate and develop high-value-added agriculture and processing zone. (3) Services Utilize natural landscapes to promote eco-tourism. Promote LOHAS (lifestyles of health and sustainability) tourism, including interactive farming experiences that tie in with organic farming. Concrete cooperation offered by JETRO (proposal) Promote business matching between Japanese and Lao companies in the manufacturing, agriculture & food processing, and services sectors. Contribute to the development of local industries through JETRO s support for Japanese high-tech company s investment to Lao PDR. Conduct surveys into potential business opportunities in agriculture & food processing and services sectors where there is a lack of information; and pass on this information to Japanese companies. Support the tourism sector through projects that support local traditional products (Chai Lao). 5
Policy Recommendation on Industrial Location in Lao PDR July 4, 2015 Institute of Developing Economies Japan External Trade Organization (IDE-JETRO)
Services Liberalization The level of services barrier in Laos is very high. A simulation result tells that services liberalization to the level of Cambodia in 10 years will raise Laos s GDP by 0.31% in 2030. In particular, services related to manufacturing sector, such as logistics, finance and professional services, should be focused to reduce the barrier in manufacturing sector and gain higher economic growth. Barriers in Services Sector (Indices) Economic Impacts of Service Liberalization of Laos to the level of Cambodia [Scenario 2] (USD/km 2, 2030) Scenario 1 Impacts on Services Liberalization Laos* (%) of Laos with no impact on manufacturing sector 0.05% Scenario 2 Services Liberalization of Laos allowing to impact the manufacturing sector 0.31% Estimated by IDE-GSM team IDE-GSM Simulation Result, IDE-JETRO * Increment of estimated GDP of Laos compared with that in the baseline scenario in 2030. 7
Improvement in investment procedures Large investment barriers in Laos: investment procedure takes average 92 days, 154 th (189 economies) Streamlining investment procedures reduce fixed costs of investment, thereby promoting FDI. Larger FDI promotion effects if investment procedures are improved up to the level of developed economies Streamlining investment procedures promote middle-sized firms that consider FDI in Laos Cambodia Laos Indonesia Philippines Vietnam China Thailand India Bangladesh Sri Lanka Japan Mexico Malaysia UK USA France Korea Singapore New Zealand Procedure Days 34 34 31 28 28 20 11 11 6 6 6 6 5 4 3 1 Source:World Bank(2014) 53 101 92 To Reduce the Average Number of Procedure Days for Foreign Firms to the Average Level in Developed Economies Economy Reduction in fixed investment cost Laos 36.8% Vietnam 25.7% Thailand 4.4% Indonesia 22.7% China 27.7% India 8.3% Peru 7.3% Mexico 3.4% Chile 2.8% Firms across productivity group Changes in the number of firms making FDI 0-10 -58.3% 10-20 -2.2% 20-30 50.0% 30-40 76.6% 40-50 72.0% 60-70 48.8% 70-80 39.7% 80-90 25.7% 90-99 14.3% 99-100 7.2% Source:Arita & Tanaka(2013) 8
Promotion of 5S and Kaizen for Product Upgrading through Face-to-Face Communication with Buyers/Suppliers Firms in Lao PDR whose employees have Kaizen (continuous improvement) including 5S awareness are more likely to establish face-to-face (F2F) interactions with their foreign buyers/suppliers. Face-to-Face (F2F) interactions between foreign buyers and suppliers promote international technology transfer for product upgrading. Promotion of 5S and Kaizen is effective not only for higher level of quality control and technology transfer but also for higher working discipline in firms including SMEs. Instillation of Kaizen Awareness Adoption of 5S Sort (Seiri) Straighten (Seiton) Shine (Seiso) Standardize (Seiketsu) sustain the discipline (Sitsuke) Buyer-Supplier Cooperation Face to Face Communications with Buyers/Suppliers Learning & Upgrading Introduction of New Product based on New Technologies % of the Firms with F2F Interactions with Buyers/Suppliers 32% 59% % of the Firms Introduced New Products 17% 10% Not adopted 5S Adopted 5S Without F2F Interactions with Foreign Buyer/Supplier With F2F Interactions with Foreign Buyer/Supplier Source: ERIA Survey 2012 in Lao PDR (n=201) 9
0 200,000 400,000 600,000 800,000 Promoting Industrial Location Policies in Lao PDR Population and firms concentrate within 10 km radius in Vientiane Capital but spread anywhere in major provinces. Supplying affordable accommodations in 5 km radius to attract migration; roads, electricity, water and other infrastructures from 5 km to 10 km radius around major urban areas and/or SEZs increase number of industrial location significantly. Concentration of Population Generates More Industrial Location V: Vientiane Capital; L: Louangphabang; S:Savannakhet; C: Champasak Urban Area in Major Provinces are Very Small Accumulated Population by Distance Accumulated Number of Firms by Distance Urban Area 10