Laos confidently markets itself as one of the most unspoiled countries in Asia. For years, the landlocked nation sat quietly, surrounded by neigbouring economic powerhouses China, Thailand and Vietnam.

The former French colony is one of the few remaining communist countries in the world and remains one of the poorest, with a gross national income (GNI) per capita of just $1,010, according to the World Bank.

However, a strong growth story has slowly emerged over the last two decades. In 1986, the country’s economy opened up with a series of reforms geared towards creating a market economy. From then onwards, the Lao economy averaged 6% growth to 2007 and exceeded 7% between 2008 and 2011 — the second-highest figure in Asia after China.

On the surface, it seems that Laos has all the ingredients necessary to develop to levels currently experienced by its Southeast Asian neighbours. Laos’ natural resources — in particularly hydropower, mining, precious metals, and timber — are starting to attract major foreign investment.

The government is also taking steps to join the World Trade Organisation and, perhaps most significantly, there is also a commitment to raising the country's profile among investors, with the opening of the country's first stock exchange in 2011.

In addition, official poverty rates fell from 46% in 1992 to 26% in 2010 and labour is less expensive than in more developed economies like Vietnam.  

Opportunities

Someone who knows Laos well is Prakash Jhanwer, Regional Controller for S E Asian countries at Olam International Limited, a Singapore-based agribusiness conglomerate with operations in over 30 countries and spanning six continents.

In an exclusive interview with HQ Asia, Jhanwer shared his belief that Laos holds much promise for foreign investors.

“The opportunities in Laos are enormous,” said Jhanwer, “Laos has a lot of land that is high in quality yet reasonably priced when compared to other emerging markets in the region. It has plenty of natural resources — in particular minerals, metal ores and water — and shares a border with China. It is in a very good position.”

Olam International is one of comparatively few foreign enterprises currently operating in Laos, when compared to neighbouring Vietnam or Thailand.

“We set up our operations in Laos in 2009 with a coffee plantation in an area known as the Bovan Plateau in Champasak Province, Southern Laos. It was ideal for growing coffee as the quality of the land was, and still is, exceptional. And, as a result, we were able to produce one of the lowest-cost Arabica [coffee crops] in the world,” claimed Jhanwer.

Such promising growth opportunities are not exclusive to the agriculture sector. Laos’ energy sector, too, holds much promise, particularly for foreign companies that service electricity generation, transmission and distribution.

“I think Laos has a huge opportunity in the power sector, as it can act as a hub for electricity for China, Thailand, Vietnam and Cambodia. This is mainly in the form of hydropower, as Laos has much land, a relatively low population density and high amounts of water,” Jhanwer explained.

“The other big sector in terms of growth potential is mining,” Jhanwer asserted.  

Infrastructure

According to media reports, one of Laos’ major economic stumbling blocks lies in its vastly insufficient infrastructure. As Southeast Asia’s only landlocked country, there is no direct access to the sea and its infamously underdeveloped road network makes travel and transporting goods difficult.

Not so, claimed Jhanwer.

“It was surprisingly very good. We too had notions that the infrastructure would be inadequate. However, the country actually has a very good road network and, as we speak, this is being further enhanced. In Laos, projects usually involve competent construction contractors from neighbouring Thailand or Vietnam, where the quality of construction is as good as it is in the West.”

Traditionally, the mighty Mekong River was Laos’ main method of freight transport between countries such as China, Thailand and Cambodia. However, present-day modernisation programmes have developed numerous key domestic bridges and one international bridge (the Thai-Lao Friendship bridge) to reduce the need for slow water-based transport. The government has made road and bridge infrastructure a priority, and substantial international financing is aiding progress in these projects.

In June 2012, Thailand agreed to a 900 million baht (US$28.3 million) loan to build new roads linking the two countries, in addition to supporting more Mekong bridge projects and constructing a new airport in the Lao city of Pakse. The Asian Development Bank has also pledged a US$23 million grant to carry out the Northern Rural Infrastructure Sector Project from 2011 to 2017.  

Telecoms and the Internet

Jhanwer was equally upbeat about Laos’ telecommunications infrastructure.

“The mobile providers are very advanced, in terms of coverage and quality of service,” he claimed.

“We have used two telecoms providers — Lao Telecom and Millicom Lao — and we’ve never had a bad experience with Internet connectivity. It moves as quickly as elsewhere in the region”, said Jhanwer.  

Regulation

For Western corporate investors, Laos’ legal system is commonly perceived as an area of concern. This is due to the belief that as a one-party political system, regulation fundamentally lacks impartiality. For example, disputes involving the Ministry of Planning and Investment tend to go nowhere, as disputes are only to be appealed to the Ministry itself. There is no independent court of appeal, so a company that feels it is receiving unfair treatment from the government is unlikely to receive an objective hearing.

Language can also be a problem and the reliability of unofficial translations of legal documents into foreign languages varies considerably. Although the system is evolving, with more than 91 new laws enacted between 1991 and 2009, knowledge of Laotian law is often limited among those outside the capital, Vientiane.

Despite these challenges, Jhanwer believes Laos is heading in the right direction.

“One of the biggest positives from a regulatory point of view has been the willingness of the government to go that extra mile to attract foreign investors,” said Jhanwer.

“The laws are still being developed, and foreign companies need to realise that the Lao government is not used to the fast pace of change experienced in other Asian nations. The path is long, but change is happening,” explained Jhanwer.  

Education

It is estimated that 40% of the population is aged between 15 and 24 years, offering a potentially large workforce. Yet, Laos suffers from significant human resource weaknesses in nearly all sectors. This is mainly due to poor education — English is not widely spoken and in 2008, an estimated 23% of the population in this age bracket were illiterate.

According to the UNDP, only 50% of the primary schools in Laos (of which there are more than 8,000) offer full-time education, partly due to the lack of qualifications among teachers. One of the main factors affecting access to schools is poverty; poor students are deterred from attending school by the cost of daily transport. Gender inequality is also rife within Laos’ education system, particularly at secondary level, where an onus is placed on young Lao women having families.

Although the education system looks somewhat bleak, the government has made steps towards nationwide reform. In January 2012, the Ministry of Education announced plans for the development of higher education by 2015. Foreign aid agencies, such as Save the Children, are also working in Laos to help improve education standards. Along with infrastructure, education is seen as paramount in transforming the Lao economy.  

Workforce

Arguably, the biggest challenge facing foreign investors is the availability of skilled manpower, particularly in a country where the population stands at around 6.5 million and where workers are often used to informal sector jobs, such as farming.

“When you are setting up a coffee plantation you need trained workers. And, this is an area where foreign companies face many problems,” said Jhanwer, “Laos’ workforce — particularly in rural areas — is not used to working full-time for a single company. They prefer to work for seven to eight months and then go back to their families and self-run farms. Not only is acquiring a stable workforce very challenging, they are not used to the practices of foreign companies”.

Yet, solutions to these problems exist. As Jhanwer explains, companies can either import talent from Thailand, who speak similar dialects to people in Laos, or simply bring in foreign workers from afar.

However, the most effective way of maintaining a workforce in Laos is to not only provide jobs for both men and women, but provide education opportunities for their children, as well as good-quality housing and a better quality of life.

“If you can provide a better education for workers’ offspring, you reduce the risk of them going back to their villages for three months of the year, because their children are studying nearby. At Olam, we tie-up with local schools and provide their teaching staff with help in form of books etc.. It is a huge incentive for workers to stay with the company,” explained Jhanwer.

“By providing housing and other infrastructure, foreign companies are upgrading [workers’] lives. They then become more dependent on places of work and see a bright future where they work,” said Jhanwer.  

Arguably the most noteworthy development in recent years was the opening of a stock exchange in 2011, in an effort to integrate with the world economy. The Lao Securities Exchange offers companies new sources of capital. However, for foreign investors this is a long-term objective; the stock exchange opened with just two listed companies, both state-owned.

The banking sector has boomed in recent years and there are now 19 commercial banks present in Laos, but the sector offers limited assistance for foreign businesses. Foreign banks are not allowed to operate outside the capital, and state banks are usually too small to set up relationships with foreign banks.

However, the exchange rate system is now floating, with free transfer of foreign exchange. At present, opportunities for foreign businesses lie in the training of personnel, to set up financial systems and develop the sector long-term.  

Corruption

Although Laos signed the UN convention against corruption mandate in 2003 and the Lao National Assembly introduced an anti-corruption law in 2006, the prevention of corruption in many sectors and society as a whole is still ineffective.

According to Asian Studies Review, corruption in Laos extends to: officials accepting bribes to overlook illegal trade; individuals and businesses colluding with officials to create tax benefits; bribery to bypass environmental regulations; payment for official documents and bribing influential politicians to overlook laws.

In addition to this, the country’s geographical position — being landlocked with extensive borders — means smuggling is rife. There is hope, however. Like other areas, moves are being made to improve the current system.

The government has recently urged organisations to strike out more firmly against corruption, and with international investors taking an interest in Laos, corrupt systems are increasingly falling under scrutiny.  

The future

Laos is due to enter the World Trade Organization in 2013, which expects the Southeast Asian nation to see a significant increase in volumes of international trade. However, foreign investors need to be aware that business transactions take much longer to finalise in Laos, than in other neighbouring countries. And, it is wise to involve stakeholders from all stages of the value chain in the decision-making process as early as possible, as failure to do so could result in legislative delays and workforce shortages.

Laos’ economic future is indeed bright. But, for foreign enterprises to attract and retain talent, they must go above and beyond the call of duty; they need to invest in staff training and development, good-quality housing, and — in some cases — education for the children of their workers.

This article was first published in HQ Asia (Print) Issue 04 (2012).