Multi-dimensional Review of Lao PDR

Financing Sustainable Development

Report

OECD Development Pathways

6 June 2024

5. Fostering sustainable investment in Lao PDR

Abstract

This chapter examines trends in investment and investment policies in Lao People’s Democratic Republic (Lao PDR) through a sustainability lens and provides recommendations on how to attract more sustainable investment to the country. Lao PDR experienced an impressive increase in foreign direct investment (FDI) inflows between 2006 and 2017, which has been one of the main drivers of economic growth. However, the country would benefit from FDI that generates more positive spillovers to the local economy and is more conscious of the environment and local communities. Attracting more sustainable investment – which advances environmental and social goals – first and foremost requires improving the overall enabling environment for investment in the country. It would also be important for Lao PDR to integrate environmental and social considerations into investment policies and strengthen the implementation of social and environmental safeguards for investment projects.

Introduction and strategic priorities for fostering more sustainable investment in Lao PDR

Lao PDR experienced an impressive increase in FDI inflows between 2006 and 2017, from USD 187.4 million (United States dollars) to USD 1.69 billion. This strong growth in FDI can be attributed to the government’s Turning Land into Capital (TLIC) (nayobay han din pen theun) policy, which facilitated large concession investment projects (World Bank, 2006[1]) in hydropower (64% of investment in Lao PDR between 2017 and 2021), mining (15% of investment) and agriculture (6% of investment). More recently, FDI inflows into Lao PDR decreased in the context of the COVID‑19 pandemic in 2020, but remain significant. As a result of the impressive growth in FDI inflows in Lao PDR, the country is performing well in terms of FDI as a share of gross domestic product (GDP) compared with other member states in the Association of Southeast Asian Nations (ASEAN) region and elsewhere in the world. Lao PDR’s FDI stock amounts to 80% of its GDP, which is 20 percentage points higher than in Thailand and 30 percentage points higher than in Viet Nam. FDI inflows (as a percentage of GDP) to Lao PDR were three times as high as those in Thailand, almost twice as high as the average among the ASEAN member states and above those in Viet Nam between 2020 and 2022. The People’s Republic of China (hereafter “China”) is the main country of origin of FDI in Lao PDR: it accounted for 66% of FDI inflows and for 63% of Lao PDR’s FDI stock in 2021 (IMF, 2023[2]).

FDI has been one of the main drivers of economic growth in Lao PDR. Between 2006 and 2017, when FDI inflows to Lao PDR increased dramatically, GDP growth averaged 7.7% annually. This compares with only 3.5% GDP growth in Thailand, 5.4% in ASEAN member states and 6.3% in Viet Nam. Among ASEAN member states, only Myanmar experienced higher average GDP growth during this period (8.9%) than Lao PDR (World Bank, 2024[3]). FDI in Lao PDR contributed to economic growth mainly through capital accumulation and the exploitation and export of Lao PDR’s natural resources (OECD, 2017[4]; CDE/University of Bern/MRLG, 2019[5]).

However, Lao PDR would benefit from FDI that generates more positive spillovers to the local economy and is more conscious of the environment and local communities. Natural resource sectors such as mining and hydropower (which receive the bulk of FDI in Lao PDR) are capital intensive, and activities are often conducted in isolation and typically create few jobs and business linkages with domestic companies. At the same time, these sectors are highly susceptible to creating environmental and social risks if environmental safeguards are not respected. In Lao PDR, large-scale hydropower dams have been associated with negative effects on the environment and local communities. These effects relate to water quality and sediment flows, hydrology and water levels, aquatic ecosystems, and food security (Yong, 2022[6]; OECD, 2017[4]; Intralawan et al., 2018[7]). Additionally, as a result of their effect on the scenery and natural sites, power plants and mining developments can also discourage tourism. Agriculture, on the other hand, has been linked to deforestation, soil pollution and land degradation (Sylvester, 2018[8]; Village Focus International/National University of Laos, 2019[9]; CDE/University of Bern/MRLG, 2019[5]). Finally, it would be critical to ensure that Lao PDR reaps a sufficiently large share of the benefits which accrue from hydropower development (Yong, 2023[10]).

Policy priorities for harnessing FDI in order to support Lao PDR’s sustainable development

Improving the enabling environment for investment and integrating environmental and social considerations into investment policies could allow Lao PDR to attract more sustainable investment that advances environmental and social goals. This includes investments that create a significant number of good-quality jobs, generate local linkages and spillovers such as technology and skills transfers, contribute to skills development, and adhere to strict environmental and social standards (OECD, 2022[11]). By reducing the cost and complexity of investing in Lao PDR, a better enabling environment for investment could allow more investors to make the additional effort and invest the additional resources required in order to limit the negative social and environmental impacts of their investment projects. Improving the enabling environment first and foremost requires a whole-of-government approach to investment, as well as improving access to skilled labour and land, upgrading transportation infrastructure, and reducing opportunities for corruption. It also involves strengthening the regulatory framework. In addition, it would be important to strengthen the implementation of social and environmental safeguards for investment projects and to more actively advance environmental and social goals through investment promotion policies, tax incentives and a better policy framework for responsible business conduct (RBC).

Reforms in several policy areas would be particularly important and should be prioritised. Key priorities for policy reforms include the following:

Improve co‑ordination between different government entities and between the public and private sectors. Countries that have been successful in attracting investment have mastered a whole-of-government approach to investment promotion and facilitation (OECD, 2015[12]). In Lao PDR, there is scope for better inter-institutional co‑ordination and alignment of strategic objectives and priorities among the different government entities involved in the design and implementation of investment policies. This could be achieved through the establishment of more formal channels for co‑ordination between the Ministry of Planning and Investment (MPI), the Ministry of Industry and Commerce (MOIC), the Ministry of Natural Resources and Environment (MONRE), and sectoral ministries. One possibility would be establishing an advisory board to the Investment Promotion Department (IPD) of the MPI that includes representatives both from these government entities and from the private sector. Similarly, Lao PDR would benefit from better communication between the public and private sectors. An effective and institutionalised public-private dialogue process at a high level could allow for more easily solving investors’ grievances and for better prioritising the reforms required in order to facilitate doing business in Lao PDR.
Improve the availability of skilled labour in Lao PDR through in-house training in private enterprises and the provision of better information on those skills that are in demand in the labour market. Different policies (such as tax incentives for training, for example) could encourage more in-house training by private enterprises. In addition, improved co‑ordination between the private sector, the government and educational institutions could help better align Lao PDR’s educational offerings with those skills that are in demand in the labour market. This process could be facilitated through the regular engagement of relevant stakeholders in a dedicated council or committee. Finally, an effective skills assessment and anticipation (SAA) system could identify the types of occupations, qualifications and fields of study that are in demand in the labour market in Lao PDR, or that may become so in the future (OECD, 2019[13]).
Improve institutional capacity and inter-institutional co‑ordination in land administration and management, and accelerate the implementation of the 2019 Land Law. A significant share of land in Lao PDR is not formally registered, and the responsibility for land use management is divided among a large number of institutions (National Assembly, 2019[14]), which lack sufficient co‑ordination (MRLG/LIWG, 2021[15]). This can create challenges for investors in accessing land. While a World Bank project is already in the process of significantly expanding formal land registration (World Bank, 2023[16]), going forward, it would be beneficial to simplify the institutional set-up for land management and to enhance inter-institutional co‑ordination between MONRE and line ministries. In addition, in order to ensure clarity for investors on land rights in rural areas that are governed by customary land rights and in state forest areas, it would be important to accelerate the implementation of the 2019 Land Law. Finally, additional reforms to Lao PDR’s legal framework for land rights are required in order to add further clarity to existing legislation on customary land rights and formal tenure documents in relation to state forest land (Derbidge, 2021[17]; Derbidge, 2021[18]; Derbidge, 2021[19]).
Enhance Lao PDR’s capacity for public-private partnership (PPP) delivery, strengthen infrastructure planning and improve the management of PPP-related fiscal risks. This could allow for making use of PPPs in order to improve Lao PDR’s transportation infrastructure in the long term. In order to improve PPPs’ value for money, it would be important to strengthen Lao PDR’s capacity to prepare, procure and manage PPP projects. In order to ensure that those projects with the greatest benefits are implemented first, Lao PDR requires a medium- to long-term infrastructure plan, including a pipeline of infrastructure and PPP projects with clear prioritisation based on a cost-benefit analysis. In light of the negative impact that past PPPs have had on public finances in Lao PDR, which account for almost one-half of the country’s public and publicly guaranteed (PPG) debt stock, it would also be important to improve the management of PPP-related fiscal costs and risks throughout the project life cycle. Allowing for effective risk sharing with private investors requires reducing the country’s high amount of public debt (see Chapter 3 on sustainable development financing) (OECD, 2017[4]; OECD, 2012[20]).
Improve the predictability of the regulatory framework for investment and the effectiveness of the court system while introducing policy tools that promote integrity among public officials. Gift-giving and informal payments, both on a small scale and in order to buy political support, can affect the efficiency of enterprises operating in Lao PDR (GAN Integrity, 2020[21]; ECCIL, 2022[22]). In order to reduce opportunities for corruption, first and foremost, Lao PDR requires a more stable, clearer, more predictable and more consistently applied regulatory framework for investment and an effective, fair and independent court system. An effective public procurement system that disburses public funds sustainably and efficiently is another critical element (OECD, 2015[12]). In addition, improved human resource management, training and counselling could enhance the integrity of lower-ranking public officials in Lao PDR. Integrity tools and mechanisms in high-risk areas such as conflict of interest and lobbying, as well as political whistleblower mechanisms, could also enhance public officials’ integrity (OECD, 2015[12]).

In addition, there are several other policy areas where implementing reforms would be highly beneficial. Recommended reforms include the following:

Simplify Lao PDR’s institutional and regulatory framework for starting an investment project. A large number of institutions are involved in this process, and there are three different avenues for obtaining an investment licence, depending on the sector and type of investment. Combining the responsibility for issuing investment licences for different types of investments under the umbrella of a single institution and reducing the number of institutions involved in the allocation of investment licences could speed up the licensing process, enhance efficiency, increase transparency and solve co‑ordination problems between entities.
Strengthen the implementation of social and environmental safeguards for investment projects. Lao PDR’s Law on Investment Promotion contains detailed social and environmental obligations for investors. In addition, two types of environmental impact studies exist in Lao PDR, and environmental impact assessments (EIAs) are mandatory for most investment projects. However, it has been reported that EIAs are treated as just a formality, with limited follow-up or impact on project design. In addition, the monitoring and inspection of environmental obligations could be improved.
Develop more sophisticated and better targeted policies, activities and tools for investment promotion, which should include a greater focus on environmental and social sustainability. Lao PDR would benefit from a clear and coherent inward investment promotion strategy that articulates the government’s vision on the contribution of investment towards environmental protection and social development. More targeted investment promotion efforts, including investor targeting and lead generation, could attract greater investment in Lao PDR’s nine priority sectors, many of which advance social and environmental goals. Tools such as a local supplier database, business matchmaking and supplier development services could encourage more local linkages between international investors and domestic enterprises. It would also be important to introduce more key performance indicators (KPIs), both for selecting priority investments and for monitoring and evaluating the IPD’s activities, including KPIs linked to the environmental and social impacts of investment projects. Finally, in order to allow the IPD to develop these tools and activities, it would be beneficial to gradually endow it with more and better human and financial resources, as well as technical and managerial skills.
Increase positive spillovers from Special Economic Zones (SEZs) to the local economy and improve SEZs’ social and environmental performance. Investment in Lao PDR’s SEZs has increased impressively since 2014. SEZs can facilitate access to land for investors in Lao PDR and offer spaces for policy experimentation. They can generate FDI, create jobs, contribute to economic diversification and upgrading, and allow for the transfer of knowledge, technology and skills. However, SEZs also generate costs, including administrative costs, forgone tax revenues as a result of tax incentives, and the cost of resettling local communities. Potentially significant profits earned by SEZ developers, combined with discretion in granting approval for new SEZs, could also create opportunities for rent seeking. In addition, international experience shows that SEZs often face challenges in generating linkages with the local economy and creating quality jobs. Lao PDR could increase the positive impacts and spillovers from SEZs to the local economy through the right policy and regulatory mix, by encouraging local business linkages, and through skills development. At the same time, comprehensive and strategic planning of SEZ development could reduce opportunities for rent seeking. There is also scope to improve the regulation of the social and environmental aspects of SEZs in order to limit their negative externalities on the environment and local communities.
Redesign tax incentives to be based on expenditure rather than income and to more actively advance social and environmental goals. A good enabling environment is more important for attracting and retaining investors than generous tax incentives are. While investment tax incentives can be complementary to a good enabling environment for investment, Lao PDR could consider phasing out the use of income-based incentives in favour of expenditure-based incentives, such as accelerated depreciation and tax allowances or credits. Income-based tax incentives generally attract investments that are already profitable early in the tax relief period, while expenditure-based tax incentives reduce specific costs, thereby encouraging investments that might not occur without the incentives. In addition, incentives should be designed to encourage positive spillovers to the economy and society, such as local linkages, training and skills development, and environmental protection. Incentives for investors that offer training could potentially contribute to bridging Lao PDR’s skills gap. It would also be important to reduce discretion in the allocation of incentives for concessions (which creates avenues for corruption) and to improve monitoring and evaluation of investment tax incentives.
Intensify efforts aimed at promoting and implementing international RBC and due diligence standards in the local context. First and foremost, this includes developing an institutional and policy framework for RBC, including a special dedicated RBC body or government focal point and a national RBC policy or action plan. RBC efforts should also be incorporated more systematically into investment promotion activities. In addition, home-grown RBC programmes targeted at specific high-risk industries, such as the mining, hydropower and agricultural sectors, could be developed in order to raise awareness and encourage the implementation of due diligence in business practices. Lao PDR would also benefit from better access to remediation and grievance mechanisms for addressing the negative impacts of investment projects (particularly the negative environmental and social impacts). RBC for concession investments could be improved through including stronger safeguards in concession agreements and making these agreements public.

This chapter, which is organised into eight sections, examines how to encourage more sustainable investment in Lao PDR that contributes to social and environmental goals. The first section examines trends in and characteristics of FDI as well as the impacts of such investment on the environment and society. The following subsections evaluate policies to better harness investment for Lao PDR’s sustainable development. Section two analyses overarching challenges for investors in Lao PDR and presents policy options to tackle these challenges. Section three assesses the governance and institutional framework for investment, and section four analyses the legal and regulatory framework. Section five analyses investment promotion and facilitation policies in Lao PDR, while section six evaluates Lao PDR’s SEZs. Section seven examines Lao PDR’s framework for investment tax incentives. Finally, section eight assesses RBC in Lao PDR.

Trends, characteristics and impacts of FDI in Lao PDR

In 1986, Lao PDR started a structural reform process to gradually transition from a centrally planned economy to a more open, market-led economy under the New Economic Mechanism. Lao PDR joined ASEAN in 1997. This supported its integration into the regional and global economy. Lao PDR’s accession to the World Trade Organization (WTO) in February 2013 and the creation of the ASEAN Economic Community (AEC) in 2015 further accelerated the country’s economic reforms and integration into the world economy (OECD, forthcoming[23]) (OECD, 2017[4]).

Since 2006, FDI inflows to natural resource sectors in Lao PDR from China and other neighbouring countries have increased impressively

FDI inflows to Lao PDR increased impressively between 2006 and 2017, following a brief peak in 1996 (Figure 5.1, Panel A). FDI inflows to Lao PDR peaked in 1996, but declined thereafter as a result of the Asian Economic Crisis (IFC, 2021[24]). In 2006, FDI started rising sharply as a result of the Lao PDR government’s TLIC (nayobay han din pen theun)1 policy, which facilitated large concession investment projects in the hydropower and mining sectors and, to a lesser extent, in the agricultural sector (largely focused on rubber, eucalyptus and cash crops) (World Bank, 2006[1]). Many of these investment projects were facilitated through PPP, especially in the case of hydropower. Following a decline during the 2007‑08 global financial and economic crisis (IFC, 2021[24]), FDI started expanding rapidly again in 2012, peaking at inflows of USD 1.69 billion in 2017. This compares with inflows of USD 187.4 million in 2006. Since 2012, Lao PDR has more than quadrupled its FDI stock in terms of absolute value (Figure 5.1, Panel B).

FDI inflows to Lao PDR have decreased gradually since 2017, but remain significant. FDI inflows started declining in 2018, experienced a short rebound in 2020‑21, but continued decreasing in 2022. This decline can be attributed to Lao PDR’s high amount of public debt and deteriorating creditworthiness, which has rendered risk sharing between private investors and the government through PPPs more difficult (see the Chapter 3 on sustainable development financing). The COVID‑19 pandemic, which hit the country in 2020, has also contributed to the decline in FDI inflows. In addition, Lao PDR’s challenging macroeconomic situation is discouraging investors. Despite this decline, however, FDI inflows to Lao PDR remain significant.

FDI has been one of the main drivers of economic growth in Lao PDR over the last two decades. Between 2006 and 2017, which is the period during which FDI inflows to Lao PDR increased most dramatically, GDP growth averaged 7.7% annually. This compares with only 5.4% GDP growth in ASEAN member states, 3.5% in Thailand and 6.3% in Viet Nam. Among ASEAN Member States, only Myanmar experienced higher average GDP growth during this period (8.9%) than Lao PDR (World Bank, 2024[3]). FDI has contributed to economic growth in Lao PDR mainly through capital accumulation and the exploitation and export of Lao PDR’s natural resources (OECD, 2017[4]; CDE/University of Bern/MRLG, 2019[5]).

Figure 5.1. FDI inflows to Lao PDR have increased impressively since the mid-2000s

Lao PDR is performing well in terms of FDI as a share of GDP compared with other countries in the ASEAN region and elsewhere in the world, but less so when FDI is measured per capita. Lao PDR’s FDI stock amounts to 80% of its GDP; this is more than the share in most comparator countries and is 20 percentage points higher than in Thailand and 30 percentage points higher than in Viet Nam (Figure 5.2, Panel A). In ASEAN member states, only Cambodia and Singapore have a higher FDI stock than Lao PDR when measured as a share of GDP. Average FDI inflows to Lao PDR (as a percentage of GDP) were almost three times higher than in Thailand, almost twice as high as in ASEAN member states and above those in Viet Nam between 2020 and 2022. However, Lao PDR’s good performance can be partly attributed to the country’s relatively low GDP per capita, and the country is not performing as well when considering the FDI stock and inflows per capita (Figure 5.2, Panel B): Lao PDR’s FDI stock per capita is only 40% of Thailand’s and 60% of Cambodia’s. FDI inflows per capita were 30% lower on average than those in Viet Nam between 2020 and 2022.

Figure 5.2. Lao PDR is performing well compared with other countries in the Southeast Asia region and with countries elsewhere in the world in terms of FDI as a share of GDP, but FDI remains relatively low when measured on a per-capita basis

Most FDI in Lao PDR is directed towards natural resource sectors, largely through land concessions. FDI in Lao PDR is concentrated in electricity generation, largely hydropower (63.7%) and mining (14.6%) (Figure 5.3). Agriculture is the third-largest recipient sector of FDI (6.3%). On the other hand, investment in more technology- and labour-intensive sectors such as manufacturing (handicrafts and industry: 1.4%) remains relatively low. Investment in tourism (hotels and restaurants: 1.5%) accounts for only a small share of total FDI as well. Most investment in natural resources occurs through land concessions, frequently through PPPs, especially in the case of hydropower: between 1989 and 2018, the area under land concessions in Lao PDR increased from approximately 200 000 hectares (ha) to approximately over a million ha. Forty-five percent of these concessions are agriculture concessions, 41% are mining concessions, 14% are tree plantation concessions and 1% are concessions for hydropower stations (CDE/University of Bern/MRLG, 2019[5]).

Figure 5.3. Investment in Lao PDR is concentrated in electricity generation and mining

Approved foreign and domestic investment projects by sector, 2017‑21

FDI in Lao PDR is dominated by China, which accounted for 66% of FDI inflows to Lao PDR and for 63% of Lao PDR’s FDI stock in 2021 (Figure 5.4). FDI from China has been increasing over time: between 2012 and 2016, an average of 42.5% of Lao PDR’s FDI inflows originated from China, but this number rose to 60.6% between 2017 and 2021. FDI from China peaked in 2016 at USD 3.2 billion and again in 2020 at USD 2.6 billion. These peaks and the overall increase in Chinese FDI coincide with the construction of the Boten–Vientiane railway (which connects Vientiane with the town of Boten on the Chinese border) between 2016 and 2021, and the expressway connecting Vientiane with Vang Vieng, both of which were funded by Chinese investors through PPPs (Medina, 2021[27]; Xinhua, 2020[28]). In addition, China has been one of the most important investors in hydropower and mining in Lao PDR in the past, and it has also invested in agriculture, real estate, and entertainment and tourism sites. Other important countries of origin of FDI in Lao PDR are Thailand, Viet Nam and France; Thailand accounted for 31.5% of Lao PDR’s FDI stock in 2021 (IMF, 2023[2]).

Figure 5.4. China is the main country of origin of FDI inflows to Lao PDR, and FDI inflows from China have been increasing

FDI inflows to Lao PDR by region of origin, 2010‑21

There is scope to increase the number of jobs created, local linkages and other positive spillovers from FDI to the local economy

There is some evidence for business linkages between foreign and domestic enterprises in Lao PDR’s manufacturing sector. The evidence suggests that foreign enterprises in Lao PDR’s manufacturing sector sourced approximately one-half (49%) of inputs locally in 2018, in line with the East Asian and Pacific average (50% of inputs sourced locally) (World Bank, 2018[29]). This relatively high share of locally sourced inputs can most likely be attributed to the subcontracting of local garment producers by foreign enterprises for activities such as cut, make and trim (OECD/UNIDO, 2019[30]). In addition, this result relies on a very small number of foreign manufacturing enterprises and may not be representative of the whole sector.

Overall, however, Lao PDR would benefit from FDI that creates more quality jobs and business linkages with the local economy. Lao PDR’s manufacturing sector is small and receives only a small share of FDI. The bulk of FDI in Lao PDR is directed towards natural resource sectors such as mining and hydropower, which are capital intensive, unsustainable over time and conducted in isolation from other economic activities, and these sectors create few jobs and business linkages with domestic enterprises. In addition, foreign enterprises often experience difficulties in hiring skilled labour locally in Lao PDR and therefore tend to import a relatively large share of workers in sectors such as construction (OECD, 2017[4]; IFC, 2021[24]). Even in SEZs, which host many of Lao PDR’s foreign manufacturing companies where jobs are more labour-intensive than on natural resource projects, the number of jobs created remains only moderate, at 8.9 jobs overall and 4.9 jobs for domestic workers per USD 1 million invested (SEZO, 2023[31]). This compares with 12.8 jobs per USD 1 million invested in SEZs in Poland (as of 2018) (UNCTAD, 2019[32]).

Lao PDR could encourage more positive spillovers from FDI in terms of local environmental practices. Foreign investors can have a positive impact on environmental safeguards and protection because of the more climate-friendly business practices they adopt in order to conform to more stringent international environmental standards. One of the most important channels for such spillovers is through supply chain relationships with domestic suppliers, partners and buyers. Foreign enterprises can, for example, influence their suppliers’ practices by requiring environmental certifications or adherence to certain standards as a precondition for doing business. Foreign enterprises may also share knowledge and technologies with their suppliers in order to help improve the environmental outcomes associated with their economic activities (OECD, 2022[33]). Since the bulk of FDI in Lao PDR is directed to natural resource sectors, few supply chain linkages occur and there are thus limited opportunities for positive spillovers in terms of environmental and social standards and protection. In the hydropower sector, dam projects financed by international donors such as the Asian Development Bank (ADB) usually take the EIA process very seriously and aim to comply with international social and environmental safeguards, such as the “No Net Loss Biodiversity” principle (OECD, 2017[4]). However, potential positive spillovers to suppliers or to hydropower dam projects financed by other investors have not been evaluated.

Opportunities and challenges in key investment sectors

Electricity generation

Lao PDR is one of the richest countries in hydropower resources in Southeast Asia and is one of the region’s largest generators of hydroelectric power. Approximately 70% of electricity in Lao PDR is generated from hydropower, while the remainder is largely generated from coal (IRENA, 2023[34]). Lao PDR has more than 80 operational hydropower dams, two of them on the Mekong River, with a total generating capacity of 9 483 megawatts (MW). An additional 30 hydropower dams are under construction and more than 200 are planned (IHA, 2023[35]).

FDI in hydropower in Lao PDR originates mainly from China and Thailand and has been influenced by growing demand for electricity in neighbouring countries. Lao PDR has experienced rapid growth in installed hydropower capacity since 1993, when it opened the electricity generation sector to foreign investment. Thailand is the largest investor in hydropower in Lao PDR and the largest market for Lao PDR’s hydropower exports. In 1993, Lao PDR and Thailand signed their first memorandum of understanding (MOU), aiming to achieve 1.5 gigawatts (GW) of installed hydropower capacity in Lao PDR to supply the Thai market. This MOU has been amended several times since 1993, and in 2022, Lao PDR signed an agreement with Thailand to export 10 500 MW of hydropower to the Thai market (Yong, 2023[10]; IHA, 2023[35]). Viet Nam is a much less important importer of Laotian electricity than Thailand, but it does plan to expand electricity imports from Lao PDR. In 2022, Lao PDR signed MOUs with Viet Nam to export 8 000 MW of electricity to serve the Vietnamese market by 2030 and to implement 25 projects with a combined capacity of 2.18 GW (IHA, 2023[35]; Greater Mekong Subregion Secretariat, 2022[36]). In 2021, Lao PDR exported 21 872 gigawatt hours (GWh) of electricity to neighbouring countries, more than 50% of the total amount of electricity it generated (World Bank, 2023[37]; IRENA, 2022[38]).

Improving the environmental and social sustainability, safety, and rentability of hydropower development in Lao PDR

It is important to reduce adverse social and environmental impacts of hydropower development. Large-scale hydropower dams in Lao PDR have been associated with negative effects on water quality and sediment flows, hydrology and water levels, aquatic ecosystems, biodiversity, fish migration and capture fisheries, food security, and the livelihoods of local populations. Fluctuating water levels and the loss of nutrient-rich sediment flows, which are blocked by dams, negatively affect agricultural productivity and the livelihoods of communities that depend on agriculture. Mekong River hydropower dams also obstruct fish migration routes, thereby affecting food security and the livelihoods of local communities that rely on fishing. Fish constitutes an important source of protein in Lao PDR, particularly for vulnerable and poor communities (Yong, 2022[6]; OECD, 2017[4]; Intralawan et al., 2018[7]). The total cost2 of the two already constructed and seven planned hydropower dams on the mainstream Mekong River in Lao PDR, plus two hydropower dams in Cambodia, is estimated at USD 18 billion. This outweighs the benefits from electricity generation, improved irrigation and flood control from these dams, which are estimated at USD 11 billion (Intralawan et al., 2018[7]).

It would also be beneficial to improve the safety of hydropower dams in Lao PDR. Maintenance of dams is often limited because of the Lao PDR government’s lack of capacity and a shortage of skilled workers such as maintenance technicians and engineers. This has led to concerns about the safety of many older dams. In 2018, the Xe Pian-Xe Namnoy dam in Champassak province collapsed, causing 71 deaths, displacing 14 440 people, and severely damaging 4 160 ha of farmland, which remains largely covered with mud and debris as of 2024. Similar so-called “saddle dams” exist in several other locations in Lao PDR and have not been replaced or reinforced since the collapse of the Xe Pian-Xe Namnoy dam (RFA Lao, 2022[39]; Inclusive Development International and International Rivers, 2019[40]).

There is scope to increase the benefits linked to hydropower development for Lao PDR through an improved design of power purchase agreements (PPAs) and better export management. Many hydropower dams in Lao PDR have been delivered through PPPs. The conditions of the PPAs signed by Électricité du Laos (EDL) with the private owners of hydropower dams are in many cases unfavourable for EDL (see the section on PPPs). For example, an independent review found that the 29‑year PPA between the government of Lao PDR and the Electricity Generating Authority of Thailand (EGAT) for the Xayaburi Dam, the first dam built on the mainstream Mekong River in Lao PDR, places the government of Lao PDR in a risky and disadvantaged position with EGAT (Yong, 2023[10]). Moreover, despite being a net electricity exporter, Lao PDR has to import electricity during the dry season as a result of fluctuating water levels combined with a fragmented electricity grid. The cost of these electricity imports from Thailand (USD 0.11 per kilowatt hour (kWh)) is twice the rate of Lao PDR’s electricity exports to Thailand (USD 0.05 per kWh) (Yong, 2023[10]).

Abundant investment opportunities remain in Lao PDR’s energy generation sector despite several challenges

Despite the challenges outlined above, abundant investment opportunities remain in Lao PDR’s electricity generation sector. Other renewables (such as wind or solar power, which are frequently used to complement hydropower) and storage technologies (such as battery storage or pumped storage) constitute opportunities: complementing hydropower with these technologies could enable a reduction in the seasonality of electricity generation and the variability of Lao PDR’s power supply, thereby allowing the country to become a more reliable energy exporter and to increase the prices it charges for power exports. One example of such complementary power generation is the 600 MW Monsoon Wind Power Project close to the Vietnamese border, which is currently under development. The Monsoon Wind Power Project is financed by several international financial institutions, donors and private investors, including the ADB (ADB, 2023[41]). In addition, there are also opportunities to expand electricity exports to Cambodia, Malaysia, Singapore, Thailand and Viet Nam; however, exports to Malaysia and Singapore are constrained by weak interconnecting infrastructure in central and Southern Thailand (World Bank, 2021[42]).

In order to continue expanding electricity generation and fully exploiting existing hydropower, significant investment in Lao PDR’s transmission and interconnection infrastructure would be required. Lao PDR’s electricity grid is fragmented across three regional grids. As a result of this fragmentation, surplus electricity generated cannot always be used or exported. Further expansion of hydropower generation capacity and exports as well as those of other renewable energy sources would require investment in domestic transmission infrastructure and in the regional interconnection of Lao PDR’s electricity grid (OECD, 2017[4]). Investment needs in domestic transmission and interconnection infrastructure are estimated at USD 1.2‑1.7 billion (World Bank, 2021[42]).

In planning and designing additional hydropower dams, it will be important to carefully assess the impact of climate change. Climate change may affect Lao PDR’s hydropower generation capacity through prolonged droughts and water shortages. This was already the case between 2019 and 2021, when water levels in the Mekong River fell to unprecedentedly low levels. This can potentially compromise the economic viability of hydropower dams in Lao PDR. In addition to climate change, uncoordinated investment in hydropower dams by different operators could also affect water levels and, in turn, Lao PDR’s hydropower generation capacity (Yong, 2022[6]).

Reducing the debt of Lao PDR’s public electricity company Électricité du Laos (EDL) could facilitate future investment in Lao PDR’s electricity sector. EDL accounts for 45% of PPG debt, which stood at 112% of Lao PDR’s GDP in 2022 (World Bank, 2023[43]). This debt is largely the result of disadvantageous investments in electricity generation (mainly hydropower) and transmission infrastructure by EDL, financed to a large extent through PPPs with limited investment rationale and which were not appropriately designed and managed (see the section on PPPs) (World Bank, 2021[42]). This significant amount of debt compromises EDL’s creditworthiness and limits its scope for signing PPAs for new investment projects in renewable energies. One option for electricity producers to circumvent this problem is signing PPAs for new power plants directly with the utility companies in neighbouring countries such as Thailand or Viet Nam. This option is especially feasible when these plants are located close to Lao PDR’s borders. In the long term, it would be important to reduce EDL’s debt and to increase its creditworthiness.

Mining

Mining is the second-largest recipient of FDI in Lao PDR (15% of FDI inflows), and mining products account for more than 30% of Lao PDR’s exports. Copper, gold, silver, lignite, anthracite and gypsum account for the largest share of mining production in Lao PDR. Zinc, lead, bauxite and aluminum are also extracted in the country (Ngangnouvong, 2019[44]; IFC, 2021[24]). There are currently 49 enterprises operating in Lao PDR’s mining sector, and mining concessions are dominated by China and Viet Nam (Ngangnouvong, 2019[44]; Financial Times, 2023[45]). The largest mines in Lao PDR are Phu Bia Mining Ltd.’s Phu Kham mine (which is 90% owned by PanAust Ltd. and 10% by the Lao PDR government) and Lane Xang Minerals Ltd.’s Sepon mine (which is 90% owned by Chifeng Jilong Gold Mining Co., Ltd . and 10% by the Lao PDR government). Both are Chinese-owned and Australian-operated enterprises (OECD, 2017[4]; Ngangnouvong, 2019[44]).

In the planning and preparation process of new mines and power plants, it will be important to carefully assess such projects’ effects on the tourism sector. Mining projects and hydropower dams are frequently located in protected areas or close to important tourism and natural sites. These projects’ adverse impacts on the environment and scenery can discourage tourism. For example, the construction of two new coal power plants – Boualapha Power Plant, located in the Boualapha District in Khammouane province, and Xekong Power Plant, located in Xekong province – is currently planned or ongoing (Phonesack Group, n.d.[46]). Boualapha Power Plant was originally planned for construction very close to Hin Nam No National Park, which is proposed as a United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Site, but the government of Lao PDR is reconsidering construction of the power plant following a call from international donors to stop the project. Going forward, it will be important to more systematically take into account the impacts of mines and power plants on tourism when deciding on the location of new projects.

Agriculture

Agriculture is the third-largest FDI recipient sector (6%) in Lao PDR, and agriculture, food and forestry products account for more than 30% of the country’s exports. Timber, rubber and sugar are important recipients of FDI and, more recently, there have also been increasing investments in banana producers. FDI in forestry and agriculture originates largely from China (primarily directed towards the acacia, eucalyptus and rubber industries), Thailand (largely sugar) and Viet Nam (mainly rubber) (OECD, 2017[4]; Financial Times, 2023[45]; CDE/University of Bern/MRLG, 2019[5]; Sylvester, 2018[8]). Investors largely fund producers of agricultural commodities for export, and China is the biggest export market for these products (Village Focus International/National University of Laos, 2019[9]). There has been a trend away from large-scale state land concessions and towards contract farming and non-state land leasing in Lao PDR’s agricultural sector. This has been influenced by both government policies and investors seeking alternatives to large-scale land concessions as a result of the challenges linked to accessing land (CDE/University of Bern/MRLG, 2019[5]; Sylvester, 2018[8]).

Lao PDR’s agricultural sector constitutes an important part of the country’s economy. The agricultural sector’s contribution to Lao PDR’s GDP has declined from close to 50% in 1990 to 14.6% in 2022. Nevertheless, this remains elevated compared with other ASEAN member states (11%) and OECD member countries (1.4%). Moreover, as much as 58.1% of Lao PDR’s population works in the agricultural sector compared with 4.8% of the population in OECD member countries and 46.5% in ASEAN Member States on average (as of 2021) (World Bank, 2024[3]). Seventy percent of agricultural land in Lao PDR is used for the cultivation of rice. Maize, Job’s tears (or adlay millet), sweet corn, rubber and coffee account for a large share of the remaining agricultural land area. In recent decades, with the increase in agricultural land concessions, exports of agricultural products and contract farming, Lao PDR’s agricultural sector has transitioned from subsistence agriculture to a more commercial orientation (Village Focus International/National University of Laos, 2019[9]; CDE/University of Bern/MRLG, 2019[5]).

Agricultural productivity remains low in Lao PDR. Agricultural productivity in Lao PDR, measured as value added per worker in agriculture, forestry and fishing, is only 6.7% of the ASEAN average and increased at an annual rate of only 1.8% between 2009 and 2019 (Figure 5.5). This is too slow to catch up with the agricultural productivity of more developed countries (ECCIL, 2022[22]; World Bank, 2024[3]).

Figure 5.5. Labour productivity in Lao PDR’s agricultural sector is the lowest among regional and other comparators

Value added per worker in agriculture, forestry and fishing

Agriculture is linked to deforestation, soil pollution and land degradation. The annual deforestation rate in Lao PDR amounted to 0.3% between 1982 and 2010, and agricultural land increased by 59% between 1999 and 2011. As of 2018, forest coverage in Lao PDR amounts to 43.5% (CDE/University of Bern/MRLG, 2019[5]). Deforestation and land degradation can be attributed to an increase in investment in commercial plantations of short-cycle so-called “cash crops” (which are often planted in monocultures), such as cassava, bananas, starch, Job’s tears or maize, for export to neighbouring countries. These crops rapidly deplete the soil and are drivers of deforestation (Sylvester, 2018[8]). In addition, the agrochemicals used in these plantations contaminate soil and water sources (Village Focus International/National University of Laos, 2019[9]). Illegal logging, influenced by bans on logging in neighbouring countries and increased demand for timber, has also contributed to deforestation and land degradation in Lao PDR. Hydropower development and the construction of transportation infrastructure in order to access mining sites are additional but less important drivers of deforestation (OECD, 2017[4]). Land degradation is exacerbated by the high land erosion risk in Lao PDR as a result of its steeply sloping terrain and relatively shallow soil (CDE/University of Bern/MRLG, 2019[5]). Lao PDR’s vulnerability to climate change is further exacerbating these challenges.

The commercialisation of agriculture in Lao PDR can have adverse social impacts, including health risks and rural indebtedness. The expansion in the use of agrochemicals such as fertilisers, pesticides and herbicides and the resulting increase in pollution has created significant health risks in rural areas, especially for the communities living in these areas (Village Focus International/National University of Laos, 2019[9]). In addition, contract farming has contributed to rural indebtedness as farmers borrow money for agricultural inputs in order to improve their yields. It has also contributed to food insecurity as communities reorient their production towards market commodities (CDE/University of Bern/MRLG, 2019[5]).

These challenges in Lao PDR’s agricultural sector translate into ample opportunities for productivity- and sustainability-enhancing investment in the sector. Investment in the mechanisation and modernisation of agriculture, combined with the traditional knowledge of the sector and a better organisation of smallholder farmers, could increase the sector’s productivity and expand agricultural production and the value added generated by agriculture. The expansion of longer-cycle crops (such as coffee, tea, sugar cane, and non-timber forest products such as certain mushrooms) could reduce the damage to the environment caused by short-cycle crops such as cassava or bananas. In addition, Lao PDR’s geographic location, improving regional connectivity and the availability of suitable land constitute advantages for investment in tree plantations.

Tourism

Lao PDR’s tourism sector accounts for only a small share of FDI inflows (1.5%), but its contribution to Lao PDR’s economy is increasing. In 2020 (prior to the COVID‑19 pandemic), Lao PDR registered 4.79 million international tourist arrivals, tourism receipts accounted for 13.9% of the country’s exports, and the tourism sector accounted for 9.1% of GDP and created 300 000 jobs. Tourists originated mainly from other Asian countries, most importantly Thailand (45% of international tourist arrivals in 2019), China (21%), Viet Nam (19%) and Korea (4%) (UNDP, n.d.[48]). There are several large tourism investment projects by Chinese enterprises in development, such as a USD 9 billion project by enterprises from Hong Kong, mainland China and a Lao PDR SEZ in Champasak province, which aims to transform the have area into one of the leading tourism sites in Southeast Asia in order to attract 1.3 million visitors per year (MOIT Vietnam, 2021[49]; Clark, 2021[50]).

Lao PDR’s relatively low tourism receipts per arrival open opportunities for expanding tourism value added by attracting more tourists who stay longer and spend more money. Tourism receipts in Lao PDR amounted to only USD 203.30 per arrival in 2019, prior to the COVID‑19 pandemic; this was less than one-fifth of the ASEAN average (USD 1 159.70) (Figure 5.6). In addition, tourism receipts per arrival have not increased quickly enough since 2010 to catch up with other countries in the region. Lao PDR’s low tourism receipts per arrival can be attributed to tourists’ short average length of stay in the country; many tourists from neighbouring countries visit Lao PDR for only one day (for example, to visit a temple), while tourists coming from farther away combine a vacation in Thailand with a short stopover in Lao PDR. Lao PDR could increase tourism receipts per arrival by designing policies to attract tourists for longer periods of time and by expanding the high-end segments of its tourism industry. Facilitating access to the country’s numerous tourist sites through improved connectivity and transportation infrastructure would be key to encouraging tourists to stay longer.

Figure 5.6. Tourism receipts per arrival in Lao PDR are only one-fifth of the ASEAN average

Tourism receipts per arrival, 2010 and 2019

There are many opportunities to increase the contribution of tourism to Lao PDR’s economy by diversifying the sector. This includes the diversification of both the source markets of tourists and of tourism products (UNDP, n.d.[48]). The latter includes ecotourism and nature tourism, historical sites, ethnocultural tourism, adventure tourism, agriculture tourism, and wellness tourism. Improving the tourism products offered in Lao PDR could also help attract tourists for longer stays and increase the amount of money they spend in the country.

Better protecting UNESCOWorld Heritage Sites and reducing pollution from slash-and-burn agriculture around tourism sites could help make Lao PDR more attractive to tourists. Slash-and-burn agriculture is a traditional farming method that consists of burning vegetation in order to create a nutrient-rich layer of soil. Widespread seasonal burnings in Lao PDR close to key tourism sites, such as the city of Luang Prabang, cause severe air pollution and smog. This negatively affects the tourism sector through booking cancellations, tourists deciding against visiting Lao PDR during the burning season, and by tarnishing Lao PDR’s reputation as a tourism destination (Delgado and Siviero, 2023[51]; Rieger, 2020[52]). In this context, developing an effective strategy for reducing slash-and-burn agriculture in areas close to important tourist sites could boost tourist arrivals during the slash-and-burn season. In addition, it would also be important to better preserve and protect special tourism zones such as Luang Prabang. In Luang Prabang, this would require the regular maintenance and repair of traditional buildings using appropriate techniques and materials (UNESCO, 2023[53]), as well as minimising loud noise and disturbing music and preserving the traditional cityscape by preventing the over-commercialisation of the traditional city centre (Liu et al., 2019[54]).

Manufacturing

There is scope to expand Lao PDR’s manufacturing sector, which remains small and receives much less FDI (1.4% of FDI inflows) than the country’s natural resource sectors. Manufacturing accounts for only 8.7% of Lao PDR’s GDP compared with 20.5% on average in ASEAN Member States, 24.8% in Viet Nam and 27% in Thailand, 18.1% in Cambodia (in 2022) and 13.2% in the OECD (in 2021) and the sector’s contribution to GDP has stagnated and even moderately decreased over the last two decades (World Bank, 2024[3]). This reflects a very slow and stagnating structural transformation from agriculture to manufacturing and services in Lao PDR. The country’s manufacturing sector is dominated by textiles and clothing (15.7% of the manufacturing sector in 2017) and food processing (33.4% of the manufacturing sector in 2017) (IFC, 2021[24]; World Bank, 2024[3]). In addition, an electrical components manufacturing industry is developing in Lao PDR (World Bank, 2021[42]). Medium- and high-technology manufacturing accounts for only 3.8% of the sector’s value added (World Bank, 2024[3]). Manufacturing enterprises in China, Thailand and Viet Nam that want to diversify their production bases present a potential opportunity for Lao PDR to expand its manufacturing base (ECCIL, 2022[22]).

Lao PDR’s exports are dominated by natural resources and are largely directed to neighbouring countries

Lao PDR’s exports consist largely of natural resources and raw materials (approximately 70%), reflecting the focus of FDI. Metals (22.3% of exports) and electricity (21.3% of exports) are Lao PDR’s most important export goods, followed by paper and wood products (10.3%), vegetable products (9.6%) and minerals (9.1%) (Figure 5.7, Panel A). FDI in Lao PDR in the hydropower, mining and agricultural sectors is a major generator of and contributor to exports (OECD, 2017[4]). Lao PDR’s electricity, metal and mineral exports started expanding rapidly in 2005‑06 as a result of the increase in FDI inflows in land-based investments in the mining and hydropower sectors in the context of the TLIC policy (Figure 5.7, Panel B). Since then, Lao PDR’s electricity exports have increased at an annual growth rate of 24%, from USD 62.8 million in 2005 to USD 1.96 billion in 2021, while the country’s metal and mineral exports have increased at an annual rate of 22.9%, from USD 106.4 million in 2005 to USD 2.9 billion in 2021.

Figure 5.7. Lao PDR’s exports are concentrated in natural resources and raw materials

Lao PDR’s main export destination countries are China (32.6% of exports in 2021), Thailand (32.2%) and Viet Nam (17.5%) (Figure 5.8). Exports to China consist largely of raw materials, including minerals and gold, paper and pulp, and agricultural products, especially bananas and rubber. These reflect Chinese FDI in the mining sector, the agricultural sector, and the wood and paper industry. More than one-half of Lao PDR’s exports to Thailand are electricity (59.9% in 2021), reflecting the large amount of Thai investment in hydropower. Other important export goods to Thailand are precious metals (mainly gold), agricultural products (mainly cassava) and intermediate manufacturing goods, which serve as inputs for manufacturing enterprises in Thailand such as parts for consumer electronics and optical equipment. Exports to Viet Nam consist largely of agricultural products such as rubber, beef, sugar, cassava and coffee, as well as electricity, minerals and wood products, and a small amount of intermediate manufacturing goods (Datawheel, n.d.[56]).

Figure 5.8. More than 80% of Lao PDR’s exports are directed to China, Thailand and Viet Nam

Lao PDR’s exports by partner economy, 2021

Key opportunities to improve the investment climate

There are numerous opportunities to improve Lao PDR’s investment climate and to reduce the cost of doing business in the country. This includes increasing the availability of skilled labour and the supply of capable workers more generally. This also encompasses facilitating access to the land that the government has allocated to investors through land concessions and leases. Investment in transportation infrastructure and, in turn, a more vibrant logistics sector could reduce transportation costs. An effective judiciary and robust and fully enforced regulatory framework for investment could reduce opportunities for corruption. Better co‑ordination and policy alignment among those institutions involved in the investment process could reduce red tape and long and cumbersome business procedures.3 It would also be important to streamline and simplify the process of starting an investment project, which remains complex and involves three different channels for obtaining an investment licence. Moreover, Lao PDR requires a more stable, more predictable, clearer and more consistently applied set of policies, rules and regulations. In addition to these opportunities, it would be beneficial to stabilise Lao PDR’s macroeconomic environment. This includes reducing inflation and currency depreciation.

Improving Lao PDR’s business environment could encourage more investors to engage in activities that would limit the negative social and environmental impacts of their investment projects. This includes giving more importance to the EIA process; respecting environmental management plans; adhering to voluntary international social and environmental safeguards, such as Free, Prior and Informed Consent (FPIC); and conducting public consultations with local communities and providing them with appropriate compensation for resettlement and expropriation. All these environmental and social safeguards generate additional business costs, which add to the already high overall cost of doing business in Lao PDR. Improving Lao PDR’s business environment and tackling overarching challenges to doing business there could allow more investors to pay these costs and ensure the sustainability of their investment projects.

This section focuses on the opportunities for policy reforms to tackle four overarching challenges for investors in Lao PDR. First, encouraging in-house training in private enterprises and improving information on those skills that are in demand in the labour market could enhance the availability of skilled labour in Lao PDR. Second, improving institutional capacity and inter-institutional co‑ordination in land administration and management and fully implementing Lao PDR’s 2019 Land Law could facilitate access to land for private investors. Third, PPPs could support the development of transportation infrastructure in Lao PDR. And fourth, a more predictable regulatory framework for investment and an independent court system combined with policy and regulatory tools that promote the integrity of public officials could reduce opportunities for corruption. The following subsections will discuss challenges for investors linked to governance and the institutional set-up, the legal and regulatory framework, and the implementation of investment policies in Lao PDR.

Investment policy options to improve the availability of skilled workers in Lao PDR

Improving the availability of skilled labour and human capital for private investors could significantly improve the investment climate in Lao PDR (IFC, 2021[24]; ADB, 2011[58]; ECCIL, 2022[22]; ECCIL, 2018[59]). Private investors in Lao PDR commonly experience shortages in technical and vocational workers such as mechanics, maintenance workers for heavy machinery, technicians and technical workers for dam maintenance, construction workers, and nurses, as well as a lack of engineers. Soft skills such as reliability, timeliness, work morale and a general willingness to work can also be difficult for investors to find. For example, some investors report that workers abandon the workplace to help their families during harvesting season and expect to return after the season is over (OECD/UNIDO, 2019[30]), while others report that workers in factories sleep during working hours. In order to fill vacancies, employers frequently have to offer higher salaries (which in many cases exceed the relatively low levels of labour productivity) or import labour from neighbouring countries, even for relatively low-skilled positions (ECCIL, 2018[59]). Both offering higher salaries and importing labour are expensive and generate additional business costs.

Lao PDR has achieved high primary school enrolment rates. Gross primary school enrolment stands at 98.5% in Lao PDR, which is in line with the average of ASEAN member states of 101.9% and the OECD average of 101.3%, as well as with most comparators in the Southeast Asian region and elsewhere around the world (Figure 5.9, Panel A). Primary school enrolment in Lao PDR has increased impressively over the last 50 years, from only 58% in 1971, but has experienced a decline between 2012 and 2021(Figure 5.9, Panel B).

Figure 5.9. Lao PDR performs worse than most comparators in secondary, tertiary and TVET enrolment, and enrolment has declined since 2012

However, challenges in the quality of education and low enrolment rates above the primary level contribute to skilled labour shortages in Lao PDR. Student performance on standardised tests in Lao PDR is among the lowest in the Southeast Asian region (Figure 5.10, Panel A), indicating a low quality of education in Lao PDR. As a result, job prospects for graduates are limited. These limited job prospects do not incentivise student enrolment in school. This is reflected in low enrolment rates above the primary level: enrolment in secondary and tertiary education and in technical and vocational education and training (TVET) in Lao PDR is lower than in comparator countries in the Southeast Asian region and elsewhere around the world (Figure 5.9, Panel A). The challenges in educational quality are linked to a lack of funding in the education sector. Lao PDR is the country that spends the least on education (as a share of GDP) among the included comparators (Figure 5.10, Panel B) (World Bank, 2023[61]).

Figure 5.10. Limited funding for education in Lao PDR contributes to the country’s low levels of student performance on standardised exams compared with other countries in the region and around the world

The COVID‑19 pandemic and the current economic crisis in Lao PDR have further exacerbated these challenges. As a result of these crises, government spending on education has decreased significantly from its already low levels, from 3.2% of GDP in 2013 1.4% of GDP in 2022 (Figure 5.10, Panel B). At the same time, official development assistance (ODA) has also been decreasing since 2018, and private financing for education is likely constrained by the economic crisis and the COVID‑19 pandemic. In addition, the pandemic and the economic crisis have accelerated the gradual increase in unemployment in Lao PDR, which had already been observed prior to the pandemic.4 This has further reduced the already low private returns on investment in education and households’ incentives to enroll their children in school. As a consequence of the decrease in funding and the decline in the returns to education, student enrolment has further declined: primary enrolment declined from 106% (gross) in 2017 to 98.5% in 2021, secondary enrolment declined from 67.5% (gross) in 2017 to 59.8% (gross) in 2021, and tertiary enrolment declined from 15.7% in 2017 to 12.9% in 2021 (Figure 5.9, Panel B) (World Bank, 2024[3]).

High migration to neighbouring countries is another cause of the skills shortages that private investors experience in Lao PDR. Most skilled and unskilled workers in Lao PDR who are willing to work in a factory environment emigrate to neighbouring countries, where minimum wages largely exceed those in Lao PDR and there is a high demand for low-skilled labour in sectors such as infrastructure, services, manufacturing and agriculture. At present, the minimum wage in Thailand (THB 354 (Thai baht) per day, which is equivalent to approximately THB 9 000 or USD 240 per month) is three times the minimum wage in Lao PDR (LAK 1.6 million (Lao kip), or approximately USD 80 per month) (ECCIL, 2022[22]). In 2018, prior to the COVID‑19 pandemic, 277 845 Laotians migrated to neighbouring countries. While this figure decreased during the COVID‑19 pandemic when many workers returned to Lao PDR (IOM, 2020[63]), it is reported that migration has picked up again in 2022‑23 and that the number of migrants exceeds those registered in 2018. This recent increase in migration can be attributed to the difficult macroeconomic conditions in Lao PDR, including high and accelerating inflation and declining real wages. As a result of the increase in emigration, hiring workers has become increasingly challenging for enterprises in Lao PDR independent of workers’ skill level. This is reported in the tourism sector as well as in SEZs, where demand for labour exceeds supply (SEZO, 2023[31]).

There is scope to improve the quality of TVET in Lao PDR and to better align those skills produced by TVET institutions with demand in the labour market. TVET institutions in Lao PDR are reported to experience shortages in qualified and trained teachers, which has been aggravated by the economic crisis. Teachers frequently lack teaching skills and industry experience. TVET curricula are often outdated, not aligned with private sector needs, and do not involve sufficient practical training. Many TVET institutions lack modern facilities and the equipment, machines and tools required for the practical training of students. Private sector involvement in TVET through financing, curriculum development and delivery of practical training could be improved. TVET enrolment has been declining in high-demand skill areas where skill shortages are greatest, such as the construction sector (ADB, 2011[58]; ECCIL, 2018[59]; UNESCO/UNEVOC, 2020[64]).

Encouraging in-house training and improving information on skills that are in demand in the labour market

In order to improve the availability of workers with the right skills in Lao PDR, it will be important to encourage more in-house training by private investors. Only 24.4% of enterprises in Lao PDR offer formal training to their workers, compared with 31.2% of enterprises in East Asia and the Pacific on average (World Bank, 2018[29]). This can be partly explained by the perception among employers in Lao PDR that in-house training might be seen as a benefit-in-kind and therefore taxed. It would be important to ensure that this perception changes and employers offering in-house training to their workers are not subject to any additional tax payments or charges (ECCIL, 2018[59]). In addition, in order to encourage more in-house training by private enterprises, tax incentives for training could be introduced, such as making training costs fully or partially tax-deductible (see the section on investment tax incentives). In the context of a limited budget for education and the structural challenges in Lao PDR’s education system, private enterprises are critical for equipping workers with the right skills and bridging the skills gap in the short term.

It would also be critical to improve co‑operation and co‑ordination between the private sector, the government and educational institutions (ECCIL, 2022[22]). For this purpose, stakeholders in Lao PDR (such as business associations, employers and businesses, trade unions and non-governmental organisations, educational institutions, and government institutions) could be regularly engaged through a dedicated council or committee. This process should be as inclusive as possible and should involve a sufficiently wide range of stakeholders, including those from emerging sectors of the economy such as new technology enterprises and training providers, which may be less well-represented in traditional institutions and entities (OECD, 2019[13]). Better co‑ordination between the private sector, the government and educational institutions could help better align the educational opportunities with those skills that are in demand in the labour market.

Lao PDR already has a public-private co‑ordination body for TVET: the National TVET and Occupational Skills Consultation and Development Council. It is chaired by the Minister of Education and Sports. The Minister of Labour and Social Welfare and the President of the Lao National Chamber of Commerce and Industry (LNCCI) are its vice chairs. Other members include the Assistant Minister of Education and Sports, the Assistant Minister of Labour and Social Welfare, the Directors-General of relevant departments, the chairs of relevant TVET associations, specialised experts, and representatives of TVET facilities. The National TVET and Occupational Skills Consultation and Development Council’s role is designing legislation, regulation, policies, strategies and projects for the development and management of TVET and occupational skills training, and advising the government of Lao PDR on TVET policies and skills development issues (National President of Lao PDR, 2014[65]).

However, the National TVET and Occupational Skills Consultation and Development Council has not succeeded in building strong linkages between the public and private sectors in TVET (ADB, 2011[58]; ECCIL, 2018[59]). In practice, the Council does not convene regularly and suffers from a lack of leadership. Its members are at a very high level and the Council’s budget is limited. Twelve trade working groups were established under the Council with the objective of overseeing skills, occupational and professional standards and curricula development, and of co‑ordinating with the private sector. However, no information is available on whether these working groups still exist and convene on a regular basis. As a result of these challenges, the National TVET and Occupational Skills Consultation and Development Council has not been very successful in practice in better aligning Lao PDR’s TVET system with private sector needs or in facilitating exchanges between businesses, the government and educational institutions (UNESCO/UNEVOC, 2020[64]; ADB, 2023[41]; ILO, 2016[66]).

In order to better align its education system (and in particular TVET) with the private sector’s needs, Lao PDR requires information on those skills that are either readily available or lacking in the labour market. Individuals and enterprises alike require this information in order to make decisions about which skills to develop. The government of Lao PDR needs this information to design relevant education and training policies and programmes. An effective SAA system could identify the types of occupations, qualifications and fields of study that are currently in demand in the labour market, or that may become so in the future. Such systems should use both quantitative and qualitative methods, as well as both short- to medium-term and longer-term evaluations in order to allow for robust analysis (OECD, 2019[13]). Both Norway and Portugal have developed comprehensive SAA systems that rely on effective policy co‑ordination between different public and private institutions (Box 5.1). A labour market information system, such as a robust labour market observatory with sufficient technical capabilities, could also contribute to identifying skills needs in Lao PDR.

Box 5.1. Norway and Portugal have developed regular SAA exercises and dedicated bodies for policy co‑ordination in skills development

SAA exercises and policy co‑ordination in Norway

The Norwegian Committee on Skill Needs was formed in response to the need for an evidence-based understanding of the country’s future skills needs. The Committee plays a key role in co‑ordinating between different ministries and stakeholder bodies in the area of skills needs assessments and responses. The Committee is funded by the Ministry of Education and Research, and its secretariat is within the Norwegian Directorate for Higher Education and Skills in the Ministry of Education and Research. The Committee includes 18 members who represent social partners, ministries and researchers. It is tasked with compiling evidence on Norway’s future skills needs, contributing to open discussions and the better utilisation of resources between stakeholders, and producing an annual report with analyses and assessments of Norway’s future skills needs.

The Norwegian Committee on Skill Needs uses a comprehensive set of methods and tools in order to determine Norway’s current and future skills needs. These include employer surveys, surveys of workers or graduates, quantitative forecasting models, sector studies, qualitative methods and labour market information systems. The Committee also makes use of projections. Norway forecasts skills needs 10‑80 years into the future in the healthcare sector, and 35 years into the future in the education sector. Furthermore, it carries out 20‑year general occupational forecasts, and estimates employment trends in specific industries 1 year in advance as a direct input for the planning of training and employment policy. Unusually, these skills needs are forecast at both the national and regional levels.

SAA exercises and policy co‑ordination in Portugal

Portugal’s skills needs assessment system, the Sistema de Antecipação de necessidades de Qualificação (SANQ), was created in 2014. The SANQ is co‑ordinated by Portugal’s National Agency for Qualification and Vocational Education and Training. It has a consultative board that encompasses the public employment service and representatives of workers and employers, and that board receives technical assistance from the International Labour Organization (ILO). Its diagnostic exercises assess skills needs through both a retrospective analysis of labour market trends and a forecast of the future demand for certain qualifications. The system is used to plan the delivery of TVET for young people, and Portugal is considering expanding its use in order to plan the supply of adult learning programmes. Moreover, Portugal uses inputs of skills needs assessments in order to provide young people with career guidance through its network of Qualifica centres.

Source: (OECD, 2023[67]), Multi-dimensional Review of El Salvador: Strategic Priorities for Robust, Inclusive and Sustainable Development, OECD Development Pathways, based on (OECD, 2019[13]), OECD Skills Strategy 2019: Skills to Shape a Better Future.

In addition, it would also be important to improve the quality of education in Lao PDR (including TVET) and to increase funding for education, but that topic is beyond the scope of this chapter. This chapter focuses on the issue from an investment policy perspective. Investment policies include the provision of in-house training and strategies to improve the information available on those skills that are most in demand in the labour market. Developing detailed policy advice on how to deal with structural challenges in Lao PDR’s education system is therefore beyond the scope of this chapter.

Policy options to facilitate access to land for private investors in Lao PDR

In 2019, Lao PDR adopted a new Land Law, which has significantly improved the legislative and regulatory framework for land management. The 2019 Land Law is much more detailed, informative and clear than the 2003 Land Law. The 2019 Land Law provides clearer and more detailed regulations on concessions and leases of land by foreigners and specifies that concession rights can be traded. The new law also provides clearer and more detailed information on the zoning and classification of land; land surveys and protection; changes to land categories; land administration; the acquisition, use and loss of land use rights; and the management of state land. In addition, it makes MONRE’s central and co‑ordinating role in land management clearer and defines each ministry’s rights and obligations in the management of the use of land clearly. The law also introduces national and provincial land allocation master plans, land use strategies and strategic land use plans. It also includes a prohibition on encroachment and clarifies land use rights in the context of condominiums. Going forward, in order to facilitate its implementation, the 2019 Land Law would benefit from additional details and clarity (MRLG/LIWG, 2021[15]; National Assembly, 2019[14]).

The 2019 Land Law allows for land titles and land use rights to be used as collateral. Under the previous 2003 Land Law, land use rights could not be used as collateral. The 2019 Land Law abolishes this restriction, which had been a major impediment to accessing finance for private entrepreneurs in the past. Land titles and land use rights as a result of a lease or concession can now be used as collateral in order to access credit from foreign and domestic banks (OECD, 2017[4]).

Under the 2019 Land Law, Lao PDR continues to apply restrictions on foreign ownership of land. Domestic entities may obtain “land use rights”, whereas foreign investors, including minority foreign-owned established entities, may only lease land or receive land in concession from the state. The lease or concession of land by the state to a foreign-owned enterprise registered in Lao PDR is limited to 50 years under the 2016 Law on Investment Promotion and the 2019 Land Law. The lease of land by a Laotian citizen to a registered foreign-invested company is limited to 30 years. Foreign investors are entitled to own the structures and developments made on leased land, and they are also entitled to own apartments that are part of condominiums (OECD, forthcoming[23]) (National Assembly of Lao PDR, 2016[68]) (National Assembly, 2019[14]).

Going forward, it would be important to improve foreign investors’ access to the entire area of state land that they have been granted in land concessions and leases by the government. This can be a particular challenge for investors, especially in sectors that require a large amount of land, such as agriculture and forestry. The land that investors are allocated by the government is often already in use for other purposes, such as customary use for residential and farming purposes by local communities, especially in rural areas. As a result, investors frequently have to revert to contract farming or to leasing land from local communities, especially those investors pursuing socially sustainable investment models. This is costly and means that investors have to pay both the government (for concessions or leases) and local communities in order to access land (Sylvester, 2018[8]). Alternatively, rather than being allocated available land by the government based on national and local land allocation plans, investors have to identify suitable land themselves before receiving a concession or lease from the government. In practice, this requires first consulting with local communities on which land areas are available and only thereafter receiving government approval (Village Focus International/National University of Laos, 2019[9]). Finally, even after investors have identified available land or entered into leases with local communities, illegal land grabs can be a challenge as a consequence of incomplete enforcement of land legislation.

It would also be critical to avoid expropriations and the loss of collective land used for agriculture and forestry by local communities as a result of land concessions to investors. Not all investors respect local communities’ claims on land in concession areas that they have been allocated by the government. This can lead to expropriations of both land holdings by individuals in rural communities and collectively used land, as well as resettlements. In many cases, compensation offered for expropriation is insufficient or non-existent, and there would be scope to improve dispute resolution mechanisms and make them more easily accessible for rural communities. There are also concerns about corruption in the land administration, and the process for granting land concessions lacks transparency (CDE/University of Bern/MRLG, 2019[5]; GAN Integrity, 2020[21]).

Enhancing institutional capacity in land administration and improving land registration

Improving land registration in Lao PDR could facilitate access to land for private investors. Currently, only approximately 40% of land plots in Lao PDR are formally registered. A large share of land rights are still transferred in informal markets, especially in rural areas. Although existing land registries are generally well-maintained and most land transfers are registered in urban areas, this is not always the case in rural areas, where land registries are not always aligned with the actual status of property rights. The incomplete record of land registries and the absence of a cadastre in many rural areas result in frequent land disputes and can lead to opportunities for corrupt practices. In the absence of a clear and updated land cadastre and registration system, it is often difficult to identify whether a land parcel is available or not (OECD, 2017[4]). In addition, local land use and management plans do not always exist, and those plans that do exist do not always reflect the reality on the ground in the context of customary land use and contract farming (Village Focus International/National University of Laos, 2019[9]).

A World Bank project could significantly improve land registration and titling in Lao PDR outside state-owned forest land. The World Bank’s Enhancing Systematic Land Registration Project is currently working on the formal registration of the remaining land plots outside of state-owned forest land in Lao PDR and aims to finalise the registration of these land plots within the next five years (World Bank, 2023[16]). However, approximately 30% of land plots that are located in state-owned forest land will remain without formal registration. In the past, formal tenure documents could not be issued for state-owned forest land. The 2019 Land Law did introduce Land Use Certificates for state-owned forest land, but such certificates have not been issued yet (see below).

There is scope to improve institutional capacity for land use management and administration, especially at the provincial and district levels. The Department of Land Allocation and Development in MONRE is responsible for formulating and implementing land policy in Lao PDR, while MONRE’s district offices are responsible for land registration and maintaining land registries at the local level (National Assembly, 2019[14]). However, the institutional capacity of local offices of the Department of Land Allocation and Development is often relatively low. Although land registration is digitalised through the Lao LandReg desktop application at the central level, district and provincial offices are still using paper records, which need to be manually transferred to the central database. The World Bank is currently working on a new version of Lao LandReg, which will involve rolling this version out to district offices, automating updates to the central database and moving the new database to a government data centre (World Bank, 2023[16]). In order to build on the World Bank’s work going forward, it should be a priority to endow MONRE with the skills and the human, financial and technical resources required to fully implement the 2019 Land Law, especially at the provincial and district levels.

Simplifying the institutional set-up for land use planning and management and improving inter-institutional co‑ordination

The responsibility for land use management and planning in Lao PDR is divided among a large number of institutions. The 2019 Land Law defines eight categories of land, each of which is managed by a different sectoral ministry (Table 5.1). In addition, MONRE is assigned as the leader and co‑ordinator of land management among these different institutions (National Assembly, 2019[14]). This complex land classification system does not always reflect the reality on the ground, but rather Lao PDR’s institutional set-up in terms of sectoral ministries.

Type of land	Responsible entity
Agricultural land	Ministry of Agriculture and Forestry (MAF)
Forestry land	Ministry of Agriculture and Forestry (MAF)
Industrial land	Ministry of Industry and Commerce (MOIC); Ministry of Energy and Mines in mining areas and Ministry of Planning and Investment (MPI) in SEZs
Cultural land	Ministry of Information, Culture and Tourism
Land for national defense and security purposes	Ministry of Defense; Ministry of Public Security
Communication land	Ministry of Public Works and Transport
Construction land	Ministry of Public Works and Transport
Water area land	The ministry responsible for the category of land within which the water area land falls

Source: (National Assembly, 2019[14]), Land Law, https://faolex.fao.org/docs/pdf/lao77471.pdf.

Simplifying the institutional set-up for land management and enhancing inter-institutional co‑ordination would be critical for streamlining land management in Lao PDR. The 2019 Land Law makes MONRE’s central role in land management much clearer than the previous Land Law and requires all line ministries to co‑ordinate with MONRE (Articles 31, 167 and 168). However, in practice, co‑ordination between MONRE and sectoral ministries on land management remains rather limited, and a formal co‑ordinating mechanism has not been established by the law (MRLG/LIWG, 2021[15]). The only existing co‑ordinating mechanism between MONRE and sectoral ministries is a land subsector working group under MONRE, but it remains donor-driven and relatively weak. This lack of co‑ordination has resulted in multiple and overlapping land use and management plans. In addition to this lack of inter-institutional co‑ordination, land use planning and management is also hampered by weaknesses in local authorities’ capacity to fulfil their land use planning and management obligations. Inter-institutional co‑ordination could be improved by setting up a formal inter-ministerial co‑ordination mechanism for land management that would meet regularly. There is also the need for inter-ministerial data- and information-sharing mechanisms (Derbidge, 2021[69]).

The World Bank’s Enhancing Systematic Land Registration Project could facilitate information sharing on land registration and planning among different entities. In the context of this project, the World Bank is planning to design a new version of the Lao LandReg desktop application, which allows different government agencies and other institutions to access land use data, including the Ministry of Finance for property tax collection and commercial banks for mortgages. It would be important to also include the IPD in this process in order to improve the allocation of land concessions to investors. In the long term, Lao PDR should consider revising the legal framework to include fewer institutions in land management processes.

Accelerating the implementation of Lao PDR’s 2019 Land Law and further improving the legislative framework for land management

Formal tenure documents in rural areas governed by customary land rights and in state forest areas could facilitate access to land for investors and better protect local communities. Most farmers in rural areas in Lao PDR do not have formal land tenure documents and their land parcels are not registered. They rely on customary tenure systems based on traditions and agreements with communities (Derbidge, 2021[17]; Derbidge, 2021[18]). In addition, the 2003 Land Law did not provide any legal basis for formalising land tenure in Lao PDR’s three categories of state-owned forest land (protection, conservation and production forests), which are reported to account for 63% of Lao PDR’s land area and to host more than 3 000 communities (Derbidge, 2021[19]) (which comprise approximately 25% of Lao PDR’s population). The lack of formal tenure documents in rural areas and on state-owned forest land can result in conflicts with investors that have been allocated concessions in these areas. Such conflicts can either lead to expropriations (sometimes without appropriate compensation) or the inability of investors to exploit the land areas that they have been allocated as concessions. Those investors that are respectful of local communities frequently have to pay local communities to use the land which the investors have already been allocated as a concession, thereby facing additional business costs.

The 2019 Land Law offers a solution for formalising customary land rights, but scope remains for further improving the legislative framework. The law protects customary land use rights and allows for the issuing of land titles to individuals who have occupied and used land for more than 20 years before the adoption of the 2019 Land Law (Article 130) (National Assembly, 2019[14]). However, the 2019 Land Law does not mention the protection of the customary rights of collective or communal land areas. Rural communities in Lao PDR are highly dependent on collective land for agriculture, livestock raising and forestry. Moreover, the law does not protect the customary rights established more recently than 20 years prior to the adoption of the 2019 Land Law. Finally, the law does not provide information on the implementation of the protection of individual customary rights and the issuing of land titles (Derbidge, 2021[17]; Derbidge, 2021[18]). Providing clarity on these points, introducing formal land use rights for collective land through land titles or land use certificates, and advancing the issuance of land titles and registration of customary land would be important in order to provide investors with more accurate information on which land parcels are available for concessions and to reduce conflicts between rural communities and investors (Derbidge, 2021[17]).

Similarly, the 2019 Land Law also offers a solution for issuing formal tenure documents for state-owned forest land, but some challenges remain. According to the 2019 Land Law, the members of communities living on state-owned forest land are eligible to obtain land use certificates (Article 44) (National Assembly, 2019[14]). This is a major improvement over the 2003 Land Law, which did not provide any legal basis for formalising land tenure in state-owned forest land. However, the implementation of the issuance of such certificates remains challenging, and the law fails to specify the rights that are granted by these certificates, or whether the land use rights granted by these certificates are permanent or temporary. There have been discussions between MONRE and MAF to issue land titles rather than land use certificates for land holders of permanent residential and agricultural land in villages located inside state forest areas that already existed before the official declaration of the respective forest land (Derbidge, 2021[19]). However, issuing land titles for state-owned forest land would require reforming or amending the 2019 Land Law once again, and given resistance by the National Assembly of Lao PDR and the Ministry of Justice, this is likely to be feasible only in the medium term.

The new 2019 Land Law improves citizens’ rights with respect to expropriation and other negative externalities of investment projects, but would benefit from additional details. The law introduces an obligation to pay compensation prior to expropriation, and limits expropriation to state investment purposes. The new law also introduces the obligation for concessionaires and lessees to compensate those affected by their operations (Article 122) (National Assembly, 2019[14]). However, the law would benefit from more clarity on whether the compensation clause in cases of expropriation also applies to customary land rights. Moreover, it would be beneficial to make the participation and consultation of landowners and local communities in decisions about expropriation mandatory (Derbidge, 2021[69]). Going forward, it would be important to more clearly define the rights emanating from customary tenure (Derbidge, 2021[17]).

In order to ensure that investors respect local communities, mandatory public consultations and tenure investigations could be introduced for all investment projects involving large amounts of land. Such detailed tenure investigations or analyses and public consultations could be conducted prior to the implementation of investment projects. This could allow for the better protection of local communities. Such an obligation could apply to all investment projects involving land at the village level (Derbidge, 2021[18]). At present, investors must conduct public consultations only as part of EIAs and only if investment projects involve compensation or resettlement (Sylvester, 2018[8]; National Assembly of Lao PDR, 2016[70]).

Better land dispute resolution mechanisms and awareness raising constitute other opportunities. The 2019 Land Law lacks clear provisions on grievance redress and dispute resolution mechanisms, beginning with a simple administrative review process, semi-formal reviews by local officers, appeals at the provincial level and, finally, appeals to the courts. Furthermore, there is a general lack of awareness of land rights and regulations and of access to legal support in rural areas in Lao PDR (Derbidge, 2021[69]; MRLG/LIWG, 2021[15]). In this context, it would be important to establish competent, efficient, transparent and independent institutions to resolve land disputes (OECD, 2015[12]). This requires, first and foremost, strengthening the independence of Lao PDR’s judiciary and the effectiveness of its court system. This could also include the creation of specialised land courts (OECD, 2017[4]). Negotiation, mediation and arbitration mechanisms could also facilitate the settling of disputes (OECD, 2015[12]). In addition, it would be important to raise the public’s awareness of all aspects and processes regarding expropriation and compensation and the rights of landholders; access to information; and, in cases of disputes, people’s access to grievance mechanisms and legal support, especially in rural areas (Derbidge, 2021[69]).

There are already some initiatives to improve land dispute resolution mechanisms. Notably, a European Union (EU)-funded project by the Gesellschaft für Internationale Zusammenarbeit (GIZ), Citizen Engagement for Good Governance, Accountability and the Rule of Law (CEGGA), is currently engaging with the National Assembly of Lao PDR and the country’s Provincial People’s Assemblies in order to improve the assemblies’ petition systems. These petition systems are one of the key judicial grievance redress mechanisms in Lao PDR, which also receive many complaints related to land rights (GSWG, 2022[71]; WFD, 2022[72]; GIZ, 2017[73]).

Policy options to improve Lao PDR’s transportation infrastructure and to reduce transportation costs

Recent investments in road and railway infrastructure have improved Lao PDR’s transportation connectivity. A highway connecting Vientiane to Vang Vieng was opened in 2020, and a high-speed railway from Vientiane to the town of Boten on the Chinese border and connecting Vientiane with the city of Kunming in Yunnan province, China, was opened in 2022. Thanaleng Dry Port, which is located close to the Thai border (within one kilometre (km) of the Thai–Lao Friendship Bridge over the Mekong River), was opened in December 2021. These investments have facilitated access to key tourism sites (such as Luang Prabang and Vang Vieng), and the Vientiane-Boten railway is facilitating tourism from China. They have also improved export routes from Lao PDR to China and potentially reduced transportation costs. Estimates indicate that the Boten–Vientiane railway could reduce transportation costs within Lao PDR by 20‑40%, between Vientiane and Kunming by 40‑50%, and between the Laem Chabang Port in Thailand and Kunming by 30‑50% (World Bank, 2020[74]). However, investment in adjacent road and logistics infrastructure (last-mile connectivity) in Lao PDR would be required in order for the country to fully benefit from the improved connectivity facilitated by the Boten–Vientiane railway (World Bank, 2021[42]).

The Boten–Vientiane railway could increase trade flows between Lao PDR and China, as well as trade transiting through Lao PDR. This includes trade flows from ASEAN Member States, most importantly Malaysia, Singapore and Thailand. In 2016, only 37% of bilateral merchandise trade between Lao PDR and China was transported by land and a mere 5% of merchandise trade between China and Malaysia, Singapore and Thailand was transported on land via Lao PDR (the remainder was transported by sea). In the future, part of the trade through maritime transport could be transported via the Boten–Vientiane railway, thereby reducing transportation costs and transit times. In addition, the Boten–Vientiane railway could also increase trade flows between Lao PDR and China, and could facilitate an increased volume of Lao PDR exports in particular (World Bank, 2020[74]).

Going forward, pursuing further improvements in connectivity and reducing transportation costs could significantly improve Lao PDR’s investment climate. High transportation costs remain a challenge for many private investors in Lao PDR, particularly in the agricultural sector, for export-based manufacturers and in the tourism sector. Deficiencies in Lao PDR’s transportation infrastructure render access to many tourism sites difficult and have resulted in a concentration of tourism in Lao PDR’s capital city, Vientiane, despite Lao PDR’s many historical cultural sites and natural assets in other regions. Vientiane accounts for more than 40% of international tourist arrivals and approximately 50% of investments in hospitality (OECD, 2017[4]). A 2018 study by the World Bank estimates that the average road transportation costs in Lao PDR per tonne-km are USD 0.028‑0.070, with an average cost of USD 0.059 per tonne-km (World Bank, 2018[75]). A 2017 study by the Japan External Trade Organization’s Institute of Developing Economies estimates that the transportation costs are USD 0.11 per tonne-km for full container loads and USD 0.37 per tonne-km for partial container loads. This compares with road transportation costs in Viet Nam of USD 0.04 per tonne-km for long-haul operators and of USD 0.11 per tonne-km for short-haul operators (Lam, Sriram and Khera, 2019[76]), and with average road transportation costs in Thailand of USD 0.05 per tonne-km (World Bank, 2021[42]). The Institute of Developing Economies’ study finds that transportation costs along important trade corridors are between 1.4 and 2.2 times higher in Lao PDR than in Thailand (IDE-JETRO, 2017[77]).

Upgrading Lao PDR’s transportation infrastructure could reduce transportation costs. The high transportation costs in Lao PDR partly reflect its geography as a landlocked country. As a result, the bulk of freight and passenger transportation in Lao PDR is road transportation. However, at the same time, there are significant deficiencies in Lao PDR’s transportation infrastructure: only 22.4% of roads in Lao PDR are paved, compared with an average of 56.6% in ASEAN Member States (Figure 5.11, Panel B). Even though this is an improvement compared with 2011 (when only 13.9% of roads in Lao PDR were paved), progress has been slow. Within ASEAN member states, only Cambodia and Myanmar perform worse than Lao PDR in this respect. Similarly, Lao PDR performs worse than most comparators on the World Bank’s Logistics Performance Index (LPI) (Figure 5.11, Panel A). The LPI measures how easy or difficult it is to transport merchandise within a country. It comprises different logistics-related factors beyond transportation, including warehousing, brokerage, express delivery, terminal operations, related data and information management (IFC, 2021[24]). In the past, most of the public investment in Lao PDR’s road infrastructure was directed towards extending the road network, while funding for maintaining and upgrading the existing road network has been limited (OECD, 2017[4]). Going forward, improving road, rail and river transportation infrastructure would be important in order to facilitate both access to tourism sites and exports of agriculture, forestry and manufacturing goods.

Figure 5.11. Lao PDR performs worse than comparators in the South East Asia region and elsewhere in the world in terms of road transportation infrastructure and logistics

Expanding the offer and quality of logistics services in Lao PDR and opening the transportation sector up to competition could reduce transportation costs. Lao PDR’s logistics market is dominated by local providers offering traditional logistics services. The availability of logistics services – such as door-to-door multimodal transport, container leasing, inventory management or cold chain services – is limited. Moreover, the market is segmented between different regions and provinces. This is the result of limited competition in the domestic logistics market due to restrictive, complex and unevenly applied regulations, such as entry and ownership restrictions and minimum capital requirements. Complex regulations and restrictions prevent international players from entering the market. In order to reduce transportation costs for investors, reduce transit times and improve the quality and variety of logistics services offered, it would be important to reform regulations so as to simplify market entry and remove restrictions and operational barriers. Given the limited expertise among domestic operators, the skills and know-how of foreign enterprises are critical to improving logistics services in Lao PDR (World Bank, 2020[74]).

Simplifying and reducing the cost of import and export procedures could also reduce transportation costs in Lao PDR. This includes discretionary fees for import licences, fees paid at unofficial checkpoints throughout the country (e.g. at traffic light intersections, weighing stations and the borders between provinces) and additional high fees at border checkpoints using an X-ray scanner system (ECCIL, 2022[22]). Furthermore, non-tariff measures, manual paper-based border clearance processes and widespread physical inspections by customs officials at the border contribute to long border clearance times (World Bank, 2021[42]). Despite the introduction of a new electronic system, Smart Tax, for collecting customs fees and charges, customs fees and charges are still collected manually in many cases (ECCIL, 2022[22]). Lao PDR would also benefit from an appropriate international transit management system other than its current system, which requires time-consuming controls for a large share of shipments (60% in 2016) (World Bank, 2020[74]). These challenges are reflected in Lao PDR’s weak performance on the OECD’s Trade Facilitation Indicators (0.910/2 in Lao PDR compared with the ASEAN average of 1.378/2 in 2022) (Figure 5.12) (OECD, 2023[79]).

Administrative reforms, digitalisation, the simplification of procedures and improved inter-agency co‑ordination could facilitate cross-border trade in Lao PDR. In order to reduce delays at border crossings, it would be important to allow imports and exports to be cleared at inland ports. In addition, planning and co‑ordination among border control agencies within Lao PDR (such as the Lao Customs Department, the Department of Immigration of Lao PDR, the Quarantine Division, and the Food and Drug Department) could be improved. There is also a need for an integrated risk management system, the simplification of procedures for non-tariff measures and border clearance, and full utilisation of the electronic customs system (World Bank, 2020[74]). These reforms are particularly important in light of the recent opening of the Boten–Vientiane railway, which facilitates trade between Lao PDR and China. In order to fully take advantage of the railway for the transport of goods, it would also be important to enhance co‑operation among customs agencies in China, Lao PDR and Thailand, including the exchange of pre-arrival information (World Bank, 2021[42]).

Figure 5.12. Lao PDR performs worse than comparators in South East Asia and elsewhere in the world on the OECD’s Trade Facilitation Indicators

Selected OECD Trade Facilitation Indicators, 2022

Enhancing Lao PDR’s capacity for the planning, delivery and management of fiscal risks linked to public-private partnerships (PPPs)

In the long term, PPPs could be one option to support transportation infrastructure development in Lao PDR. PPPs could allow for mobilising the sources of capital required for investment in transportation infrastructure, which would otherwise be difficult to finance. PPPs can further increase the efficiency of infrastructure improvement projects and enhance value for money in the use of public finances for infrastructure development through an efficient risk allocation process, increased competition, the use of private sector managerial and technological skills, and an incentive to minimise costs (OECD, 2015[12]; OECD, 2017[4]). PPPs also allow private investors to share risks with the government (ECCIL, 2022[22]). Other options to finance investment in Lao PDR’s transportation infrastructure include land value capture tools5 (which capture revenues from the indirect and proximity benefits generated by transportation infrastructure), green bonds for sustainable transportation infrastructure such as railways in the long term6 (OECD, n.d.[80]), and ODA. Discussing these options in detail is beyond the scope of this chapter.

However, developing transportation infrastructure in Lao PDR through PPPs would require improved PPP planning and delivery and better management of PPP-related fiscal risks. In addition, in order to allow for effective risk sharing with private investors, it would be important to reduce the country’s high amount of public debt (see Chapter 3 on sustainable development financing). The OECD Recommendation of the Council on the Governance of Infrastructure provides countries with practical guidance for developing efficient, transparent and responsive decision-making processes in infrastructure investment, including PPPs (Box 5.2).

Box 5.2. The OECD Recommendation of the Council on the Governance of Infrastructure 2020

Infrastructure governance is crucial to ensuring that public investments contribute to sustainable growth while strengthening infrastructure resilience, particularly for challenges such as climate change and inclusive growth.

The Recommendation of the Council on the Governance of Infrastructure, adopted by the OECD Council in July 2020, provides countries with practical guidance for developing efficient, transparent and responsive decision-making processes in infrastructure investment. It supports a whole-of-government approach and covers the entire life cycle of infrastructure projects, putting special emphasis on regional, social, gender and environmental considerations. It includes the following principles:

developing a long-term strategic vision for infrastructure
guarding fiscal sustainability, affordability and value for money
ensuring efficient procurement of infrastructure projects
ensuring transparent, systematic and effective stakeholder participation
co‑ordinating infrastructure policy across levels of government
promoting a coherent, predictable and efficient regulatory framework
implementing a whole-of-government approach to managing threats to integrity
promoting evidence-informed decision making
making sure the asset performs throughout its life
strengthening critical infrastructure resilience.

Source: (Ruiz Rivadeneira, Dekyi and Cruz, 2023[81]), “OECD infrastructure governance indicators: Conceptual framework, design, methodology and preliminary results”, OECD Working Papers on Public Governance, No. 59.

Lao PDR has the highest PPP capital stock in the world as a share of GDP (over 60%) (see Chapter 3 on sustainable development financing, Figure 3.8.) (World Bank, 2023[43]). There have been 36 PPPs in Lao PDR since the 1990s, with the bulk of projects (30 projects and 76% of the capital invested) occurring in the energy sector (largely hydropower dams and one wind farm), followed by the Boten–Vientiane railway (23% of capital invested). The remaining PPP projects consist of the Thanaleng Dry Port, the Vientiane International airport and projects in the telecommunications sector (World Bank, 2023[82]).

In the past, deficiencies in PPP preparation and delivery and in the management of the associated fiscal risks have generated significant fiscal liabilities for Lao PDR. PPPs can generate considerable fiscal risks for the government through contingent liabilities (World Bank, 2023[43]). As mentioned previously, contingent liabilities from PPPs in Lao PDR’s energy sector account for almost one-half of the country’s PPG debt stock. Many of these PPPs are hydropower dams owned by private investors. These PPPs were selected based on unsolicited proposals without appropriate screening and competition. As a result, in many cases, the investment rationale and value for money of these dams was limited. Some of these dams have not performed well due to a lack of water, while others lack buyers for the electricity they produce. The PPAs that EDL signed with the private owners of hydropower dams frequently have unfavourable terms for EDL, sometimes even resulting in a net loss. These PPAs require EDL to buy the electricity generated by these dams at high prices in foreign currencies while EDL is frequently able to sell electricity only at considerably lower prices, or in some cases cannot sell it at all, and electricity bills are paid in LAK. Moreover, the average tariff EDL pays independent electricity producers through PPAs is higher than the export tariff to Thailand. In addition, EDL needs to pay capacity charges for the electricity produced by independent electricity producers even if it cannot resell that electricity, further adding to its financial burden (RFA, 2022[83]; World Bank, 2021[42]).

Lao PDR recently improved its legislative framework for PPPs by adopting a PPP Decree. The PPP Decree came into force in January 2021 and provides the institutional framework governing PPPs as well as the regulatory framework for preparing, tendering, awarding and implementing PPPs. It fills the legal void on PPPs in Lao PDR, introduces competitive tendering at the selection stage of PPPs, and sends a positive signal to potential investors by providing a clear regulatory framework for PPPs. The decree assigns the MPI as the government institution responsible for PPPs and for co‑ordinating with sectoral authorities (Government of Lao PDR, 2020[84]; Farrands, Xu and Newby, 2023[85]). Previously, Lao PDR did not have a legislative and regulatory framework for PPPs, and PPP projects were directly negotiated, awarded and implemented as concessions based on the Law on Investment Promotion (Farrands, Xu and Newby, 2023[85]). The new PPP Decree could attract more private investment in PPPs and limit the scope for awarding PPPs with limited value for money and highly unfavourable conditions, as has previously been the case in Lao PDR’s energy sector. Establishing a credible institutional and regulatory environment is critical to reducing policy uncertainty and inducing private investment in infrastructure (OECD, 2017[4]).

In order to effectively implement this new legislation, it would be important for Lao PDR to improve its capacity to prepare, procure and manage PPP projects. Lao PDR scores low in PPP preparation and procurement on the World Bank’s Benchmarking Infrastructure Development index, which is based on a survey of the characteristics of the PPP procurement process (Figure 5.13). Given how recently the PPP Decree was adopted, Lao PDR lacks human resources that are familiar with PPPs, and also lacks knowledge on and experience with the PPP process (World Bank, 2021[86]). A significant number of PPPs implemented in Lao PDR in the past were largely based on the concession investment model (Farrands, Xu and Newby, 2023[85]). Going forward, it would be important to enhance Lao PDR’s human resources and skills in PPP preparation and delivery, in particular in the central PPP unit (World Bank, 2021[86]). It would also be beneficial to improve co‑ordination among different government institutions involved in the PPP preparation, procurement and management process in Lao PDR (World Bank, 2023[43]).

Figure 5.13. Lao PDR is performing worse than most comparators in the preparation, procurement and contract management of PPPs

Benchmarking PPPs

Furthermore, Lao PDR would benefit from a medium- to long-term infrastructure plan, including a pipeline of infrastructure and PPP projects with clear prioritisation based on a cost-benefit analysis. This would maximise the benefits of PPPs by ensuring that those projects with the greatest benefits are implemented first. It could also make infrastructure development more attractive for private investors. A credible pipeline of projects facilitates competition in the market and allows potential investors to build their strategies on a portfolio of opportunities rather than on a project-by-project basis. Moreover, an infrastructure plan and project pipeline could help promote greater policy co‑ordination and alignment across levels of government and assure investors of the government’s long-term commitment to infrastructure development. In addition, such a plan and project pipeline would create a basis for prioritising, assessing and awarding PPPs, thereby limiting opportunities for corruption and untransparent project prioritisation and awards. A medium- to long-term infrastructure plan should be aligned with development objectives (OECD, 2017[4]).

The project pipeline should be based on a cost-benefit analysis and should determine which investment method is likely to yield the most value for money. The cost-benefit analysis should take into account the entire project lifetime, alternative modes of delivery and efficiency in project delivery. It requires co‑ordination among different government agencies and levels of government (OECD, 2017[4]). The procurement path of individual projects should be determined through a careful assessment of which investment method is likely to yield the most value for money (OECD, 2017[4]; OECD, 2012[20]). This is especially important given that the PPP Decree defines eight different investment models for PPPs while also allowing for other investment models, but does not provide any guidance in determining the most appropriate investment model for a project (Farrands, Xu and Newby, 2023[85]).

In light of the fiscal challenges linked to past PPPs’ contingent liabilities, it would be critical to improve the management of PPP-related fiscal costs and risks throughout the project life cycle. PPPs should be assessed for their affordability during the preparation process in order to determine the exact amount of expenditures and contingent liabilities for the government and whether they can be accommodated in the budget throughout the project life cycle. This includes expenditures such as costs related to resettlements, which are often high, or the construction of access roads or other infrastructure. Furthermore, all costs and contingent liabilities linked to PPPs should be assessed thoroughly and disclosed in the government budget. This includes PPPs or PPP-like arrangements managed by public institutions other than the central government, such as state-owned enterprises (e.g. EDL) (OECD, 2012[20]).

Lao PDR should carefully evaluate the costs and benefits of unsolicited PPP projects. Lao PDR’s PPP Decree allows for unsolicited PPP projects but introduces several safeguards: unsolicited proposals must undergo a tendering process, and they must use new technology and innovation and yield high returns. In addition, unsolicited projects cannot benefit from tax incentives, financial support or risk sharing with the government (Government of Lao PDR, 2020[84]). Despite these safeguards, PPP projects can still be awarded on a negotiated basis, since the Law on Investment Promotion and the Law on Electricity (which applies to PPPs in the electricity sector), which are both of a higher rank than the PPP Decree and therefore take precedence over it, do not require competitive bidding (World Bank, 2021[86]). The existence of unsolicited PPP projects can give rise to the prioritisation of projects with comparatively fewer economic and social benefits. This remains a particular concern in the context of significant levels of corruption and rent seeking in Lao PDR (see the section on policy options to reduce opportunities for corruption).

It would be important to improve infrastructure procurement choices in Lao PDR. Lao PDR’s PPP Decree lists eight different delivery models for PPPs, and also allows for other delivery models as determined by the government. However, it provides no guidance on how to determine the best delivery model for any given PPP project (Government of Lao PDR, 2020[84]; World Bank, 2021[86]). The Support Tool for Effective Procurement Strategies (STEPS), developed by the Queensland University of Technology and the OECD, could allow Lao PDR to improve its infrastructure delivery model and other procurement choices. STEPS is an evidence-based tool grounded in economic theory that is available to inform the procurement strategy of major projects (see Box 5.3).

Finally, there is scope to better clarify the content of the PPP Decree; for example, through the development of guidelines. Detailed guidelines and standards are required in particular for PPP preparation, appraisal and selection. Such guidelines would be particularly important to ensuring the quality and comparability of project proposal and feasibility studies. There is also a need for detailed guidance on assessing unsolicited proposals (OECD, 2017[4]).

Box 5.3. The Support Tool for Effective Procurement Strategies (STEPS)

Infrastructure projects are often affected by cost overruns, delays, conflict and litigation, among other issues, which are caused by poor stakeholder management, failures in risk assessment and other factors. But even if a project owner could do everything perfectly right up to the point of procurement, the project could still fail if the owner pursues an inadequate procurement strategy. Indeed, procurement choices can have major consequences, such as:

A low number of bidders: Breaking down the project into contracts (the “packaging problem”) and the associated risk allocation co‑determine the competitive response. Having two bidders instead of six may result in a 20% difference in the project cost.
The wrong choice of delivery model (e.g. design-bid-build, design and build, collaborative models, etc.): This can, in itself, lead to exorbitantly more expensive infrastructure. The current state of the procurement process promotes a one-size-fits-all logic, ignoring the fact that activities in major projects are not homogenous in terms of risk or uncertainty.

In order to improve procurement choices, the Queensland University of Technology and the OECD developed STEPS. STEPS is an evidence-based tool grounded in economic theory that is available to help inform the procurement strategy of major projects. STEPS seeks to prevent three key pre- and post-contract procurement failures:

competition failures (i.e. too few bidders)
hold-up (events in which the supplier’s bargaining power leads to high-cost premia)
inadequate risk allocation (one-size-fits-all commercial arrangements).

Applying STEPS to the procurement of infrastructure can reduce costs, delays, conflict and litigation, and avoid a loss of innovation potential. The outcome of the application of STEPS is a comprehensive procurement strategy that helps define (among others) the capabilities to retain in-house, the contract scoping of projects and the commercial terms of those contracts.

Source: (OECD, 2022[88]), Support tool for effective procurement strategies: Informing the procurement strategy of large infrastructure and other bespoke projects, https://web-archive.oecd.org/2023-05-24/629218-STEPS-brochure-april-23.pdf.

Policy options to reduce opportunities for corruption

Lao PDR has taken measures to reduce opportunities for corruption and promote integrity among public officials. Lao PDR has had an Anti-Corruption Law since 2005 which criminalises abuse of power, embezzlement, passive bribery7 and fraud in the public sector. Fraud in the public sector refers in particular to public procurement and the allocation of concessions. The Anti-Corruption Law provides the legal basis for the State Inspection Agency, which was established in 2001 (GAN Integrity, 2020[21]; National Assembly of Lao PDR, 2005[89]). In addition, in 2019, Lao PDR adopted the Decree on the Ethics of Civil Servants in order to improve public services. This decree prohibits civil servants from abusing their power for personal gain or for the benefit of their relatives and people associated with them, and introduces disciplinary measures. It also prohibits public officials from accepting gifts. In addition, the decree asks civil servants to treat all citizens – irrespective of their gender, age, ethnicity or other characteristics – with fairness, kindness and politeness, and to deliver public services on time (Kang, 2019[90]; Prime Minister of Lao PDR, 2019[91]).

Going forward, additional efforts to reduce informal payments and gift-giving would be important to improve Lao PDR’s investment climate. Informal payments and gift-giving remain common in Lao PDR’s business culture. Such payments are frequently required in order to speed up administrative procedures (ECCIL, 2022[22]). It is also reported to be common practice for investors to buy political support (GAN Integrity, 2020[21]). These practices can affect the efficiency of enterprises operating in Lao PDR and generate additional business costs. In 2022, Lao PDR ranked 126th out of 180 countries on Amnesty International’s Corruption Perceptions Index, scoring 30 out of 1008 (Amnesty International, 2022[92]). Among enterprises in Lao PDR, 40.3% report having been requested to pay at least one bribe compared with an average of 25.8% of enterprises in East Asia and the Pacific. Enterprises in Lao PDR were requested to give gifts or make informal payments in 35.8% of public transactions, compared with only 21.1% of transactions in East Asia and the Pacific on average. Low wages for government officials, as well as nepotism and political patronage in the recruitment of administrative personal, favour and sustain corruption (GAN Integrity, 2020[21]).

There is scope to reduce informal payments and gift-giving, particularly in the tax, customs and land administrations, in public procurement, in the processes of acquiring permits and licences, and in public utilities. Land disputes, which are frequent in Lao PDR as a result of the country’s incomplete cadastre (see the section on access to land), are in many cases solved through informal payments to officials. Long and cumbersome border procedures (see the section on transportation infrastructure) open up avenues for bribe payments to speed up importing and exporting processes. In public procurement, it is reported that government contracts are frequently awarded to enterprises with close ties to government officials. In line with these findings, private enterprises report that the expectation to give a gift is particularly high if they are trying to get an operating licence, an import licence or a water connection, and in meetings with tax officials (Figure 5.14, Panel A) (World Bank, 2018[29]).

Reducing bribery and informal payments could encourage more foreign investment. Foreign enterprises are more affected by bribery than domestic enterprises (Figure 5.14, Panel B). For foreign enterprises, the bribery incidence (having experienced at least one bribe payment request) is 70.7% compared with only 33.7% for domestic enterprises. Moreover, foreign enterprises report that an informal payment or gift is expected in 62.9% of public transactions, while domestic enterprises reported that this is the case in only 23.7% of public transactions (World Bank, 2018[29]). As a result, foreign enterprises face an even higher cost of doing business in Lao PDR than domestic enterprises. This can be a deterrent for FDI.

Figure 5.14. Gift-giving is most widespread in Lao PDR for getting an operating or import licence, and foreign enterprises are more affected by gift-giving requests than domestic enterprises

A more predictable regulatory framework for investment and an independent court system should be combined with policy tools to promote integrity among public officials

In order to tackle opportunities for corruption, first and foremost, Lao PDR requires a fair, clear, predictable and fully enforced regulatory framework for investment and an effective, fair and independent court system. Such a regulatory framework for investment and its consistent application are fundamental if markets are to function properly. Uncertainty about the enforceability of lawful rights and obligations can encourage corruption: investors may be more likely to seek to protect or advance their own interests through bribery, and government actors may seek undue benefits. When contracts cannot be enforced or disputes cannot be resolved in a timely and cost-effective manner, enterprises may depend more heavily on personal and family connections. The court system has a fundamental role in enforcing contracts and settling disputes, both among private actors and between investors and the state. Therefore, the efficiency, effectiveness, integrity and independence of the courts are essential for creating a sound enabling environment for investment. The court system can be made more attractive to investors by strengthening the independence of judges, creating efficient and predictable court procedures and effectively executing judgments (OECD, 2015[12]).

It would be important to fully implement existing anti-corruption legislation, including the Anti-Corruption Law and the Decree on the Ethics of Civil Servants. Despite the adoption of the Anti-Corruption Law in 2005, the prosecution of public officials under this law remains uncommon. Those who are prosecuted under the Anti-Corruption Law are largely lower-ranking officials. Except for two provincial governors who lost their jobs as a result of corruption allegations in 2017‑18, higher-ranking and senior officials are rarely targeted. The Lao PDR government intensified its anti-corruption rhetoric in 2016, but this has yet to translate into a significantly improved implementation of anti-corruption legislation. It would also be important to introduce a legal obligation for appointed or elected officials to publicly disclose their assets or income (GAN Integrity, 2020[21]; Bertelsmann Stiftung, 2022[94]).

Reducing discretion in the granting of concessions for investment as well as investment incentives for concessions could reduce potential opportunities for rent seeking by government officials (OECD, 2017[4]). Both land concessions and investment incentives for concessions are negotiated on a case-by-case basis between the government and the investor, thereby leaving space for discretionary decision making and rent-seeking behaviour (see the section on investment tax incentives). Investors report that the amount of incentives granted depends on personal relationships and vested interests. Furthermore, it is also reported that, in some cases, tax incentives are granted on an ad hoc basis without any legal grounding (IFC, 2021[24]).

Integrity tools and mechanisms could limit political capture and build safeguards to protect the public interest in high-risk areas in Lao PDR, such as conflicts of interest, lobbying and political financing. Such tools include the effective management of conflicts of interest and adequate lobbying and political finance regulations. According to the OECD guideline Managing Conflict of Interest in the Public Sector (2005), effective management of conflicts of interest should identify risks to the integrity of public organisations and public officials; prohibit specific unacceptable forms of private interest; make public organisations and individual officials aware of the circumstances in which conflicts can arise; and ensure that effective procedures are deployed for identifying, disclosing, managing and promoting the appropriate resolution of conflict-of-interest situations. The OECD Principles for Transparency and Integrity in Lobbying (2010) provide guidance to decision-makers on promoting good governance in lobbying (OECD, 2005[95]) (OECD, 2010[96]) (OECD, 2015[12]).

An effective public procurement system that disburses public funds sustainably and efficiently is another critical element for preventing opportunities for corruption. This is particularly important in the context of the large number of PPPs in Lao PDR (see the section on PPPs). Such a system should include the sound and effective planning, design and delivery of public procurement. An effective public procurement system serves the public’s needs; provides customer satisfaction; delivers value for money in a fair, open, competitive and transparent way; ensures a level playing field for all enterprises; and is regularly measured and evaluated for improvement. The OECD Recommendation of the Council on Public Procurement provides clear and effective guidance on how to implement an effective public procurement system that disburses public funds sustainably and efficiently (OECD, 2015[12]). The Methodology for Assessing Procurement Systems (MAPS), developed by the OECD, in turn provides countries with a comprehensive approach to assessing their procurement systems (see Box 5.4). Lao PDR’s PPP Decree (adopted in 2019) is a first step in this direction (see the section on PPPs).

Improved human resource management, training and counselling could also enhance integrity among public officials in Lao PDR. Effective human resource policies can provide public officials with suitable conditions and incentives for integrity. This includes basing recruitment and promotion on merit, providing adequate remuneration, and taking ethical considerations into account in recruitment and performance appraisal. Training and counselling can also raise awareness among employees and help develop their skills for meeting integrity standards in daily practice (OECD, 2015[12]).

Reporting suspicion of misconduct by public officials could be either required by law or facilitated by organisational rules in Lao PDR’s public sector. So-called whistleblowing – the act of raising concerns about misconduct within an organization – is important in order to ensure transparency and accountability and should be encouraged in the public sector. An ombudsman or inspector general, official complaint or whistleblower procedures, and help desks or dedicated telephone lines could all facilitate the reporting of suspicious or corrupt behaviour by public officials and citizens in Lao PDR (OECD, 2015[12]). At present, Lao PDR does not have an ombudsman (GAN Integrity, 2020[21]; Bertelsmann Stiftung, 2022[94]). In addition to making such a whistleblowing mechanism available, it would be essential to effectively protect whistleblowers against potential retaliation in order to encourage the reporting of wrongdoing (OECD, 2015[12]).

Box 5.4. Using public procurement as a strategic policy tool: Sustainable Public Procurement

Used strategically, public procurement can help make societies more sustainable, economies more productive, public sectors more efficient and institutions more trustworthy.

Public procurement is increasingly recognised as a potential strategic instrument and a lever for achieving government policy goals (e.g. stimulating innovation, delivering on the green transition, creating a circular economy, helping small and medium-sized enterprises (SMEs) to access furtherpublic procurement opportunities, and promoting social values).

Sustainable Public Procurement (SPP) is a strategic approach that promotes the integration of the three pillars of sustainable development: economic development, social development and environmental protection. SPP has emerged as a powerful strategic instrument that governments are increasingly using in order to help achieve national policy objectives. Most prominently, the UN’s 2030 Agenda for Sustainable Development calls on governments to promote public procurement practices that are sustainable in accordance with their own national policies and priorities. SPP builds on the principles and good practices of public procurement and considers additional factors in order to appropriately achieve social, environmental and economic benefits for procuring entities, their supply chains and society as a whole. SPP introduces new practices in order to contribute to social development and environmental protection, achieve value for money, and stimulate innovation.

The 2015 OECD Recommendation of the Council on Public Procurement promotes the strategic and holistic use of public procurement. It emphasises the importance of achieving the right balance between various policy objectives so that public procurement systems support the achievement of broader outcomes. It calls for developing an appropriate strategy for the integration of strategic policy objectives into public procurement systems and employing an appropriate impact assessment methodology in order to measure the effectiveness of procurement in achieving strategic policy objectives.

MAPS: SPP supplementary module

MAPS is an international standard and the recognised universal tool with which to evaluate public procurement systems anywhere in the world. MAPS assessments provide countries with useful information in order to monitor the performance of their public procurement systems and design reforms to improve them.

The MAPS core methodology provides a comprehensive approach for assessing procurement systems. It uses an objective set of indicators in order to identify gaps in the use of best practices and proposes recommendations based on a country context analysis.

Supplementary modules complement this core assessment methodology. These modules focus on specific policy areas of public procurement and can be used by countries to deepen their understanding of these areas. The MAPS SPP supplementary module allows countries to assess how well their public procurement systems support and promote sustainability principles. It considers economic, social and environmental dimensions, including elements such as green and gender-responsive procurement.

Source: (OECD, 2018[97]), Methodology for Assessing Procurement Systems (MAPS), https://www.mapsinitiative.org.

Transparency in government operations and review mechanisms for assessing the anti-corruption performance of public institutions are other important opportunities. Ensuring the independence and impartiality of such reviews is critical. For example, they can be undertaken by independent external investigators such as an ombudsman or inspector general. The scrutiny of such reviews can help hold public officials accountable for their actions. Similarly, transparency in government operations can encourage citizen participation and ensure accountability. Freedom of information legislation, digitalisation and electronic procedures can all advance transparency and public scrutiny of public officials’ behaviour, as can an active media and well-organised interest groups (OECD, 2015[12]).

Finally, improved public-private dialogue is required in Lao PDR in order to combat corruption (see the section on public-private dialogue). Public-private co‑operation is essential in combating corruption and other misconduct. Combating corruption requires standards, measures and setting the right incentives in both the public and private sectors. This includes, for example, measures to encourage enterprises to invest in compliance systems (OECD, 2015[12]).

Governance and institutional framework for investment

Lao PDR would benefit from better co‑ordination among those institutions that are involved in investment policy making and implementation. The main institutions responsible for the design and implementation of investment policies in Lao PDR are the MPI (particularly the IPD) and the MOIC. Until 2022, the Committee for Investment Promotion and Management (CIPM) had an important role in the design of investment policies and the approval of investment projects, but it is currently being abolished. The Special Economic Zone Promotion and Management Office (SEZO) serves as the MPI’s secretariat for all SEZ-related activities. Lao PDR’s MONRE is involved in the investment process in Lao PDR through its role in EIAs and land administration and management. Sectoral ministries are involved in the review and approval of investment projects. In addition, many institutions – such as the IPD, the CIPM and MONRE – are subdivided into entities at both the central and provincial levels. However, few formal challenges to co‑ordination and the alignment of policy objectives exist among these institutions, or between them and the private sector.

In order to increase efficiency and predictability for investors, Lao PDR requires a whole-of-government approach to investment policy. Countries that successfully attract investment have mastered a whole-of-government approach to investment promotion and facilitation. This includes effective co‑ordination among various authorities involved in the design and implementation of investment policies, including at local government level. Poor co‑ordination can increase the risk of duplication, inefficient spending, lower-quality services, and contradictory objectives and targets, all of which can undermine investor confidence. A whole-of-government approach can facilitate the development of public policies and services for investors that are integrated and correspond to their needs and that are not defined by siloed administrative structures. A whole-of-government approach to policy design and delivery can allow for the integration of cross-disciplinary perspectives into policy, improve co‑ordination and facilitate resource sharing (OECD, 2015[12]).

Institutions responsible for investment policy making and implementation in Lao PDR

The main institutions responsible for the design and implementation of investment policies in Lao PDR are the MPI (particularly the IPD) and the MOIC. The MPI is officially responsible for all matters that relate to investment, and its IPD is Lao PDR’s dedicated investment promotion agency (IPA) (OECD, 2017[4]). In addition, SEZO, which is attached to the MPI, is responsible for supervising all SEZs in Lao PDR. The MOIC is responsible for enterprise registration in uncontrolled business activities (business activities that do not affect Lao PDR’s “national security, public order, national fine tradition and environment, society and nature” (National Assembly of Lao PDR, 2016[98]); see the section on simplifying the process for starting a business) (OECD, forthcoming[23]) (OECD, 2017[4]) (National Assembly of Lao PDR, 2016[98]).

Established in 2004, the IPD is 1 of the 12 departments of the MPI. It is fully government funded (rather than being an autonomous body) and has little room to manoeuvre in comparison with most IPAs worldwide (OECD, 2017[4]; OECD, 2018[99]). The IPD is made up of eight divisions: international investment co‑operation; PPPs; project appraisal; one-stop service; contract appraisal and management; project supervision, planning and evaluation; administration; and investment promotion (IPD, 2023[100]). In addition to the central office in Vientiane, the IPD has an office in each province (OECD, forthcoming[23]) (OECD, 2017[4]) (National Assembly of Lao PDR, 2016[98]).

The IPD’s mandate encompasses investment promotion and facilitation, as well as regulatory and administrative functions. This includes promoting Lao PDR as an investment destination, offering investment incentives, screening investment projects, collecting investment data and monitoring investment operations. The IPD is also in charge of investment policy making, including preparing investment laws and negotiating international investment agreements (OECD, 2017[4]).

Going forward, it would be important to set out a clearer structural delineation between the IPD’s regulatory and promotional functions. Evidence shows that IPAs focusing exclusively on investment promotion perform better in attracting investment than those that carry out both regulatory/administrative and promotional functions (OECD, 2017[4]; Griffin, Ortega Sotes and Whyte, 2011[101]). An institution engaged in both investment promotion and regulation can potentially face conflicts of interest between maximising investment and ensuring rigorous regulation (IFC, 2021[24]).

The IPD is strongly focused on investment in concessions and controlled business activities. Granting business licences to projects in these sectors falls within its remit, whereas uncontrolled business activities are the responsibility of the MOIC. Granting the IPD responsibility for investment approvals only in concessions and controlled business activities means that the IPA lacks a good incentive to actively promote FDI in all sectors of the economy (OECD, 2017[4]). Going forward, it would be important to better align the IPD’s incentives with its role of promoting FDI in all sectors of Lao PDR’s economy.

The MPI is responsible for formulating relevant policies for and regulating, supervising and managing SEZs in Lao PDR. SEZO has the status of a department of the MPI and serves as the MPI’s secretariat for all SEZ-related activities (Government of Lao PDR, 2018[102]). Previously, the National Committee for Special Economic Zones (NCSEZ) and its secretariat, which was attached to the Prime Minister’s Office, were responsible for SEZ-related matters. However, as a result of the 2016 reform of the Law on Investment Promotion and the 2018 reform of the Decree on Special Economic Zones, responsibility for all SEZ-related matters was transferred to the MPI, and specifically to SEZO (National Assembly of Lao PDR, 2016[98]; Government of Lao PDR, 2018[102]). Bringing together both investment promotion and SEZ policies under the umbrella of one single institution allows for better co‑ordination and a more integrated approach to the implementation and design of investment and SEZ policies.

Until 2022, the CIPM had an important role in the design of investment policies and the approval of investment projects. The CIPM is a government-established, inter-ministerial organisation with the role of providing the strategic orientation for and co‑ordinating investment promotion within Lao PDR, as well as approving concession investments, investments in controlled business activities and investments in business activities in SEZs for which SEZ authorities cannot give approval. The CIPM has 12 members and is chaired by the Deputy Prime Minister.9 In addition to the CIPM at the central government level, there are CIPM offices in each province. The one-stop service division of the MPI (which is in practice a division of the IPD) serves as the CIPM’s secretariat (OECD, forthcoming[23]) (OECD, 2017[4]) (National Assembly of Lao PDR, 2016[98]) (Government of Lao PDR, 2018[103]) (National Assembly of Lao PDR, 2016[98]). However, as of 2022, those investments that previously required approval from the CIPM are now approved by the Prime Minister’s Office based on the IPD’s recommendation. An ongoing reform of the 2016 Law on Investment Promotion will ultimately result in the formal abolition of the CIPM (National Assembly, 2023[104]).

The benefits of abolishing the CIPM should be carefully weighed against the drawbacks. Abolishing the CIPM could reduce red tape by decreasing the number of steps involved in the approval process for investment projects. This could, in turn, reduce opportunities for patronage and corruption. However, abolishing the CIPM might also diminish scrutiny and increase opportunities for discretionary decision making. Excessive administrative discretion in the hands of public officials can, in turn, increase the risk of corruption and undermine good governance objectives, which are fundamental to an attractive and enabling environment for investment (OECD, 2015[12]).

It would be beneficial to transfer the CIPM’s role in providing the strategic orientation for investment policies to an advisory body that includes private sector representatives. IPAs in other ASEAN Member States (such as Malaysia and Thailand) have governing boards that offer advice, supervise the work of these countries’ national IPAs and provide the strategic orientation for their national investment policies. These boards include private sector representatives. Thailand’s Office of the Board of Investment (BOI) has 13 members, including 3 private sector representatives: the Chairman of the Thai Chamber of Commerce and the heads of the Thai Bankers’ Association and the Federation of Thai Industries (OECD, 2021[105]; IFC, 2021[24]). At least 6 of the 14 members of the board of the Malaysian Investment Development Authority are from the private sector (mainly from large private enterprises and large chambers of commerce in Malaysia), and 1 of its members is from academia (IFC, 2021[24]; MIDA, 2023[106]). Given that Lao PDR’s IPA is a department of the MPI, setting up a governing board for the IPA might prove difficult. However, Lao PDR could establish an advisory board for the IPD that includes private sector representatives to advise the organisation and provide it with a strategic orientation. Such an advisory board with private sector representation could benefit from greater responsibility for providing a strategic orientation for investment policies than the CIPM and would ensure that business perspectives and interests are taken into account.

The role of other public entities in the investment process

Lao PDR’s MONRE is involved in the investment process in Lao PDR through its role in EIAs and land administration and management. MONRE is the government institution responsible for policy making and regulation in the areas of natural resources and the environment. MONRE’s Department of Land Allocation and Development is responsible for land management and registration, including land use planning, issuing land titles and certificates, and mapping and managing land registration. MONRE’s Department of Environmental and Social Impact Assessments is in charge of reviewing and approving EIAs and for monitoring the implementation of environmental management plans (Prime Minister of Lao PDR, 2011[107]).

Line ministries are involved in the review and approval of investment projects. Investment projects in controlled business activities and concession investments require approval from line ministries (“sector authorities”) before they can be granted a business licence (National Assembly of Lao PDR, 2016[98]). These ministries include the MICT, the MAF, the Ministry of Public Works and Transport, the Ministry of Education and Sports, the Ministry of Energy and Mines, and the Ministry of Health. Moreover, a large number of sectoral ministries are members of the CIPM (which is chaired by the MPI), including the Ministry of Finance (MOF), MONRE, the Ministry of Energy and Mines, the MAF, the Ministry of Labour and Social Welfare, the Ministry of Public Works and Transport, the MICT, and the Ministry of Public Security (National Assembly of Lao PDR, 2016[98]).

The National Assembly of Lao PDR has to approve investments with specific characteristics, primarily large concession investments. Investments that require the National Assembly of Lao PDR’s approval include the following: PPP projects with a state equity participation of more than LAK 20 billion (approximately USD 1 million); the construction of a nuclear power plant; casino and gambling businesses; the extension of the concession term of a SEZ; businesses involving the conversion of a national reserved forest and protected forest; businesses that have a serious impact on the environment, nature and society (e.g. projects involving the diversion of a natural water flow or that would result in the resettlement of hundreds of families); and projects benefitting from special incentives (see the section on investment tax incentives) (National Assembly of Lao PDR, 2016[98]).

Towards better inter-institutional co‑ordination and clearer multilevel governance processes

Co‑ordination between institutions responsible for investment policies and those responsible for environment, tourism, land and other sector-specific policies could be improved. The MPI (and, more specifically, the IPD) aims to maximise investment in Lao PDR without giving much consideration to the negative externalities of investment projects on the environment, local communities or tourism sites. There is a lack of co‑ordination and alignment of strategic objectives and priorities between the MPI and MONRE, the MICT and other sectoral ministries. On the other hand, there is also insufficient co‑ordination between the MPI and MONRE’s Department of Land Allocation and Development on concessions and the availability of land for concessions.

It would be beneficial to establish more formal channels for co‑ordination between the MPI, MONRE, the MICT and other institutions involved in investment, environmental and tourism policies. The only formal co‑ordination mechanism involving representatives of MPI as well as those of MONRE and the MICT is the CIPM, which is currently being abolished (Figure 5.15). Given these co‑ordination challenges, it would be critical to either maintain the CIPM and to extend its mandate to the co‑ordination of investment, environmental and tourism policies in Lao PDR and the alignment of these policies’ goals, or to establish an alternative effective co‑ordination mechanism for investment, environmental and tourism policies.

Figure 5.15. The only formal co‑ordination mechanism between the different institutions involved in the investment process is the CIPM, which is currently being abolished

Institutions involved in the investment process in Lao PDR

Multiple levels of government are involved in many investment processes in Lao PDR. This includes central-, provincial- and district-level government institutions. These institutions’ competencies, duties and functions are not always clearly defined and sometimes overlap. For example, a large number of government institutions at the central and provincial levels are involved in the process of starting an investment project. This includes IPD offices and investment promotion and management committees at both the central and provincial levels (IFC, 2021[24]). These overlapping and sometimes conflicting rules, procedures and responsibilities across levels of government can create confusion and a complex administrative burden for investors. They can also render inter-institutional co‑ordination more difficult (OECD, 2015[12]). Even though decentralisation can have important benefits, in the context of investment processes in Lao PDR, it would be important to carefully weigh these benefits against the cost of decentralisation and to consider reducing the number of levels of government involved in investment processes or to improve central level co‑ordination.

Improving public-private dialogue

The Lao PDR government’s main public-private dialogue platform is the Lao Business Forum (LBF). The LBF is supposed to gather government officials and representatives of the private sector to discuss options to improve the business environment in the country. It was established in 2005 with the support of the International Finance Corporation (IFC) based on the success of other public-private dialogue models, such as those in Cambodia and Viet Nam. The LBF’s Secretariat is hosted at the LNCCI, the largest and most representative chamber of commerce in Lao PDR. A focal point for the public sector was established by the MOIC’s Department of Planning and Co‑operation and has the role of overseeing the LBF and following up on the outcomes of public-private dialogue (LNCCI, n.d.[108]; OECD, 2017[4]).

Public-private dialogue is organised through annual events, a consultation committee and working groups. The LBF organises an annual event gathering public and private sector stakeholders. Following a disruption in the organisation of these annual events in 2010 as a result of the termination of the IFC’s support for the LBF, annual events resumed in 2016‑17 with the technical support of the Second Trade Development Facility (TDF‑2).10 The annual forum was last organised in March 2023. In addition to this annual forum, Public Private Consultation Meetings are organised twice per year, and 15 specialised working groups convene on a regular basis; these working groups are: information and communication technology, Manufacturing, Services, Agro-processing, Handicrafts, Transportation and Logistics, Construction, Mining, Tourism, Banking and Insurance, Hydropower, State-owned Enterprises, SMEs, Businesswomen, and a cross-cutting working group (LNCCI, n.d.[108]; OECD, 2017[4]).

There is scope for improving communication between the public and private sectors in Lao PDR. The LBF’s success in resolving the private sector’s grievances has been limited, since it does not operate at a sufficiently high level of the public administration.11 This is demonstrated by the choice of the public sector focal point for the LBF. In addition, access to the LBF’s annual event is highly selective, and private sector participants are mainly from large enterprises, chambers of commerce and other business associations. There are few other channels for communication between the private sector and government institutions in Lao PDR. Members of the private sector are not always sufficiently consulted during the development of legislation and changes in regulations that may affect them (Village Focus International/National University of Laos, 2019[9]; CDE/University of Bern/MRLG, 2019[5]) despite the legal requirement in Lao PDR to submit laws to public consultations during the drafting and adoption process (National Assembly of Lao PDR, 2012[109]). This can lead to the adoption of laws that do not work in the local context and are difficult to implement (Village Focus International/National University of Laos, 2019[9]), as well as to frequently changing regulations, which can affect the profitability of private investments.

Going forward, it would be important to establish an effective institutionalised mechanism for public-private dialogue in Lao PDR. Lao PDR could consider reforming the LBF and providing it with stronger political backing. Alternatively, Lao PDR could create a new institution to play this role, which would be governed jointly by the public and private sectors. In Viet Nam, the Vietnam Business Forum (VBF) has a very similar structure to the LBF but is a more effective channel of communication between the public and private sectors than the LBF. Since its establishment, the VBF has gradually evolved into a fully effective mechanism for interaction between the public and private sectors in Viet Nam. This process has been facilitated by the government of Viet Nam’s strong commitment to the VBF and to a constructive partnership with the business community, as exemplified by the former Prime Minister of Viet Nam’s participation in the VBF (Box 5.5).

Box 5.5. Public-private dialogue in Viet Nam: The Vietnam Business Forum

In Viet Nam, the Vietnam Business Forum (VBF) serves as both a regular and high-level, not-for-profit and non-political channel of communication between the business community and the government. The VBF allows the government to involve the private sector in policy design and to collect private enterprises’ feedback on issues affecting their operations. It was established in 1997 with the support of the World Bank Group. The objective was to create a platform for nurturing public-private dialogue in order to develop a favourable business environment that attracts both domestic and foreign private sector investment and stimulates sustainable economic development in Viet Nam. As of today, the VBF seeks to work with the government of Viet Nam in order to create pathways to long-term and sustainable business performance, to promote the interests of the national and international business communities in Viet Nam, and to enhance investment and trade in local and overseas markets. The VBF engages in research and legal analysis, identifies problems and provides practical solutions.

Public-private dialogue is organised primarily through high-profile biannual forums between the business community and Vietnamese leadership and through specialised sectoral Working Groups. Working Groups exist for a number of sectors, such as agri-business, automotive, banking, capital markets, customs, education and training, governance and integrity, infrastructure, investment and trade, mining, and tourism. The forums that take place every two years are co‑chaired by Viet Nam’s Minister of Planning and Investment, the World Bank’s Viet Nam Country Director, the IFC’s Country Manager for Viet Nam, and the co‑chairmen of the Consortium.

The VBF Secretariat is led by the business sector. In early 2012, the co‑ordination function of the VBF Secretariat was transferred from the World Bank Group to a consortium of international and local business associations and chambers of commerce. This allowed the private sector to play a bigger role in the VBF’s sustainable development. The consortium is led by 5 consortium members and supported by 11 associate members, which are foreign and local business associations and chambers of commerce in Viet Nam. Viet Nam’s IPA, the Foreign Investment Agency, is the VBF’s contact point in the government of Viet Nam and is in charge of redirecting issues raised during the meetings to the relevant parts of Viet Nam’s Ministry of Planning and Investment and other ministries.

Since 1997, the effectiveness of the VBF as a channel of communication between the public and private sectors in Viet Nam has gradually improved. Although the VBF was created more than two decades ago, members of the foreign investment community report that it is only since the WTO accession that the central government of Viet Nam consults them more systematically and is truly attentive to their concerns. WTO transparency commitments have helped through their emphasis on making draft laws and regulations readily available for public comment before they are enacted.

Public-private dialogue reached a new level beginning in 2014, when former Prime Minister Nguyen Tan Dung started participating personally in the VBF’s biannual forums. The Prime Minister’s participation in the biannual forums since then has been very well received by the private sector, as it sent a strong signal of the government’s commitment to a constructive partnership with the business community. Since 2014, the private sector reports that it fully recognises the VBF as a useful mechanism through which to interact with the government and suggest reforms that can provide concrete results towards delivering a better business environment in Viet Nam. Thanks to the VBF, foreign investors in Viet Nam consider their ability to influence policies as one of the country’s greatest competitive advantages, according to the survey of foreign-owned enterprises conducted to prepare the Provincial Competitiveness Index.

Source: (OECD, 2018[110]), OECD Investment Policy Reviews: Viet Nam 2018, OECD Investment Policy Reviews.

The role of investment in Lao PDR’s national development plan and strategic documents

Enhancing investment quality and effectiveness has become a top priority in Lao PDR’s 9th Five-Year National Socio-Economic Development Plan (2021-2025). The National Socio-Economic Development Plan (NSEDP) aims at maximising investment that aligns with and contributes to the plan’s overarching priorities. 12 In terms of FDI, the NSEDP aims to attract more investment in the nine priority sectors defined in the 2016 Law on Investment Promotion. Priorities for FDI are encouraging more technology transfers and innovation, import substitution, and labour-intensive FDI, thus creating a large number of jobs. Another goal of the NSEDP is promoting PPPs for large-scale transportation infrastructure, energy, education and health projects, specifically capital-, technology- and innovation-intensive projects. The 9th NSEDP puts a stronger emphasis and focus on enhancing the quality of investment and attracting more quality investment than the 8th NSEDP did (Government of Lao PDR, 2021[111]).

The 9th NSEDP includes several references to enhancing the contribution of private investments to environmental protection and sustainability. It mentions the importance of “improving legislation and management of the use of land and natural resources to ensure the sustainability of investment projects” (Government of Lao PDR, 2021[111]). The NSEDP also aims at increasing the participation of private investors in the conservation and restoration of forests and at expanding commercial tree plantations as a means to regenerate forests in order to achieve 70% forest cover, however, the definition remains to be clarified (FAO, 2021[112]). It also targets the expansion of ecotourism and the development of sustainable and organic agriculture, and particularly crop rotation in order to reduce soil degradation, as well as limiting the cultivation of monoculture crops or growing a single crop for an extended period of time (Government of Lao PDR, 2021[111]).

In recent years, there has been an increasing focus on green growth and environmental protection in Lao PDR within and beyond the 9th NSEDP (Sylvester, 2018[8]). The 9th NSEDP aims to enhance environmental protection and sustainability in the use and management of natural resources. It includes a 70% target for forest cover by 2025 (Government of Lao PDR, 2021[111]). Moreover, Lao PDR published the National Green Growth Strategy of the Lao PDR till 2030 in 2018, which defines green growth in the context of Lao PDR as “raising the efficiency, effectiveness and sustainability of the utilization of limited natural resources” (Government of Lao PDR, 2018[113]) and sets green growth objectives for different sectors and policy areas. In addition, Lao PDR’s MAF has published a Green and Sustainable Agriculture Framework for Lao PDR to 2030 (MAF, 2021[114]).

In order to attract more private investment, the 9th NSEDP (2021-2025) has a strong focus on improving procedures and regulations for doing business in Lao PDR. This includes the implementation of the 2018 Prime Minister’s Order on Improvement of Regulations and Co‑ordination Mechanism on Doing Business in Lao PDR and the 2020 Prime Minister’s Order on the Improvement of Services Related to the Issuance of Investment and Business Licenses. The 2018 Prime Minister’s Order aims to improve procedures and regulations for doing business and to make concrete progress in the ten indicators of the World Bank’s ease of doing business index. The 2020 Prime Minister’s Order aims to simplify the process for issuing investment and business licences and to make this process more transparent and uniform (Government of Lao PDR, 2021[111]; Prime Minister of Lao PDR, 2018[115]).

Going forward, it would be important to focus on improving the business environment in Lao PDR beyond reducing red tape and the World Bank’s former ease of doing business index. In the past, the World Bank’s ease of doing business index (which was discontinued in 2021) was widely used by businesses worldwide as a first reference point against which to evaluate a country’s business climate. However, it captures only part of what makes a good investment climate, and less regulation is not always better than more regulation (Thomsen, 2019[116]). Improving the enabling environment for investors – including the availability of skills, access to land, governance and transportation infrastructure – should be the Lao PDR government’s top priority.

Legal and regulatory framework for investment

Lao PDR’s Law on Investment Promotion provides the legal framework for foreign and domestic investment and provides investors with a number of safeguards and rights. The Law on Investment Promotion Law underwent a reform in 2016, which improved the law significantly (OECD, 2017[4]). In line with best practices, Lao PDR’s Law on investment Promotion covers both domestic and foreign investment under the same umbrella. This limits the risk of treating foreign and domestic investors unequally and sends a positive signal to investors. The law gives investors guarantees that they are allowed to invest, manage business operations and hire employees, and provides them with a right of residence and free repatriation of capital. It also contains a provision protecting against unlawful expropriation, as well as a dispute settlement provision (Part X) (OECD, 2017[4]; National Assembly of Lao PDR, 2016[98]).

The Law on Investment Promotion would benefit from the addition of further details and the provision of clarity on the guarantees for investors and the role of the IPD. The law does not contain an explicit principle of non-discrimination, but only provides an implicit reference to the equality of foreign and domestic investors. Moreover, the provision against expropriation remains relatively broad and vague, and would benefit from the addition of more details with regard to indirect expropriation. The Law on Investment Promotion does not provide the IPD with a clear mandate to conduct investment promotion activities and could more clearly describe the role and core functions of the IPD, such as image building, investment generation, investment facilitation, aftercare and policy advocacy. A more solid legal framework could strengthen the IPD and avoid inefficiencies (OECD, 2017[4]; National Assembly of Lao PDR, 2016[98]; IFC, 2021[24]).

In terms of investment restrictions, Lao PDR is generally aligned with its ASEAN peers but is more restrictive than OECD member countries under the OECD FDI Regulatory Restrictiveness Index. It maintains greater restrictions on foreign investment than most countries other than the Southeast Asian region (Figure 5.16). Lao PDR does not maintain foreign ownership ceilings or require local equity participation outside of controlled sectors; locally incorporated enterprises may be fully foreign-owned (Article 27 of the Law on Investment Promotion). The 2016 amendment to the Law on Investment Promotion had abolished the remaining minimum capital requirements for foreign investors which had existed under the previous Law on Investment Promotion from 2009 (OECD, forthcoming[23]) (National Assembly of Lao PDR, 2016[98]). However, minimum capital requirements exist for many sectors that fall under the category of controlled business activities, including tourism, transportation and logistics, and manufacturing (MOIC, 2015[117]) (OECD, forthcoming[23]). In addition, Lao PDR restricts some activities to Laotian natural or legal persons, including certain activities within the forestry, manufacturing, energy and tourism sectors (MOIC, 2015[117]) (OECD, forthcoming[23]).

Figure 5.16. Lao PDR has a similar level of FDI restrictions as ASEAN Member States on average, but is generally more restrictive than OECD countries

OECD FDI Regulatory Restrictiveness Index, 2016 and 2020

Towards a more transparent, clear and predictable regulatory framework for investment and an independent and effective judiciary

In order to attract more sustainable investment, Lao PDR requires a more stable, predictable, clear and consistently applied set of policies, rules and regulations. A fair, transparent, clear and predictable regulatory framework for investment is a critical determinant of investment decisions and their contribution to development. It is especially important for foreign investors who may have to function within regulatory systems, cultures and administrative frameworks that are very different from their own. Uncertainty about the enforceability of lawful rights and obligations can raise the cost of doing business, thereby weakening enterprises’ competitiveness and reducing the level of investment (OECD, 2015[12]; ECCIL, 2022[22]).

It would be important to better align different laws and regulations with each other and to apply laws and regulations more consistently. In Lao PDR, new laws and regulations are not always aligned with existing ones, and regulations adopted by the provinces are not always consistent with national-level regulations. This can lead to the inconsistent and uneven application and enforcement of these laws and regulations across administrative bodies and provinces; for example, investors complain about the variable interpretation of the Law on Investment Promotion in Lao PDR. In other cases, new regulations are not applied due to public agents lacking the information or training necessary in order to properly apply them. Another challenge is that regulations change frequently without advance notice to, or consultation with, private investors. This can create uncertainty for investors and discourage investment (OECD, 2017[4]; ECCIL, 2018[59]; Sylvester, 2018[8]).

It would also be beneficial to accelerate the implementation of newly adopted laws and regulations and to enhance the clarity of laws and regulations. This could strengthen the predictability of Lao PDR’s regulatory framework for investment. The adoption of secondary legislation for the implementation of new laws in Lao PDR is frequently delayed. This can create confusion about the timing of the implementation of new laws among both investors and government authorities. The lack of clarity and the ambiguity of many laws and regulations can, in turn, favour discretionary decision making and create opportunities for corruption (see the section on legal and regulatory framework). These challenges can ultimately discourage investment (OECD, 2017[4]; ECCIL, 2018[59]; Sylvester, 2018[8]).

In order to tackle these challenges, first and foremost, it would be important to strengthen the independence of Lao PDR’s judiciary and the effectiveness of its court system. Good dispute resolution mechanisms enhance predictability in commercial relationships by assuring investors that their contractual rights will be upheld promptly. When disputes cannot be resolved in a timely and cost-effective manner, enterprises may restrict their activities (OECD, 2015[12]). The court system plays a fundamental role in enforcing contracts and in settling disputes both among private actors and between an investor and the state. The efficiency, effectiveness, integrity and independence of the courts are important considerations for all investors (OECD, 2015[12]). Lao PDR’s judiciary is not endowed with sufficient capacity to efficiently deal with commercial disputes. It also suffers from a lack of independence and autonomy from the executive power, and the reasoning behind judgments and the availability of appeals mechanisms are not always clear. For example, it can be difficult to challenge the destruction of commercial property in court. In addition, administrative decisions cannot be challenged before an independent body or court; for example, there are no dispute resolution mechanisms for disputes between investors and the MPI other than contesting decisions before the MPI itself. Only foreign investors that are covered by the provisions of bilateral investment treaties have recourse to international arbitration in order to solve their disputes against the government of Lao PDR (OECD, 2017[4]).

It would also be important to strengthen Lao PDR’s infrastructure for commercial arbitration, which suffers from several shortcomings. As a result of the challenges linked to Lao PDR’s court system, investors tend to favour non-judicial means of dispute settlement, including arbitration, mediation and conciliation (OECD, 2017[4]). The Law on the Resolution of Economic Disputes (which was amended in 2018) governs mediation and arbitration mechanisms in Lao PDR (Bhamra, 2019[120]). The institution in charge of implementing arbitration and mediation mechanisms is the Economic Dispute Resolution Centre (EDRC), which is part of the Ministry of Justice and was created in 1995. The EDRC’s arbitrators are appointed by the Ministry of Justice. However, the EDRC lacks capacity in terms of human and financial resources, skills and knowledge, and autonomy as a fully integrated part of the Ministry of Justice. It is more similar to a first instance dispute resolution body than to a fully fledged arbitration body, since it is mandatory to go to the EDRC in order to solve economic disputes through arbitration before being allowed to go to the courts or international arbitration. Going forward, access to and the quality of arbitration in Lao PDR could be improved by creating a private arbitration body (OECD, 2017[4]).

A set of other measures and policy and regulatory approaches could also improve the quality of Lao PDR’s regulatory framework for investment and strengthen implementation. This includes consulting with interested stakeholders, simplifying and codifying legislation, drafting in clear and concise, developing registers of existing and proposed regulations, and expanding the electronic dissemination of regulatory material. The effective implementation of Lao PDR’s regulatory framework for investment could be improved by ensuring that officials responsible for applying regulations have adequate credentials, are well-trained and provided with fair salaries, and have sufficient resources for carrying out their tasks. Officials should be fully accountable for their actions, particularly those involving discretionary decision making (OECD, 2015[12]).

Simplifying the process for starting an investment project in Lao PDR

The 2016 Law on Investment Promotion defines two types of investments: (i) general activities; and (ii) concession investments. Concession investments are defined as “concessions of land, the development of special economic zones, zones for industrial processing for export, mining, electricity generation and transmission, aviation and telecommunications” in the Law on Investment Promotion (Article 41) (National Assembly of Lao PDR, 2016[68]; OECD, forthcoming[23]), and more details are provided in Annex 2 of the Controlled Business List Decree adopted in 2019 (Prime Minister of Lao PDR, 2019[121]). Infrastructure development through PPPs also falls into this category (National Assembly of Lao PDR, 2016[68]; OECD, forthcoming[23]).

General activities are subdivided into two categories: (i) business activities under the controlled business list; and (ii) business activities outside the controlled business list. Controlled business activities are defined as activities that have an impact on Lao PDR’s “national security, public order, national fine tradition and environment, society and nature” (Article 34 of the Law on Investment Promotion) (National Assembly of Lao PDR, 2016[68]; OECD, forthcoming[23]). The complete list of controlled business activities is set out in Annex 1 of the Controlled Business List Decree (Prime Minister of Lao PDR, 2019[121]). It includes agriculture and forestry, mining, waste management, air transportation, accommodation (hotels), media, and financial activities, among others (Prime Minister of Lao PDR, 2019[121]).

There are three different processes for obtaining an investment licence in Lao PDR depending on the type of investment. The MOIC is responsible for granting investment licences for projects in uncontrolled business activities. This process is governed by the 2013 Enterprise Law, and the same terms apply to both foreign and domestic investors. The approval of both controlled business activities and concessions follows a multilevel approval process involving both central and local- or provincial-level authorities. The one-stop service division in either the IPD’s central office or provincial office, depending on the size and location of the investment project, is responsible for granting investment licences to concessions and projects in controlled business activities. Concession investments become effective upon the signing of a concession agreement between the investor and the Lao PDR government (National Assembly of Lao PDR, 2016[68]; OECD, forthcoming[23]). For controlled business activities, upon the clearance of the enterprise registration and the receipt of its investment licence, the investor is required to obtain specific business licences from sectoral agencies and authorities in order to carry out the controlled activity (Prime Minister of Lao PDR, 2019[121]). These licences need to be renewed annually (ECCIL, 2022[22]). Investments in SEZs are directly approved either by the SEZ management authority or by the IPD for a number of business activities for which the SEZ management authority cannot give approval (Government of Lao PDR, 2018[102]). In addition, investments with specific characteristics – generally large concession investments – require the National Assembly of Lao PDR’s approval.

Lao PDR’s institutional and regulatory framework for starting an investment project is complex and involves a large number of institutions. This can create confusion for investors, as well as inefficiencies. Deadlines are not always respected and delays are reported to be frequent. Investors are supposed to obtain their business licence from the MOIC within 10 working days for investments in uncontrolled business activities, within 25 working days for controlled business activities and within 65 working days for concessions. The deadline is usually met for uncontrolled business activities; however, for those projects requiring consultation with and approval from line ministries, the process can take much longer and lacks transparency (OECD, 2017[4]).

Going forward, it would be important to simplify Lao PDR’s institutional and regulatory framework for starting an investment project. It would be beneficial to combine the responsibility for issuing business licences for different types of investments under the umbrella of a single institution in order to reduce the number of institutions involved in the process of obtaining an investment licence and to streamline the consultation and approval process with line ministries. This could speed up the process, enhance efficiency, increase transparency and solve co‑ordination problems between entities (IFC, 2021[24]; OECD, 2017[4]). In addition, the long list of controlled business activities could be shortened to a small number of strategic sectors subject to screening – for example, sectors related to national security interests. At the same time, the list of uncontrolled business activities, which remains incomplete and excludes many innovative business activities, could be entirely removed. This could simplify the process of starting an investment project in a large number of sectors. It would also be important to regularly review and update these lists (ECCIL, 2022[22]; IFC, 2021[24]).

Enhancing the implementation of social and environmental safeguards

The Law on Investment Promotion contains detailed social and environmental obligations for investors. Article 73 is fully dedicated to investors’ social obligations, and Article 74 is fully dedicated to environmental obligations. Environmental obligations include compliance with environmental standards and prioritising the protection of the environment, redressing any environmental damage incurred, respecting the environmental obligations set out in international treaties to which Lao PDR is a party and contributing financially to environmental protection. Social obligations include the implementation of social security schemes for employees, respecting and supporting worker organisations such as unions, respecting local customs, compensating those affected by business operations, promoting local businesses and the development of the localities where the businesses are located, and contributing financially to social development (National Assembly of Lao PDR, 2016[98]). These obligations are more detailed than what is commonly included in investment laws (OECD, 2017[4]).

In addition to these detailed social and environmental obligations, the Law on Investment Promotion contains several other provisions that encourage sustainable investment. The law’s objective is defining principles, regulations and measures for foreign and domestic investment promotion and administration “in line with green growth and sustainability” (Article 1) (National Assembly of Lao PDR, 2016[98]). In addition, “Protecting and utilizing natural resources effectively in compliance with the policy of green growth and sustainability” (Article 5) (National Assembly of Lao PDR, 2016[98]) is one of the principles for investment promotion. “Business having serious impact on environment, nature and society, for instance, a diversion of a natural water flow, a resettlement of five hundred families or more, a concession of land of ten thousand hectares or more” and “business involving the conversion of a national reserved forest and protected forest” (Article 49) (National Assembly of Lao PDR, 2016[98]) require the National Assembly of Lao PDR’s approval . Provincial People’s Assemblies have to approve smaller projects and concessions of degraded forest land (National Assembly of Lao PDR, 2016[98]). The 2016 Law on Investment Promotion also includes clearer mechanisms for dispute resolution (Part X) and for monitoring (Part XI) than the previous Law on Investment Promotion from 2009 (Sylvester, 2018[8]; OECD, 2017[4]).

Environmental impact assessments

Two types of environmental impact studies exist in Lao PDR: comprehensive environmental impact assessments (CEIAs) and preliminary environmental impact assessments (PEIAs) (Government of Lao PDR, 2022[122]). Investment projects with little or no impact on the environment – generally smaller projects, such as small power plants, mining activities on a small scale in rivers, or laboratories and scientific research activities – require PEIAs, whereas investment projects that have a significant impact on the environment – generally larger projects, such as large power plants, large mining projects and large infrastructure projects – require CEIAs (Article 9). Instruction No. 358 by MONRE provides detailed lists of project characteristics by sector (energy, mining, agriculture and forestry, manufacturing, infrastructure, and laboratories and research) subject to PEIAs and CEIAs (Ministry of Natural Resources and Environment, 2023[123]). Upon approval of PEIAs and CEIAs, investors receive an environmental certificate. Public participation is mandatory for both PEIAs and CEIAs in all three project stages: preparation and planning, construction and operation, and project conclusion (Government of Lao PDR, 2022[122]).

Both CEIAs and PEIAs are governed by the Environmental Impact Assessment Decree and fall within the responsibility of MONRE. This decree (No. 389) was reformed most recently in 2022 (Government of Lao PDR, 2022[122]). The 1999 Environmental Protection Law (No 29/NA), which was revised in 2012, provides the legal basis for the Environmental Impact Assessment Decree and lays out the framework for national safeguards that help mitigate the impacts of investment in natural resources (OECD, 2017[4]). MONRE is the government institution responsible for the overall environmental impact assessment regulation, for reviewing and approving PEIAs and CEIAs, and for issuing environmental certificates (Government of Lao PDR, 2022[122]).

MONRE and project owners are both responsible for the monitoring and inspection of environmental aspects of investment projects. Project owners must report the results of regular inspections to MONRE and line ministries, and detailed reporting intervals are laid out in environmental certificates. Accidents causing serious damage to the environment must be reported within 24 hours. In addition, MONRE conducts regular inspection visits two to four times per year. For complex projects, Environmental Management Unit of MONRE is used in the field for inspection and monitoring and is composed of representatives of MONRE and the institutions responsible for investment, as well as specialist foreign and domestic experts from the public and private sectors (Article 55). The project owner is responsible for covering the cost of this unit. The reformed Decree on Environmental Impact Assessment (No. 389) also introduces Article 56, which provides clarity on the fee that project owners must pay to MONRE for monitoring and inspection activities (Government of Lao PDR, 2022[122]).

The 2022 reform of the Decree on Environmental Impact Assessment has reduced the delays in reviewing and approving CEIAs and PEIAs. During the latest reform of the Environmental Impact Assessment Decree in 2022, Lao PDR significantly shortened the delays in government authorities’ review of EIAs and PEIAs that are submitted by investors, from 40 to 25 days for PEIAs and from 90 to 50 days for PEIAs for normal projects, and from 120 to 80 days for PEIAs for complex projects. Delays for other EIA- and PEIA-related procedures, such as verifying the completeness of the documents submitted, were shortened as well (Government of Lao PDR, 2022[122]). Although this measure reduces red tape and could have a positive impact on the business environment, there is a possibility that these shorter delays for reviewing and approving EIAs could further reduce the rigour of reviews and the effectiveness of the review process if they are not combined with improvements in MONRE’s capacity for planning, implementing and monitoring EIAs.

The revised Environmental Impact Assessment Decree would benefit from more clarity for the committee approving complicated CEIAs, and from the addition of information on dispute resolution mechanisms. The decree introduces a MONRE-appointed, non-permanent Review Committee for complicated CEIAs for complex projects, which consists of experts, stakeholders, legal entities, and public and private institutions (see Chapter 6). However, the decree remains rather vague on the composition of this Review Committee, leaving much discretion to MONRE in appointing the members. Finally, the section on dispute resolution was removed from the revised decree, thereby reducing clarity on the available options and legal measures that investors can take in the case of disputes concerning EIAs (Government of Lao PDR, 2022[122]).

While the preparation of PEIAs has been reformed recently, removing the remaining restrictions on CEIA preparation could enhance the quality of these assessments. Prior to the 2022 reform of the Environmental Impact Assessment Decree, both PEIAs and CEIAs had to be developed by a licensed technical service provider. According to the 2022 Environmental Impact Assessment Decree, PEIAs can be carried out by the project owners themselves or by a technical service provider, but CEIAs must be carried out by an environmental service provider licensed by MONRE (Article 58) (Government of Lao PDR, 2022[122]). In practice, this change for PEIAs has only been implemented on a pilot basis for projects in tourism and. However, while this change facilitates the PEIA process, CEIA preparation remains restricted to environmental service providers that are licensed by the government of Lao PDR. At present, there are only five licensed environmental service providers, and new licences are not available from the government. This creates an oligopoly in Lao PDR’s CEIA market and does not encourage quality CEIAs or the respect of best practices because it means that many international EIA experts are excluded from the market.

Those projects that are funded by international financial institutions and donors generally take the EIA process very seriously. In most cases, they are required to comply with international environmental safeguard standards, which are stricter than Laotian standards (OECD, 2017[4]). This includes projects in the energy sector, such as hydropower dams and, more recently, a 600 MW wind park on the border between Lao PDR and Viet Nam, which was financed by several international financial institutions and donors, including the ADB, the Canadian Climate Fund for the private Sector in Asia, and other private investors and development finance institutions (ADB, 2023[41]).

However, there is scope to better enforce the EIA process among other private investors. It is reported that many investors that do not rely on financing from international donors or financial institutions treat EIAs as a bureaucratic hurdle rather than an obligation that must be met (Village Focus International/National University of Laos, 2019[9]; OECD, 2017[4]). A study from 2019 by the University of Bern found that fewer than 10% of agricultural investment projects and only 43% of commercial tree plantation projects in Lao PDR have carried out EIAs. Moreover, it found that 70% of EIAs were prepared after land had already been cleared (CDE/University of Bern/MRLG, 2019[5]). In addition, there is often scope to improve the quality of EIA reports (Village Focus International/National University of Laos, 2019[9]; Yong, 2022[6]), and anecdotal evidence suggests that in some cases, EIAs are copied and pasted from international reports available online. Public decision making in the EIA process is often not meaningful and is treated as a rubber stamp by both government institutions and investors (Yong, 2022[6]; Yong, 2023[10]).

Better environmental monitoring and inspection of investment projects could improve the enforcement and implementation of EIAs. In order to improve the monitoring and inspection of investors’ environmental obligations, MONRE requires qualified skills and increased human, financial and institutional capacity. MONRE’s district offices frequently lack sufficient monitoring tools and technologies, such as equipment for testing soil, water or air quality. One of the reasons for this lack of resources is that, despite the provisions in the Environmental Impact Assessment Decree, few investors contribute to the state budget for monitoring (Village Focus International/National University of Laos, 2019[9]). In addition, the significant role that project owners play in monitoring their environmental obligations, combined with MONRE’s lack of resources for monitoring and inspection create moral hazard problems (OECD, 2017[4]). Enterprises frequently do not act upon environmental hazards in the absence of inspection visits or government instructions (Village Focus International/National University of Laos, 2019[9]). MONRE’s lack of capacity, skills and experience in environmental management is more pronounced for mining projects than it is in the energy sector. In the energy sector, projects financed by international institutions have demonstrated good environmental safeguards, but this is not the case in the mining sector (OECD, 2017[4]).

Regulations to limit the negative environmental and social impacts of agriculture, forestry and mining

In the past, in order to limit the negative environmental impacts of investments, Lao PDR has banned or placed temporary moratoria on the cultivation of certain commercial crops and on the extraction of certain minerals. For example, a Prime Minister’s Order in 2007 banned new concessions for mineral exploration and tree plantations larger than 100 ha. In 2012, a Prime Minister’s Order (No. 013) placed a moratorium on new rubber and eucalyptus plantations and concessions for certain minerals. In 2017 a Prime Minister’s Order (No. 483) banned expansion of and investment in new banana plantations in six northern provinces, while in July 2018, a Prime Minister’s Order lifted this ban on the expansion of organic banana plantations. Lastly, in 2016, a Prime Minister’s Order banned timber exports (Village Focus International/National University of Laos, 2019[9]; Sylvester, 2018[8]; CDE/University of Bern/MRLG, 2019[5]).

However, such bans and moratoria can create uncertainty for investors and do not always have the expected positive impacts on the environment. They create an unpredictable, restrictive and confusing legal and regulatory landscape for investors, thereby discouraging investment in sustainable agriculture. In addition, these bans and moratoria can sometimes do more harm than good to the environment. For example, in 2016‑17, following the Prime Minister’s Order prohibiting investment in banana plantations, some banana investors quickly left the industry without repairing the environmental damage that they had caused to the soil and water, leaving behind degraded land and large quantities of waste. Moreover, local communities suddenly lost their sources of income and did not always receive their final payments from their employers. Although the ban on timber exports reduced illegal logging and unsustainable forestry practices, enterprises exporting processed wood experienced lengthy delays at customs because officials were uncertain whether their products fell under the restriction (Village Focus International/National University of Laos, 2019[9]).

Investment promotion

Lao PDR has developed a proactive policy to promote and facilitate FDI in the country. This includes the establishment of a dedicated investment promotion agency, the IPD, in 2004. The IPD has developed a website with pertinent information for investors, most notably information on laws, regulations and business procedures in Lao PDR. Moreover, Lao PDR has recently adopted several decrees to simplify regulatory procedures and reduce red tape. This includes the 2018 Prime Minister’s Order (02/PM) on Improving Regulations and Co‑ordinating Mechanisms for Doing Business in Lao PDR and the 2020 Prime Minister’s Order (No. 03/PM) on the Improvement of Services Related to the Issuance of Investment and Business Licenses (Government of Lao PDR, 2021[111]; Prime Minister of Lao PDR, 2018[115]). Lao PDR has also established more than 20 SEZs since 2003 and offers qualifying investors in SEZs and other investment zones a set of tax incentives (see the section on investment tax incentives).

There remains scope to further improve investment promotion and facilitation policies in Lao PDR. In a survey on investment facilitation conducted by ASEAN in ASEAN Member States, less than 20% of enterprises interviewed in Lao PDR rated investment facilitation services as either satisfactory or exceeding expectations, compared with between 60% (in Cambodia) and 100% (in Singapore) of investors in other ASEAN Member States. Similarly, close to 90% of enterprises in Lao PDR indicated that there was room for improvement in investment facilitation services compared with approximately 15% (in Indonesia) to 40% (in Cambodia and Malaysia) of enterprises in other ASEAN Member States (ASEAN/UNCTAD, 2022[124]).

Despite significant differences across countries, in most cases, IPAs perform five key functions: (i) image building, which involves promoting a positive image of the host country and branding it as a profitable investment destination; (ii) investment generation deals, with direct marketing techniques targeting specific industries, activities, enterprises and markets in line with national priorities; (iii) investor servicing, which focuses on providing support to prospective investors in order to facilitate the establishment phase of their projects; (iv) aftercare, which aims to retain established enterprises and encourage reinvestments by proactively responding to investors’ needs and challenges after enterprises have been established; and (v) policy advocacy, which includes identifying bottlenecks in the investment climate and providing recommendations to the government on how to address them (OECD, 2017[4]).

Although Lao PDR’s Law on Investment Promotion defines investment promotion, it would benefit from including more detailed information on the five key functions of IPAs. Investment promotion is defined as “the formulation of promotion policies and the creation of a favourable investment climate to enable investors to conduct their business in a convenient, expeditious, transparent, fair and lawful manner” and as “[…] formulating policies to create a favourable investment climate, including construction of infrastructure, providing necessary information, granting incentives in terms of custom duty, tax, import of foreign labour, and the land use rights, access to finance […]” (National Assembly of Lao PDR, 2016[98]).

The IPD’s activities in the area of investment promotion focus on image building. They include advertising, running public relations campaigns, disseminating brochures, participating in fairs and forums, and developing its website. Proactive investor targeting and lead generation activities targeting specific industries, markets and investors remain relatively limited (OECD, 2017[4]). Moreover, Lao PDR does not have an official investment promotion strategy. The IPD also lacks sufficiently detailed and up-to-date information and statistics on target sectors and activities in different geographic areas and on investment opportunities.

The IPD would benefit from more KPIs for both selecting priority investments and evaluating its performance. The KPIs used for selecting priority investments are linked to productivity and innovation and to job creation, quality and skills (Figure 5.17, Panel A). The KPIs used for evaluating the performance of the IPD include the number of enterprise registrations with the MOIC, the number of investment licences issued by the MPI and the number of investment licences issued in SEZs, as well as the amount of investment capital stated in those licences and in data from the Bank of the Lao PDR on foreign capital inflows (Figure 5.17, Panel B). In comparison with IPAs in other ASEAN member states, Lao PDR’s IPA uses KPIs linked to few sustainability dimensions, both for selecting priority investments and for evaluating its activities. The IPD does not use any KPIs linked to environmental sustainability (OECD, 2023[125]).

Figure 5.17. Lao PDR figures among those ASEAN Member States with the fewest KPIs for selecting priority investments and for evaluating the activities of their IPAs

Going forward, it would be important for Lao PDR to adopt a clear and coherent inward investment promotion strategy and to enhance the IPD’s institutional capacity. Such a strategy should include clear objectives, activities, and monitoring and evaluation indicators, and be aligned with national economic development priorities. The IPD would also benefit from more and better human and financial resources and technical and managerial skills, particularly with regard to investor targeting and lead generation (OECD, 2017[4]). In addition, sufficient empowerment could enable the IPD to take a stronger role in co‑ordinating responsibilities with other institutions involved in the investment process (IFC, 2021[24]). Costa Rica’s export promotion agency, Promotora de Comercio Exterior oficial de Costa Rica (PROCOMER), is one example of an IPA that has successfully implemented changes to its methods, strategy and organisation that have enhanced the agency’s efficiency and effectiveness in investment promotion and facilitation (Box 5.6).

Box 5.6. Efficiency-enhancing changes to the strategy, methods and organisation of PROCOMER, Costa Rica’s export promotion agency

In 2010, changes to the strategy, methods and organisation of PROCOMER, Costa Rica’s export promotion agency, greatly improved the institution’s effectiveness and efficiency. The government of Costa Rica appointed a businessman from the private sector as Chief Executive Officer of PROCMER in 2010 who had no previous experience from policy making, political or policy studies. Until this appointment, no investment promotion frameworks or related goals had existed, but shortly afterwards PROCOMER produced its first strategic plan to attract investments, with updates planned to take place every two years thereafter. PROCOMER was reorganised with a strong emphasis on monitoring and accountability; the development of KPIs for every department, programme and person within the institution; and extensive use of information technology in order to modernise management, including a customer relationship management system, enterprise resource planning for management and financial purposes, and web-based training tools for PROCOMER’s staff and its customers.

Improvements in PROCOMER’s efficiency were facilitated by strengthening its human resources and improving its co‑ordination with other public institutions. The agency gained enough administrative, political and financial independence to employ staff with the right skills. In particular, mastery of English and formal training in project management were established as requirements. In addition, the metric for job performance evaluation changed. A set of nine different indicators are now used in order to evaluate the success of a project and the performance of the staff involved. These indicators include customer satisfaction, volume of transactions, development of suppliers and fundraising for new projects. PROCOMER also enhanced co‑ordination with other public institutions, including other ministries, the Chamber of Commerce of Costa Rica and educational institutions.

Source: (OECD, 2020[126]), Multi-dimensional Review of Viet Nam: Towards an Integrated, Transparent and Sustainable Economy, OECD Development Pathways, based on (OECD/UNIDO, 2019[30]), Integrating Southeast Asian SMEs in Global Value Chains Enabling Linkages with Foreign Investors and (Dal Bó et al., 2018[127]), Building Capabilities for Productive Development.

It would also be important to concentrate investment promotion efforts on Lao PDR’s priority investment sectors, which have attracted little investment in the past. These priority sectors are high and modern technology; clean agriculture; environmentally friendly agro- and forestry processing and handicrafts; cultural and historical tourism and ecotourism; education; healthcare; infrastructure; banking and microfinance focusing on poverty reduction; and modern commercial trading centres (IPD, n.d.[128]; National Assembly of Lao PDR, 2016[98]). According to the results of a survey conducted across all ASEAN member states, investment priorities in Lao PDR are mainly motivated by each country’s political agenda, the UN’s Sustainable Development Goals (SDGs), and the results of previous monitoring and evaluation activities (OECD, 2023[125]). However, despite these investment priorities, FDI flows to Lao PDR have been largely concentrated in mining and hydropower in the past. More targeted investment promotion efforts – including investor targeting and lead generation, as well as providing potential investors with more detailed information on investment opportunities – could help attract more investors in these target sectors.

It would be beneficial to increase environmental and social sustainability efforts in investment promotion in Lao PDR. At present, the environmental and social sustainability of investment projects seems to play only a minor role in the process of allocating business licences in Lao PDR, and investment projects are rarely stopped as a result of their environmental impact.13 This is reflected in the IPD’s contribution to the SDGs: the IPD believes that it contributes to fewer SDGs than most other IPAs among the ASEAN member states (Figure 5.18). Going forward, in the process of developing an inward investment promotion strategy for Lao PDR, it would be important to ensure that such a strategy articulates the government’s vision for the contribution of investment to environmental protection and social development. In addition, an investment promotion strategy should set goals and identify priority policy actions in order to maximise the contribution of FDI to environmental protection and social development and to minimise negative environmental impacts. The IPD could also better tailor its activities in order to attract more investment in its priority sectors by, for example, improving its lead generation activities. Several of the IPD’s priority sectors do advance environmental and social goals, but investment in these sectors remains limited (OECD, 2022[11]).

Figure 5.18. Lao PDR’s IPA believes that it contributes to fewer SDGs than most other ASEAN member state IPAs

Which of the SDGs do you believe you contribute to as an IPA?

In order to attract more sustainable investment that contributes to social and environmental goals, the IPD could also introduce KPIs linked to the social and environmental impacts of investment projects. Such KPIs could be introduced both for selecting priority investments and for monitoring and evaluating its activities. In this regard, introducing KPIs linked to the environmental impacts of investment projects would be particularly important in Lao PDR, given that investment projects are frequently reported to harm the country’s rich biodiversity. The number of jobs created can also be a useful indicator with which to measure sustainability outcomes if jobs are linked to a specific sustainability-oriented skill set, sector or project (OECD, 2023[129]). Other ASEAN member states, such as Malaysia, Myanmar, the Philippines, Singapore and Viet Nam, as well as several OECD member countries, provide examples of how environmental outcomes can be used in order to select priority investments and evaluate IPAs’ performance (Box 5.7).

Box 5.7. KPIs linked to environmental outcomes at IPAs in other ASEAN member states and OECD

Several countries in the Southeast Asian region use KPIs linked to environmental outcomes, gender equality and regional development in order to select priority investments. KPIs related to the low-carbon transition are used by Malaysia, the Philippines, Singapore and Viet Nam. Malaysia uses indicators such as the adoption of green technologies, reuse and recycling activities, and initiatives applying the circular economy model (e.g. pollution and waste management) in order to prioritise investment. The Philippines uses KPIs measuring green processes and the use of modern technology. The carbon emissions rate is one of Viet Nam’s KPIs to select priority investments. The Philippines also uses KPIs in order to prioritise investment projects that have a positive impact on nature conservation and the protection of the sea and coastline. In addition, the IPAs in the Philippines, Singapore and Viet Nam employ KPIs that measure gender equality, usually according to the number of female employees in foreign enterprises. Indonesia uses an indicator that relates to the geographical dispersion of FDI – specifically, it measures the value of investment projects outside of Java.

Many IPAs in other ASEAN member states use KPIs linked to innovation and digitalisation, and some IPAs have indicators for skills development. For example, the adoption of Industry 4.0 technologies, investment in R&D and the adoption of digital technologies in enterprise processes are KPIs used to select priority investments in Malaysia. Myanmar uses indicators such as the Global Cybersecurity Index, the number of Internet users and the number of investments in innovation. Skills and knowledge upgrading, future-ready economic development and upskilling, the introduction of new processes, the commercialisation of intellectual property, and the utilisation of Industry 4.0 technologies are KPIs used to select priority investments in the Philippines. Viet Nam measures the share of investment in R&D, the use of modern technologies and the share of employees with higher education degrees.

In OECD member countries, 48% of IPAs use carbon-related KPIs for investment prioritisation purposes. For example, the Industrial Development Agency Ireland has set a target to win 60 environmental sustainability investments between 2021 and 2024. In order to identify priority investments, the Industrial Development Agency Ireland has developed an approach guided by the six sustainable activities set out in the EU taxonomy for sustainable activities. The Industrial Development Agency Ireland has also performed analyses to identify the sustainability opportunities that align with Ireland’s core strengths and that are deemed to present the greatest opportunity to attract FDI. In addition to targeting new investments focused on the green economy, the Industrial Development Agency Ireland is also partnering with existing multinational enterprises in Ireland to support decarbonisation and sustainable production.

In Sweden, Business Sweden’s Pioneer the Possible’ fossil free initiative seeks to increase the share of sustainable investments in Sweden in order for the country to become fossil fuel free by 2045. Business Sweden identifies enterprises, solutions and expertise that can support the reduction of carbon dioxide emissions in Sweden and monitors and adapts its investment promotion priorities and activities accordingly. For this purpose, Business Sweden has developed internal frameworks and definitions based on the EU taxonomy for sustainable activities. Business Sweden has also updated its project database with more than 400 green global business opportunities.’ Pioneer the Possible’ is overseen by a steering group consisting of Swedish business leaders and experts.

Some IPAs in OECD member countries are also developing sustainability scoring mechanisms. For example, Germany Trade & Invest developed an integrated scoring model in which FDI projects are assessed for sustainability and scored against a set of qualitative and quantitative indicators. The agency then adjusts the promotion and advisory services it provides to investors accordingly. Similarly, Invest in Canada has recently introduced a scoring mechanism to prioritise investment opportunities based on two dimensions: FDI impact and investment potential. The first dimension evaluates the likelihood that the investment will benefit Canada, and one variable within this dimension focuses on social and sustainable development.

Monitoring and evaluating the environmental sustainability of IPAs’ activities and the sustainability outcomes of FDI

In other ASEAN member states, such as Malaysia, Myanmar and Singapore have dedicated indicators that measure the environmental sustainability outcomes of the attracted FDI. Malaysia conducts cost-benefit analyses using environmental, social and governance indicators. Myanmar measures the number of investment projects in SDG sectors, the number of EIAs and environmental management plans, and the number of projects in renewable energies.

Among OECD member countries, Finland and the Republic of Türkiye (hereafter “Türkiye”) are examples of countries using sustainability-related KPIs and tracking projects in related priority sectors. For example, Türkiye’s IPA measures the number of projects that are realised in targeted low-carbon sectors, namely recycling, renewable energy, and the development of energy-efficient components and technologies. In addition, similar to what is done for prioritisation, some IPAs (such as Invest in Finland) introduced scoring mechanisms in order to monitor and evaluate the quality or the sustainability outcomes of the attracted FDI. Invest in Finland also introduced a dedicated sustainability KPI in 2022 that measures FDI in sustainable solutions in Finland.

Invest in Finland evaluates the degree of sustainability of FDI projects in Finland through direct interviews with enterprises based on a predominated set of questions. An advisor for Invest in Finland completes this questionnaire for each FDI project in Finland. By compiling and analysing the responses to these questions, Invest in Finland keeps track of the sustainability outcomes of FDI projects in the country. Answers to the following questions are recorded for each FDI project:

1. Have you discussed environmental and/or social responsibility questions with the investor(s) related to this opportunity?

2. Does this opportunity contribute to new solutions that decrease carbon emissions?

3. Does this opportunity contribute to new business models or solutions based on circular economy or life cycle thinking (i.e. a way of thinking that includes the economic, environmental and social consequences of a product or a process over its entire life cycle)?

4. Does this opportunity contribute to other sustainable development topics like clean energy, sustainable service production, sustainable manufacturing, smart mobility or sustainable health solutions (i.e. is it compliant with the SDGs)?

Source: (OECD, 2023[129]), “Enabling sustainable investment in ASEAN”, OECD Business and Finance Policy Papers; (OECD, 2023[125]), Survey on IPA Monitoring & Evaluation and Prioritisation for ASEAN Member States.

There is also scope for developing more policy tools in order to encourage local linkages between international investors and domestic enterprises. Business linkages between multinational enterprises (MNEs) and domestic enterprises, especially smaller suppliers, can facilitate the transfer of technology, knowledge, and managerial and technical skills (OECD, 2015[12]). At present, when negotiating with foreign investors for concessions, the IPD encourages the use of local labour and local suppliers in order to enable spillovers to the local economy. However, these negotiations remain on a voluntary basis. More local linkages could be encouraged through the development of a local supplier database. Such a database could also include information on environmental criteria and carbon performance in order to encourage environmental protection and the low-carbon transition. In addition, business matchmaking services and supplier development services could be offered to international investors (OECD, 2022[11]; OECD, 2015[12]). Not only can such services support the creation of local linkages they can also help correct skills mismatches and contribute to skills development. Malaysia and Costa Rica are examples of countries that have successfully implemented supplier development programmes (Box 5.8).

Box 5.8. Supplier development programmes in Malaysia and Costa Rica

The gradual creation of supplier development services in Malaysia

Malaysia has been developing policies to support supplier capacities and SME–MNE linkages since the 1980s. In the context of the Vendor Development Programme (VDP) in the 1980s, Malaysian SMEs were provided with incentives and support to become suppliers of industrial components, machinery and equipment. However, the success of the programme was limited due to the capacity weaknesses of the selected local SMEs.

Since 1996, the Industrial Linkage Programme (ILP) has built on the VDP in order to create better linkages and improve capacity. The ILP involves MNEs in the selection of suitable SMEs and helps local suppliers develop the skills that MNEs need. In addition, selected SMEs and MNEs benefit from income and investment tax reductions. SMEs also benefit from gaining access to financing schemes.

The Global Supplier Programme (GSP) was created in 2000 and trains employees of domestic suppliers in collaboration with MNEs. MNEs define the selection criteria for SMEs and take part in the development of training curricula at different regional training centres and institutes in order to avoid skills mismatches. SMEs then receive subsidies to pay for the training programmes.

The evolution of matchmaking services into supplier development services in Costa Rica

Between 2001 and 2010, Costa Rica’s IPA, PROCOMER, launched programmes aimed at matching foreign investors with local providers of inputs and services. In the context of these programmes, PROCOMER identified local capabilities and then tried to match them to the demands of MNEs. However, providers of knowledge-intensive and complex inputs and services were scarce. PROCOMER focused on the volume of linkages, not on the types of linkages or the value of the ensuing transactions. The number of linkages that the agency achieved each year was the only indicator of success.

In 2010, PROCOMER started to upgrade its matchmaking services to comprehensive business development services. These services were provided in response to demand. PROCOMER would first identify MNEs’ needs and then survey local capabilities. If such capabilities were lacking but their development was feasible, PROCOMER worked with potential suppliers and other public agencies in order to develop the necessary capabilities. As the tasks involved in developing suppliers extended beyond PROCOMER’s capabilities, universities and technical colleges were mobilised to develop specific technical skills for domestic suppliers as required by their potential foreign clients. To ensure effective inter-institutional co‑ordination, Costa Rica created an inter-ministerial linkages commission with the participation of PROCOMER; the Ministry of Foreign Trade; the Ministry of Science, Technology and Telecommunications; the Chamber of Commerce of Costa Rica; and numerous tertiary education institutions and scientific councils.

Source: (OECD, 2020[126]), Multi-dimensional Review of Viet Nam: Towards an Integrated, Transparent and Sustainable Economy, OECD Development Pathways based on (OECD/UNIDO, 2019[30]), Integrating Southeast Asian SMEs in Global Value Chains Enabling Linkages with Foreign Investors and (Dal Bó et al., 2018[127]), Building Capabilities for Productive Development.

It would be beneficial to improve the IPD’s aftercare services for investors. Even though the IPD offers aftercare services to investors, it does not always succeed in resolving investors’ grievances, especially when other government institutions such as line ministries are involved. When successful, delays in providing support to investors in resolving administrative challenges can be as long as one or two months. In order to improve its aftercare services for investors, the IPD could consider establishing a dedicated aftercare division, as well as setting up and maintaining close relationships with a network of well-informed and trained focal points in key government institutions for investors, such as line ministries. It could also be beneficial to develop a formal investor grievance management mechanism and to record and analyse investor grievances (IFC, 2021[24]).

Special Economic Zones

Lao PDR has to carefully weigh the costs of SEZs against the benefits. SEZs can facilitate access to land for investors in Lao PDR and offer spaces for policy experimentation. They can generate FDI; create jobs; contribute to the growth and diversification of exports and to economic diversification and upgrading; and allow for knowledge, technology and skills transfers. However, SEZs also generate direct costs (including administrative costs) and indirect costs (such as forgone tax revenues as a result of generous tax incentives, as well as the cost of resettling local communities). Moreover, SEZs in Lao PDR create opportunities for rent-seeking behaviour and allow developers to capture the bulk of profits earned in SEZs. In addition, international experience suggests that SEZs often face challenges in generating linkages with the local economy and creating quality jobs, and they do not always comply with rigorous social and environmental standards. Lao PDR could increase the positive impacts and spillovers from SEZs through the right policy and regulatory mix, and by encouraging local business linkages and skills development.

Investment in SEZs has been growing strongly in Lao PDR

In Lao PDR, SEZs are defined as areas with a special administration and management mechanism that provide facilities and infrastructure for business operation. They aim to attract “investments using high technology, innovation in the production of agricultural products, and clean production using less natural resources and energy for sustainable and environmentally friendly development”(Article 2) (Government of Lao PDR, 2018[102]). The first SEZ in Lao PDR was established in 2003 (Savan-Seno SEZ in Savannakhet) (OECD, 2017[4]).

Investment in SEZs has increased impressively since 2014. In Lao PDR, there are currently 21 operational SEZs (and 1 SEZ in the planning stage) hosting 1 128 foreign and 163 domestic enterprises and 59 joint ventures, with a total capital of USD 65 billion and a registered capital of USD 20 billion (as of September 2023) (SEZO, 2023[130]). In 2021, investment in SEZs by these enterprises amounted to USD 7.6 billion (Dalavong, 2021[131]). This is a significant increase in investment compared with 2014, when 213 enterprises had invested approximately USD 1.2 billion in the 10 SEZs that existed in Lao PDR at the time (OECD, 2017[4]). The Golden Triangle SEZ (comprising 417 enterprises), the Boten Beautiful Land SEZ (comprising 293 enterprises), the Saysettha Development Zone (comprising 125 enterprises), the Savan-Seno SEZ (comprising 69 enterprises), the That Luang Lake SEZ (comprising 68 enterprises) and the Vientiane-Nonhthong SEZ (comprising 67 enterprises) are the SEZs with the largest number of investors. The SEZs with the most total capital are the Phoukhyo Specific Economic Zone (USD 35.5 billion), the Thakhek SEZ (USD 12.8 billion) and the Golden Triangle SEZ (USD 5.6 billion) (SEZO, 2023[130]). Despite this impressive increase in investment in SEZs in Lao PDR since 2014, in the context of the current economic crisis in the country, decreasing trends in investment, the amount of labour employed and exports have been reported in SEZs in the manufacturing sector.

Investment in SEZs in Lao PDR flows largely into services and commerce, but also into labour-intensive manufacturing and renewable energies. Fifty-six percent of the enterprises in SEZs operate in services, 26% in trade and 18% in industry (SEZO, 2023[130]). In the first 6 months of 2023, 118 enterprises invested in Lao PDR’s SEZs: 75 enterprises invested in the services sector (64%), 30 enterprises invested in commerce (25%) and 13 enterprises invested in the industrial sector (11%) (SEZO, 2023[31]). Manufacturing enterprises in SEZs largely produce intermediate goods, which are exported to Thailand and Viet Nam for further processing. This includes garments, electronics and optical equipment (such as lenses for cameras). In the context of ASEAN integration, Malaysian and Thai manufacturing enterprises have also invested in apparel plants in Lao PDR in order to benefit from lower labour costs and preferential market access to the EU (OECD, 2017[4]; Lao NCSEZ, 2014[132]). In addition to services, commerce and manufacturing, a solar power plant has also been built in the Thakhek SEZ in Khammouane province close to the Thai border by a Chinese investor (Open Development Laos, 2019[133]). The bulk of FDI in Lao PDR’s SEZs originates from China, followed by Thailand, Japan and Malaysia (Dalavong, 2021[131]) (SEZO, 2021[134]).

Lao PDR would benefit from the creation of more quality jobs for domestic workers in SEZs. According to official statistics, there are 67 579 workers (approximately 8.9 workers per USD 1 million invested) employed in SEZs in Lao PDR, of which 37 019 are Laotian (4.9 Laotian workers per USD 1 million invested) and 30 560 are foreigners (SEZO, 2023[31]; Dalavong, 2021[131]). This is a moderate decrease compared with 2021, when there were 68 483 workers employed in SEZs (Dalavong, 2021[131]). The Golden Triangle SEZ (comprising 46 843 workers), the Vientiane Non Thong SEZ (comprising 6 134 workers), the Saysettha Development Zone (comprising 5 256 workers), the Savan-Seno SEZ (comprising 4 311 workers) and the Non-Tandan Nadi SEZ (comprising 2 232 workers) register the highest numbers of employees as of year 2023 (SEZO, 2023[31]). Foreign workers are reported to work largely in the infrastructure and construction sector, while Laotian workers are mainly employed in the manufacturing sector. Enterprises in SEZs face difficulties in hiring skilled construction workers, but more recently this has also been the case when hiring workers in general, independent of workers’ skill level. This may be linked to the recent increase in migration observed in Lao PDR in the context of the economic crisis and high levels of inflation (SEZO, 2023[31]).

SEZs can facilitate access to land and offer spaces for policy experimentation

SEZs can compensate for an adverse investment climate and to overcome administrative issues and market failures (such as a malfunctioning land market) in Lao PDR (Zeng, 2021[135]). In the specific context of Lao PDR, where access to land can be very challenging for investors and constitutes a significant hurdle for attracting investment, SEZs can provide investors with relatively easy and secure access to land.

SEZs could be more actively used for policy experimentation in Lao PDR, thereby playing an important role in the process of economic and investment policy reforms. Where governance is relatively weak or economic reforms are politically sensitive to implement, the enclave nature of SEZs can be an asset. For example, China effectively used its numerous SEZs as a testing lab for the market economy. Beginning in the 1980s, the government in China experimented with liberal economic reforms and new institutions in the Shenzhen SEZ and in other coastal SEZs before gradually introducing them to the wider economy. Recently, the more liberal “negative list” approach for foreign investment (which restricts access only in explicitly listed industries) was first tested in the China (Shanghai) Pilot Free-Trade Zone in 2013, then was further extended to other pilot zones in 2015 and was ultimately adopted as national policy in 2018. Similarly, the true success of the Mauritian Export Processing Zone programme was not job creation, investment or exports, but the economic and political reform process that it catalysed and the ensuing structural transformation of the economy. In a similar vein, SEZs could be used as effective pilot schemes for testing policies to boost the investment climate in Lao PDR. This could include policies in the areas of EIAs, one-stop services, supplier development initiatives or business matchmaking programmes (OECD, 2020[136]).

The success of rolling out pilot schemes in SEZs to the wider economy depends on the framework conditions. For example, in China, the Shenzhen SEZ was only part of the country’s overall economic reform landscape. China’s framework conditions and wider economic reforms allowed SEZs to serve a catalytic role in the policy reform process. However, what has worked for China since the 1980s will not necessarily work in other contexts. Accompanying measures to build local capabilities in both the private and public sectors can be crucial for expanding pilot projects from SEZs to the wider economy (OECD, 2020[136]).

Towards better planning of SEZ development

SEZs are regulated by the 2018 Decree on Special Economic Zones (Government of Lao PDR, 2018[102]). A new law governing SEZs has already been drafted to upgrade the 2018 Decree on Special Economic Zones to a law. The adoption of this law would be an important milestone that has been planned since the Investment Policy Review carried out by the OECD in 2016‑17 (OECD, 2017[4]). A new development strategy for SEZs to replace the Development Strategy for Special and Specific Economic Zone (SEZ) in the Lao PDR, 2011 - 2020 has already been drafted, but is awaiting adoption by the government.

The regulatory framework for SEZs in Lao PDR allows SEZ developers to potentially earn significant rents. A SEZ developer has the exclusive right to lease the land in its SEZ at a price that it defines, as well as the right to charge fees for the services it offers in the SEZ (electricity supply, water supply, etc.). SEZ developers are further eligible for generous tax incentives (see the section on investment tax incentives) (Government of Lao PDR, 2018[102]). Since there is no competition for land rentals in SEZs, in the absence of competition from other SEZs with similar characteristics and from areas outside of SEZs, SEZ developers can potentially earn significant monopoly profits and extract the maximum amount of land lease fees that investors are willing to pay. This is especially the case in SEZs with a high demand for land and a large number of interested investors.

SEZ developers’ potentially large profits, combined with discretion in the granting of approval for new SEZs, could potentially create opportunities for rent-seeking behavior. Neither a SEZ development plan nor a pipeline of SEZs exists in Lao PDR. According to the Decree on Special Economic Zones, “local authorities shall determine and propose Special Economic Zones in their area by collaborating with the Investment Promotion and Supervision Committee at the central level” (Article 9) (Government of Lao PDR, 2018[102]). However, it is reported that in practice, SEZs are frequently proposed directly by investors or by local authorities based on investors’ demands. While international best practices show that the establishment of SEZs should indeed be influenced by enterprises, Lao PDR’s discretionary approach to SEZ development creates opportunities for rent-seeking behaviour by the government officials responsible for approving new SEZs. This is a particular challenge given the potentially significant rents that SEZ developers can extract through land leases and fees for services offered in their SEZs.

Strategic planning of SEZ development based on comprehensive stakeholder consultations could reduce opportunities for rent seeking. SEZ development could be better integrated into Lao PDR’s development planning process. Effective SEZ programmes are integral parts of national, regional or municipal development strategies. Furthermore, Lao PDR could conduct thorough strategic planning exercises and involve all major stakeholders in this process. In the context of SEZ planning, it is particularly important to understand the private sector’s needs in terms of SEZ development and to conduct a rigorous assessment of demand for SEZs by the private sector in specific market sectors, including the private sector’s demand for industrial infrastructure in the designated area; this can include an investor survey. In addition, before SEZ initiatives are included in a national pipeline or approved, preliminary locations, sectors and potential investors should be identified and a comprehensive cost-benefit analysis should be conducted (Zeng, 2021[135]).

Policy and regulatory tools to encourage positive spillovers from SEZs to the local economy

International experience suggests that SEZs often face challenges in generating linkages with the local economy and in creating quality jobs. This evidence shows that SEZs can be effective in attracting investors in the short term by offering adequate infrastructure, services and incentives, but that they have often stagnated in terms of sustaining innovation and competitiveness over time. Frequently, jobs created in SEZs are low-skilled and limited-quality jobs in low-technology manufacturing. Economic activities within SEZs tend to have weak linkages with the rest of the economy and investors often operate in isolation from the rest of the country. As a result, SEZs risk creating enclaves and parallel economies. Finally, labour and environmental standards within SEZs are often lower than in the rest of the country (OECD, 2015[12]; OECD, 2020[136]).

The implementation of policies to promote positive spillovers from SEZs to the local economy can support the attraction of more quality FDI to Lao PDR. Positive spillovers from SEZs can include knowledge and technology transfers through supply chain linkages with domestic enterprises and improvements in human capital through skills development and transfers. Policies to promote such spillovers include appropriate connectivity between SEZs and the rest of Lao PDR, and engagement with domestic enterprises and educational institutions. They also include specific policies, programmes and incentives that encourage local linkages between international investors in SEZs and domestic enterprises, such as supplier development programmes, matchmaking services or supplier databases (see the section on investment promotion) (OECD, 2017[4]; OECD, 2020[136]). In order to encourage more skills development by SEZ developers and investors in Lao PDR, they could be encouraged through appropriate incentives to retrain, reskill and eventually employ those people who are subject to resettlement and may lose their means of living as a result of SEZ development. This could simultaneously serve to compensate local communities for the negative externalities of SEZs (Zeng, 2021[135]). Investment tax incentives could also be used to advance social and environmental goals (see the section on investment tax incentives).

In order to increase positive spillovers from SEZs and limit their negative externalities, Lao PDR could introduce specific performance-based criteria that investors must meet in order to invest and operate in SEZs. Such criteria can relate to employment, skills transfers and environmental performance. For example, both Cambodia and Myanmar require investors in SEZs to train local workers. The Myanmar Special Economic Zone Law mandates the provision of training and course material on subjects relevant to the business “for the improvement of the skill of the citizen staff”. In Cambodia, all investors (both within and outside of SEZs) are required to provide adequate and consistent training to Cambodian staff under the Law on the Investment of the Kingdom of Cambodia. Moreover, SEZ developers have a duty to co‑operate with the Ministry of Labour and Vocational Training in order to facilitate the training of Cambodian workers and employees and to promote the development of new knowledge and skills through specifically designed programmes. In terms of employment, Myanmar allows the employment of foreign personnel in SEZs only for activities requiring technical or managerial skills. In addition, the Myanmar Special Economic Zone Law requires enterprises in SEZs to gradually increase the share of Myanmar citizens in their skilled labour force, from at least 25% in the first year of operation to 75% in the fifth year. This approach of gradually reducing the share of foreign employees may be a way of encouraging skills upgrading and anchoring investors to the country, although it entails potentially high administrative costs for monitoring and enforcing the regulation (OECD, 2020[136]).

Improving the social and environmental aspects of SEZ regulation

Lao PDR’s Decree on Special Economic Zones contains several provisions on the environmental and social sustainability of SEZs. The Decree on Special Economic Zones defines the objective of SEZs as contributing to “sustainable and environmentally friendly development” (Article 2) (Government of Lao PDR, 2018[102]). Furthermore, according to the decree, SEZs shall “ensure sustainable development, environmental protection and promote and conserve national fine culture” (Article 5) (Government of Lao PDR, 2018[102]). The Decree on Special Economic Zones also includes articles on “environmental, cultural and social protection” (Article 38) and on “Contribution to the Community Development” (Article 39) (Government of Lao PDR, 2018[102]). According to these articles, “the Special Economic Zone Authority (SEZA) shall monitor, inspect and encourage Zone Developers and Investors for the protection and preservation of the environment, society, and national fine culture […] encourage Zone Developers and Investors to contribute to the local community development, such as in agriculture and animal husbandry, handicraft and others” (Government of Lao PDR, 2018[102]).

In order to further improve the environmental and social sustainability of SEZs in Lao PDR, it would be important to develop clear criteria for the approval of SEZs and to conduct public consultations prior to SEZ development. Currently, beyond the requirement for SEZs to complete EIAs, there is no requirement for public consultations in the SEZ approval and development process. Going forward, it would be beneficial to introduce mandatory public consultations that include all relevant stakeholders, especially local communities, and which should be conducted in advance of SEZ development. Public consultations are very important given that SEZs often involve land acquisition and the resettlement of local communities (Zeng, 2021[135]). In addition, it would be important to introduce environmental and social criteria and safeguards into the criteria and development standards for the approval of SEZs (OECD, 2009[137]). Moreover, the government of Lao PDR could regularly monitor the social and environmental performance of SEZs (Zeng, 2021[135]). It would also be beneficial to assess and take measures to combat corruption in SEZs (OECD, 2015[12]).

Investment tax incentives

Lao PDR has a complex system of investment tax incentives. Incentives and eligibility conditions are described in the Law on Investment Promotion, except for investment incentives in SEZs, which are described in the Decree on Special Economic Zones. Investment projects in nine promoted business sectors in three promoted investment zones could benefit from investment tax incentives. Available incentives include corporate income tax (CIT) exemptions and reduced CIT rates, customs duty and value added tax (VAT) exemptions and reductions and exemptions of rental and concession royalties for state land (Table 5.2). Investment tax incentives are contingent on one of the following: (i) a minimum investment of LAK 1.2 billion or the employment of at least 30 Laotian skilled employees; or (ii) the employment of at least 50 Laotian employees (regardless of their skills) with an employment contract of at least 1 year. The large number of tax incentives and their dual categorisation by sector and zone can be confusing for investors and difficult for the administration to manage.

The nine promoted sectors eligible for tax incentives in Lao PDR support sustainable development. These sectors are the same as the priority investment sectors (Table 5.2). Many of them have a focus on environmental sustainability (clean agriculture; environmentally friendly agro-processing and handicrafts; and cultural, historical and ecotourism), social development (education, modern and traditional healthcare, infrastructure, and banking and microfinance institutions focusing on poverty reduction and access to finance in remote areas) and economic diversification into more sophisticated activities (businesses using high and modern technology, and modern commercial centres).

Sector	Zone	CIT incentives	Concession royalty and state land incentives	Customs duty and VAT exemptions
Cultural, historical and ecotourism Infrastructure Banking and microfinance institutions focusing on poverty reduction and access to finance in remote areas Businesses using high and modern technology Modern commercial centres	Zone 1: Poor and remote areas with socio-economic infrastructure that is unfavourable to investment	Exemption for ten years	Exemption for ten years	Exemptions from customs duties paid on materials and equipment that cannot be produced or supplied in Lao PDR, and on machinery and vehicles directly used for production Customs duty exemptions on imported materials, equipment and parts used in production for exports VAT exemptions on domestic raw materials that are not natural resources and that are used to produce finished and semi-finished products SEZs (Zone 3): VAT exemption and VAT payment at 50% of the VAT rate for the use of electricity and water for factory construction for export 50% of the VAT rate for the construction and development of infrastructure to support the business operations of investors that are not 100% for exports
	Zone 2: Areas with socio-economic infrastructure that is favourable to investment	Exemption for four years	Exemption for five years
	Zone 3: SEZs	Exemption for 12 years if located in Zone 1 and for 6 years if located in Zone 2
Clean agriculture Environmentally friendly agro-processing and handicrafts Education Modern and traditional healthcare	Zone 1: Poor and remote areas with socio-economic infrastructure that is unfavourable to investment	Exemption for 15 years	Exemption for 15 years
	Zone 2: Areas with socio-economic infrastructure that is favourable to investment	Exemption for seven years	Exemption for eight years
	Zone 3: SEZs	Exemption for 12 years if located in Zone 1 and for 6 years if located in Zone 2; thereafter, reduced CIT rate at 35% of the normal rate for 5 years
SEZ developers	Zone 1: Poor and remote areas with socio-economic infrastructure that is unfavourable to investment	Exemption for 16 years; thereafter, reduced CIT rate at 35% of the normal rate for 5 years		VAT exemption for the construction of roads, electricity systems, water supply systems, waste treatment systems and waste disposal systems
SEZ developers	Zone 2: Areas with socio-economic infrastructure that is favourable to investment	Exemption for eight years; thereafter, reduced CIT rate at 35% of the normal rate for five years

Note: The MPI’s Instruction on Granting Investment Incentives on Profit Tax and State Land Rental or Concession Fee from 2021 provides a detailed list of promoted business subsectors as well as a detailed list of cities and districts that are part of investment zones 1, 2 and 3.

Source: (National Assembly of Lao PDR, 2016[98]), Law on Investment Promotion; (Government of Lao PDR, 2018[102]), “Decree on Special Economic Zones”, https://investlaos.gov.la/wp-content/uploads/formidable/22/Final_IPL_No.14.NA_17Nov2016_Eng_30_Oct_2018.pdf.

A large share of FDI in Lao PDR benefits from tax incentives that do not follow clear criteria and are negotiated on a case-by-case basis. In addition to the tax incentives listed in Table 5.2, which are clearly defined in the Investment Promotion Law and subject to clear eligibility criteria, the Law on Investment Promotion also allows for the allocation of “special incentives” to investors, which are negotiated on a case-by-case basis between the government and the investor (Articles 4 and 19). Such special incentives are not limited to the nine promoted sectors described previously, nor are they dependent on investing in one of the three promoted investment zones. The agreements between the government of Lao PDR and investors detailing these incentives are approved by the National Assembly of Lao PDR (National Assembly of Lao PDR, 2016[98]) and are, in most cases, not publicly available. Projects benefitting from such special incentives are generally large concession investments. They frequently fall into the mining and hydropower sectors, but also fall into the telecommunications, transportation infrastructure, agricultural, forestry and tourism sectors, and constitute the bulk of FDI in Lao PDR (OECD, 2017[4]).

Going forward, it would be important to place a stronger focus on the enabling environment for investment in Lao PDR and reduce the focus on generous tax incentives. Incentives should be used to complement, not replace, wider efforts to improve the country’s investment climate. While tax and non-tax incentives can help promote certain types of investment, a country’s tax burden is one of many factors (and not always the most important) considered by potential investors when weighing up investment decisions. The macroeconomic and business conditions, the legal and regulatory framework, the market size, the labour force conditions and the location-specific profit opportunities are equally or more important for investors than the tax burden. A higher tax burden in a host country could generally be acceptable to investors if the country’s overall enabling framework for investment is attractive (OECD, 2015[12]). In Lao PDR, in order to attract more quality investment, it would be particularly important to improve the availability of well-trained labour, governance and infrastructure, as well as the macroeconomic environment.

It would also be important to reduce discretion in the granting of investment tax incentives for concessions. The current incentive regime for investments in concession activities leaves a lot of space for discretion. Excessive administrative discretion in the hands of public officials can create unnecessary market distortions due to officials favouring some enterprises over others. It can also increase the risk of corruption and create opportunities for rent seeking as enterprises try to “convince” authorities to approve their applications. This can undermine good governance objectives that are fundamental to securing an attractive investment environment (OECD, 2015[12]; OECD, 2017[4]). Indeed, private investors in Lao PDR report that incentives are granted on an ad hoc basis, with different outcomes depending on personal relationships and vested interests (IFC, 2021[24]). In order to reduce the amount of personal discretion, all tax incentives (including those for concession investments), along with their eligibility criteria, could be incorporated into the Law on Investment Promotion Law and other relevant laws and regulations. Eligibility criteria for all tax incentives should be uniform, clearly defined and predetermined.

Furthermore, Lao PDR’s incentive system would benefit from simplification and increased transparency, and incentives linked to remote locations could be reconsidered. The large number of tax incentives and their dual categorisation by sector and zone can be confusing for investors and difficult to manage administratively. Providing investors with better and clearer information on the tax incentives available and the conditions linked to those incentives, combined with the simplification of outcome conditions, could improve transparency. Moreover, international evidence suggests that some of the objectives of Lao PDR’s investment tax incentives are difficult to attain: incentives have been found to not be very effective in attracting investment to remote and less developed regions. This is likely to be even more true in Lao PDR, given that investors are not required to operate in remote areas in order to benefit from incentives since multiple other avenues exist for benefiting from incentives, including SEZs and special incentives (IFC, 2021[24]; OECD, 2017[4]).

Lao PDR could consider phasing out the use of income-based incentives in favour of expenditure-based incentives, such as accelerated depreciation and tax allowances or credits. In Lao PDR, all CIT incentives for investors consist of income-based tax incentives (CIT exemptions and reduced CIT rates), which reduce the rate applied to income generated and generally attract investment that is already profitable early in the tax relief period (Box 5.9). They tend to favour enterprises with relatively high upfront profits and a limited time horizon in the country. These enterprises may not be those most in need of government support and may have undertaken their investment even without such incentives. On the other hand, expenditure-based tax incentives (e.g. tax allowances or tax credits) relate to the capital or current expenditure of enterprises and allow better targeting of incentives towards reducing specific costs, thereby encouraging investments that might not occur without the incentives. Furthermore, expenditure-based incentives are expected to be less affected by the Global Anti-Base Erosion (GloBE) rules, which introduce a minimum global effective tax rate of 15% for large MNEs (see Chapter 4 on Sustainable Fiscal Revenue) (OECD, 2023[138]).

Box 5.9. Tax incentive instruments

The most commonly observed CIT incentives can be categorised as income-based tax incentives (CIT exemptions and reduced CIT rates), which reduce the tax rate applied to income generated, and expenditure-based tax incentives (tax allowances and tax credits), which relate to enterprises’ capital or current expenditure, for instance:

Tax exemptions provide a full or partial exemption to qualifying taxable income and apply on either a temporary or permanent basis.
Reduced rates are CIT rates set below the standard rate for a sector or enterprise type and apply on a temporary or permanent basis.
Tax allowances are deducted from taxable income (i.e. income subject to taxes) and may target current expenditure (e.g. operating expenses) or capital expenditure. Tax allowances may allow for a faster write-off of the value of capital expenditure from taxable income up to 100% of incurred costs (i.e. acceleration) or can go beyond 100% of an acquisition cost (i.e. enhancement). This could include, for example, allowing enterprises to deduct 150% of the value of a new machine. Tax allowances for current expenditure are always enhancing (i.e. the deductible expenditures are higher than the actual costs incurred).
Tax credits are deductions from the amount of taxes due (i.e. tax liability) that may relate to capital expenditure or current expenditure.

Source: (Celani, Dressler and Wermelinger, 2022[139]), “Building an Investment Tax Incentives database: Methodology and initial findings for 36 developing countries”, OECD Working Papers on International Investment 2022/01; (OECD, 2022[140]), Investment Tax Incentive Database (ITID), https://www.oecd.org/fr/fiscalite/building-an-investment-tax-incentives-database-62e075a9-en.htm.

It would also be beneficial to use investment incentives more actively in order to advance environmental and social goals (OECD, 2022[11]; OECD, 2022[141]). This would be particularly important given that investment projects are frequently reported to have negative impacts on the environment and communities in Lao PDR. At present, Lao PDR makes less use of incentives in order to advance development goals than other ASEAN Member States and elsewhere around the world (Figure 5.19). Environmental and social goals could be supported through incentive eligibility conditions that require investors to meet certain measurable performance criteria (e.g. job creation, the provision of training or R&D, or no or low levels of pollution) or operate in certain sectors (e.g. renewable energy, organic agriculture or ecotourism), or by designing the incentive to reduce the costs of certain activities (e.g. R&D, training or pollution abatement) and increasing the revenues associated with other activities (e.g. exports). This could encourage enterprises to undertake activities they might not otherwise attempt, such as providing training or implementing measures to reduce pollution (Celani, Dressler and Wermelinger, 2022[139]).

Lao PDR could design incentives to support training, environmental protection and local linkages in particular. Investment incentives could help address Lao PDR’s skills shortage, support spillovers to the local economy and reduce negative environmental externalities linked to investment projects. Box 5.10 provides examples of how other countries use tax incentives in order to support environmental protection, to encourage on-the-job training and skills development, and to advance other social goals. In order to cultivate local linkages through tax incentives, Lao PDR could either: (i) require investors benefitting from investment incentives to source a minimum share of inputs from the local market or local SMEs; or (ii) provide accelerated deductions or enhanced allowances for locally sourced inputs or inputs sourced from domestic SMEs (OECD, 2022[140]). As part of the ongoing reform process of Lao PDR’s Law on Investment Promotion the IPD is already planning to introduce new eligibility criteria for the allocation of investment incentives that reflect the environmental and social impacts of investment projects.

Figure 5.19. Lao PDR makes less use of CIT incentives to advance development goals than other ASEAN member states and comparators elsewhere in the world

Development goals supported by CIT incentives

Outcome-linked incentives should be based on clear and quantifiable criteria, and there should be careful monitoring of whether firms adhere to these criteria and whether the incentives support the stated goals. Outcome conditions are often vague or based on non-quantifiable criteria (e.g. whether they contribute to job creation or are beneficial to the national economy), leaving ample room for discretionary approval of incentives by the awarding authorities. Moreover, performance criteria require close monitoring in order to ensure that enterprises adhere to these criteria and that the desired outcomes have been achieved. This, in turn, requires public resources, sufficient administrative capacity and, often, co‑ordination with other government agencies (e.g. cross-checking the number of jobs created or salaries against social security information) (OECD, forthcoming[142]). Given the current challenges in Lao PDR with regard to the inspection and monitoring of investment projects’ environmental outcomes (see the section on EIAs), ensuring effective monitoring of environmental outcomes linked to incentives in Lao PDR would require enhanced financial, human and technical resources for environmental inspection and monitoring. Moreover, while it would be important to make better use of investment incentives in order to promote sustainable development, it must be pointed out that other policy instruments can sometimes be more appropriate and important in reaching these goals.

Box 5.10. Using investment incentives in order to advance social and environmental goals

CIT exemptions and reductions for environmental protection, energy and water savings in China

In order to encourage environmental protection and sustainability, specific CIT incentives that promote energy and water savings and environmental protection exist in China. Eligible investment projects benefit from a three-year full CIT exemption, followed by a 50% exemption for another three years. Projects eligible for these incentives include public wastewater treatment, public trash disposal, comprehensive development and utilisation of biogas, upgrades of energy-saving or pollution-discharge-reduction technologies, and seawater desalination projects, among others (Deloitte, 2020[143]; PWC, 2023[144]; OECD, 2022[140]).

In addition, China offers tax credits for the purchase of equipment for environmental protection and workplace safety. Qualifying enterprises purchasing and using equipment for environmental protection, energy and water conservation, or workplace safety are eligible for a tax credit of 10% of the cost of the equipment. Any unused amount of this tax credit can be carried forward and credited in the following five years. However, if the enterprise itself does not use the special equipment purchased for at least five years, but instead transfers or leases it to someone else, it is no longer entitled to the tax credit and must make supplementary tax payments for any tax credit already used (Deloitte, 2020[143]; PWC, 2023[144]).

CIT exemptions for enterprises meeting economic, social and environmental criteria, and tax allowances for corporate social responsibility in Poland

The allocation of CIT exemptions in Poland is based on a scoring mechanism that takes social and environmental criteria into account. Companies can score up to eight points for meeting clear and detailed sustainable economic development criteria linked to Poland’s national development policy, R&D, human resource management, investing in national key manufacturing clusters, creating regional links, robotisation and automation (having at least one industrial robot), green energy, or qualifying as a micro, small and medium-sized enterprise. They can score up to five points for sustainable social development criteria, such as creating high-paid or specialised jobs, providing education and training, having a limited negative impact on the environment, introducing employee care measures, and being located in less developed regions. The minimum number of points required in order to be eligible for a CIT exemption varies from 4 to 6 points out of a total possible 13 points, depending on the location of the investment project (PAIH, 2023[145]; PAIH, n.d.[146]; PWC, 2023[147]; PAIH, 2023[148]).

CIT exemptions are more generous in less developed regions and specific subsectors. A lower minimum number of points is required in order to be eligible for a CIT exemption in less developed provinces. Similarly, depending on the location, enterprises can benefit from CIT exemptions for 10‑15 years. Again, incentives are more generous in less developed provinces. In addition to scoring 4‑6 points depending on their location, enterprises must satisfy different minimum investment capital expenditures, ranging from PLN 0.2 million (Polish zlotys) to PLN 100 million depending on their size and the unemployment rate in the area where the investment takes place. Minimum investment costs are lower in areas with a larger deviation from the national average unemployment rate. Furthermore, minimum cost thresholds are 95% lower for specific technology-intensive subsectors related to information technology and other modern services (PAIH, 2023[145]; PAIH, n.d.[146]; PWC, 2023[147]; PAIH, 2023[148]).

In addition to CIT incentives, Poland offers tax allowances for corporate social responsibility (CSR) linked to sports, culture and education. Investors can deduct 50% of the costs incurred for selected activities from the tax base in their tax return for the tax year in which these costs are incurred. Eligible costs include the purchase of sports equipment and the cost of organising or participating in sports competitions; covering employees’ costs for using sports facilities; financing cultural activities and cultural institutions; funding student, research and sports scholarships; covering the costs for an employee pursuing further education; and providing remuneration for students during internships and work placements (PWC, 2023[147]).

Tax allowance for skills development in Indonesia

Indonesia offers a tax allowance to enterprises that provide internships, educational activities, apprenticeships or training programmes. This tax allowance seeks to encourage skills development opportunities for Indonesia’s labour force. It enables enterprises to deduct 200% of the costs incurred for relevant activities from their taxable income (ILO, 2019[149]).

Tax deductions for youth employment and training in Angola

Angola recently introduced tax benefits in order to encourage youth employment and social inclusion. In addition to a 100% deduction of the enterprise’s taxable income, enterprises hiring young people for professional internships can deduct 50% of the lowest salary for civil servants per intern. The additional deduction increases to 60% of the lowest civil service salary for female interns or interns with disabilities. The benefit requires a contract duration ranging from 6 to 12 months (Morais Leitão, 2022[150]). Angola also offers a training deduction that enables enterprises to deduct an additional 25% of the training costs incurred, provided that the training was carried out by a certified institution. The incentive is capped at a maximum of AOA 1 million (Angolan kwanzas) for training costs (PWC, 2023[151]).

Source: (PWC, 2023[144]), China, People's Republic of - Corporate - Tax credits and incentives; (Deloitte, 2020[143]), Survey of Global Investment and Innovation Incentives - China – 2020; (PAIH, 2023[145]), Sustainable Growth - Strategic FDI Priorisation; (PAIH, n.d.[146]), Investment Incentives Polish Investment Zone; (PWC, 2023[147]), Poland - Corporate - Tax credits and incentives; (OECD, 2022[140]), Investment Tax Incentive Database (ITID); (ILO, 2019[149]), Indonesia’s tax deduction programme to attract more industries involved in apprenticeship; (Morais Leitão, 2022[150]), Angola - The Tax Benefits Code; (PWC, 2023[151]), Angola: Corporate - Tax credits and incentives; (PAIH, 2023[148]), Public Aid.

In addition to improving the design of tax incentives in Lao PDR, it is also critical to ensure that there is transparency on all types of incentives available to investors. Investment incentives can be divided into three broad categories: (i) tax, financial and in-kind incentives; (ii) regulatory incentives; and (iii) non-financial incentives. These types can be further categorised by instrument (e.g. CIT incentives, direct grants, or provisions related to infrastructure and land). Ensuring transparency on these different types of incentives is essential in order to facilitate not only their uptake by investors but also the evaluation of their costs and benefits. This requires, first and foremost, that relevant information and legislation on all incentives is up to date and available to investors and the public. Moreover, it is important that this information is easily accessible – for example, through the development of incentive guides or the issuance of consolidated legal acts that combine and streamline all information on investment incentives from relevant legal and regulatory documents (such as the Law on Investment Promotion and the Decree on Special Economic Zones in Lao PDR). Finally, it is necessary to ensure that incentives have a clear design and to avoid overly complex incentive systems (Chafiz, Dressler and Wermelinger, 2023[152]).

Improving the design and increasing the effectiveness of tax incentives in Lao PDR also requires evaluating whether incentives achieve their objectives, and if so, at what cost. While the IPD has produced a brief analysis of the advantages and disadvantages of investment incentives, including revenue losses, this document is not publicly available and a more comprehensive evaluation of investment tax incentives in Lao PDR does not exist. Such an evaluation should assess whether tax incentives are best designed to support the country’s policy goals and whether they succeed in generating additional investment. Benefits of tax incentives, which should be taken into account in a comprehensive cost-benefit evaluation of tax incentives, include the amount of investment motivated by incentives; the direct impact of the incentive-motivated investment; and the incentives’ indirect and induced impacts due to inter-industry transactions, positive externalities, and social and environmental benefits. The costs that should be included in such an evaluation include revenue forgone due to tax incentives (both directly and indirectly through revenue leakages); costs incurred by taxpayers in order to comply with a given tax incentive programme; the administrative costs of running the tax incentive programmes; and the cost to the economy of creating an “uneven playing field” (OECD, 2017[4]; OECD, 2015[12]).

In addition to a comprehensive cost-benefit evaluation of tax incentives, it would also be important to monitor tax incentives in Lao PDR on a regular basis. This should include the regular collection of data on tax incentive expenditure, as well as tracking investor compliance with qualifying conditions and audits in order to detect potential fraud or abuse. Such data can then be used in order to evaluate whether tax incentives achieve their objectives (OECD et al., 2023[153]; OECD, forthcoming[154]).

Responsible business conduct

RBC means that businesses should avoid and address the adverse effects of their operations and make a positive contribution to economic, environmental and social progress in the countries in which they operate. This applies to all businesses, regardless of their legal status, size, ownership structure or sector. RBC expectations encompass business activities within an enterprise’s operations, as well as its relationships within the supply chain. The main international frameworks on RBC are set out in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, the UN’s Guiding Principles on Business and Human Rights and the ILO’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (OECD, 2015[12]; OECD, 2017[4]; OECD, 2023[155]). RBC principles and standards outline the requirement for all enterprises to address the adverse impacts of their activities by engaging in a process known as due diligence. This process involves businesses identifying, preventing and mitigating both actual and potential negative effects, while also being accountable for how they address these impacts (OECD, 2018[156]).

Governments have the role of providing businesses with an enabling framework for RBC. An enabling framework of this nature can contribute to attracting higher quality and more responsible investment and to minimising the adverse impacts of investment projects. Governments’ increasing focus on RBC through both voluntary initiatives and regulations, as well as the growing significance of environmental, social and governance factors in the decision-making processes of consumers and investors, have transformed RBC into a critical factor to consider for any country seeking to maintain its competitiveness as a destination for sourcing and investment on the global stage.

Awareness of RBC and due diligence remains low among businesses in Lao PDR. Some foreign investors, especially those that receive funding from international financial institutions, do engage in RBC: for example, forestry enterprises adhering to the FPIC principles, or wind and hydropower plants financed by international donors. Furthermore, the IPD is making some efforts to encourage investors to engage in RBC. Overall, however, Lao PDR’s government has undertaken few initiatives to promote RBC and provide businesses with a comprehensive enabling framework for RBC, which has yet to be developed.

RBC could contribute to addressing the environmental and social issues linked to investment projects discussed previously (see the section on opportunities and challenges in key investment sectors), as well as issues linked to forced labour and human trafficking. It is reported that in some cases, human traffickers persuade Laotian men, women and children to move abroad to neighbouring countries with false promises of legitimate jobs or fraudulent recruitment for jobs on the Internet. These individuals are then forced to serve as manual labourers or sex workers. Complex formal migration procedures, especially in the aftermath of the COVID‑19 pandemic, have favoured informal migration, with migrants frequently resorting to using human traffickers. Human traffickers have also been reported to force Laotians and foreigners to work for cyber and telephone scams in Lao PDR, especially in SEZs. Child pornography rings are also an issue. Foreign and Laotian workers in SEZs and working at or near foreign-owned or foreign-operated agricultural operations and transportation infrastructure construction sites are particularly affected by forced labour and sex trafficking. Local communities in Lao PDR that are displaced by natural disasters or foreign investment projects are also vulnerable to trafficking. The COVID‑19 pandemic opened up new opportunities for human trafficking by increasing economic hardship in Lao PDR, especially among migrant workers returning from abroad and their families in Lao PDR, who lost an important part of their incomes in the form of remittances (U.S. Department of State, 2023[157]).

RBC could also contribute to reducing child labour. Child labour is reported to occur in particular in ethnic minority communities in rural areas (RFA, 2021[158]). According to Save the Children’s Global Childhood Report 2021, between 2015 and 2020, 28.2% of children aged 5‑17 years engaged in child labour in Lao PDR, two-thirds of them in hazardous work (Save the Children, 2021[159]; Save the Children, 2023[160]). According to UNICEF’s Lao Social Indicator Survey II 2017, in 2017, 42% of children in Lao PDR aged 5‑17 years engaged in labour, and child labour was more widespread among ethnic minorities. Moreover, 29% of children aged 5‑17 years worked under hazardous conditions (UNICEF, 2020[161]). In many cases, children forgo education in order to perform agricultural work or stay at home taking care of younger siblings (RFA, 2021[158]; Save the Children, 2021[159]; Save the Children, 2023[160]).

There are several donor-influenced initiatives to improve RBC in Lao PDR. For example, in the context of the Poverty Environment Action for the Sustainable Development Goals initiative established by the United Nations Development Programme (UNDP) and the United Nations Environment Programme (UNEP), CSR guidelines for investors were developed and ten hotels in Luang Prabang participated in a programme to improve CSR in Lao PDR’s tourism sector. Another initiative is the Improving Performance, Accountability, Conduct, and Transparency of Businesses in Lao PDR (IMPACT Biz) project, which is supported by the government of Japan. The IMPACT Biz project seeks to advance RBC in Lao PDR by supporting the government to develop a policy and legal framework for RBC, supporting businesses in the EIA process, and assisting civil society in monitoring RBC (UNDP, 2022[162]). In addition, Germany’s GIZ published a baseline assessment of social and environmental regulations and standards and CSR in several sectors in 2015 (GIZ/BGR, 2015[163]).

Joint initiatives by the private sector, the public sector and international donors to encourage RBC have surfaced recently in Lao PDR. The Lao Responsible Business Conduct Forum has been organised four times since 2015, most recently in March 2023 by the MOIC, the Embassy of Canada in Lao PDR, and the UNDP. The Responsible Business Conduct Forum seeks to provide a platform for the government, the private sector, civil society, academia and development partners to explore the implementation of international RBC standards in Lao PDR (UNDP, 2023[164]). In addition, since 2021, the Lao Responsible Business Awards (previously called the Lao CSR Awards) have been awarded annually to those applicants from the private sector performing best in different categories of CSR. The Lao CSR Awards are a joint initiative by the Embassy of Canada in Lao PDR, Civitas Consulting, the Australian Chamber of Commerce in Lao PDR, the British Business Group Lao PDR, the European Chamber of Commerce and Industry in Lao PDR, the Embassy of Japan in Lao PDR and the LNCCI (LNCCI, 2023[165]; BBG Lao PDR, 2023[166]; BBG Lao PDR, 2022[167]; LNCCI, 2021[168]).

Lao PDR has ratified many international human rights, labour, environmental and anti-bribery conventions. Lao PDR has ratified seven of the nine UN core conventions on human rights (OHCHR, 2023[169]), and five of the eight fundamental ILO conventions on labour rights are in force in the country (ILO, 2023[170]). Lao PDR has also adhered to important climate change agreements, including the Kyoto Protocol and the Paris Agreement, and has ratified the Convention on Biological Diversity. Lao PDR has adhered to the United Nations Convention against Corruption but has not ratified the Voluntary Principles on Security and Human Rights (OECD, 2023[129]).

There is scope to better enforce the implementation of these conventions. Steps have been taken to translate these conventions into national policies, laws and regulations, but implementation remains a challenge. For example, the Labour Law of 2006 prohibits the employment of children aged under 14 years and bans the employment of children aged under 18 years in sectors that are dangerous to their health. The law also limits working hours for children aged 14‑18 years to 8 hours per day and prohibits night work (RFA, 2021[158]). However, as mentioned previously, despite these regulations, child labour (including related to hazardous work) remains an issue in Lao PDR.

Going forward, it would be important for Lao PDR’s government to develop an institutional and policy framework for RBC. Lao PDR could consider creating a special dedicated body or appointing a focal point within the government that is responsible for co‑ordinating RBC activities and promotion (OECD, 2017[4]; OECD, 2015[12]). In addition, a national action plan on RBC or on business and human rights, or a national RBC policy, is a key component of a comprehensive policy framework that guides specific government actions in order to promote RBC. NAPs have already been adopted in the region by Thailand (in 2019), Pakistan (2021) and Viet Nam (2023), and are currently being developed by India and Nepal (DIHR, 2023[171]). Such a document should be aligned with Lao PDR’s NSEDP and with international best practices, and should be based on consultations with all relevant stakeholders, including business associations and private enterprises, government agencies, worker associations, employer associations, civil society, and local communities (OECD, 2017[4]; OECD, 2015[12]). Given that many investors in hydropower, mining and agriculture (sectors that have an adverse social and environmental impact) originate from neighbouring countries, including China, Thailand and Viet Nam, it would be important to include actors from these countries in this process. Furthermore, RBC initiatives in these countries, such as the Chinese Guidelines for Sustainable Development of Natural Rubber (2017), should be taken into account in this process (Sylvester, 2018[8]).

RBC could be more actively encouraged through targeted programmes and through investment promotion and facilitation activities. Lao PDR could establish industry-specific, home-grown programmes in order to raise awareness of and encourage RBC and the implementation of due diligence among businesses. Such programmes could, for example, target the mining, hydropower or agricultural sectors, all of which have a considerable negative social and environmental impact (see the section on opportunities and challenges in key investment sectors). In addition, investment promotion efforts could be targeted at MNEs that have strong environmental and social safeguards and would be willing to source inputs locally. Supplier databases with RBC criteria could also be developed (OECD, 2017[4]).

RBC could help Lao PDR bridge the skills gap and improve environmental protection. It would be important to communicate to private enterprises that contributing to human capital formation and environmental protection are both part of RBC, and to give recognition and visibility to those enterprises involved in education and training, as well as those enterprises with rigorous environmental safeguards or that are involved in environmental protection and conservation activities. Lao PDR could also provide enterprises with incentives to provide on-the-job training, learning opportunities, apprenticeships, traineeships and internships; for example, through tax incentives (OECD, 2017[4]) (see the section on investment tax incentives). Similarly, Lao PDR could provide enterprises with incentives to adopt strong environmental safeguards and to engage in environmental protection and conservation (for example, to participate in reforestation efforts through tax or other incentives).

Lao PDR requires better remedy and grievance redress mechanisms for dealing with the negative externalities of investment projects, particularly environmental and social impacts. This includes both enterprise-level grievance mechanisms and public grievance mechanisms for local communities or investors that are negatively affected by investment projects (for example, through soil, water or air pollution) (Sylvester, 2018[8]; Village Focus International/National University of Laos, 2019[9]; OECD, 2017[4]). At present, many agricultural investors resolve complaints directly with villagers (through village meetings or on the phone), but they lack formal and effective grievance mechanisms (Sylvester, 2018[8]; Village Focus International/National University of Laos, 2019[9]).

It would be important to improve RBC for concession investments in particular. Sectors that are reported to have significant negative environmental and social impacts, including the hydropower, mining and agricultural sectors, tend to be heavily focused on concession investments. The design of concession agreements could be improved by incorporating strong environmental and social safeguards into these agreements. There is also scope to improve the implementation and respect of EIAs (see the section on EIAs). In addition, transparency could be increased by making concession agreements publicly available, which could lead to stronger accountability (Sylvester, 2018[8]).

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Notes

← 1. This policy aimed at generating economic value (including government revenues and economic development) from the marketisation of land, and has since been the driving force of land-based investment in Lao PDR. In the context of this policy, Lao PDR increasingly opened the door to FDI, especially land-based FDI (CDE/University of Bern/MRLG, 2019[5]; Sylvester, 2018[8]).

← 2. This estimate includes the loss of capture fisheries, nutrient-rich sediment flows and social migration measures for resettlement at net present value (with a 10% discount rate) (Intralawan et al., 2018[7]).

← 3. According to the ASEAN SME policy index 2024, a slow improvement in the environment for small- and medium sized enterprises (SMEs) has been noted compared to 2018. Apart from the Lao SME Service Center (SSC) established in 2017 in Vientiane there are now six provincial branches, Luang Prabang (opened in 2019), Champasak (opened in 2019), Savannakhet (opened in 2020), and Oudomxay and Bolikhamxay (opened in 2022) and Luang Namtha (opened in 2023) (ERIA/OECD, forthcoming[173]).

← 4. The increase in unemployment can be attributed to a loss in competitiveness and a loss of private sector jobs up to 2019, as well as to public sector downsizing in the context of the pandemic and the economic crisis (World Bank, 2023[61]).

← 5. Examples of land value capture tools include tax increment financing (TIF) districts, development charges, development rights and joint development (OECD, n.d.[80]).

← 6. Similar to PPPs, green bonds would be an option for financing sustainable transportation infrastructure in Lao PDR only in the long term (not in the short to medium term), given that Lao PDR is in debt distress (see Chapter 3 on sustainable financing).

← 7. “Passive bribery” refers to the offence committed by an official who receives a bribe.

← 8. The index uses a scale from 1 (highly corrupt) to 100 (very clean).

← 9. The central CIPM’s Deputy Chairmen are the Minister of Planning and Investment and the Minister of Industry and Commerce. Other members of the central-level CIPM include the deputy ministers of the MPI, the Ministry of Finance, MONRE, the Ministry of Energy and Mines, the MAF, the Ministry of Public Works and Transport, the Ministry of Information, Culture and Tourism (MICT), the Ministry of Labour and Social Welfare, and the Ministry of Public Security (Article 76 of the Law on Investment Promotion) (National Assembly of Lao PDR, 2016[98]).

← 10. TDF‑2 is a multi-donor programme financed by Australia, the EU, Germany, Ireland, the United States and the World Bank focusing on improving trade and private sector development in Lao PDR (Bank, 2017[172]).

← 11. According to interviews with private sector representatives in Lao PDR.

← 12. These priorities are as follows: (i) production and services sectors that can promote green and sustainable economic growth, increase production in order to substitute imports and promote exports, and create more diversified jobs; (ii) human resource development, especially in order to improve the quality of education, health and skills development; (iii) research and development (R&D); (iv) rural development and poverty alleviation; (v) improving public governance and administration; and (vi) infrastructure development (Government of Lao PDR, 2021[111]).

← 13. According to interviews with non-governmental organisations in Lao PDR.

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