LAOS-Incentives needed to attract investment in special economic zones

By Souksakhone Vaenkeo

Vientiane Times-Oct 31

The government has ordered action to further improve the business environment and offer additional incentives aimed at boosting investment in special and specific economic zones (SEZs) amid growing competition in neighboring countries.
A recent survey suggests that Cambodia, Myanmar and Thailand have also established SEZs and are offering greater incentives.

Incentives needed to attract investment in special economic zones

Thailand, for instance, is creating 10 special economic zones, many of which are located along its border with Laos, according to the survey, which was carried out by the National Economic Research Institute (NERI).

“These SEZs will become important competitors in attracting foreign investments flowing into Southeast Asia,” NERI’s economic analysts suggested in the survey report.
Myanmar and Thailand have exempted profit tax for the first eight years and cut by half the profit tax in the following five years, among other incentives.
To increase its competitiveness, the Lao government has entrusted the Ministry of Planning and Investment to offer conditions to better facilitate business operations in SEZs with a greater focus on making more effective use of the existing one-stop service mechanism.

The cabinet issued the instruction in its recent monthly meeting for October when the survey on the establishment and operation of SEZs was reported.
Chaired by Prime Minister Thongloun Sisoulith, the meeting asked the ministry to translate the relevant laws and regulations in defining incentives for businesses.
The survey, which highlighted opportunities and challenges, suggested that Laos is competitive for several reasons and has the potential to pursue its production base ambition.
It stated that Laos’ strategic location, being centrally positioned within the region, is a strong advantage.
With its ambitious plans and engagement in developing a number of transport networks including the ongoing construction of the Laos-China railway, Laos will better serve as a regional gateway to connect China – the world’s second largest economy – with countries in Southeast Asia.
Competitive land concession fees and the availability of land for investment are also advantages. The country’s strong potential to produce hydroelectricity for supply to businesses at a competitive price also makes Laos an attractive choice.
In addition, trade privileges for made-in-Laos products have been offered by many developed countries, which provide manufacturers with a secure market for their goods at very competitive prices.
Laos can also tap the potential of its huge workforce, which needs to undergo training to become skillful. As of June this year, some 12 SEZs offering tax breaks had been established and were operating across the country. These have attracted 503 local and foreign companies with registered capital of more than US$8.4 billion, although this figure falls far short of the target of US$34.5 billion.
First introduced in Laos in 2003, SEZs are intended to diversify the economy whose growth heavily depends on natural resources and public spending, neither of which is sustainable.
Although making increased contributions to Gross Domestic Product (GDP), which was recorded at 0.72 percent and 0.85 percent in 2015 and 2016 respectively, there is the potential for SEZs to make greater contributions if the following challenges are addressed, the NERI told the cabinet. Although the one-stop service mechanism was introduced several years ago, coordination among the relevant sectors is inefficient, according to the survey, which collected and analyzed information from all 12 SEZs.
Particular difficulties facing businesses in these zones include the issuing of work permits, applications for multi-entry visas, import and export procedures, and the issuing of real estate certificates.
Several procedures imposed on goods transport have resulted in high transport costs that undermine competitiveness, while poor road conditions between the zones and border crossings have the import and export process time-consuming.
NERI’s economic analysts said these issues have made businesses hesitant about making investment decisions.
Given the fact that zone developers have failed to obtain and allocate sufficient funds to develop facilities inside the zones as agreed, this has meant that developers are unable to offer sufficient facilities for individual investors, which is hindering the promotion of investment in the zones.
The NERI recommended that the relevant sectors hold talks to discuss ways to address these issues in order to better facilitate business operations.
Another difficulty that businesses are facing is the sourcing of sufficiently skilled local workers. This has meant they have had to hire foreign workers, denying Laos the chance to generate more jobs.
The survey underlined the need for Laos’ SEZs to employ modern technology in manufacturing, while the Lao government needs to introduce marketing policies such as a policy to promote manufacturing for domestic consumption to reduce the need for imports.

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