The Changing Landscape of Doing Business in Lao PDR

On the 31st of October 2017, the World Bank released its latest Doing Business report titled ‘Doing Business 2018: Reforming to Create Jobs’. Of concern, the Lao People’s Democratic Republic (“Lao PDR”) ranked 141 out of 190 countries on the World Bank’s Ease of Doing Business rankings, continuing a downward trajectory on the rankings from the country’s all time high of 136 in 2015, having slipped to 139 in 2016.

A number of indicators feed into the ranking received by Lao PDR, including the comparatively difficult process in establishing a business (where it ranks 164), obtaining electricity (ranked 149), the protections afforded to minority shareholders (ranked 172), the ease of paying taxes (ranked 156) and the ease of resolving insolvency (ranked 168).

On 1 February 2018, at least partially as a direct response to the World Bank’s report, the Prime Minister issued an Order[1] entitled ‘Order on the Amendment of Regulations and Coordination Mechanisms for the Operation of Businesses in Lao PDR[2] issued to various Ministries, Ministry-Equivalent Organizations, and the Capital and Provincial Administration Authorities, to implement resolve, and reduce the steps and periods related to the issuance of licenses for business operations during 2018 and 2019.

While the Order makes a number of broad statements pertaining to the responsibilities assigned to various Ministries, it also reflects concrete steps which the Government is mandated to take to reduce the burden on persons wishing to register a business in Lao PDR and are addressed at the specific 10 indicators which the World Bank addresses to determine the Ease of Doing Business ranking. As examples, the Order instructs the:

Ministry of Industry and Commerce to:

  • repeal and replace the current process related to a businesses’ “enterprise sign”;
  • upgrade various systems to allow for certain processes to run concurrently; and
  • provide for online registration of businesses by 2019.

Since the Order, the Ministry of Industry and Commerce has effected a review and reorganization of the process related to registering business entities, with a newly minted process set to have been effected during July 2018.

Ministry of Public Works and Transport to:

  • review the documents and forms necessary for construction applications;
  • publish all regulations pertaining to such applications, as well as forms and documents pertaining to, on its website to facilitate access; and
  • remove unnecessary steps in the application procedure to reduce the number of steps from 11 to 7 steps and reduce the period for approval for construction applications from 83 days to not more than 45 days during 2018 and not more than 30 days during 2019.

Ministry of Energy and Mines to reduce the number of steps and the period applicable to electricity installation. The aim is to reduce the current 6 steps to 5 steps and the applicable period from 134 days to not more than 50 days during 2018 and not more than 40 days during 2019, with shorter periods prescribed for the installation of generators;

Similarly, the Order reflects instructions to each of the Ministry of Natural Resources and Environment, the Bank of Lao PDR, the Ministry of Finance, the Ministry of Justice, the Ministry of Public Security and the Lao National Chamber of Commerce and Industry.

In addition to various regulatory amendments which will be necessary to implement, inter alia, the specific instructions relating to the decrease in steps and time of establishing businesses, construction permits and electricity installation, the Order instructs the Ministry of Justice to undertake a review of the current Law on Bankruptcy of Enterprise[3] and “upgrade” same, which will likely take the form of a repeal and replacement or amendment of the current law. As the World Bank’s report currently reflects that no practice exists with regards to the application of insolvency regime, both an amendment of the current regime and enforcement of the amended regime would go a long way to encourage foreign investors to enter the market as minority investors in Lao enterprises.

The Order dovetails with a number of legislative reforms which have been implemented in the preceding half decade or are currently being considered by the Government of Lao PDR. From the last quarter of 2013, the Government of Lao PDR has been implementing various reforms to modernise the country’s revenue collection by introducing electronic systems for the payment of tax. While the process has been slow to date, to date the electronic systems have been implemented with a variety of taxes, including profit taxes and value-added tax. The Order further instructs the Ministry of Finance to reduce the frequency of payments of profit taxes from quarterly to annually and to ease the process relating to payment of social security taxes for enterprises. Implementation of the Order, as well as the movement of tax payments onto electronic systems, should see a reduction of the number of tax payments which enterprises are required to make, as well as a reduction in the time needed to be dedicated to tax payments per year (which the World Bank determined as 35 and 362 respectively). It is also worth noting that the laws pertaining to value-added tax are set for an amendment to be debated in the National Assembly before or during the second quarter of this year.

The amendment to the Law on Value Added Tax mentioned above forms part of a plethora of draft amendments and new legislation set for debate in the National Assembly, including 14 other such pieces of legislation. Included in such, and related to the Order and the World Bank’s report, are the Law on Social Security, related to Lao PDR’s ranking in relation to the tax system, and the Law on Economic Dispute Resolutions. The latter aims to, inter alia, allow for the enforcement of commercial agreements both via the Lao PDR court system and by way of arbitration. The Order specifically instructs the Ministry of Justice to review legislation to reduce the indicators which the World Bank have utilised to determine the ranking of Lao PDR in the ‘Enforcing Contracts’ sub-ranking of the index, which the World Bank currently indicated as:

Time (days) 443

Cost (% of claim) 31.6

Quality of judicial processes index (0 – 18) 5.5

Currently, there is some hesitation for parties to initiate the judicial process in Lao PDR, and a review of the current processes and capacities, as well as the introduction of enforceable alternative dispute resolution mechanisms available to enterprises, would see a substantial uptick in the confidence of foreign investors to outlay in Lao PDR.

Those enterprises currently operating in Lao PDR, and those considering or intending to establish presences in the Lao PDR market, should expect a raft of regulatory and legislative changes over the course of the next two years. Generally, it appears that the changes will all be regarded as positive and largely aimed at facilitating the establishment and operation of enterprises in the jurisdiction and providing more certainty to both domestic and foreign investors in recouping their investments into/in the country. To the extent that the expected legislation and the instructions in the Order are successfully implemented, we would expect to see a considerably more business-friendly environment developing over the course of the next two years with concomitant increases of foreign investment (and productivity of both currently established foreign and local entities) in the medium term.

 

[1] An Order by the Prime Minister as contemplated in Part IV, Chapter 5 of the Law on Making Legislation No. 19/NA of 2012. Such Orders are instituted “to require individuals or organizations to implement a plan, laws, Presidential Decree and other legislation and other matters under their scope of rights and duties.”

[2] No. 02/PM of 2018

[3] No. 06/94 of 1994