Foreign money pours into Laos

Foreign money pours into Laos

Neighboring countries jostle for work in resources and hydropower; Western companies also step in

On the face of it, Laos is a no man's land for foreign investors.

This landlocked, Southeast Asian nation of 6.5 million people offers a tiny market. Experts say corruption is widespread. And some foreigners say they have been burned when deals in the country unraveled.

Yet investment is pouring in.

Source: World Bank, The Wall Street Journal, European PressPhoto Agency

Foreign direct investment rose more than 40% in each of the past two years, largely as neighboring countries jostled for work in the resource and hydropower sectors. Chinese companies increasingly are breaking ground on real-estate projects, and Western companies including Coca-Cola Co. and French lens makerEssilor International SA also are stepping in.

The World Bank predicted that Laos would post a record trade deficit of $1.3 billion for last year. The gap would largely stem from imports related to foreign investments, such as fuel, vehicles and construction materials.

The Laotian economy remains small compared with those of neighboring Thailand, Vietnam and Myanmar. And foreign direct investment first topped the billion-dollar mark only last year.

But Laos hopes to attract $8 billion in investment from 2011 to 2015, the vast majority of it from foreign investors, to keep its economy expanding around 8% a year. In a $9 billion economy, the injection of capital from abroad is an important part of the government's plan to expand budding industries by the end of the decade to shake off the country's status as one of the world's 48 least-developed countries.

"Laos might not be as interesting as a Vietnam or Thailand, but it's growing, and it provides steady revenue," says Chris Manley, the Laos manager for RMA Lao, the largest U.S. company operating in Laos. The company, which distributes Fords, Land Rovers, John Deere tractors and heavy trucks and equipment, is building showrooms and expanding others to meet a car boom in the capital of Vientiane and in smaller cities.

Part of the appeal for foreign companies lies in establishing a footprint in the region as Southeast Asian nations prepare to form the Asean Economic Community in 2015. The bloc will bring together nearly 10% of the world's population into a shared economy of more than $2 trillion.

Coca-Cola in late November announced plans to build the U.S. company's first bottling plant in Laos. Citing the country's entry into the World Trade Organization next month "and the beginning of the integration of the country into the global economy, we see opportunities for growth in this market," the U.S.-based company says.

Malayan Banking Bhd. in November opened its first Laotian branch, in Vientiane. And Essilor, which makes eyeglass lenses, will build a plant this year in the southwestern province of Savannakhet, the company's first in the region beyond Thailand.

China CAMC Engineering Co. 002051.SZ -1.63% is working on Vientiane's new convention center, which is expected to be completed by November, and is a year into a $600 million plan to reshape Vientiane's waterfront over the next six years or so. The state-owned company long has played a construction role in Laos, a country with only a handful of buildings higher than five stories.

Mall developer Shanghai Wanfeng Group last month broke ground in the capital on what the company said would be a $1.6 billion commercial and residential development—Shanghai Wanfeng's first major foray outside China. And Malaysia's Giant Consolidated Ltd. recently signed a contract to fund a $5 billion railway line connecting Vietnam to southern Laos, a country that is essentially barren of track today.

But whether these investors have moved too quickly remains a question. The U.S. State Department has warned that commercial law remains untested here. And risk-assessment firm Maplecroft said in a report this month that "the weak rule of law and frequent government intervention…will continue to expose foreign businesses to arbitrary legal action."

Several investments here have gone bust in recent years.

Macau-based Sanum Investments Ltd. says some of the casino operator's assets have been seized by the Laotian government in disputes between Sanum and its local partner and over roughly $23 million in taxes and fees. Sanum, a unit of Netherlands-based Lao Holdings NV, says the claims against it are baseless and that the government appears intent on expropriating the company's businesses, including one of the country's major casinos. Sanum says it invested more than $85 million in its Laotian operations and is seeking international arbitration.

Francis Chagnaud, a Frenchman who has been in the agricultural-forestry business in Laos for two decades, was told to relocate Agroforex Co.'s factory in Vientiane midway through a long-term contract when the state denied the company's landlord an extension. Mr. Chagnaud, who says the government has done little to address the issue, was forced to move when he found one day that part of his factory's roof had been removed overnight.

The Justice Ministry didn't respond to requests for comment about Sanum and Agroforex.

Mr. Chagnaud says the experience hasn't soured him on Laos, and that his troubles are typical in a developing country. "In Laos, the commercial competition may be less, but the state of law is undeveloped. And you should prepare investors for that," he says.

"Corruption is getting worse and worse," says Oudet Souvannavong, vice president of the Lao National Chamber of Commerce and Industry. "The courts go to the highest bidder." Graft is most pervasive in big-ticket projects and is perhaps the country's fundamental impediment to attracting more investment, Mr. Souvannavong says.

The government says it is working to improve the business climate and cites a streamlined bureaucracy and the country's recent acceptance into the WTO.

"It used to be that you had to go to multiple ministries to get licenses, and that's changed. We've allowed foreigners into most sectors—hotels and hospitality and tourism—and most industry, including mining and hydro," says Santisouk Phounesavath, a deputy director in the Ministry of Trade and Commerce.

"Thailand and China have always been willing to take more risks" in Laos, he says. "But now the laws are in place, so I hope this will attract more Western companies. Australia was the first to come. And companies from the U.S. and Europe, they're slowly coming too."

wall street journal