Lao PDR’s new rulebook for foreign investment in natural resources boosts local benefits

In the remote province of Sekong in southern Laos deep muddy ditches encircle villages in the Thateng district. These were not dug by villagers to protect themselves from an invading army but by a Vietnamese rubber company to stop villagers’ cattle from entering the surrounding plantation. The company was granted a 50 year land concession by the Lao PDR government to manage plantations. Last year, as the rubber estate expanded, twenty five villages were displaced, and the remaining communities lost access to the surrounding forest, the source of their food and livelihoods.

Under the Lao constitution, all land in the country is the property of the state. The evicted communities of the Thateng district were offered no compensation and no alternative land. To protect communities and local ecosystems across the country from suffering similar scenarios, the government is developing a new rulebook for foreign investors. Working in partnership with the UNDP-UNEP Poverty-Environment Initiative (PEI), the government is developing new contracts, tighter conditions and more advanced monitoring systems to make investments work for its communities as well as for the environment.

The pursuit of foreign direct investment (FDI) in Laos, a philosopher’s stone in terms of economic development for many poor nations, has brought mixed results. In the best cases, it has indeed helped to spur economic development, bringing jobs, skills and technologies to a country that is developing quickly.

The economy has been expanding at the average rate of over 6 per cent annual GDP growth over the last decade, much of which is driven by FDI in the natural resource sectors from surrounding powerhouses including China, Thailand and Vietnam. But, all too often in Lao, the societal benefits of FDI have proved elusive.

Foreign workers have been brought in to the country while raw materials have been exported out, and profits have accrued in company headquarters beyond national borders. Increasingly, indigenous lands, national parks and areas rich in biodiversity have been put ‘up for sale’. Local authorities have struggled to monitor the behaviour of incoming investors resulting in irresponsible chemical waste disposal and unhindered deforestation practices.

“Buy Land. They’re not making it any more”. Mark Twain’s caption, written for American readers of the ‘Territorial Enterprise’ newspaper in 1862, seems relevant once more, but this time on a global scale. Oxfam’s ‘land grabs’ campaign discovered that foreign acquisitions of land, particularly in the Least Developed Countries (LDCs), has increased dramatically over the last decade.

Over 1,200 large-scale land projects, involving 80 million hectares of land, have been sold or leased to international investors since 2001, mostly over the last two years.

Mapping investments

The PEI, jointly implemented by UNDP and UNEP, is one step ahead of the global story on land grabs. Over the last three years, the initiative has been working with the government of Laos to improve the quality – and not just the quantity - of foreign investments in the country.

In collaboration with the Ministry of Planning and Investment and the Ministry of Environment and Natural Resources, who had little contact with each other prior to the initiative, the PEI began by mapping out the cycle and impact of foreign investments coming into the country. The exercise revealed a chaotic picture.
Dating back to 1986, when Lao made the transition from a centrally planned to a market-based economy, the government has had an ‘open-door’ policy towards foreign investment.

Prospective companies were not subject to any standard criteria but rather were assessed on a case by case basis focusing on the financial and technical feasibility of the project. The legal contracts detailing development rights were usually drafted by large foreign companies rather than the government, and as such made few demands on the investor particularly in terms of social and environmental responsibility. There was no centralized system by which the government could track on-going foreign investments, and attempts to monitor or guide foreign operations in the country were minimal.

Manothong Vongsay, Deputy Director General for the Investment Promotion Department, describes the first generation of foreign investment, ‘We were very friendly. We wanted to attract any kind of FDI in any part of the country, in any sector’. The welcoming attitude proved to be successful. Since 1998 the government has approved nearly 25 billion dollars of investment– mostly foreign and concentrated in the mining, hydropower and agricultural sectors. Unfortunately, many of the newly arrived houseguests took advantage of the relaxed set-up.

New rules

The PEI programme found that due to the cumulative scale of poor quality investments, the problem could not be tackled by a single initiative but rather had to be dismantled and confronted from many different angles. Each phase of an investment life cycle, from arrival to departure, offered a different entry point for change.

Working alongside the government, the initiative addressed the arrival conditions for FDI into the country. On the basis of a evaluation of sample of agricultural contracts for crops such as rubber and sugar cane, for the first time the government was able to measure the extent to which the contracts helped deliver on their national strategy to ‘reduce poverty, enhance development of human capital and have least impact on the environment’ (National Strategy for Private Investment Promotion and Management in Lao PDR). The process not only revealed the social and environmental deficiencies of current contracts, but demonstrated how the Lao economy could benefit from more long-term sustainable investment patterns.

Encouraged by the findings of the analysis, the Lao government requested PEI support them to develop a new model contract for all subsequent agricultural agreements. The revised agreement ensures that the foreign company commit to promoting job creation, environmental standards and poverty alleviation. While the model contract is still being finalised, clauses have already been used in negotiations with potential investors.

For the villages of Thateng, such a contract would have empowered the government and local communities to better monitor the behaviour of the company to avoid such a scenario occurring.

Monitoring behavior

The quest for high-quality investment may start as foreign companies cross the threshold, but will only be realised in full if the company’s operations are monitored and managed continuously. Until now, provincial governments in Laos have had no means of tracking or evaluating investments into their districts.

The PEI team has been working with provinces across Laos to help local planners design, plan, monitor, and enforce investment contracts. Today, using a database built by PEI which documents investments across the country, planning officers are able to track what is happening and where. They are also equipped with a new Investment Monitoring Framework that allows them to assess the economic, environmental and social impact of investment on a continued basis.

A nation-wide approach

The changes at the provincial level have been supported by national efforts. The government is now reviewing approximately one-third of the investments coming into the country. The National Assembly’s hotline, established in 2004 to allow the Lao public to submit issues of concern to parliamentary staff is inundated with calls regarding land rights and compensation. And now for the first time, mid-level planning officers are equipped with legal tools for responding, investigating and acting on those appeals.

In June 2012 the Ministry of Planning and Investment in Laos announced a four-year suspension on new land concessions for rubber plantations and new mining licenses. Though not the first of its kind, the Minister of Planning and Investment, Somdy Duangdy, suggests that it signifies a new generation for foreign investment: “We will now inspect all approved investment projects,” he said. In future, “before approving any more projects, we will ensure that a thorough survey and allocation of land is undertaken”.

The next generation

The on-going mission of reforming foreign investment into Laos remains substantial given the scale of institutional change and capacity development required. The country suffers from a lack of finances and equipment, and there is still more technical training required for government officials responsible for reviewing Environmental Impact Assessments (EIAs) and monitoring investor compliance.

For Grace Wong, a former PEI Technical Advisor, one of the biggest obstacles proved the limited outlets for community input into the national decision-making process. While PEI’s work with the government has catalysed practical responses to some of the immediate issues of poor foreign investment, there are still the thornier issues of land use, planning and tenure that have yet to be addressed.

Now that the momentum for change is underway, the PEI is well placed to use its role as a convenor to support Government, donors and NGOs tackle these more weighty challenges.

Conclusion

In October 2012, the Laos government set up a task force to investigate the dispute in Sekong’s Thateng district. According to a government official [the taskforce] ‘will travel south to address the grievances of the people’.

Historically, the village residents have had little more than petitions and protests by which to make their case. If the work of the government continues in the same trajectory, in the future they will be protected by more powerful legal tools to safeguard their livelihoods and their local resources. The country is moving one step closer to ensuring that investment is judged by the quality of its social and environmental impacts - and not just its quantity in economic terms.