State Land Leases and Concessions in Lao PDR

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State Land Leases and Concessions in Lao PDR Study on State Land Leases and Concessions in Lao PDR Land Policy Study No. 4 under LLTP II Gunda Schumann Pheuiphanh Ngaosrivathana Bouakham Soulivanh Somboun Kenpraseuth Khamdeng Onmanivong Khamthanh Vongphansipraseuth Chithasone Bounkhong Sponsored by: Lao-German Land Policy Development Project (German Contribution to the Lao Land Titling Project II in Lao PDR) June 2006 This study is part of a series of Land Policy Studies conducted in preparation of a coherent and comprehensive “National Land Policy Statement for Lao PDR” by 2007. The following studies have already been published in this series: No. 1: Study on Land Allocation to Individual Households in Rural Areas of Lao PDR; December 2004 Authors: Bouakham Soulivanh, Anothai Chantalasy, Phounsavat Suphida, Florian Lintzmeyer, Florian Rock No. 2: Study on Land Markets in Urban and Rural Areas of Lao PDR; March 2005 Authors: Bouakham Soulivanh, Anothai Chantalasy, Phounsavat Suphida, Florian Lintzmeyer, Florian Rock No. 3: Study on Land Tax and Fees Policy in Lao PDR; February 2006 Authors: Simon Keith, Pheuiphanh Ngaosrivathana, Bouakham Soulivanh, Onsy Phimsomphou, Chanh Denuthai 2 STATE LAND LEASES & CONCESSIONS Table of Contents Page LIST OF ACRONYMS .............................................................................................................4 EXECUTIVE SUMMARY .........................................................................................................5 INTRODUCTION......................................................................................................................7 OBJECTIVES AND METHODOLOGY ....................................................................................7 PART 1: ANALYSIS OF FINDINGS SECTION 1: INVESTMENT REGIME......................................................................................9 SECTION 2: REGULATORY FRAMEWORK FOR LEASES AND CONCESSIONS ...........14 SECTION 3: CONTRACT REGIME.......................................................................................24 PART 2: RECOMMENDATIONS TO TRANSFORM STATE LAND ASSETS INTO CAPITAL SECTION 4: INVESTMENT REGIME....................................................................................33 SECTION 5: CONTRACT MANAGEMENT...........................................................................35 SECTION 6: PRICE SETTING MECHANISMS.....................................................................37 SECTION 7: MONITORING INVESTMENTS AND CONTRACT ENFORCEMENT .............39 REFERENCES.......................................................................................................................42 PART 3: ANNEXES Annex 1: Terms of Reference 48 Annex 2: Approved Foreign Investment 2000-2005 51 Annex 3: Selected Revenues from State Assets 52 Annex 4: Revenues from Timber 55 Annex 5: Industrial Processing Projects 58 Annex 6: Concession Fees for Different Sectors 59 Annex 7: Draft Decree - Building Leasing and Concessions 61 Annex 8: Hydropower Projects 71 Annex 9: Mining Projects 74 Annex 10: Agriculture and Forestry Concessions 79 Annex 11: Leasing and Concessions - Five Southern Provinces 81 Annex 12: Model Lease Agreement 88 Annex 13: Model Cash Flow 96 Annex 14: Proposals on Leasing and Concession Fee Rates 97 Annex 15: Contradictory Powers by State Organisations 99 3 STATE LAND LEASES & CONCESSIONS List of Acronyms ADB Asian Development Bank CPI Committee for Planning and Investment DDFI Department of Domestic and Foreign Investment DGM Department of Geology and Mining (Ministry of Industry and Handicraft) DoF Department of Forestry (Ministry of Agriculture and Forestry) DoL Department of Land (Ministry of Finance) DSA Department of State Assets (Ministry of Finance) DoNLUPaD Department of National Land Use Planning and Development (Prime Minister’s Office) GDP Gross Domestic Product GoL Government of Lao PDR GTZ German Technical Cooperation IPMC Investment Promotion Management Committee LD Legal Department (Ministry of Justice) LDSC State Company for Land Development and Services LLA Land Leasing Agreement LNCE Lao National Committee on Energy LPA Lao Plantation Authority MAF Ministry of Agriculture and Forestry MIH Ministry of Industry and Handicraft MPH Ministry of Public Health MoF Ministry of Finance MoJ Ministry of Justice MoT Ministry of Trade and Commerce MOU Memorandum of Understanding OSA Office of State Assets (Provincial Level) PAFO Provincial Agriculture and Forestry Office PCA Project Concession Agreement PDA Project Development Agreement PDPI Provincial Department of Planning and Investment PLO Provincial Land Office PMO Prime Minister‘s Office POC Provincial Office of Communication POE Provincial Office of Environment POI Provincial Office of Industry POT Provincial Office of Trade POTax Provincial Office of Tax SEZ Special Economic Zone An exchange rate of US$ 1 = 10,000 LAK has been applied in all conversions in this study. In May 2006, the market rate was US$ 1 = 10,100 LAK 4 STATE LAND LEASES & CONCESSIONS EXECUTIVE SUMMARY In recent years, Lao PDR has experienced an increased demand for its main national resource, the country’s land. Vast areas of agricultural and forest land, rich in natural resources, give Lao PDR a special position compared to its neighbours. Investment in hydropower projects, mainly because of Nam Theun II, rose from US$ 5.5 million in 2004 to US$ 1,065 million in 2005, while mining, agriculture, and forestry investments peaked in 2004 accounting for US$ 312 million, decreasing to US$ 76 million in 2005. Very low earnings from state land leases and concessions indicate that GoL has not yet fully developed this income source. In 2004-2005, total revenues from state land assets amounted to US$ 7.2 representing only 0.24% of GDP. To benefit from foreign capital inflows to the greatest extent possible, a sound investment regime - regulations on entry, land tenure and contracts, market oriented mechanisms for price setting, and monitoring mechanisms – have to be in place and managed well. Without these, foreign capital inflows will remain low and impede development. Data and information gathered on the government’s investment and monitoring regimes indicate that both need improvement. Regarding entry regulations, the ‘one-stop-service’ as intended by the Law on Promotion of Foreign Investment, seems not to be designed for investments needing state land because more than three permits are required to start a business. In addition, powers to conclude lease and concession agreements in agriculture and forestry are spread among various state authorities. LDSC and LPA might further exacerbate this problem in future. Furthermore, the allocation of different ceilings (financial investment and land size) for both investment approval and leasing and concession contracts to central or local authorities do not seem to be compatible. Too restrictive ceilings like the rule on permissible land size for leases and concessions induce provinces to exceed their powers. A comprehensive land inventory is missing. Such an inventory should contain inter alia relevant data on existing lease and concession contracts and details on land that could be leased. Instead, bits and pieces of information about state land are with a number of line ministries, departments and divisions at central and local levels. Since these shortcomings slow down investment approvals, investors might have to search for suitable land on their own or to give up their investment plans in Lao PDR altogether. Model agreements meeting international leasing standards are currently available only for concessions on hydropower. Other contracts for leases and concessions using state land lack clarity and consistency. While ‘lease’ and ‘concession’ are not clearly distinguished terms, rights and obligations of both parties seem not always to be balanced. All contracts reviewed lack clear and enforceable clauses on breach of contract, compensation for damage, penalties, termination, and dispute settlement. Furthermore, concession fee rates, usage charges for natural resources, and royalties set by law are not based on supply and demand. Different approaches applied in the provinces to determine fee rates do not seem to meet market standards. Granting land free-of-charge should be restricted to joint ventures when the land offered constitutes the GoL contribution to the project, but is entirely dispensable in the case of other domestic or foreign investments because the prospect for reasonable profit is deemed to be a sufficient incentive and enterprises should not be subsidised. 5 STATE LAND LEASES & CONCESSIONS DSA and OSA, responsible for contract management, have so far not succeeded in establishing a proper filing, monitoring, and reporting system because there is a lack of communication between central and local levels (including between local divisions and departments). However, efforts to improve reporting procedures from local levels to DSA are under way. Inspection and monitoring of sites by line ministries and divisions is not conducted on a regular basis, and if so, the information is not being shared with OSA. Therefore, breaches of contractual obligations to develop the land and prevent environmental damage seem to be widespread, however, there are no arbitration or court cases pending. To increase revenues from state land leases and concessions, the study team makes the following main recommendations: • Streamline entry regulations on foreign investment (e.g. ceilings for investment approval, powers of state authorities
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