Today is a big day for Laos. Overshadowed by its neighbors for years, it will host this year's Asia-Europe Summit for the first time. The country recently finalized its accession to the World Trade Organization, the last member of the Association of Southeast Asian Nations to do so. This marks a major step in Laos' integration into the global economy. Yet the government seems bent on grasping defeat from the jaws of victory.
The problem is that WTO membership alone won't be enough to sustain the country's current boom. Economic growth of 8.3% this year is impressive, but is tilted toward mining and other heavy industries. The economy must eventually attract a broader range of investments.
Although Vientiane will reap many rewards from WTO membership, plenty of growth hurdles will remain. The World Bank's 2012 "Ease of Doing Business" index ranks the Lao Peoples Democratic Republic 165th out of 183 countries, a drop of two spots from 163rd in 2011. In 2011, Laos attracted only $450 million in foreign direct investment, compared to the $892 million into Cambodia or the $7.4 billion into Vietnam, according to the U.N. Conference on Trade and Development.
Vientiane has done significant damage to its own reputation through its poor treatment of foreign and domestic investors alike. For a case study, consider the history of one of our clients, Sanum Investments Ltd. Since May 2007, the Macau-based subsidiary of a Dutch company has invested more than $85 million in a variety of projects, including resorts and gaming facilities in Laos. This has created more than 2,000 jobs.
Yet as the businesses have become more successful, they have come in for unwanted attention from some quarters of the government. The Tax Department, under the Ministry of Finance, now claims the company owes $23 million in unpaid construction taxes, various overtime fees for immigration services provided by the government at the border and an agent tax on fees paid to the operators of junkets that bring tourists to the casinos and resorts. These charges range from questionable to entirely fabricated.
Such disputes aren't unusual in the world of international investment, but Vientiane's handling of the matter has been troubling. The government has used the dispute as an excuse to cancel permits for existing and future projects, launch unlawful audits and impose retroactive tax demands. In one instance, of which the Queen in "Alice in Wonderland" would be proud, a Lao court imposed an unheard of $5 million fine and began enforcing it before the hearing was over.
The Tax Department has pursued the tax case despite the fact that in 2012 the Ministry of Finance signed an agreement with Sanum confirming that all construction taxes had already been paid. Three prime ministerial decrees have stated that overtime fees were not to be charged. The original agreement with the government under which Sanum invested was supposed to provide for a flat tax on all revenues through December 2013.
The matter of agent taxes is slightly more complex, hinging on the correct understanding of the legal relationship between Sanum and junket operators. But the caprice with which Vientiane has acted in the other matters doesn't inspire confidence in its ability to reach a fair resolution.
Indeed, despite what appear to be firm statements from government officials in Sanum's favor in two of the three disputed matters, the Tax Department maintains that if the company doesn't pay the $23 million bill, it will seize Savan Vegas, the company's largest remaining project in Laos.
If it does, the likely beneficiary will be the ST Group. It has already been handed another valuable Sanum asset, the Thanaleng Slot Club. That casino was seized in April 2012, once its monthly net income attained the $3 million mark, after legal wrangling similar to the current cases involving Sanum.
In that instance, which started as a joint venture between Sanum and ST Group, the ST Group sued Sanum on baseless allegations that the expiration of a temporary agreement ended the joint venture, even though the Master Agreement between the parties covering all Lao investments remained in full force. The proceeding itself was heavily tilted in ST Group's favor—Sanum was only given three days' notice of the setting of the trial, insufficient given the magnitude of the proceeding.
Moreover, Sanum was afforded only an hour to present evidence in a complex commercial matter, saw its assets seized by the court before the trial was over, and less than an hour later was issued a nine-page, single-spaced court judgment. After wrongfully awarding Sanum's 60% stake in the venture to ST Group, the court then imposed a $5 million fine on Sanum for having asserted a counterclaim for damages that was denied.
This kind of case has an obvious chilling effect on foreign investment, but its negative consequences for Laotians extend further. Sanum has filed for international arbitration against the government, pursuant to international investment treaties Vientiane signed. Not only is such arbitration expensive for Laotian taxpayers, but if Sanum wins, the taxpayers will have to pay compensation.
Laotians have already incurred such an expense at least once in recent history. In 2009, Thai-Lao Lignite, a Thai company, won an arbitration award against Laos. In that case, the company had signed a project development agreement with Vientiane to build a power plant near the Thai border to sell electricity into Thailand. After a dispute arose over whether the company was also allowed to mine coal in Laos for the plant, the government tried to argue Thai-Lao Lignite hadn't been a party to the PDA. The company received a multi-million dollar judgment from an arbitration tribunal.
It does not have to be this way. Just as joining the WTO will require fundamental changes associated with more openness and respect for the rule of law, so too Laos' leaders can decide to turn the corner and respect foreign investment. A positive change here can complement WTO accession and send the message that Laos is ready for sustained growth.
Vientiane has done significant damage to its own reputation through its poor treatment of foreign and domestic investors alike. For a case study, consider the history of one of our clients, Sanum Investments Ltd. Since May 2007, the Macau-based subsidiary of a Dutch company has invested more than $85 million in a variety of projects, including resorts and gaming facilities in Laos. This has created more than 2,000 jobs. 