Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 2018  ii Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Final report June 20, 2018 Report No: AUS0000419 Table of Contents Acknowledgments i Acronyms and Abbreviations ii Executive Summary 1 1 Introduction 3 2 Rice Value Chain 9 2.1 Domestic market 10 2.2 Export market 22 2.3 Cost drivers 26 3 Vegetables Value Chain 31 3.1 Conventional vegetables 32 3.2 Cost drivers 36 4 Conclusions and Policy Recommendations 41 A. Value chain linkages 42 B. Regulatory environment 44 C. Investment 45 Annex 47 Detailed cost data for sticky rice value chain 47 Detailed cost data for vegetables value chain 49 References 52 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects List of Figures Figure 1 Segments of a typical agricultural value chain 5 Figure 2 Value chain concept 5 Figure 3 Rice retailing in Vientiane 22 Figure 4 Retail prices of glutinous rice in Vietnam, US$/ton, 2015 23 Figure 5 Lao PDR: Price build-up and value added along the sticky rice value chain, US$/ton 28 Figure 6 Lao PDR: Magnitude and origin of different categories of costs, LAK/ton 30 Figure 7 Lao PDR: Wet market with vegetables in Vientiane 35 Figure 8 Lao PDR: Price build-up and value added along the lettuce value chain, US$/ton 37 Figure 9 Lao PDR: Price build-up and value added along the coriander value chain, US$/ton 38 List of Tables Table 1 Per capita rice consumption, selected countries, kg/year, 1993–2013 9 Table 2 Lao PDR: Cost and margins of the rice value chain at farm-gate 11 Table 3 Paddy prices and paddy farm profitability: cross-country comparisons 11 Table 4 Lao PDR: Source of leading rice mills’ paddy supply in Khammouane Province 12 Table 5 Lao PDR: Costs and margin of the rice value chain at the assembly stage 14 Table 6 Lao PDR: Costs and margin of the rice value chain at the milling stage 16 Table 7 Lao PDR: Costs and margin of the rice value chain at the wholesale stage 19 Table 8 Lao PDR: Costs and margins of the rice value chain at the retail stage 21 Table 9 Lao PDR: Rice value chain: costs, prices, profits, US$/ton 26 Table 10 Share of farm-gate prices in wholesale and retail prices: cross-country comparison 26 Table 11 Lao PDR: Distribution of costs and profits along the rice value chain at the beginning of the season, US$/ton 27 Table 12 Costs added as share of total costs along the value chain of conventional rice in Bangladesh, India, and China (in %) 27 Table 13 Share of total profit accruing to value chain participants in selected countries 28 Table 14 Lao PDR: Costs and margins in the vegetables value chain at the production stage 33 Table 15 Lao PDR: Costs and margins of the lettuce value chain at assembly, wholesale, and retail stages 34 Table 16 Lao PDR: Costs and margins of coriander value chain at assembly, wholesale, and retail stages 34 Table 17 Lao PDR: Distribution of costs and margins along the lettuce value chain, US$/ton of farm-gate product 36 Table 18 Lao PDR: Distribution of costs and margins along the coriander value chain, US$/ton of farm-gate product 36 Table 19 Thailand: Vegetable prices at fresh markets in Nongkhai and Udon Thani 38 Table 20 Cost drivers and key recommendation 46 Acknowledgments This report was prepared by a joint team from the World Bank’s Food and Agriculture, and the Macroeconomics, Trade, and Investment Global Practices in the East Asia and Pacific Region. Report preparation was led by Mombert Hoppe and Sergiy Zorya (Task Team Leaders) and included a team consisting of Anke Reichhuber, Kenekeo Sayarath, Wisambi Loundu, and Somchay Soulitham from the UNIQUE Forestry and Land GmbH, Freiburg, Germany. The team is grateful to the staff of the Ministry of Agriculture and Forestry, the Ministry of Industry and Trade, the Ministry of Planning and Investments, the donor agencies, and other participants for their inputs at a technical workshop hosted by the German Agency for International Cooperation (GIZ) in Vientiane on November 21, 2017 and at a validation workshop hosted by the World Bank in Vientiane on June 18, 2018. The team is further grateful to Hannah McDonald-Moniz (Communications Officer, EAPEC) for support provided during preparation and dissemination of the report. Jean-Christophe Maur (Senior Economist, GFCAC) and Steven Jaffee (Lead Agricultural Economist, GFA02) served as peer reviewers. Nathan Belete (Practice Manager, GFA02), Mona Haddad (Director, CCEDR), Deepak Mishra (Practice Manager, GMTP1) supported this work and provided guidance during preparation of the report and its dissemination. Amy Gautam (Consultant, GFA02) edited the report and Phet Udom Mainolath (Program Assistant, EACLF) provided logistical support. Preparation of this report was funded from the MDTF to support the Second Trade Development Facility, funded by Australia, the European Union, Ireland, Germany, the United States, and the World Bank. © 2017 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2018. Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects. © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. i Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Acronyms and Abbreviations CoO Certificate of Origin EBA Everything But Arms EU European Union FAO Food and Agriculture Organization of the United Nations FAO GIEWS FAO’s Global Information and Early Warning System GDP Gross domestic product ha Hectares kg kilogram LAK Lao kip MoIC Ministry of Industry and Commerce O&M Operations and maintenance PDR People’s Democratic Republic US$ United States dollar ii Executive Summary Rice is Lao PDR’s biggest agricultural commodity generating knowledge on the vegetables value in terms of farmers involved in production, chain, which is less studied than those of rice and cropland area allocated, and food consumption. other agricultural commodities in Lao PDR. Rice also generates important economic spillover effects, supporting jobs in milling, trading, and The study finds that Lao farmers receive food catering sectors nationwide. Vegetables are a relatively high farm-gate price, yet high emerging as a new source of growth, benefiting production costs “eat” their profits (rather than from the rising demand of more affluent and low farm-gate prices, as often perceived in the urbanized Laotians for nutritious and diverse diets. country). However, the share of farm-gate prices This report studies the extent of commercialization in wholesale and retail prices in Lao PDR is the of rice and vegetables value chains in Lao PDR, lowest among its peers. This dampens farm the main challenges and opportunities, and ways supply responses. In addition, the issues holding to increase their contribution to the country’s back the rice sector in Lao PDR pertain to: (i) low economic development. Economic benefits are productivity and quality management at the farm maximized when farmers have incentives to and immediate postfarm levels; (ii) a fragmented produce for profit while consumers gain from milling sector dominated by small operators with reasonable prices and good quality of products. old technology; (iii) an overall market system that Therefore, this report focuses on the cost build- fails to provide incentives for product quality; up between farmers and consumers, motivated and (iv) the lack of a significant consumer class by the high retail rice prices in Vientiane vis-à-vis with high purchasing power that could foster complaints of low farm-gate prices. consolidation of wholesale and retail sectors and reduce their costs. In summary, the high cost of The report follows a qualitative and quantitative paddy production and operational inefficiencies value chain approach combined with a detailed among multiple players in the value chain are regulatory assessment. It is based on about 100 responsible for high consumer rice prices. interviews with key experts and stakeholders. It studies the value chain for rice from Khammouane These constraints are largely structural and to Vientiane Capital and for vegetables from require public action aimed at: (i) facilitating value Vientiane Province to Vientiane Capital.1 The chain linkages between farmers and millers; (ii) results are not country representative; they enhancing access to finance of farmers and millers; should be read as a snapshot of the selected value and (iii) improving the quantity and quality of chains in selected areas in 2017. Yet this work is public services delivery, while increasing focus on unique for Lao PDR, among the first to generate those areas critical to reduce production costs and detailed estimates of cost build-up at each stage commercialize the agriculture sector; e.g., seed, of the value chain using primary data and applying applied research, mechanization, cooperatives/ a consistent methodology. It is also unique in farm clusters, and good agricultural practices. 1 Vientiane Capital refers to the greater Vientiane area. 1 While regulatory or administrative barriers were bans/roadblocks for movement of rice) seem to not found to currently play a major role in directly have generated some progress. Yet room still exists inflating the cost structure of either the rice or for regulatory improvements. Lowering regulatory vegetables value chain, the report finds that costs for businesses, strengthening enforcement cumbersome regulations limit entry, affect market of contra cts and product labelling, and removing structure, and reduce competition. Recent efforts price regulations for paddy and rice would by Lao authorities to encourage private sector increase private sector investment, competition, investment in value chains, promote contract and incentives for efficiency improvements, and farming, and limit the use of distortive trade further reduce costs along both value chains. instruments (such as export or cross-provincial 2 3 1 Introduction 1 Over the past two decades, the Lao People’s strategies rather than commercial endeavors. Democratic Republic (PDR) experienced rapid, Increased domestic (and tourist) demand for fresh yet not highly inclusive, economic growth. fruits and vegetables is being serviced primarily Gross domestic product (GDP) growth typically by imports from Thailand and China. Improving exceeded 7 percent per year and, in 2016, this nutritional outcomes will require more affordable lower-middle-income country had a per capita and regular access to such foods. GDP of US$2,340. While Lao PDR’s population and livelihood dependence remain predominantly rural 3 The Government of Lao PDR has recognized and agrarian, the bulk of recent economic growth the importance of improving people’s access stemmed from more intensive utilization of the to diverse and nutritious food at affordable country’s natural resources, including those for prices. This necessitates a gradual shift from rice mining, forestry, and hydroelectric power. Despite production to rice value chains, paying attention their output growth, job creation in those sectors to competitiveness and supporting production of has been modest. Because of this, the poverty other crops – vegetables, for example.2 This also reduction elasticity of Lao PDR’s growth has necessitates looking at food prices in Lao PDR, been relatively low. For every 1.0 percent of GDP where, for instance, rice prices are among the growth, poverty in Lao PDR has declined by only highest in Asia. In 2017, the average retail price 0.4 percent, compared to 1.2 percent in Cambodia of second-grade quality rice in Vientiane Capital and 1.0 percent in Vietnam. was US$0.85/kg,3 compared to US$0.42/kg in Phnom Penh, US$0.38/kg in Hanoi, US$0.40/kg 2 Agriculture is important for future inclusive in Bangkok, US$0.44/kg in Yangon, US$0.50kg in growth, not least because it remains the primary New Delhi, US$0.73/kg in Manila, and US$0.80/ source of livelihood for most Laotians. Around 2 kg in Jakarta.4 High rice prices have a significant million adults are currently engaged in agriculture, effect on Lao consumers. In 2013, Laotians representing 64 percent of the workforce. This consumed an average 159 kg of rice per capita per pattern of employment is among the most agrarian year (see Table 1 in the next section). This is more in the world. While Lao agriculture remains than in China (77 kg), Malaysia (88 kg), Thailand structurally narrow, commercial opportunities (114 kg), and Vietnam (144 kg). are emerging, both domestic and for export. Rice accounts for some 72 percent of cultivated 4 One of the reasons for high rice prices is area, with much of the remaining diversification Laotians’ preference for a quite rare glutinous representing household livelihood coping (or sticky) rice. Most Asian consumers mainly 2 The Government of Lao PDR prepared the food security action plan and engaged the Asian Development Bank and the World Bank to prepare  projects to implement it. The Agricultural Competitiveness Project financed by the International Development Association (IDA), which targets the development of rice, maize, and vegetables value chains, was approved in April 2018. The project to be financed by the Asian Development Bank will be approved over the summer of 2018. 3 First-quality glutinous rice even fetched US$1.0/kg in Vientiane Capital in 2017, according to FAO GIEWS. 4 Rice prices are from the FAO GIEWS dataset. While rice quality is not directly comparable across countries, the presented prices are for the quality of  rice closest to second-grade rice in Lao PDR. Other than in Vientiane, the reported prices are for non-glutinous rice, the preferred type of rice across Asia. 3 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects eat non-glutinous rice varieties. Glutinous rice traders. Most vegetables in Vientiane Capital are is produced with surplus only in Thailand. This imported from China, Thailand, and Vietnam. No makes Lao PDR vulnerable to domestic production information is available about costs and prices shocks and price fluctuations. Another reason at various stages of the value chain, limiting the is low farm productivity, which leads to high understanding about the reasons for Lao farmers’ production costs and thus inflated prices (FAO, low supply response to the emerging market IRRI, and World Bank 2012; World Bank 2014, opportunities for vegetables. 2016). Yet information about the rest of the rice value chain is patchy and incomplete. No recent 6 To shed light on the above questions, this study applies a coherent methodology to estimate report studies the status of different segments the cost build-up along all stages of the rice value of value chains for rice and vegetables and chain in Lao PDR, which makes it difficult to make estimates the cost/profit build-up in 2017 in a specific policy recommendations for rice sector consistent manner. For rice, the study starts in the commercialization. paddy production areas of Khammouane Province and ends in retail outlets in Vientiane Capital. For 5 Even less is known about the vegetables value vegetables, the value chain starts on farm fields chain in Lao PDR, although the demand for more in Vientiane Province and ends in retail outlets in information and analyses increases along with the Vientiane Capital. The study draws conclusions increase in demand for vegetables. The market as to what types of policy actions could assist for “clean and safe” vegetables is growing in fast- in reducing the costs along the value chain and growing urban centers in Lao PDR, which provides increasing private sector investment. ample market opportunities for Lao farmers and 4 Introduction 7 The study uses a value chain approach. collectors, who buy from farmers and deliver to Segments of typical rice and vegetables value rice mills. In the case of contract farming, the chains in Lao PDR include input supply, production, miller may arrange its collectors hired on a flat- assembly, processing, wholesaling, and retailing rate basis. Farmers closer to the rice mill can (Figure 1). Inputs are supplied from different also deliver harvested paddy directly to the mill. sources, among them private input suppliers and Wholesaling and retailing involve mostly small public agricultural stations, such as centers for wholesalers and retailers, but not exclusively. seeds. Production is carried out by many small- For instance, rice mills can directly cover this and medium-sized farm households. Small farmers function by retailing rice at mill gate. Rice mills increasingly partner with agribusinesses such as also wholesale rice directly to big urban markets rice mills, which provide fertilizer on credit and in Khammouane, Pakse, and Vientiane Capital. seeds sourced from seed production groups. Those inputs are repaid “in kind” during the harvesting season. Paddy assembly is taken care of by local Figure 1 Segments of a typical agricultural value chain PRODUCT WHOLESALE/ INPUTS ASSEMBLY PROCESSING CONSUMERS ION RETAIL St tions, Mill rs Coll ction Whol s l rs Input Suppli rs, Fr m rs (m dium si ) Consum rs Mill rs L r mills Mill rs oth r proc ss Growin Coll ction, S d production Dr in , storin , Dr in , storin , H rv stin tr nsport, p dd nd distribution, millin , r din , millin , r din , Consumption Thr shin s llin , f rtilis rs r t il tr din tr din Dr in ric tr din Source: World Bank staff presentation. Figure 2 Value chain concept Incremental costs created by stage of value chain •• Wages •• Interests and rents •• Depreciation •• Direct taxes Total Value generated by the value chain or by •• Inputs and equipement stages of the value chain •• Energy, water •• Operational services =price*volume of product sold Transfers to operators at the previous stage of the value chain for intermediate products (raw material, semi-finished or traded product) Profit Source: World Bank staff presentation. 5 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 8 This study is unique for Lao PDR in estimating 10 The analysis of profits at each stage allows the cost build-up at each stage of the value chain, understanding where operators have market using primary data, and applying a consistent power that they can exploit. In economic theory, methodology. The approach followed in this study under perfect competition firms do not make is a qualitative and quantitative value chain profits. They are price takers and adjust their analysis of the rice and vegetables value chains production to sell at a price where price equals combined with a detailed regulatory assessment. marginal cost. In the long-run equilibrium, their In value chain analysis, all inputs and outputs returns cover all costs, including opportunity carry forward their inherited value from the costs, but they operate at zero profits. Under previous stage. The total value generated is split welfare considerations such perfect markets are between incremental costs created by each stage optimal and operate under allocative efficiency. of the value chain, the semi-finished or finished Naturally, due to various reasons like asymmetric intermediate products supplied by operators in information or external effects, real markets the previous value chain stage, the inputs and are not perfect, but range from close-to-perfect services supplied by other, external enterprises, to very imperfect depending on the degree of and the profits of value chain participants. To competition or at least contestability (the threat arrive at the value captured by chain operators, of entry and competition). the costs of bought-in materials, components, and services are deducted from the value generated. 11 The existence of high and sustained Value added is commonly defined as the sum of profit margins mainly depends on the level of incremental costs and profit. Figure 2 provides a competition, and therefore on barriers to entry. summary of this concept. Such barriers prevent (some) other firms from entering the market and competing profits away 9 This study identifies key drivers of value chain from incumbents by offering products at lower costs, profits, and, as a result, final output prices. prices. Barriers to entry can be the result of tariffs, The main variable of interest is the final domestic zoning, supplier agreements, vertical integration, consumer price. However, the results with respect limited access to finance, uncertainty, and risk, to the competitiveness of the production and to name just a few. In the extreme case of a processing stages are of course relevant for export monopoly, individual firms have market power: competitiveness or competition with imports. The though monopolists are constrained by consumer analysis follows these routes: demand, they are not price takers, but instead either price setters or quantity setters. This allows •• By looking at the build-up of incremental costs firms to set a price higher than that which would from stage to stage, this study helps to reveal be found in a competitive market, allowing them the competitiveness of individual participants. to generate economic profit in both the long and short run. Similar outcomes can be observed •• By looking at profits at each stage, this where only a few companies are present that study helps to identify areas for efficiency collude in setting prices for outputs. Because the improvements. additional gains to producers are smaller than the losses to consumers (who can consume less and •• By looking at cost categories, this study points pay higher prices), such markets generally have toward cross-cutting issues with a potential for an overall negative effect on welfare compared to cost reductions. competitive markets. 6 Introduction 12 However, profits of individual companies can However, data on costs and margins are sensitive also be the result of superior skills, products, or information, and the private sector is often management. The cost structures of individual reluctant to share such data. Information received firms can vary greatly, and those firms that are during the interviews was checked rigorously for more efficient in transforming inputs into outputs its plausibility. Triangulation was performed in can generate significant profits over the short different ways: (i) primary data were compared run, or they can have market power by offering with secondary sources; (ii) data on the cost build- products with particular characteristics (think of up were compared with final sales prices; and (iii) Apple, Inc.). Large margins per product sold may data sourced from interviews were compared with also reveal the necessity of covering fixed costs. data sourced from participant observation. For example, the cost structure of firms in the technology and pharmaceutical sectors requires 14 The results of this report are not substantial costs in product development, so representative for everyone and true to every prices will reflect not just marginal production detail. For example, for the rice processing costs but include a margin to recover investment stage, the data approximate a medium-sized costs. Or in the case of self-employed businessmen modernizing mill that could sell directly to retailers and -women, large margins may cover their own and source directly from farmers via collectors. Its returns to labor, effectively their opportunity cost structure is different from that of the small costs. However, high profits for the average traditional mills that are the majority in the region, firm in a low-innovation industry indicate that but do not supply markets in Vientiane Capital. The competition is limited. geographical coverage is limited to Khammouane Province and Vientiane Province and Capital. Yet 13 Primary information and data for the rice the study targeted the most popular value chain and vegetables value chains were collected in locations with significant trade flows and major 2017 in Vientiane and Khammouane Provinces actors in the value chains. It is, therefore, useful of Lao PDR. Around 100 interviews were and relevant for policy discussions about how to conducted with stakeholders and key experts. increase the economic contribution associated Efforts were made to collect as much current, with commercializing food value chains in Lao PDR. primary information as possible for this study. 7 3 2 Rice Value Chain 15 Lao PDR mostly produces glutinous or sticky constitutes 70 percent of households’ caloric and rice (Oryza sativa), which is primarily geared protein intake. Average per capita consumption toward domestic consumption. It is derived from in 2013 was 159 kg per year, only slightly reduced a mixed variety of long, short or broken waxy grain compared to 1993 (Table 1). Laotians consume types, and requires minimal processing (mainly much more rice per capita than their neighbors, sorting) relative to processing of non-glutinous except Cambodians. Most rice consumed is a rice. Non-glutinous or white rice is derived from second-quality rice costing about US$0.85/kg long grain varieties and requires a high level in Vientiane Capital; yet first-quality rice, which of processing to transform the grain from the costs US$1.0/kg, is increasingly demanded by translucent state to its white color. Because of its wealthier consumers in Vientiane. The large high quality, non-glutinous rice fetches a premium consumption of glutinous rice is a unique feature above the glutinous variety. The demand for white of Lao PDR. Most Asian people eat non-glutinous rice is mostly from foreigners, urban consumers, rice, and besides Lao PDR only Thailand produces and the middle class. a large quantity of glutinous rice for domestic consumption and exports. This makes Lao 16 Rice remains the main crop and almost all PDR vulnerable to weather variations affecting of Lao PDR’s 783,000 farm households produce production and price fluctuations in Thailand. paddy on 75 percent of the arable land. Between 2015 and 2016 Lao PDR produced 4.1 million Table 1 Per capita rice consumption, selected tons of rice; by 2020 rice output is projected to countries, kg/year, 1993–2013 increase to 5 million tons. Most paddy is produced 1993 2000 2007 2013 during the wet (or monsoon) season due to lack of Cambodia 174 167 158 159 irrigation required for production during the dry China 74 77 75 77 Lao PDR 164 160 159 159 season. Between 2000 and 2010, average paddy Malaysia 86 84 80 81 production grew by 1.8 percent per year, largely Philippines 89 104 129 119 due to the increase in rice land area and cropping Thailand 108 117 123 115 intensity. Between 2010 and 2017, the growth in Vietnam 137 149 144 144 paddy production accelerated to 5.3 percent per Source: FAOSTAT. year, due to increases in cropping intensity (1.4 percent) and yields (3.7 percent).5 18 Processing and trading of rice in Lao PDR still follow traditional ways rooted in trust 17 Despite the recent growth acceleration, rice relationships but these activities are moving produced in Lao PDR mainly meets domestic notably toward a more modern and professional consumption (about 95 percent). Laotians eat system. The structure of the traditional rice value predominantly glutinous or sticky rice. It accounts chain in Lao PDR is configured as many small- for 92 percent of rice production area and and medium-scale farmers on one end; many 5 According to the US Department of Agriculture Global Database. 9 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects small assemblers and traders and larger (than 2.1 Domestic market farmers) millers in the midstream; and many small wholesalers and retailers at the other end. Recently, foreign investors and forward-looking Production millers supported by projects brought some dynamism into the sector, which has significant 22 Lao PDR lags behind its neighbors Vietnam development potential. and Thailand on indicators of land and labor productivity (World Bank 2016). Its average 19 Exports account for only 5 percent of rice yield of 3.5 tons/ha is much lower and its production. Almost all of Lao PDR’s exports are average use of nitrogen fertilizers is well below of glutinous rice to Vietnam during the Tet Lunar the recommendations. Production is very labor- New Year period, when demand is high. Lao sticky intensive and costly, because not all farmers rice is less expensive than the sticky rice produced employ machinery for land preparation and in Vietnam and much cheaper than that produced harvesting, leading to high labor costs, mostly in Thailand, allowing it to compete in Vietnam with for hired labor. Although productivity gains were local and Thai rice. Improved road connectivity achieved in the past, major constraints continue between Lao PDR and Vietnam also helps increase to exist in Lao PDR, including a weak extension Lao rice competitiveness. service and difficulties in accessing farm credit. Postharvest losses caused by delays in harvesting 20 In the last few years, Lao PDR entered in and threshing after harvesting as well as on-farm bilateral agreements on export quotas with storage systems are two other major factors China and Vietnam and Lao PDR can also benefit driving paddy costs. They further have negative from the “Everything but Arms” (EBA) initiative, effects on the quality of paddy. Important criteria which grants the country full duty-free and quota- for the quality of paddy are head rice, variety, free access to European markets for all products moisture content, proportion of whole grains, and except arms and ammunition. Benefiting from freedom of foreign material. If the paddy falls these market access arrangements, however, below a certain standard it negatively affects would require a substantial increase in production the milling process and causes additional costs. quantity and quality of rice, and a reduction in According to key informants, currently 80 percent non-tariff barriers for exporting firms, such as of paddy sourced falls below that standard. obtaining authorizations, processing documents with multiple offices, and informally paying 23 Low productivity, high production costs, and officers to speed up the process. low quality of paddy lead to low farm profits. Table 2 presents the costs and margins of the rice value 21 This chapter first portrays the domestic chain at production stage for glutinous rice. With part of the rice value chain, focusing on glutinous profit rates of 12 percent, the average profit of wet rice, before describing the export regime and season paddy production was US$109/ha in Lao competitiveness. A last section summarizes the PDR. Based on these estimates a farmer owning 3 challenges and key cost drivers. hectares (ha) of rice in Lao PDR would earn about US$300 per season, hardly enough to have an incentive to engage in production. According to PhilRice and IRRI estimates in Bordey et al. (2016), farmers in India and Vietnam achieved profits of 10 Rice Value Chain US$193/ha and US$246/ha, respectively, during the beginning of the season. Since 2009 the the low-yielding (wet) season. Relative profit leading mills have formed in the five districts margins at the farmer level in Lao PDR are also low of Khammouane so-called development rice compared with other countries in the wider region miller groups for cooperation and coordination. (Table 3). Farmers in neighboring China, Thailand, These groups’ objective is to contribute to the and Vietnam, as well as in India, receive a much development of the rice sector in the province. The larger share of total value chain profits compared Khammouane development rice miller group, for with those in Lao PDR.6 In China and Thailand, example, discusses and agrees on minimum paddy this is partially a result of higher farm-gate paddy prices or export opportunities. Millers who want prices, but in India and Vietnam, farm-gate prices to join the group must support at least 200 farm are lower than those in Lao PDR, but this does households via contract farming arrangements. not prevent their farmers from generating higher profits. It seems that high production costs put 25 Interviews with rice millers and farmers pressure on Lao farmers, not low farm-gate prices gave the impression that contracts were rather as often perceived in the country. indicative. No formal written agreements are signed. Instead, both parties rely on fairness, trust, 24 In Khammouane Province, small farmers and constant interactions to keep the supply chain increasingly produce under some form of contract operational. Growing this informal system will for the leading modern mills, which provide require investments in trust-building and bringing them with good quality inputs and training at partners together. But inevitably, it will hit its limit Table 2 Lao PDR: Cost and margins of the rice value chain at farm-gate Farm Production Per Hectare LAK USD Gross revenu (yield*price) 7,584,500 923.03 Production costs Variable costs 6,491,000 789.95 Total investments 200,00 24.34 Total Costs 6,691,000 814.29 Farmer income Gross margin (revenue -var costs) 1,093,500 133.08 Net profit (gross margin - invest cost 893,500 108.74 Source: World Bank staff estimates. Table 3 Paddy prices and paddy farm profitability: cross-country comparisons Lao PDR Thailand Vietnam India China Ratio of net profit to total costs 12% 59% 48% 21% 44% Price of paddy, US$/ton (14% moisture) 290* 332 227 254 476 Note: * Average moisture content of Lao paddy at harvest is 22%. Farm-gate price of wet paddy is US$264/ton, the price used for calculations in Table 2. For international comparison, however, this price is converted to dried paddy equivalent with 14% moisture content. Source: Bordey et al. 2016, and World Bank staff estimates for Lao PDR. 6 This comparison needs to be made with a caveat. In contrast to Lao PDR, where sticky (or glutinous) ric, is mainly produced, other countries produce largely non-sticky (ordinary) rice. Sticky rice is usually more expensive than non-sticky rice, but the benchmark data for sticky rice produced in other countries are not available. 11 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects when mills’ capacities and resources for constant economic disputes. While the law permits parties interactions and supervision are stretched too far. undertaking international trade or business to Effective mechanisms for contract enforcement nominate a foreign or international arbitration are nonexistent. Millers reported that they would institution as their dispute resolution mechanism, welcome more professional relationships, as enforceability of an arbitration award in Lao they had some bad experiences with farmers not PDR is subject to determination of the Peoples’ paying back their loans. Court.7 As anecdotal accounts confirm, this leads to lengthy proceedings and delays in awarding 26 According to the Doing Business “Enforcing arbitration awards. contracts indicator,” no court or court division in Lao PDR is dedicated exclusively to hearing 27 To facilitate working with farmers and to commercial disputes (World Bank 2017a). Rather, create an environment for stable relationships, anecdotal accounts reveal a lengthy process rice mills have organized the paddy market. whereby plaintiffs must first endeavor to bring Table 4 lists four leading mills of the Khammouane disputes at the village (most likely for mediation development rice miller group, each of which and arbitration), then to district and provincial provide one of the vice presidents of the group, level for resolution before proceeding to judicial and the villages they source their paddy from. measures in Vientiane Capital. The country’s In Thakhek and Xebangfai districts only Vanida Law on Economic Dispute Mechanism governs is active. All four mills source their paddy from both domestic and international arbitration on Nongbok district but they go to mostly different Table 4 Lao PDR: Source of leading rice mills’ paddy supply in Khammouane Province Mill District Vanida Soulivan Bounmy Phosavan Thakhek Yes No No No Xebangfai Yes Nongbok Tarntherng Dongsangam Navarngnoy Navarngnoy Navarngthong Nvarngthong Navarngvai Navarngvai Sadeu Dongphungphao Phonsao E Naxiengdy Beungsarntherng Nongplard Dongyarng Dongyarng Xiengwarngthong Xiengwarngtha Songmeuangneu Songmeuangthai Koutjub Nonsila Nahoun Nachampa Nalak Pongkiw Nongpham Nonjik Dongtae Source: World Bank staff estimates. 7 http://arionlegal.la/arbitration-in-lao-pdr/ 12 Rice Value Chain villages. The fact that hardly any overlap exists are not negotiating directly with mills but are indicates that they are avoiding competition for aware of the prices being paid in the market. The paddy. This segmentation of the paddy market spread of cell phones has given farmers access is also due to geographical factors, as distance to information about marketing options, which increases transport costs, and is accentuated by means that they are in a better position to deal with trust issues, as outlined above. Thereby, millers the assemblers. Based on unanimous information have acquired monopsony buying power, which received from different sources, assemblers and most likely guarantees them preferred prices from collectors receive a flat fee of about 2,000 LAK/ farmers. However, those contract arrangements meun (166 LAK/kg, 2 US cents/kg, or US$20/ are not mutually exclusive. Millers also buy rice ton) for transporting the paddy from the farmer from farmers who are not under contract. Once to the mill at a distance of 20 kilometers (km) on they have paid back their loans, farmers under average. Table 5 presents the costs and profits for contract can also sell outside of the contract if the assemblers. mill is in oversupply or if farmers can get a better deal elsewhere. For example, traders from outside 30 The inefficient assembly system is the main the province sometimes offer higher paddy prices, driver of transport costs for assemblers. Apart although they may not show up every season, from fuel and maintenance of their own (1.5- weakening the relationships between farmers ton) truck, packing materials, and hired labor for and local mills. loading, assemblers do not face large cost items. They drive themselves and their profit is their own 28 Overall, millers and farmers report returns to labor. No warehouses exist at local level benefiting from these contract arrangements. that would allow farmers to store and manage Working with farmers allows mills to improve their rice stock at a central location. Instead, the quality of the paddy and as a result they can assemblers drive up to three days from farmer increase their milling efficiency. Farmers benefit to farmer buying a few bags (50 kg) of paddy from support provided in terms of seeds, fertilizer, from each to fill their truck. With some farmers and training. It helps them raise their yields and they have made agreements via phone; others quality. In addition, they benefit from relatively they visit unsolicited. After the main harvest predictable paddy demand. season, farmers agree to only sell small portions of their remaining stock whenever they need cash. Assembly Assemblers, therefore, need many stops before they leave rural areas and drive back to the mills 29 Traditionally paddy assembly is taken care to empty their truck. A profit of US$11/ton of of by local assemblers who buy from farmers paddy (Table 5), therefore, equals a wage8 for the and deliver to mills. Medium-sized mills, however, assembler of less than US$4/day. This is about the with more modern equipment depend on larger same as the current minimum wage in Vientiane, catchment areas to fill their capacities, and rely and as a matter of fact in all of Lao PDR, as the more on collectors. In the areas visited (Thakhek rate of 900,000 LAK (roughly US$107/month) and Nongbok districts), 50–60 assemblers are was established by the government and became active. Interviews with farmers revealed that they effective as of April 2015.9 8 The daily wage is estimated based on the following assumptions: an assembler drives a small truck that can handle a maximum of 1.5 tons of paddy and spends three days collecting the goods and transporting them to the mills. 9 Following preparation of this report, the minimum wage was increased to 1,100,000 LAK per month in April 2018. 13 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 31 Few regulatory controls and restrictions law impose geographical limits or restrictions on exist at the assembly stage and compliance tonnage for transportation. The only key setback costs remain small. The Law on Land Transport for assemblers is the duration and validity of (Amended version) No. 24/NA from December 12, the permit. The validity period is only one year, 2012 represents the primary legal framework whereas as in other jurisdictions, notably Vietnam governing the transport of goods commercially and Thailand, licenses are valid for a period of for domestic and international markets. Small seven or five years, respectively, and only required informal traders, operating their own secondhand at the company level. truck, are subject to a vehicle use permit. The annual fees for obtaining that permit are 32 The tax regime is also favorable for 200,000 LAK. Relative to other costs incurred by assemblers. The current tax law grants traders (i.e., vehicle operations and maintenance businesses operating with an annual turnover [O&M]), this represents a small cost. Interviews of less than 12,000,000 LAK exemption from conducted with assemblers during the field remitting turnover tax.10 Assemblers, however, investigation confirm that the past restrictions are frequently required at official checkpoints to and controls that restricted the flow of goods present a copy of their annual tax registration across districts and provinces have been lifted. and payment during transit to ensure compliance Assemblers are no longer required to acquire with existing regulation. The purpose of these permits in various districts and localities to random checks during transit is to check whether transport goods in the country. There are no assemblers have paid their taxes, but they are other restrictions or significant requirements also said to be used to extract informal payments, for transporting agricultural goods nor does the which the study was unable to quantify. Table 5 Lao PDR: Costs and margin of the rice value chain at the assembly stage Assembly Per MT farm gate product LAK USD Gross revenu (qty sold*price) 2,334,000 284.05 Production costs Crop purchases (payment to farmer) 2,167,000 263.72 Other variable costs 61,364 7.47 Investment costs 15,000 1.83 Total costs 2,243,364 273.01 Assembler’s income Gross margin (revenue- total var costs) 105,636 12.86 Net profit (gross margin - invest cost 90,636 11.03 Source: World Bank staff estimates. 10 Article 56 Lump-sum tax rate of the Tax Law. From 12,000,000 LAK and lower is exempted; from 12,000,001 LAK to 50,000,000 LAK is subject to lump-sum tax of not more than 600,000 LAK. 14 Rice Value Chain Rice mills that case transport costs reduce to 150,000 LAK/ ton (4.1 US cents/ton-km). Currently a transport 33 Many rice mills operate in Lao PDR. They company located in Savannakhet is serving rice achieve a lower efficiency and higher cost than millers in Khammouane. According to millers, it mills in neighboring countries. Milling efficiencies is newly established and provides better service, range from 55 percent to 65 percent depending lower prices, better trucks, and more customer- on the mills and paddy sourced. This is lower than friendly payment modalities than the transport the average efficiency of 66 percent found in companies based in Khammouane. Thailand and Vietnam. Thanks to recent foreign direct investment (FDI), it rose to 64 percent in 36 Transport costs internalized by mills are Cambodia. FDI in Lao PDR has been limited. about 20–30 percent cheaper than rates available on the market, at least for smaller volumes. This 34 Rice mills in Khammouane Province are reflects concerns voiced by stakeholders that small- to medium-sized operations that can transport prices in the market are too high. One process 5–48 tons/day. A total of 105 medium- reason behind this finding may be related to the sized rice mills in Khammouane were registered as fact that transport companies sometimes face business operators with the provincial government challenges in complying with the law. Transport in 2016 (Mekong Institute 2016). However, many companies are subject to the same Law on Land small rice mills operate in communities with Transport as assemblers and need a transport production capacities not exceeding 1 ton/day. enterprise-level license (Article 21 Establishment Most of them are not in the provincial database. of Land Transport Enterprise) to operate. The They are located farther away from the main annual fees for obtaining the enterprise-level transport lines and markets, and operate at a license are set at 200,000 LAK. There are no much lower standard, efficiency, and volume. As a other restrictions or significant requirements result, they generally incur high processing costs. for transporting agricultural goods nor does the They only process paddy for local demand and law impose geographical limits or restrictions on sometimes sell to modern mills, where the paddy tonnage for transportation. However, transport is graded, sorted, and further processed to obtain companies report that processing documents in grade A (first-quality) rice. many offices and sections, sometimes even in the same department, is so time-consuming that they 35 Medium-sized rice mills in Khammouane occasionally pay money to speed up the process. mostly transport the rice to customers in Vientiane Capital in their own trucks instead of 37 A recent study on domestic transport prices relying on transport companies. This is due to the in Lao PDR finds that prices are high largely due small volumes of trade. The average order weight to the fragmentation of the market and low is lower than 20 tons, which makes it unprofitable levels of competition (World Bank forthcoming). to hire transport companies. Transport costs from Prices are set per truck, meaning the prices per Khammouane to Vientiane Capital in their own ton for less-than-full truckloads turn out to be truck is about 200,000–250,000 LAK/ton (5.4– very high. Overall, the sector is fragmented with 6.8 US cents/ton-km) versus 300,000–350,000 about a dozen larger players. The sector faces a LAK/ton (8.2–9.5 US cents/ton-km) if they hire a combination of an aged fleet, low truck utilization, transport company. Millers report hiring transport and large overcapacity, leading to high fixed costs. companies only for quantities of over 30 tons. In Operators are specialized along specific routes 15 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects and are largely unwilling to compete for additional Bank estimates range between US$26 to US$30/ traffic on other routes, or to compete for traffic ton (World Bank 2016). among neighboring countries. This reduces competition and prevents consolidation among 40 This study finds that rice mills are subject operators from taking place, which would reduce to indirect regulatory controls and policies that high fixed costs and could reduce prices. impede their ability to access affordable credit and benefit from state budget allocation for their 38 Rice mills face significant difficulties in investment capital needs. Regulatory controls in accessing financial services and improving the banking sector also have an adverse impact their business. Their difficulties are partly due to in limiting rice mills’ access to investment capital. limited business and communication skills. They The banking sector is dominated by state-owned also lack confidence, which prevents them from commercial banks that control a large share of approaching banks and government agencies. the market. By the end of 2016, stated-owned Only 4–6 medium-sized mills have managed to commercial banks, including joint state banks, invest over the years in modern infrastructure and controlled nearly two-thirds of the total credit upgrade their equipment, using short-term (1–3 share in the economy (Bank of Lao PDR 2016). years) working capital loans. Informal interviews conducted during the field investigations (with rice mills and private banks) 39 Data collected during interviews suggest confirmed that financing to the agriculture sector that milling in Lao PDR is profitable for those is almost exclusively dominated by the Agricultural mid-sized mills that were able to modernize. Promotion Bank (APB) and to a lesser extent the Table 6 shows costs and margins for 1 ton of Lao Development Bank, Ltd.12 processed paddy (65 percent rice, 35 percent bran and husks). According to those estimates, 41 Bank informants confirm that 80 percent the estimated milling costs for rice (100 percent, of the total portfolio lending is geared toward without byproducts) are US$27/ton,11 similar to production, leaving few options for financing for those in Cambodia, which according to World other value chain activities such as trade and Table 6 Lao PDR: Costs and margin of the rice value chain at the milling stage Processing Total MT processed product (rice, bran, husk) LAK USD Gross revenu (qty sold*price) 2,915,000 354.75 Production costs Crop purchases (payment to farmer) 2,334,000 284.05 Other variable costs 103,285 12.57 Investment costs 41,667 5.07 Total costs 2,478,952 301.69 Processor’s income Gross margin (revenue- total var costs) 477,715 58.14 Net profit (gross margin - invest costs) 436,048 53.07 Source: World Bank staff estimates. 11 This cost (US$27/ton) does not consider the value of byproducts such as bran and husk produced during the milling process. When the byproduct value is accounted for, the average milling cost is US$17/ton, as presented in Table 6. 12 A third bank, Nayoby Bank, also has a lending portfolio in rural markets, but it is a specialized policy lending bank that targets lending to poor families in the country’s urban centers and rural markets. 16 Rice Value Chain processing. The APB provides lending to the sector operating collateral registry for movable assets via three programs: (i) personal loans geared (such as machinery, equipment, and receivables) toward producers; (ii) group lending programs; and that can enable asset financing rather than more (iii) lending to businesses.13 Lending to rice mills traditional asset-based financing. Few banks comes almost exclusively in the form of short-term practice this type of lending, however. Some of (1–3 years) working capital loans, with interest the key constraints reported by the state banks rates ranging as high as 13–17 percent. Given the in lending include the fact that most mills lack the lack of investment capital, it was reported that proper accounting and recordkeeping to enable rice mills often use their working capital loan to banks to perform adequate due diligence. Most finance investment activities. mills interviewed during the field investigation are family-owned businesses and operate on an 42 Interest rate subsidies exist but the process informal basis. is cumbersome. Interest rates are set by the Bank of Lao PDR, which exerts extensive control over 44 All private banks interviewed during the lending rates. Bank regulation set caps on lending field investigation confirm that they did not rates for loans mobilized through deposits at 3 have a lending portfolio in the agriculture sector. percent above deposit rates (inclusive of service, Roughly 90 percent of private banks in Lao PDR approval, and valuation fee). This is applicable are foreign, and their lending is geared toward for all commercial banks (state-owned and a corporate clientele (mostly foreign) with high private). While the APB and Lao Development turnover. Lending activities are targeted at large Bank receive state budget to support their lending infrastructure projects, such as hydropower, activities, interviews conducted during the field and construction. One bank reported that loan investigation confirm that most of the lending is applicants need a minimum of three years of mobilized through deposits on commercial terms. financial records for lending. Few indicated a These loans are eligible for interest rate subsidies presence of bank branches outside of Vientiane at 7 percent. Interest rate subsidies, however, are Capital, despite a 2006 amendment in the administered at the consumer level. Banks charge country’s banking law that authorized foreign the full interest rate (usually at the standard banks to set branches in the provinces. rate of 14 percent) and once received, borrowers must apply individually with the state bank 45 Some evidence also suggests that headquartered in Vientiane Capital to receive inefficiencies in the country’s judicial processes the subsidy. This process involves cumbersome and arbitration system for resolving commercial paperwork, and all banks interviewed confirmed disputes diminish private banks’ risk appetite for that significant delays arise in disbursement of lending to the sector. While most private banks the subsidy. interviewed during the field investigation cited lack of expertise as a key deterrent in lending to 43 Collateral requirements set by banks’ lending the sector, anecdotal accounts with two private activities are prohibitively high. State banks banks also indicated that difficulties in enforcing reported collateral requirements as high 70 percent contracts and resolving commercial disputes for extending credit. Collateral requirements come likely diminish their risk appetite for lending. Two exclusively in the form of immovable assets (land banks each reported separate accounts whereby and real estate) even though the country has an commercial disputes had risen all the way up to the 13 Lending to businesses is spread across five categories: (i) handicraft; (ii) irrigation and equipment; (iii) construction; (iv) trade and services; and (v) other. 17 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects country’s Supreme Court. Proceedings for the first for milled rice reported by mills and wholesalers bank lasted four years (a claim of roughly US$1 were consistently above the official price. This is million), while proceedings for the second bank are explained by the fact that the mills in the study currently in the third year and still pending a final sample are medium-sized, and have, to some resolution. Both instances involved defendants extent, upgraded their facilities and can charge with close ties to the government, however in the higher prices for their rice. These differences first case, the court ruled in favor of the bank. between official and actual prices are not legally possible but are nevertheless consistently 46 Rice mills have been subject to price controls observed. More transparency of prices in the since the 2012–2013 harvest season that are country by regular publication of market prices supposed to have the overall impact of capping that consider quality differences and phasing out the gross margins for processors at no more price controls for paddy and rice would improve than 500 LAK for glutinous rice. Pursuant to incentives for all stakeholders throughout the the Ministry of Industry and Commerce (MoIC) chain to improve quality. Announcement No. 1502/MIC dated August 24, 2016,14 a price floor for purchasing glutinous rice 48 The price control regulation could prevent paddy from producers at the farm-gate or village entry of investors, as newcomers might feel level is currently set at 2,500 LAK/kg (US$300/ they would face higher scrutiny on prices they ton). The regulation also sets a price ceiling for rice pay and receive and would therefore have lower sold by rice mills and rice mill associations, and profit expectations. Additional uncertainty in the for the purposes of stockpiling, to no more than business environment is created by the Decree 3,000 LAK/kg (US$360/ton). Informants confirm on Management of Goods Price and Service Fees that government representatives at the district No. 474/PM from November 18, 2010, which and provincial levels are heavily involved in setting grants the MoIC jurisdiction to control prices as and negotiating prices, particularly during the “it deems necessary.” The stated objective of the preharvest planning season when they, along with decree is to “achieve price stability and protect rice mills and farmers’ cooperatives, set prices for lawful rights and interests of business operators contract farming. However, these prices disregard and consumers, and State interests.” Article 8 differences in quality. of the regulation defines measures such as “the determination of the highest price, lowest price, 47 The actual paddy buying prices paid at farm- and scope of price” as well as “adjustment of supply gate or village level were consistently below the and demand” among other permitted controls. official price because they reflected the quality A Price Administration Authority comprising the of the paddy. This discrepancy is explained by MoIC at the federal, provincial, and district level is the fact that only an estimated 20 percent of defined as the governing authority. In this context, farmers produce the required standard in terms a newcomer seeking to create cost advantages in of variety, moisture content, mixing of different its operations to improve margins may in theory varieties, and foreign matter (refer to Table 2, be subject to price interference and control from where the paddy farm-gate price was estimated the regulatory authorities, which may undermine at US$264/ton). On the other hand, selling prices such efforts. 14 Titled: “Average price for buying glutinous paddy (paddy and irrigated rice field) from Oct to Dec 2016 and all round year 2017.” 18 Rice Value Chain 49 A recent report undertaken by the MoIC millers in different districts surrounding Vientiane finds that the use of minimum and maximum Capital. Apart from fuel and maintenance of their prices in Lao PDR has generally not been effective own truck, packing materials, and hired labor and recommends ending this practice (MoIC, for loading, wholesalers do not face large cost 2018). The report finds that direct price setting items. They drive themselves and their profit discourages investment, and can slow down is their own returns to labor. Storage facilities innovation and productivity growth. It stresses would allow wholesalers to potentially benefit that, as in the case outlined in this report, the from higher prices later in the season and larger enforcement of such prices is not effective nor contracts, but would require significant working feasible due to challenges with defining and capital. According to key informants, wholesalers enforcing quality-adjusted prices. It further would also risk storage losses, because the rice stresses that they have globally failed to reduce would lose its quality and weight after a month price volatility. The report advises to end the policy of storage. of recommending minimum and maximum prices for selected “sensitive” products and to focus on 51 Transaction costs and travel time are driving collecting price and cost information to enable up costs at the wholesale stage. Like assemblers, more efficient price discovery, and the promotion wholesalers pay unsolicited visits to retailers of more efficient markets through reducing hoping for business. They spend a lot of time barriers to entry and promoting competition. driving around markets trying to sell the rice on their truck. Wholesalers could significantly reduce Wholesaling in Vientiane Capital handling cost and fuel cost per ton by investing in larger trucks if they had large orders. However, 50 Wholesaling in Vientiane Capital is mostly most traded quantities are small. A typical performed by small traders driving their own order from a retailer is 10 50-kg bags. Given Hyundai trucks of 1–3.3 tons loading capacity their business model and the small quantities, with typical annual turnover of less than 50 tons. these wholesalers drive their own truck and it Interviews revealed that many of them do not even is not economical to hire transport companies. have a formal title because of the occasional nature Moreover, large trucks are not allowed to enter of their business. The usual distance between market areas during daytime due to the small source and market is 10 to 50 km as they buy from roads and high volume of traffic. Wholesalers thus Table 7 Lao PDR: Costs and margin of the rice value chain at the wholesale stage Wholesaling Total MT trade product (rice) LAK USD Gross revenu (qty sold*price) 5,000,000 608.49 Production costs Crop purchases (payment to processor) 4,000,000 486.80 Other variable costs 192,480 23.42 Investment costs 10,100 1.23 Total costs 4,202,580 511.45 Processor’s income Gross margin (revenue- total var costs) 807,520 98.27 Net profit (gross margin - invest costs) 797,420 97.05 Source: World Bank staff estimates. 19 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects need many stops before they empty their truck. a storage room to keep a small rolling stock. The They generate profit estimated at US$97/ton of storage is sometimes a room in the retailers’ house. rice (Table 7). This profit equals a wage for the Due to the large number of retailers, turnover is wholesaler of US$13/day, assuming seven working low and on some days, may be close to zero. Fixed days per week, just from selling rice. costs are paid per month, the largest factor being rental fees for market stalls. 52 Wholesalers face the same regulatory regime as assemblers. Few regulatory controls 54 Some traders combine the wholesale and and restrictions exist and compliance costs retail stage. Net profits for pure retailing are remain small.15 Past legal restrictions and controls estimated to be around US$120/ton (Table 8). that restricted the flow of goods across districts Assuming an average daily turnover of 50 kg at and provinces have been lifted. This means that a profit of US$120/ton equals an income of only the cross-border trade restrictions that prevailed US$6/day. By ordering directly from the mills and in the past have disappeared. Official checkpoints selling larger quantities, they can save costs. They along the road still exist but only to ensure basically perform both functions depending on compliance with existing tax regulation.16 Traders demand. That means they are flexible enough to are no longer required to acquire permits in various sell small amounts of rice to consumers as well as districts and localities to transport goods in larger volumes to other retailers. The usual threshold the country. The tax regime is also favorable for between retail price and wholesale price is 1 ton. these small wholesalers. According to the current tax law, businesses operating with an annual 55 Competition plays out in many ways. turnover from 12,000,001 LAK to 50,000,000 Traditional shops demonstrated during the LAK are subject to lump-sum tax of not more than interviews that they are aware of the current 600,000 LAK.17 market prices and situations of their fellow retailers. Some retailers try to differentiate themselves by Retail in Vientiane Capital offering a better rice quality and services to build long-term relationships with regular customers. A 53 The main retail outlets are the many popular strategy is to compete via prices “in order traditional small shops outside of wet markets, to sell more.” Sometimes the tough competition which are most often owner-operated and forces traditional retailers to adjust their margins characterized by very low turnover (1 ton/ to reduce the price fluctuations from wholesale, to month). Retailers are supplied on a real-time, per- keep their clientele. Some retailers pointed out how order basis by wholesalers and operate on rented buying directly from millers would allow them to premises with virtually no investment apart from sell rice at cheaper prices than their competitors. 15 The Law on Land Transport (Amended version) No. 24/NA from December 12, 2012 represents the primarily legal framework governing the transport of goods commercially for domestic and internationally markets. Two types of licenses are referenced in the regulation: (i) a transport enterprise- level license for transport companies (Article 21 Establishment of Land Transport Enterprise); and (ii) a truck or vehicle use permit (Article 17 Vehicle Use Permit). Small informal traders operating their own second-hand truck would be subject to the vehicle use permit, and the more formal traders to the enterprise-level license. The annual fees for obtaining the enterprise-level license are set at 200,000 LAK per year, whereas the fees for the truck level permit range from 200,000 LAK for vehicles and cargo under 7 tons to 400,000 LAK for over 15 tons. Relative to other costs incurred by traders (i.e., vehicle O&M), this represents a small cost. No other restrictions or significant requirements exist for transporting agricultural goods nor does the law impose geographical limits or restrictions on tonnage for transportation. The only key setback for assemblers is the duration and validity of the licenses. For both licenses (business and truck-level), the validity period is only one year, whereas as in other jurisdiction, notably Vietnam and Thailand, licenses are valid for a period of seven to five years, respectively, and only required at the company level. 16 It is doubtful whether enforcing tax payments along roads is an efficient way to do so, while there is anecdotal evidence that such checkpoints offer opportunities for extracting informal payments. Reviewing this approach would be important. 17 Article 56 Lump-sum tax rate of the Tax Law. 20 Rice Value Chain Table 8 Lao PDR: Costs and margins of the rice value chain at the retail stage Retailing Total MT traded product (rice) LAK USD Gross revenu (qty sold*price) 6,500,000 791.04 Production costs Crop purchases (payment to wholesaler) 5,000,000 608.49 Other variable costs 393,030 47.83 Investment costs 121,545 14.79 Total costs 5,514,575 671.12 Processor’s income Gross margin (revenue- total var costs) 1,106,970 134.72 Net profit (gross margin - invest costs) 985,425 119.93 Source: World Bank staff estimates. Selling packaged and branded rice rather than just price display) aimed at promoting price discovery loose rice was one strategy to attract customers in retail markets.19 For instance, it was observed with a higher willingness to spend. Retailers are that for rice retail markets in Vientiane Capital, clearly adapted to the type of customers that are retailers consistently displayed the price of their dominant around the location of the shop. product (Figure 3). 56 Retail markets are currently not subject 57 Supermarkets are emerging but appear to government price controls.18 However, a to be marginal still in terms of importance to recent article in the Laotian Times reported “The retail. Experience from India, Bangladesh, China, National Assembly proposed upgrading the Prime Thailand, and Vietnam suggests that modern food Ministerial Decree on the management of prices to retail (supermarkets, hypermarkets, convenience a law […..and it has also] advised that an accurate store chains, neighborhood chain stores, and price structure for each category of product and discount and club stores) will also grow rapidly in set guidelines for the reduction of product costs Lao PDR, displacing traditional retailers. Yet it will should be developed.” This raises concerns as take some time. Supermarkets can use economies more regulated prices would introduce further of scale in procurement and marketing to reduce distortions with potentially negative consequences costs of staples to consumers and can use on the competitiveness and development of the economies of scope to differentiate quality and sector (see also paragraph 49). It is unclear what thus appeal to different segments of consumers, specific foodstuffs or commodities are targets so they will be able to offer lower prices than for these price controls; however, interviews traditional stores. Important conditions for with wholesalers and retailers in the rice and modern retail are a stable and favorable business vegetable markets did not confirm this. Rather, environment, a growing middle class, and access regulatory oversight of the retail markets is aimed to affordable and well-located real estate. While at establishing consumer protection standards Lao PDR has a growing middle class, the business such as product labelling regulation (including environment remains cumbersome and anecdotal 18 https://laotiantimes.com/2017/05/19/national-assembly-seeks-price-stability/ 19 The Department of Internal Trade, Ministry of Industry and Commerce Announcement 1285, restating the requirement to include labels in the Lao language on products: http://www.laotradeportal.gov.la/index.php?r=site/display&id=957#.WacyhsiGPIU 21 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Figure 3 Rice retailing in Vientiane Photo by Bart Verweij/World Bank Laos evidence indicates that informal restrictions to prohibited activity is “distribution of goods in the accessing prime real estate exist.20 price management list without approval from the price management authorities.” Whether informal 58 Legal barriers to entry for supermarkets barriers to entry exist could not be confirmed but do not appear to be in place, but the minimum would be useful to study, as key informants report capital (investment) requirements are very that it is difficult to receive a supermarket license high and informal barriers may exist. The at central location. Decision on Shopping Centers and Department Stores No. 1950/MOIC.DTD from September 22, 2015 references retailers directly. Article 7 sets 2.2 Export market standards and conditions for establishing such enterprises and defines supermarkets as having an area of no more than 10,000 m2 and hypermarkets 59 Lao PDR only exports a small proportion of no more than 50,000 m2. Another regulation (about 5 percent) of its rice production and is the Decision on Wholesale and Retail Business relies on cross-border trade with its neighbors. No. 1005/MOIC.ITD from May 22, 2015, which The export market for rice can be separated into regulates wholesale and retail businesses. Again, the markets for glutinous and non-glutinous no major formal barriers to entry were found there. rice. Currently, almost all exports are glutinous Both foreign and local companies are permitted to rice exported to Vietnam. Interviews conducted engage in wholesale and retail business (foreign with processors confirmed that Lao PDR holds a companies were previously prohibited). Article competitive advantage in this market, offering a 22 does include a list of prohibited activities for good mix of price and quality competing well with wholesale and retail business, however, and one the offers of Vietnam and Thailand. Vietnam’s 20 For a detailed discussion of challenges in the Lao business environment and the role of discrete decision making, see World Bank (2018) and Imboden and Hoppe (2017). 22 Rice Value Chain glutinous rice is of worse quality than that from often these quotas are not met, resulting in export Lao PDR, so Vietnamese consumers are prepared prohibitions, was not available. However, the to pay a premium for Lao rice (Figure 4). On the threat of export prohibitions has globally shown other hand, Thai rice is of much higher quality to reduce incentives for investment into such and more expensive, being consumed by more sectors as it reduces investors’ ability to assess affluent Vietnamese consumers and providing Lao their likely returns on investment. As a result, PDR with a good niche to serve a large number of export restrictions negatively affect the long- middle-income consumers in Vietnam (CASRAD term growth of the sector by reducing investment 2015). inflows, which could bring in knowledge and technological innovations. 60 Domestic regulations are relatively favorable to exports, although provincial reserve quotas 61 Indirect costs exist in the form of exist. The MoIC governing ordinance “Procedures bureaucratic processes. For instance, under for Rice Import and Export in the Lao PDR” from the regulation, traders are required to obtain March 1, 2012“ is the main regulatory framework authorization for exporting from the MoIC at both governing the imports and exports of rice. While the provincial level and Vientiane Capital to ensure exports of rice are legally permitted, quotas set surplus reserves in the country to enable exports. at provincial level restrict the flow of rice across Transport providers and exporters complain about borders. According to the MoIC’s Announcement burdensome procedures to process documents dated July 11, 2013, a baseline quota of 350 kg/ with too many offices. Informally they report that head/year (after deduction of wet/dry paddy they make payments to officers to speed up the ratio and rice reserves) is set for each province process. In combination with the threat of export to ensure sufficient quantities for reserves. After prohibitions, this further reduces incentives meeting reserve quotas, remaining quantities for larger investors targeting primarily export are eligible for export. Information regarding how markets to invest in Lao PDR. Figure 4 Retail prices of glutinous rice in Vietnam, US$/ton, 2015 1400 1200 1000 Us$/ton 800 600 400 200 0 Vi tn m s L o first- L o s cond- Th i ordin r Th i sp ci l ric r d ric r d ric Source: CASRAD 2015. 23 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 62 The government has given priority to two supporting documents to issue one CoO. The reducing regional trade barriers in the past few process of issuing CoOs could be simplified. The years to deepen integration in the Southeast Asia issuance of other supporting documentation is region. In 2010, Lao PDR ratified the ASEAN Trade also frequently reported to take significant time. 23 in Goods Agreement, which eliminated intra- Exporters see this process as burdensome. They ASEAN21 import duties on 99.65 percent of their further report that approvals by the Vietnamese tariff lines. In accordance with the agreement and officials of CoOs and required paperwork are often implementation of a bilateral trade agreement arbitrary, and additional requests cause delays at entered into force in 2015 between Vietnam and custom points. More research is needed to identify Lao PDR, a preferential tariff agreement was regulatory simplifications and other cost-saving signed into law in 2016 granting tariff reduction measures to facilitate border procedures. of 50 percent for products listed in Annex 2b of the agreement, including rice, through October 64 In addition to Vietnam, potential export 2020. Under the tariff agreement, imports of markets for glutinous rice would be China and the rice paddy along with milled and semi-milled rice European Union (EU). Under a recent agreement, from and into Lao PDR are subject to a tariff rate China agreed to purchase 20,000 tons of organic of 5 percent. Currently exports of glutinous rice rice per year from Lao PDR. First shipments to Vietnam face an import quota to Vietnam of were made in 2016 under a previous agreement 70,000 tons of rice per year. for 8,000 tons. However, currently only one mill (the IDP rice mill, a foreign-owned rice mill in 63 Non-tariff barriers to trade persist and Savannakhet Province) can produce rice with limit the potential scope of export markets. For high enough quality to meet Chinese standards. instance, goods entering Vietnam are subject Export to Chinese markets is further undermined to Rules of Origins requirements to qualify for by the fact that China’s Development and Reform the preferential tariff rate in Vietnam. In this Commission elected the Chinese enterprise case, only agricultural goods that are entirely Xyanye Lao Co Ltd. as the sole exporter of Lao (100 percent) originating from Lao PDR are rice to China, creating a de facto monopsony.24 eligible for the preferential tariff. To benefit from Regarding the EU, as a Least Developed Country, tariff preferences (with a preference margin of Lao PDR benefits from the most favorable terms 40 percent), exporters are required to obtain a under the EU Generalized Scheme of Preferences, Certificate of Origin (CoO) at the provincial level namely the EBA initiative, which grants the or in Vientiane Capital to claim preferences in country full duty-free and quota-free access to Vietnam.22 This process is said to be cumbersome European markets for all products except arms as traders complain that they need to obtain and ammunition. It is one of the few countries, 21 Association of Southeast Asian Nations. 22 Certificate of Origin use under Lao–Vietnam is called Form S and obtained via the Lao Trade Portal. 23 Additional licensing requirements and documentation for export are required and include a copy of the enterprise registration, a phytosanitary certificate from the Department of Agriculture and Forestry at the provincial level, a commercial invoice, a bill of lading, a packing list, and a copy of tax registration. Some of these requirements are mandated by Lao authorities only. 24 A monopsony allows buyers to pay lower prices, negatively affecting producers’ income, and reducing incentives to expand production. Such market structures can have significant negative welfare effects on producers. Further work is underway to understand the impact of such restrictions in Lao PDR (where they occur frequently). 24 Rice Value Chain beside Cambodia, in the ASEAN block to enjoy this 66 Poor paddy quality as well as poor milling preferential treatment.25 standards in the processing of non-glutinous rice hinder the ability of medium-sized mills to 65 For non-glutinous rice, export export. These results are in line with the current competitiveness challenges are quite big for Lao anecdotal evidence. Thai-Ha company (Kaset PDR. As a small player on those markets, Lao PDR brand) formerly imported Lao non-glutinous rice is a price taker; to be competitive it must adjust from mills in Nongbok and Thakhek districts, its cost structure accordingly. The dominant providing technical assistance to monitor milling forces and main producers are Vietnam, India, quality and providing package with Thai rice and Thailand. Traders report that paddy white branding. Interviews with key traders show that rice produced in Lao PDR is more expensive than the firm closed its office in Savannakhet Province in Thailand and Vietnam by 500–1,000 LAK/kg as it was no longer profitable. (US$122/ton). Based on the information sourced during interviews, paddy production costs for 67 Only under exceptional circumstances and white rice in Lao PDR were US$322/ton. A few favorable exchange rates can mills find an opening millers in Khammouane Province can offer white for trade. One mill – Vanida rice mill in Khammouane rice at US$523/ton.26 Based on a report from The Province – can meet the Good Manufacturing Institute of Developing Economies of the Japan Practice (GMP) standards in processing. A second External Trade Organization (IDE-JETRO),27 it is company – the Bounmy and Soulivan rice mills safe to assume a cost of logistics from mill to border –is currently in a pilot rice mill program for GMP of about US$60/ton of milled rice, which would funded by the Mekong Institute and Swiss Agency cover transport, loading, and border crossing. It for Development and Cooperation. However, most follows from those estimates that under current rice mills are unable to meet the GMP standards, conditions, Lao PDR is not a competitive producer citing a lack of modern processing infrastructure of milled white rice. The main cost factor is the (drying, heating, polishing, and sorting) as the key quality and price of paddy production. constraints. One of the main constraints in their effort to upgrade processing technology is difficult access to finance. 25 The EU regulation on rice is complicated. As indicated below, the EBA initiative established under EU regulation 978/2012 provides zero duty and quota-free access for all types of rice (including milled rice) for rice originating from Least Developed Countries, including Lao PDR. According to a special report by the USA Rice Foundation on EU rice regulation (comments regarding the 2015 National Trade Estimate Report on Foreign Trade Barriers; Docket No. USTR-2015-0014, dated October 28, 2015) since 2005 the EU replaced the margin of preference trade concession regime with multiple import regimes for rice consisting of a mix of Tariff Rate Quotas (TRQ), variable applied duties, and country-specific concessions. Import duties for milled and semi-milled rice (of all types) are summarized in Regulation No. 192/2010 fixing the import duties applicable to semi-milled and wholly milled rice. The import duty is bound at €175/ton. The applied rate is set twice a year (September 1 and March 1) based on imports from the preceding 12- and 6-month reference period, and is set at an applied rate of either €145/ton or €175/ton. However, special TRQ set at zero duty are established twice per calendar year: the first quota is set at 63,000 tons (Jan-July), with the lion’s share going to the United States (~ 38, 000 tons), Thailand (~ 21,000 tons), and Australia (~1,800 tons). The second quota is set at 40,216 tons, with specific targets specified for India (~ 1,800 tons) and Pakistan (~ 1,600 tons). The remaining balance is set for rice of “other origins” and all other countries. These quotas are provided for under Regulation No. 1273/2011, providing for the administration of certain TRQ for imports of rice and broken rice. Regulation No. 449/2010 also provides TRQ for Egypt at 81,149 tons at zero duty for milled rice. 26 For comparison, the average export prices of white, non-glutinous, and non-aromatic rice offered by Thailand and Vietnam range between US$320 and US$450/ton depending on quality and the rice supply situation on the world market. 27 For a detailed treatment of logistics costs in Lao PDR please refer to IDE-JETRO (2015). 25 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 2.3 Cost drivers retailers, net profits are estimated at US$120/ ton, resulting in a daily income of only US$6. 68 Table 9 presents the cost and profit 69 Despite the relatively high farm-gate price breakdown at various stages of the value chain (Table 3), Lao farmers do not seem to fully benefit between Khammouane Province and Vientiane from high consumer prices. In peer countries, the Capital. Farm production costs explain 29 ratio of farm-gate to wholesale prices ranges from percent of the final consumer price. They are 34 percent to 51 percent (Table 10). Yet in Lao PDR mainly driven by the high costs of hired labor, the this ratio is only 27 percent. The share of farm- lack of mechanization, and low yields. The rest gate to retail prices is also low in Lao PDR. is explained by high profits at the wholesale and retail segments, which are largely a reflection of 70 The build-up of incremental costs from stage the high transaction costs associated with each on to stage reveals where most of the value in the the spot business deal and very small quantities, chain is generated and how costs accumulate. as described above. Recall that translating profits The underlying hypothesis of this analysis is that into income per day, for a wholesaler a profit of by reducing the costs of individual participants, US$97/ton of rice equals a daily income of US$13 the competitiveness of the whole chain can be assuming seven working days per week. For increased. Any effort to cut costs would usefully Table 9 Lao PDR: Rice value chain: costs, prices, profits, US$/ton Farm-gate Assembly* Milling Wholesale Retail Price 264 284 355 608 791 Cost: 233 273 302 511 671 Purchase of intermediate product 233 284 486 608 Incremental costs 233 40 18 25 63 Profit 31 11 53 97 120 Note: * Prices and costs at farm-gate and assembly are presented for paddy. For the remaining segments, prices and costs are for rice. Source: World Bank staff estimates. Table 10 Share of farm-gate prices in wholesale and retail prices: cross-country comparison Countries Ratio of farm-gate to wholesale prices, % Ratio of farm-gate to retail prices, % China 51 n/a Indonesia 45 39 Philippines 34 33 India 46 39 Thailand 46 n/a Vietnam 44 n/a Lao PDR 27 21 Note: Price ratio for Lao PDR is for 2017. For other countries, the ratio is for 2013. Source: World Bank staff estimates based on FAO GIEWS price data and PhilRice/IRRI 2016. 26 Rice Value Chain target those stages with the highest cost figure to 4.5 tons by improving farming techniques and therefore the highest potential to make a while keeping input costs constant would reduce significant change. Table 11 provides a summary the above production costs from US$233/ton to of the incremental cost build-up along the stages US$181/ton. The second highest costs are created of the sticky rice value chain for 1 metric ton of at retail stage. These results are in line with farm-gate product at the beginning of the season, data on other rice-producing countries in Asia. when prices are low.28 Table 12 displays the results on costs added for Bangladesh, India, and China. The highest costs 71 Not surprisingly, the highest costs are created are generated at the farm stage. In India and at farm stage. This is related to the inherent Bangladesh, the second highest costs are also nature of agricultural production. Nevertheless, added by retailing, the highest for all postharvest it may represent a good entry point for improving stages. In both cases, rice retailing is described the competitiveness of the end-product as well as as very small operators selling small bags of rice the whole value chain. The above analysis assumes from small stalls, indicating a similarly inefficient an actual average yield of 3.5 tons of dry paddy small shop sector for staple foods. per hectare. Just to illustrate, increasing that yield Table 11 Lao PDR: Distribution of costs and profits along the rice value chain at the beginning of the season, US$/ton Farm production Assembly Milling29 Wholesale Retail Incremental costs 233 9 18 16 41 Transfers to previous stage 0 264 284 317 396 Profit (sales price - incremental 31 11 53 63 78 costs and transfers) Total value generated (sales price) 264 284 355 396 514 Incremental costs as % of final 45% 2% 3% 3% 8% consumer price Value added 264 20 71 79 118 Share of total value added (%) 48% 4% 13% 14% 21% Profit rate (net profit/total costs) 13% 4% 18% 19% 18% Profit as % of final consumer price 6% 2% 10% 12% 15% Profit as share of value added (%) 12% 55% 75% 80% 66% Daily income (US$) N.A 4 N.A 13 6 Source: World Bank staff estimates. Table 12 Costs added as share of total costs along the value chain of conventional rice in Bangladesh, India, and China (in %) Cost added as share of total costs Farm production Assembly Processing Wholesale Retail Bangladesh 87 1 3 1 8 India 63 2 7 3 22 China 44 36 11 7 Source: Reardon et.al. 2012, and World Bank staff estimates for Lao PDR. 28 Differences in totals are due to rounding. 29 For the milling stage, the output includes rice and by-products; i.e., bran and husks. Thus, the sales price at milling stage and transfer at wholesale stage are not the same. That is why summing up profits and incremental costs over all stages adds to slightly more than the final sales price of rice. 27 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 72 For the identification of key drivers of illustrates how the final consumer price for sticky value chain costs, the analysis of profits is rice is built up by value added at each stage of the particularly interesting if profits comprise a value chain, presented in a paddy equivalent.30 large share of consumer rice prices. Table 11 The value added at each stage is the sum of profits displays the distribution of profits and margins and incremental costs. along the rice value chain at the beginning of the season for 1 ton of farm product. It follows that 73 The relatively high profit rate of the milling profits at processing, wholesale, and retail stage stage is cause for some concern. It seems accumulate to 37 percent of the final consumer relatively high, given that the underlying cost price. Each stage shows significant profit rates of assumptions include interest and depreciation 18–19 percent, which warrants a deeper analysis. of capital investments. Shares of total profits It should be noted, however, that one reason that accruing to the processing stage in Bangladesh these profit rates represent a relatively larger and India, for example, are much lower, although share of the final consumer price is that they are investment costs are not included in their budgets situated toward the end of the value chain. Figure 5 (Table 13). Millers’ share of the value chain profits Table 13 Share of total profit accruing to value chain participants in selected countries Cost added as share of total costs Farm production Assembly Processing Wholesale Retail Bangladesh 69 4 8 10 9 India 69 6 6 3 13 China 60 33 6 1 Lao PDR 13 5 23 27 33 Source: Reardon et.al. 2012, and World Bank staff estimates for Lao PDR. Figure 5 Lao PDR: Price build-up and value added along the sticky rice value chain, US$/ton 18 514 41 71 Incr m nt l cost p r st 264 20 Profit F rm Ass mbl Proc ssin Whol s l R t il Tot l pric production Source: World Bank staff. 30 Consumer price of rice in a paddy equivalent of US$514/ton equals a consumer rice price of US$791/ton. 28 Rice Value Chain in China was larger than that of South Asian 75 Similarly, the wholesale stage represents millers, possibly because Chinese millers tend to a large cost factor for the rice value chain. sell directly to large urban wholesale markets and According to the study’s regulatory assessment, buy directly from farmers. A similar set-up could legal barriers to entry do not exist for either explain the high margins for the processing stage wholesale or retail markets. Instead, the main in Table 11, which assumes a medium-sized modern factors driving costs per ton are high transaction mill that can sell directly to retailers and sources costs associated with each on the spot business directly from farmers via collectors. Furthermore, deal and very small quantities. Consolidation the description of the processing stage in the among retail stalls, larger storage, and better previous section hinted at the prevalence of linkages between millers, traders, and retailers barriers to entry because of regulation, supplier are opportunities for cost cutting and increasing agreements, and limited access to finance in the the efficiency of the value chain. However, sector, which prevent outsiders from investing. For interviews suggest that traders are reluctant example, apparently fixed prices for buying and to enter into long-term contracts with business selling rice might lead to lower profit expectations partners because they face the risk of default. of potential investors, while in practice profits In the absence of functioning and affordable could be higher than the apparent cap at 500 LAK mechanisms for the resolution of commercial per kilo (see paragraph 46). These disincentives disputes, all transactions are on the spot and to invest might therefore contribute to generate business relations are trust-based. Investments handsome profits for those modern mills already into better linkages and consolidation are also inside the market. constrained by limited access to finance and weak human capital. 74 Traditional retailing is a key source of employment in Lao PDR but clearly adds costs 76 Describing costs by categories can point to food consumers. Profit rates at retail stage are toward cross-cutting issues with a potential for estimated to be around 18 percent, which seems cost reduction. Figure 6 displays the magnitude high. In neither India, Bangladesh, nor China is the and origin of different types of value chain costs. share of total profit accruing to traders as high By far the largest cost factor is hired labor, most as in Lao PDR. However, in Bangladesh and India, of which is needed for farm production. Another which display a similar small shop system and area of interest for improving competitiveness high costs at retail stage, profit shares were also is everything related to mechanization, repairs, high compared with those of other postharvest and maintenance. At each stage, significant value chain stages. It is further noted that these costs are created by some form of machines profits in Lao PDR include the cost of covering and vehicles, and licensing requirements for the retailers’ own returns to labor, which may have import of machinery and spare parts (non-tariff been deducted from the profit estimates for the measures) restrict access to machinery and other countries. If all labor costs are deducted parts and reduces competition to provide such from income, retailers’ profits and consequently inputs. This is also reflected in the very low rating their profit shares will be smaller. As mentioned of the machinery indicator in the 2017 Enabling above, an average daily turnover of 50 kg at a the Business of Agriculture report, particularly profit of US$120/ton equals a daily income of with regard to tractor dealer requirements US$6 for a traditional retailer. (World Bank 2017b). The cost of complying with different sector-specific regulations (tax, levies, 29 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects licenses, permits) is also a significant factor Yet regulatory and administrative costs also still based on the available data, which only include need to be addressed to enhance efficiency along the actual regular payments. The true cost of the value chain and crowd in private investment. compliance could be considerably higher as it Currently, these costs do not seem to directly would also include informal payments, which were inflate the cost structure of the value chain, but not possible to quantify, and transaction costs the report finds that cumbersome regulations associated with application processes, which may still matter as they limit entry, affect market also differ considerably by occasion and office structure, and reduce competition; thus they involved. require attention. Among the most prominent are those related to access to capital, paddy and 77 In summary, the costs most attributable to rice price regulations, and the lack of an efficient the large wedge between producer and consumer conflict resolution mechanism for commercial rice prices in Lao PDR are a result of structural disputes. problems, the resolution of which requires public and private investments. Key among the structural problems is the low farm productivity. Figure 6 Lao PDR: Magnitude and origin of different categories of costs, LAK/ton Hir d m chin r M rk t st ll r nt Int r st R p irs nd m int n nc F rm production V hicl O&M Ass mbl D pr ci tion Proc ssin L nd r nt/t x, crop l vi s, lic nc s, p rmits,... Whol s l Hir d l bor R t il P ckin m t ri ls En r S d nd F rtili r 400,000 800,000 1,200,000 Source: World Bank staff estimates. 30 3 Vegetables Value Chain 78 This chapter focuses on the value chain small, and medium processing enterprises. of conventional vegetables. Lao consumers However, the current state of processing of are increasingly becoming aware of the specific vegetables in Lao PDR is very low. According to attributes of agricultural and food products, farmers and traders, this is mainly due to the lack particularly in terms of their identity and means of of knowledge on processing techniques and lack of sustainable production. While growing consumer access to finance. Likewise, the lack of labor is a concern for safe and sustainably sourced food is common constraint among farmers and traders. driving market expansion for certified products – whether organic, fair trade, or geographic 80 The main market outlets are traditional indication – from specialty retailers to high- wet markets. Supermarkets, hypermarkets, and volume retailers, the conventional vegetable specialized luxury stores are gaining importance market remains by far the biggest. The specific and they are increasingly supplying a range of vegetables analyzed in this study are lettuce and processed food imports as well as traditional coriander. While lettuce is a common and popular foods and fruits and vegetables to middle- to high- vegetable, coriander is a specialty crop, like other income shoppers. However, most of the produce is herbs that are less widely grown and bring better sold by small retailers on traditional wet markets. prices. The production of herbs enjoyed impressive Most of the trade is carried out by small-scale, growth in the last two decades as more people one-person traders; many of them are farmers began using fresh herbs for cooking, medicinal themselves. The crop is assembled by collectors herbs, and value-added herbal products such as who own small trucks and transport the goods to soaps, candles, teas, and bath oils. Study districts wholesale markets. Business is mostly done face- are in Vientiane Province supplying Vientiane to-face, one-on-one, and with payments in cash. Capital. Wholesalers buy vegetables from collectors, hire a trolley, and carry vegetables from the collector’s 79 Most of the produce is sold in relatively truck to their stall. Retailers operate at a small unprocessed form. Increasing female scale and sell many different types of vegetables participation in the workforce will increase the to consumers. They usually sell in fresh markets demand for ready-to-cook, ready-to-eat, and around Vientiane Capital. Market offerings are processed foods. Consumers with higher incomes highly dependent on production seasonality. and education levels are demanding foods that are compliant with sanitary standards, and that 81 Due to the strong production seasonality, meet their expectations for taste, packaging, vegetable price fluctuations are very high in Lao and appearance, and they are willing to pay PDR. Prices are highest very early in the harvesting more for these foods. In addition to necessitating season, when overall supply is still low. Later compliance with food regulations and standards, during the harvest times there is an oversupply their demand should be driving innovation in and prices drop drastically. For example, producer processing, packaging, and branding in micro, prices for coriander are 9,000 LAK/ton in the 31 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects rainy season and 5,000 LAK/ton in the dry PDR is relatively low as farmers either harvest on (winter) season. International trade of vegetables demand or call their regular collectors when they is limited. Vegetables are imported from Thailand, have produce that is ready for harvest. Normally, but according to interviews volumes vary and are traders provide farmers with plastic bags. The only intended to fill seasonal gaps in the supply produce is harvested, cleaned, and bundled in situ offered by Lao farmers. Exports to Thailand are in the open the field. Overmaturity is a frequent the exception rather than the norm. occurrence, as some farmers wait for the order from collectors rather than harvest the crop when it is ready but with no sure market. Losses 3.1 Conventional that materialize later and are caused by quality issues and overmaturity are passed on to farmers vegetables because collectors require 25 percent allowance for losses incurred when handling the produce from the farm to the market. Because they usually Farm production provide plastic bags as packing material with 12 kg capacity, farmers fill each plastic bag with 15 kg. 82 Vegetable production is mostly practiced in Therefore, improving quality and productivity at a traditional way by individual households. The farm stage to reduce overall costs represents a typical size of the vegetable farm is 2 rai (or 0.32 good entry point for improving the competitiveness ha) on average. While adoption of new technologies of the whole value chain. in vegetable production in Lao PDR is progressing, the situation is still characterized by poor crop 85 Farmers are not subject to any form of public management, less choice of variety, and pest and regulation in terms of production standards disease problems, which decrease productivity or food safety regulations. As a result, they do and quality and increase the cost of production. not face any cost of compliance. On the other The main factor driving up the cost is hired labor, hand, an opportunity to improve the quality of the same as for paddy production. vegetable products is missed. Upgrades in terms of standards could add benefits to the whole value 83 Farmers do not have formal contractual chain. arrangements with collectors. They have informal links with several collectors who buy from them 86 The traditional supply chain does not on a regular basis. Farmers keep two to three provide for product differentiation by branding, varieties to mitigate risks related to production for example, or certificates of origin. All farmers and marketing. The rotations allow for some supply the exact same type of markets with diversification: mustard in the early dry season, similar products and, depending on the current followed by eggplant; or Chinese cabbage after the supply and demand situation, profit rates at farm main rice harvest followed by cauliflower; or lettuce stage fluctuate daily in line with price fluctuations. after coriander. During the rainy season, less Farmers try to manage price risk by diversifying vegetables are harvested and productivity is lower. their crops and by dealing with a handful of different traders to negotiate the best price. Cell 84 Farmers incur a loss of production due to phones are essential tools to receive current price poor postharvest handling, albeit less than and market information. Margins at farm stage expected. Incidence of loss at farm stage in Lao vary a lot (Table 14). The difference in the margins 32 Vegetables Value Chain between lettuce and coriander can, to some However, sweating inside the bag is a common extent, be explained by the type of crops, specialty condition that makes it more likely for produce to versus common vegetables, but may also reflect rot if it has been damaged as a result of handling. some scarcity of coriander when data collection took place (in April 2017). All things considered, if Inspection: The quality of vegetables is mainly done properly, vegetable farming can be a much inspected visually. High losses are due to trimming more profitable business than rice farming. of damaged leaves and rotten parts because of bacteria soft rot. Traders (collectors, wholesalers, retailers) Market infrastructure: The conditions at wet 87 Collectors, wholesalers, and retailers share markets, which lack modern cooling and storage many characteristics and sometimes these facilities, force retailers to sell their goods within functions are combined. Costs for collectors three days maximum. Prices for goods at the end (assembly) and wholesalers are related to transport of the first day and on their second or third day are and hired labor. Costs incurred at retail stage are reduced drastically. mostly related to costs of operating the market stall and packing and cooling the vegetables. 89 Given the dominant quality issues, Table 15 and Table 16 show that all traders make traders spend a lot of time sorting, cleaning, positive profits per ton of end-product. and repacking the goods at each stage of the chain. Losses reduce the profits at each stage; 88 Large cost factors for all three types accordingly, the underlying analysis assumes 10 of traders are losses caused by the mix of percent loss at each stage. In total this means that suboptimal/outdated packing technology, 1.0 tons of final product require 1.4 tons of raw insufficient inspection methods, and outdated material (farm-gate product). This is in line with market infrastructure: earlier estimates. A previous study conducted by AVRDC estimated that an average of 17 percent Packing technology: Produce is washed and of vegetables leaving the farm-gate are never packed in plastic bags, which is beneficial in consumed and are lost along the supply chain preventing too much water loss. Washing adds (Weinberger et al. 2008). water to the produce and increases the weight at which wholesalers can sell it on the market. Table 14 Lao PDR: Costs and margins in the vegetables value chain at the production stage Farm Production Coriander Per Hectare Lettuce Per Hectare LAK USD LAK USD Gross revenu (yield* price) 78,750,000 9,583.79 35,340,000 4,300.84 Production costs Variable costs 36,381,000 608.49 32,175,000 3,915.66 Investment costs 571,000 14.79 1,142,000 138.98 Total costs 36,952,000 671.12 33,317,000 4,054.64 Farmer income Gross margin (revenue - var costs) 42,369,000 5,156.26 3,165,000 385.18 Net profit (gross margin - invest costs) 41,798,000 5,086.77 2,023,000 246.20 Source: World Bank staff estimates. 33 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 90 Like at the farm stage, profit margins vary commercial disputes, all transactions are on and fluctuate daily, depending on the current the spot and business relations are trust-based. demand and supply conditions. The high price Some traders try to cut costs and manage fluctuations suggest that the supply chain is not risks better by combining several functions well managed. No long-term contracts between (retailing, wholesaling, and collection) through traders and farmers’ groups exist to manage vertical integration. However, these efforts and supply risk. In the absence of functioning and investments are constrained by limited access to affordable mechanisms for the resolution of finance and lack of labor capacity. Table 15 Lao PDR: Costs and margins of the lettuce value chain at assembly, wholesale, and retail stages Assembly Wholesale Retail assembled (washed) product traded (washed) product traded (washed) product LAK/ton USD/ton LAK/ton USD/ton LAK/ton USD/ton Gross revenu 7,000,000 851.89 8,300,000 1,010.10 12,000,000 1460.39 (qty sold* price) Production costs Crop purchases 6,270,000 763.05 7,700,000 937.08 9,130,000 1,111.11 (payment to farmer) Other variable costs 597,165 72.67 350,000 42.59 1,634,888 198.96 Investment costs 68,547 8.34 128,750 15.67 224,250 27.29 Total costs 6,935,712 844.07 8,178,750 995.35 10,989,138 1,337.37 Assembler’s income Gross margin (revenue - total 132,835 16.17 250,000 30.42 1,235,113 150.31 var costs) Net profit (gross margin - 64,288 7.82 121,250 14.76 1,010,863 123.02 invest costs) Source: World Bank staff estimates. Table 16 Lao PDR: Costs and margins of coriander value chain at assembly, wholesale, and retail stages Assembly Wholesale Retail assembled (washed) product traded (washed) product traded (washed) product LAK/ton USD/ton LAK/ton USD/ton LAK/ton USD/ton Gross revenu 15,000,000 1,825.48 22,000,000 2,677.38 12,000,000 3,529.27 (qty sold* price) Production costs Crop purchases 9,990,000 1,215.77 16,650,000 2,026.29 22,000,000 2,677.38 (payment to farmer) Other variable costs 650,400 79.15 350,000 42.59 2,579,550 313.93 Investment costs 31,743 3.86 1128,750 15.67 224,250 27.29 Total costs 10,672,143 1,298.79 17,128,750 2,084.55 24,803,800 3,018.60 Assembler’s income Gross margin (revenue - total 4,359,600 530.56 5,000,000 608.49 4,420,450 537.96 var costs) Net profit (gross margin - 4,327,857 526.70 4,871,250 592.83 4,196,200 510.67 invest costs) Source: World Bank staff estimates. 34 Vegetables Value Chain 91 The price peaks observed in Vientiane Capital Ministerial Decree on the management of prices to indicate that good opportunity exists for regional a law […..and it has also] advised that an accurate trade or investment in supply chain management, price structure for each category of product as the peaks occur during different periods of the and set guidelines for the reduction of product year and could be exploited by traders. However, costs should be developed.” It is unclear what these opportunities are apparently not exploited specific foodstuffs or commodities are targets to the extent possible. Access to farmers could be for these price controls; however, interviews with a barrier to entry, as most existing collectors are wholesalers and retailers in the rice and vegetable from the same villages as the farmers and benefit markets did not confirm this initiative. Rather from preferential treatment due to family and regulatory oversight of the retail markets is aimed friends. at establishing consumer protection standards such as product labeling regulation (including 92 While few regulatory controls and price display) aimed at promoting price discovery restrictions exist at collection stage (the same in retail markets;32 however, enforcement of such regulations as for traders of rice apply), some measures remains weak. For instance, during the evidence suggests that retail markets are market survey a consistent lack of compliance subject to some government regulation.31 A was observed among retailers in the vegetable recent article in the Laotian Times reported “The markets, where few labels were displayed (Figure 7). National Assembly proposed upgrading the Prime Figure 7 Lao PDR: Wet market with vegetables in Vientiane Source: World Bank staff picture. 31 https://laotiantimes.com/2017/05/19/national-assembly-seeks-price-stability/ 32 The Department of Internal Trade, Ministry of Industry and Commerce Announcement 1285, restating the requirement to include labels in the Lao language on products: http://www.laotradeportal.gov.la/index.php?r=site/display&id=957#.WacyhsiGPIU 35 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects 3.2 Cost drivers season in 2017. Production costs are adjusted accordingly. (Differences in totals are due to rounding.) 93 The build-up of incremental costs from stage to stage reveals where most of the value in the 94 Like for the rice value chain, the highest chain is generated and how costs accumulate. The costs in lettuce and coriander are generated at underlying hypothesis is that by reducing the costs the farm stage. This is related to the inherent of individual participants, the competitiveness of nature of agricultural production. Nevertheless, the whole chain can be increased. Any effort to cut it may represent a good entry point for improving costs would usefully target those stages with the the competitiveness of the end-product as well as highest cost and therefore the highest potential the whole value chain. Important cost factors at to make a significant change. Table 17 and Table farm stage are hired labor and inputs. Incremental 18 depict the distribution of costs along the value costs generated at retail stage also make up a chains of lettuce and coriander. The price data significant portion of the final consumer prices. were collected on one single day during the rainy Table 17 Lao PDR: Distribution of costs and margins along the lettuce value chain, US$/ton of farm- gate product Farm Assembly Wholesale Retail production Incremental costs 654 74 47 158 Transfers to previous stage 0 693 749 778 Profit (sales price - incremental costs and transfers) 40 7 12 86 Total value generated (sales price) 694 774 808 1022 Incremental costs as % of final consumer price 64% 7% 5% 15% Net profit as % of final consumer price 4% 1% 1% 8% Profit rate (net profit/total costs) 6.1% 1% 1% 9% Profit as share of value added 5.7% 8.75% 20% 35% Source: World Bank staff estimates. Table 18 Lao PDR: Distribution of costs and margins along the coriander value chain, US$/ton of farm-gate product Farm Assembly Wholesale Retail production Incremental costs 514 75 47 239 Transfers to previous stage 0 1095 1621 1874 Profit (sales price - incremental costs and transfers) 581 475 447 357 Total value generated (sales price) 1,095 1,645 2142 2470 Incremental costs as % of final consumer price 21% 3% 2% 10% Net profit as % of final consumer price 24% 19% 19% 14% Profit rate (net profit/total costs) 113% 41% 28% 17% Profit as share of value added 53% 86% 90% 59.9% Source: World Bank staff estimates. 36 Vegetables Value Chain 95 For the identification of key drivers of value fresh markets in Thailand across the border from chain costs, the analysis of profits is particularly Vientiane. Retailers in the two visited markets interesting if profits comprise a large share of in Thailand employ similar markups to the ones the vegetable consumer prices. The tables above visited in Vientiane. The retail prices in Thailand show the distribution of profits along the value are 1.5 to 2.0 times higher than the purchasing chains of lettuce and coriander. Overall, as a high- prices at wholesale markets. value product coriander is much more profitable for farmers and traders. Net profits along the 97 To analyze margins at retail and wholesale lettuce value chain are not as high as for coriander, stage more in detail, the study conducted a and only the profits at retail stage contribute in survey of five different wet markets in Vientiane a significant way to the final consumer price. For (Nonkhor, Thongkhankham, Khuadin, Huakhua, coriander the profits generated by all three types and Nonsavarng). Given the large differences of traders combine to half of the final consumer between the results for coriander and lettuce, price, which suggests some space for efficiency price data were collected across nine different improvements, keeping in mind that profits for vegetables (spinach, morning glory or water collectors, wholesalers, and retailers include spinach, Vietnamese lettuce, Chinese flowering their own returns to labor. Figure 8 and Figure 9 cabbage, Chinese cabbage, cabbage, coriander, illustrate how final consumer prices are built up by mint, green or spring onion). The comparative value added at each stage along the lettuce and analysis revealed that one market (Nonkhor) coriander value chains. was consistently the cheapest and one market (Nonsavarng) was consistently the most 96 To further analyze the profit margins at retail expensive for consumers. Average retail prices stage a simple comparison with price data from in Nonsavarng were 1.4 times higher than in Thai wholesale and retail markets was carried Nonkhor. This difference was driven by wholesale out. Table 19 presents data from two different prices to some extent. Nonsavarng was 1.2 times Figure 8 Lao PDR: Price build-up and value added along the lettuce value chain, US$/ton 214 1.022 34 80 694 Incr m nt l cost p r st Profit F rm Ass mbl Whol s l R t il Tot l pric production Source: World Bank staff estimates. 37 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects more expensive at that stage. But gross margins Integration: In Nonkhor retailers have better at retail stage in Nonsavargn (1.8) were also found access to many wholesalers on the spot and do to be significantly higher than in Nonkhor (1.5). not have to pay for transportation. In Nonsavarng some retailers purchased from other wholesalers Table 19 Thailand: Vegetable prices at fresh who purchased from Nonkhor market and some markets in Nongkhai and Udon Thani retailers purchased vegetables imported from Vegetable Wholesale (LAK/kg) Retail (LAK/kg) Thailand by other wholesalers and sold them at a Nongkhai higher price to recover their cost. Coriander 15,600 24,000 Lettuce 6,480 9,600 Size: The number of retailers in Nonsavarng market Udon Thani Coriander 12,960 19,200 compared to Nonkhor market is approximately Lettuce 3,650 7,200 one-third, which reduces competitive pressure on prices. Source: World Bank staff estimates. Transparency: In Nonsavarng retailers do not 98 Overall, factors that were identified to display prices. Given high search costs and the influence retail prices were: need for negotiation, many buyers end up paying higher prices. Location: Nonsavarng is far from other markets in the area, which reduces competitive pressure on Administration: Market fees in Nonkhor are retail prices. Nonkhor is in the center of Vientiane cheaper than in Nonsavarng market. Capital and retailers can sell more than in Nonsavarng market. Figure 9 Lao PDR: Price build-up and value added along the coriander value chain, US$/ton 497 2470 497 550 Incr m nt l cost p r st 1.095 Profit F rm Ass mbl Whol s l R t il Tot l pric production Source: World Bank staff estimates. 38 Vegetables Value Chain 99 In terms of cost categories pointing regulations misses the opportunity to meet the toward cross-cutting issues, two factors can be increasing demand for safe and sustainably identified: losses and high price fluctuation. Poor sourced food that is driving market expansion for crop management at farm stage, wrong choice of certified products. variety, and pest and disease problems decrease productivity and quality and increase the cost of Poor management of wet markets: Significant production. Coupled with traditional postharvest potential to reduce retail prices for vegetables systems and market infrastructures, high losses exists by improving the efficiency of wet market are incurred at every stage of the chain. A fractured operations. Entry points are the administration supply chain causes high price fluctuation, market and level of market fees, as well as the enforcement risks, and inefficiencies, which could be overcome of product labelling regulation (including price by closer business linkages among all players. display) aimed at promoting price discovery in retail However, a longstanding preference for well- markets. Investment in market infrastructure to known business partners and the lack of access improve cooling and storage facilities would go a to affordable and timely resolution of commercial long way to reduce food losses. conflicts reduce the appetite of value chain actors to form longer-term contractual relationships and Lack of value chain organization: Apart from the enter into deals with business partners outside of fact that farmers and traders lack the necessary their trusted comfort zone. technical and financial capacity to address issues related to quality, food safety, certification, 100 Summarizing, these key factors seem to postharvest systems management, logistics, drive value chain costs and prices for vegetables: agroprocessing, packaging, and branding, they need stronger coordination along the chain to Low farm productivity: Poor crop management agree on joint systems and standards. Stronger and postharvest handling, low choice of variety, vertical linkages between different stages of the and pest and disease problems decrease chain and horizontal consolidation via marketing productivity and quality and increase the cost and contractual arrangements between farmers of production. The absence of public regulation and traders/processors would reduce losses and in terms of production standards or food safety price fluctuations. 39 4 3 Conclusions and Policy Recommendations 101 This study analyzed the reasons for high 103 The two value chains also share some consumer prices and a large price wedge between challenges that affect all stages: farm prices in production regions and Vientiane, •• Lack of access to a system that provides the consumption center. Consumer prices for affordable and timely resolution of commercial rice are driven up by the following key factors: (i) conflicts reduces the appetite of value chain low farm productivity; (ii) barriers to entry and actors to form longer-term contractual to investment at the processing stage; (iii) high relationships and enter into deals with business profits and high transaction costs associated partners outside of their trusted comfort zone; with an inefficient trade and marketing system yet this could bring larger volumes, better at the traditional wholesale and retail stage; quality, and better risk management. and (iv) costs associated with mechanization •• The regulatory environment includes challenges and maintenance of vehicles and machinery. for nonfarm businesses to make investments and Consumer prices for vegetables are driven up grow. Complying with regulation creates some by: (i) low farm productivity; (ii) an inefficient unnecessary transaction costs in the transport trade and marketing system coupled with poor sector. The system of mandated prices distorts management of wet markets; and (iii) a lack of the market and does not capture the realities on value chain organization. the ground as in rice production (accounting for quality differences), while initiatives of consumer 102 Bringing together the analysis of the rice protection such as price labelling regulations are and vegetables value chains, some common price not fully implemented (in the vegetable sector). drivers can be identified: Exporters of rice face burdensome bureaucratic •• High production costs per ton at farmer level processes in the form of non-tariff-barriers and is a key constraint. For rice, production costs domestic requirements. Access to finance for comprise 45 percent of the final consumer price. private investors in agricultural value chains is For vegetables, they represent 21–64 percent of constrained by the current legislation. the final consumer price. 104 Based on the summary of findings, •• The relatively high margins and costs at the retail three action areas for policy consideration are stage are cause for some concern because they highlighted: (i) value chain linkages; (ii) regulatory also have a large impact on consumer prices. The environment; and (iii) investment. The sections sector is dominated by an inefficient small shop below elaborate upon each area and provide system, characterized by small quantities, and examples. Summarizing at the end, Table 20 links on the spot deals that drive costs up because of the action areas to the identified cost drivers. the associated transaction costs and fixed costs incurred by every stall. 41 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects A. Value chain linkages 106 Another example of closer contacts between value chain participants is the informal contracts between farmers and Khammouane Incentivizing closer contacts between value rice miller groups, which benefit both stages chain participants and facilitating stronger of the value chain. Public support of such kind coordination of arrangements in the form of public–private partnerships could complement the provision 105 Government can play an important role of public extension services with the aim to as facilitator between producers, processors, increase the competitiveness of the rice chain service providers, and traders. For example, in and to support the establishment of farm groups Champassak Province under an FAO-executed and farm clusters around the stronger rice mills. project, the Lao government and a Thai-based Based on the nature of these informal contracts, company successfully collaborated to establish an important recommendation is to increase and operate a small packing house in a vegetable investments in trust-building and collaborative production area.33 The government made available activities. This would have the highest chance a plot of land on which the project constructed a of success when supported by mechanisms for small packing house for the postharvest treatment contract enforcement, as these can to some and retail packaging of produce for export. extent replace the need for constant interaction Small-scale farmers in the area were trained to or supervision by the mills, which have scarce produce herbs and vegetables under contract for capacities (see below). the Thai-based company. The company signed a six-year lease with the provincial administration 107 A third example for public support to value of Champassak Province to use and operate the chain development would be improving the packing house. The crops produced (i.e., coriander, environment in which the operation of machines Thai basil, strawberries, and others) are delivered is cost-effective. Important aspects for the cost- to the packing house where they are cleaned, effective operation of machines are the availability sorted, graded, and retail-packaged, mainly of spare parts, access to repair services, low energy for ethnic European and Japanese markets. costs, and reliable energy supply. All stages of the Infrastructure of this type is required in most rural value chain would benefit but this area would be areas if farmers are to be linked to international particularly relevant in view of the need for the markets, especially in the vegetable sector. The milling sector to upgrade its equipment to access role of the government would be to ensure that new markets and increase competitiveness. It basic infrastructure, such as electricity, potable would also help farmers who are currently incurring water supply, and road access, is available, as high hired labor costs to reduce their dependence well as a long-term lease for a site suitable for on hired labor and move into mechanization. packaging or processing facilities. The location of However, the 2017 Enabling the Business of packing house facilities in the production areas is Agriculture report stresses the poor performance often key to lowering the cost of logistics. of Lao PDR in the machinery indicator, affecting mechanization (World Bank 2017b). Reducing restrictions and regulatory requirements in this area would be important to support 33 “Vegetable farmers in the Bolovens are reaching international markets.” See http://www.fao.org/laos/programmes-and-projects/success-stories/ bolovens/en/ 42 Conclusions and Policy Recommendations mechanization. Also in this area, government could commercial disputes, undue delays by local courts play a role as facilitator by actively supporting in settling and reopening cases for additional and building the skills of mechanics, importers review undermine the effectiveness of these of machines, and service providers and bringing mechanisms. Implementing reforms of existing them together with potential clients. Removal regulation, for example, by setting time limits of the notoriously lengthy procedure to obtain and imposing sanctions for delaying tactics, import licenses for vehicle spare parts, which can significantly reduce the length of time in also applies to agricultural equipment, would reaching a settlement or resolution to commercial contribute to increasing access to such parts as it disputes. Implementing these measures can play would increase competition among importers for a significant role in increasing private sector spare parts.34 participation and better linking value chain actors, as well as possibly increase private banks’ 108 A fourth example would be addressing readiness to finance activities in this sector. constraints for agribusiness development. Underinvestment of the private sector in lowering 110 Extension service authorities can be milling costs and reducing losses leads to large linked with producers and processors to offset losses for society, thereby justifying targeted high production and labor costs. Many farmers public support in some areas. Such support could do not employ machinery for land preparation, entail strengthening rice mills’ capacity to prepare necessitating the use of hired labor. This, coupled business and investment plans for upgrading their with incorrect fertilizer application, contributes to processing and postharvest handling facilities, and Lao PDR’s low score of labor and land productivity. their management capacities to improve product As evidenced in the analysis, the highest costs are quality, increase operational efficiency, reduce created at the farm production stage. Therefore, physical losses, and link them with farm groups setting this as an entry point for advisory and to improve marketing of farm produce. These technical services would improve the overall business plans can be used to borrow from commercial competitiveness of the end-product. Improved banks or receive support from donor projects.35 access to knowledge and technical expertise can contribute to an overall increase in productivity, Strengthening contract enforcement and and can indirectly increase farmers’ profit margins. alternative dispute resolution mechanisms to This holds true for rice production as well as for ensure timely resolution of commercial disputes vegetables, where the current state of processing is low due to a lack of knowledge on processing 109 Interviews conducted with foreign techniques, limited access to finance, and lack banks and private businesses during the field of necessary labor. Vegetable farming also faces investigation revealed that lengthy judicial losses due to detrimental packing technologies, proceedings in resolving commercial disputes, and insufficient inspection, which can be reduced even for small claims, increase the cost and risk through appropriate support. This would require of conducting business in the country. While shifting public expenditure away from irrigation, many have sought out-of-court proceedings where it is currently concentrated, to improving such as arbitration and mediation to resolve services such as extension. 34 http://www.laotradeportal.gov.la/index.php?r=searchMeasures/view&id=326 35 The World Bank-supported Lao Agriculture Competitiveness Project, which became effective in June 2018, seeks to establish an agricultural value chain facility to support interested rice mills in strengthening their operational and management capacity and entering into formal contract arrangements with farm clusters established with the support of the project. Another example is a similar project being prepared by the Asian Development Bank. 43 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects B. Regulatory 113 In recent years, the government administered price controls as a means to environment improve the affordability of foodstuffs, and guaranteed a minimum price for producers; however, no evidence suggests that these Streamlining and simplifying business measures have had success in achieving their compliance and transaction costs associated intended objectives. Variance in consumer prices with dealing with government to create a more across markets persists, forcing consumers to business-friendly environment effectively function as price takers with limited information on the market. For example, the 111 While the previous section prescribes transparency in consumer prices varies from ways in which the government can become market to market. Consumer protection standards more involved in the value chains of rice and aimed at promoting price discovery and curbing vegetables, there is a concurrent need for the unfair trading practice and monopolistic behavior government to step back from certain practices, among value chain actors can play a significant and for heavy bureaucracy to be neutralized to role in enabling consumers to control for this create a more business-friendly environment. variance. While the government has taken some For instance, speeding up processing times steps in increasing transparency in retail markets, at licensing offices would enable transport namely via product labeling regulation (including companies to comply with the law and bring down price display), application and enforcement of transport prices. Dismantling tedious bureaucratic these measures remain weak. For instance, for practices at export-related offices will also create rice retail markets in Vientiane Capital, retailers an environment more conducive to profitable consistently displayed prices for their product international sale. but a lack of compliance persists among retailers in vegetable markets. The intent to establish a 112 Transparency in the provision of public Business Competition Control (BCC) Commission sector services to business should be improved and Secretariat as outlined in the country’s new through measures such as publication of all fee Business Competition Law to address business schedules, permits, and licensing requirements. competition violations and ensure compliance This would also help to establish a more predictable is an important step toward this goal; however, playing field for the private sector, with consistent no promulgating decree has been issued for the implementation of publicly available legislation, new law. The government could take steps to rules, and regulations and with reduced establish these supervising entities and ensure bureaucratic discretion. For instance, it would be the establishment of a dedicated inspection beneficial to extend the validity period of transport unit within the BCC Secretariat for addressing licenses to five years, as in Thailand. grievances and violations in agricultural markets. This would allow phasing out minimum prices Strengthening enforcement of price labelling set up for paddy and rice, removing unnecessary and display regulations and phasing out price distortions and potential entry barriers for new controls for paddy and rice investors. 44 Conclusions and Policy Recommendations C. Investment and cost of banking operations. Reforms aimed at introducing branchless banking activities (such as e-money and agent-banking) and enabling asset Adopting a more balanced approach to ensure financing (as opposed to asset-based financing) that existing budgetary allocations for can create significant scope in extending private agriculture are administered more efficiently in banks’ outreach in rural markets and increasing support of production-enhancing investments access to investment capital for agribusinesses. 114 Significant scope remains for improving the Providing capacity building for mill owners quality and capacity of farming activities, but and farmers to improve their business and the share of existing public expenditure and the communication skills dedicated budget line for agriculture are heavily skewed toward irrigation investments. Little has 116 Supportive capacity-building activities been spent on improving the quality of research to improve the business and communication and extension services, seeds, cooperatives, skills of mill owners and farmers would enable mechanization, business incubators, and other these actors to approach banks and avail public goods needed to increase the productivity themselves of financial services. This form of and competitiveness of agricultural production. support would contribute to the improvement of This needs to be drastically changed, with funds market infrastructure. It may also enable smaller, shifted to the above-listed areas, which are traditional mills to achieve mid-size status and critical to addressing market failures in support modernize their equipment and processes, thereby of commercialization of agricultural value chains. increasing profitability.36 Reviewing indirect regulatory controls and policies Removing barriers to investment in modern retail that impede agribusinesses’ ability to access and wholesale markets affordable credit and benefit from state budget allocation for their investment capital needs 117 Traditional small-scale trading is a key source of employment in Lao PDR but clearly 115 Recent reforms enabling entry of private adds costs to food consumers. The main factors and foreign banks in the banking sector helped driving costs per ton are the high transaction introduce some level of competition, but state- costs associated with each on the spot business owned banks continue to dominate the sector. deal and very small quantities. Consolidation is This dominance is even more pronounced at the highly desirable to bring down costs and increase district and provincial level as most private banks efficiency and profits. However, this is currently not do not have presence in those markets. Collateral happening as small traders are reluctant to enter requirements set by banks’ lending activities are into long-term contracts with business partners prohibitively high. Interest rate subsidies exist but due to the risk of defaulting. Needed improvements the process is cumbersome. Existing regulations in the area of contract enforcement and access favor state-owned banks (for example, only to finance are highlighted above. Investments in borrowers of the state’s leading agricultural banks modern retail and wholesale markets by outsiders are eligible for the interest rate subsidy), while could help too, but it is unclear whether they face frequent interventions via foreign currency controls informal barriers to enter the market. A more and caps on lending rates increase the riskiness detailed investigation is required. 36 Refer to paragraph 108 for specific activities that could be supported by the public sector. 45 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Table 20 Cost drivers and key recommendation Cost driver Action area for policy consideration Specific recommendations High cost of production at farm stage •• Incentivize closer contacts between value chain participants and facilitate stronger coordination Value chain linkages •• Link extension service with producers and processors to offset high production and labor costs •• Adopt a more balanced approach, shifting funds from infrastructure to research and extension services, Investment seeds, and cooperatives/farm clusters, and promote mechanization •• Improve quality of public programs Barriers to entry and private •• Strengthen contract enforcement investment at milling stage and alternative dispute resolution Value chain linkages mechanisms to ensure timely resolution of commercial disputes •• Increase transparency and improve pricing rules Regulatory environment •• Phase out regulated prices for paddy and rice •• Introduce greater competition in the banking sector, particularly in support of rural markets and agribusinesses Investment •• Build capacity in proper accounting and recordkeeping among mills to facilitate access to private finance High profits and high transaction •• Incentivize closer contacts between costs associated with an inefficient value chain participants and facilitate trade and marketing system at the stronger coordination or consolidation traditional wholesale and retail stage, Value chain linkages •• Strengthen contract enforcement as well as poor management of wet markets and lack of value chain and alternative dispute resolution organization mechanisms to ensure timely resolution of commercial disputes •• Streamline and simplify business compliance and transaction costs associated with dealing with Regulatory environment government to create a more business-friendly environment •• Strengthen enforcement of consumer protection standards •• Introduce greater competition in the banking sector, particularly in support Investment of rural markets and agribusinesses •• Study informal barriers to investment in modern retailing to address them •• Incentivize closer contacts between Value chain linkages value chain participants and facilitate Costs associated with mechanization stronger coordination and maintenance of vehicles and machinery •• Remove import licenses for vehicle Regulatory environment spare parts 46 Annex Annex Detailed cost data for sticky rice value chain Detailed cost per data for sticky rice value chain LAK/ton at farm-gate % of total Variable Costs Seed 85,714 4.5% Fertilizer 173,143 9.1% Irrigation costs - 0.0% Machinery O&M 328,571 17.2% Packing materials 32,857 1.7% Hired labor 978,571 51.2% Land rent/tax 255,714 13.4% Total Variable Costs 1,854,571 97.0% Fixed Investments 57,143 3.0% TOTAL 1,911,714 100.0% Total in US$ 232.65 100.0% Detailed cost per ton of assembled paddy LAK/ton SV assembled % of total SV Variable Costs Purchase from grower 2,167,000 96.9% Packaging 20,000 0.9% Storage and depot costs - 0.0% Vehicle O&M 30,000 1.3% LIcense and permits - 0.0% Crop levies 11,364 0.5% Hired labor - 0.0% Overhead and management - 0.0% Interest - 0.0% Total Variable Costs 2,228,364 99.3% Fixed Investments 15,000 0.7% TOTAL 2,243,364 100.0% Total in US$ 273.01 100.0% 47 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Detailed cost per ton of processed paddy LAK/ton SV processed % of total SV Variable Costs Purchase from assembler 2,334,000 94.2% Energy and machine operation 10,286 0.4% Packing and consumables 10,714 0.4% Storage - 0.0% Repairs and mainteance 6,857 0.3% Vehicle O&M 17,143 0.7% Hired labor 37,714 1.5% Tax and licenses - 0.0% Interest 20,571 0.8% Total Variable Costs 2,437,285 98.3% Fixed Investments 41,667 2% TOTAL 2,478,952 100.0% Total in US$ 301.69 100.0% Detailed cost per ton traded sticky rice wholesale LAK/ton % of total Variable Costs Purchase from processor 4,000,000 95.2% Energy and machine operation - 0.0% Packing and consumables - 0.0% Storage - 0.0% Repairs and mainteance - 0.0% Vehicle O&M 142,480 3.4% Hired labor 42,000 1.0% Tax and licenses - 0.0% Interest 8,000 0.2% Total Variable Costs 4,192,480 99.8% Fixed Investments 10,100 0.2% TOTAL 4,202,580 100.0% Total in US$ 511.45 100.0% Detailed cost per ton sticky rice retail stage LAK/ton % of total Variable Costs Purchase from wholesaler 5,000,000 96.9% Licenses, permits, taxes and duties 72,000 1.3% Other overhead 321,030 5.8% Storage - 0.0% Repairs and mainteance - 0.0% Vehicle O&M - 0.0% Hired labor - 0.0% Interest - 0.0% Total Variable Costs 5,393,030 97.8% Fixed Investments 121,545 2% TOTAL 5,514,575 100.0% Total in US$ 671.12 100.0% 48 Annex Detailed cost data for vegetables value chain Detailed production cost per ton of coriander LAK/ton at farm-gate % of total Variable Costs Seed 160,000 3.8% Fertilizer 381,143 9.0% Chemicals 97,143 2.3% Spraying costs - 0.0% Irrigating costs 2,857 0.1% Machine O&M 214,286 5.1% Packing materials 24,686 0.6% Selling expenses - 0.0% Hired labor 3,192,857 75.6% Family labor - 0.0% Overhead and management - 0.0% Seasonal credit 43,429 1.0% Land rent/tax 41,429 1.0% Total Variable Costs 4,157,829 98.5% Fixed Investments 65,257 1.5% TOTAL 4,223,086 100.0% Total in US$ 513.94 100.0% Detailed production per ton of lettuce LAK/ton at farm-gate % of total Variable Costs Seed 120,968 2.3% Fertilizer 537,903 10.0% Chemicals 129,032 2.4% Spraying costs - 0.0% Irrigating costs 16,129 0.3% Machine O&M 302,419 5.6% Packing materials 29,032 0.5% Selling expenses - 0.0% Hired labor 3,930,242 73.1% Family labor - 0.0% Overhead and management - 0.0% Seasonal credit 53,226 1.0% Land rent/tax 70,565 1.3% Total Variable Costs 5,189,516 96.6% Fixed Investments 184,194 3.4% TOTAL 5,373,710 100.0% Total in US$ 653.97 100.0% 49 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects Detailed production per ton of coriander wholesale LAK/ton % of total Variable Costs Purchase from processor 16,666,667 97% Loading and reloading 100,000 1% Storage 100,000 1% Transport to delivery point - 0.0% Duties and tax - 0.0% Cleaning fees - 0.0% Licenses and permits 150,000 1% Other overhead - 0.0% Interest - 0.0% Total Variable Costs 17,016,667 99% Fixed Investments 128,750 1% TOTAL 17,145,417 100% Total in US$ 2,086.58 1.0% Detailed production per ton of lettuce at wholesale LAK/ton % of total Variable Costs Purchase from processor 7,777,778 94% Loading and reloading 100,000 1% Storage 100,000 1% Transport to delivery point - 0.0% Duties and tax - 0.0% Cleaning fees - 0.0% Licenses and permits 150,000 2% Other overhead - 0.0% Interest - 0.0% Total Variable Costs 8,127,778 98% Fixed Investments 128,750 2% TOTAL 8,256,528 100% Total in US$ 1,004.81 100% Detailed production per ton of coriander retail LAK/ton % of total Variable Costs Purchase from wholesaler 24,444,444 90% Loading and reloading 600,000 2% Storage 69,000 3% Transport to delivery point 300,000 1% Duties and tax 150,000 1% Cleaning fees - 0.0% Licenses and permits - 0.0% Other overhead 839,550 3% Interest - 0.0% Total Variable Costs 27,023,994 99% Fixed Investments 224,250 1% TOTAL 27,248,244 100% Total in US$ 3,316.08 100% 50 Annex Detailed cost per ton of lettuce retail LAK/ton % of total Variable Costs Purchase from processor 9,222,222 83% Loading and reloading 375,000 3% Storage 150,000 1% Transport to delivery point 187,000 2% Duties and tax 600,000 5% Cleaning fees - 0.0% Licenses and permits - 2% Other overhead 322,388 3% Interest - 0.0% Total Variable Costs 10,857,110 98% Fixed Investments 224,250 2% TOTAL 11,081,360 100% Total in US$ 1,348.59 100% 51 Commercialization of Rice and Vegetables Value Chains in Lao PDR: Status and Prospects References Bank of Lao PDR. 2016. “Monetary Statistics Report for Quarter 4.” Vientiane, Lao PDR. 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