Business issues Bulletin 45082 Lao PDR THE BUSINESS INFORMATION CENTER AT THE LAO NATIONAL CHAMBER OF COMMERCE AND INDUSTRY No. 6 March 2008 Improving the Investment Climate for the Mining Sector in Lao PDR Background Existing regulatory regime The mining sector in Lao PDR has grown rapidly since The primary mechanism for obtaining investment and 2000 when the country significantly widened its doors to mining licenses has been negotiation of a comprehensive private enterprise. Mineral resources with good prospects contract, based upon a model Mining, Exploration and include gold, copper, tin, coal, potash, gypsum, and Production Agreement (MEPA). This agreement was sapphire, and there is potential for mining other minerals developed by the Committee for Planning and Investment as well. In the country's recent National Socio-Economic (now the Ministry of Planning and Investment), in Development Plan, mining was named a key sector for consultation with the Ministry of Energy and Mines (MEM). private investment as it has the potential to boost economic Inrecentyears,theprocesshasbeenbrokenintotwoparts, and social development, and enable Lao PDR to graduate with companies first negotiating an exploration contract, from least developed country status by 2020. and then, if a promising mineral resource is identified, negotiating a separate mining and production contract. In 2000, mining accounted for 0.5% of GDP, and by 2006, This is an issue for mining companies, as it means that the sector had grown to 5.5%. By 2010, the Government a company that invests in identifying a promising mineral projects that mining will account for 10% of GDP, making resource is not guaranteed the first option to mine the it the largest industrial sector. The mining sector is resource. important not only for its ability to generate significant revenue for the national treasury, but also for its potential Companies also have been required to obtain additional to create jobs in remote mine site communities and licenses and permits from a range of ministries in order surrounding areas. Currently, 112 foreign and domestic to secure the resources required to explore and then mining projects are under development in Lao PDR, in develop a mining project. These numerous rounds of stages that range from exploration and feasibility studies, negotiation frustrate investors and discourage many from to extracting what is discovered. In order for the sector even starting exploration. The current regulatory regime to achieve the Government's development objectives, the essentially provides that different terms and conditions number and kinds of companies engaged in mining must are negotiated for each and every mining project. Due to increase, and existing companies must be able to expand the low level of transparency, potential investors can find their operations. out little about what terms to expect for themselves. In addition to tremendous practical problems facing In addition, the administrative burden of negotiating the mining sector in Lao PDR, including lack of access complex agreements on a project-by-project basis has to resources such as large tracts of land, power, water, seriously eroded the ability of MEM to administer and telecommunications, equipment, local and international regulate the sector. One result has been a moratorium on experts and qualified workers, the mining sector is also gold exploration permits, which is the mineral of greatest held back from achieving its potential due to the regulatory interest to investors. This moratorium will continue until regime. The Government recognizes the need to improve a new regulatory regime for mining is passed by the the legal and regulatory environment and is currently revising the 1997 Mining Law. The private sector, through the Lao Business Forum's Energy and Mining Working Group, has raised several issues that impact the sector and has become increasingly engaged in policy discussion This bulletin is published with support from the Mekong Private Sector through the public-private dialogue process. Development Facility (MPDF), a multi-donor funded initiative managed by the International Finance Corporation (IFC), the private-sector arm of the World Bank With a more modern regulatory regime and the Group. Government's greater understanding of what international The "Business Issues Bulletin" provides those interested in business issues mining companies require in order to invest, Lao PDR with a short summary and analysis of a particular topic affecting the business environment in Lao PDR, and exposure to different opinions held by various could position itself as a desirable country for the mining stakeholders on the topic. industry and provide the impetus for increased investment The statements and opinions presented here are only meant to provide and important contributions to development. additional reference material and do not reflect official opinion of the Lao National Chamber of Commerce and Industry (LNCCI) or IFC-MPDF. Readers are welcome to copy and distribute the information contained in this bulletin provided acknowledgement is given to LNCCI/MPDF as the source. National Assembly. The new Mining Law will govern all use); new licensing in the sector. Despite the good intentions · Strengthening intergovernmental coordination for all of the moratorium, it seriously affects the growth of development projects; investment, and will reduce government revenues in the near to intermediate term. · Carefully considering the kinds of regulations that are necessary at each stage of development Major regulatory issues from exploration to mining, and whether investor protection is required at all stages; Significant steps have been taken by the Government to · Strengthening assurance for investors that the revise the Mining Law. A draft law has been prepared with information they submit to Government will remain the assistance of the World Bank and the International confidential; and Finance Corporation, and significant consultation has · Clarifying licensing procedures as well as provisions taken place with the private sector and other stakeholders. for transitioning existing licenses when the new In December 2007, MEM hosted a stakeholder meeting Mining Law comes into effect. to discuss the draft Mining Law, how to attract high quality mining companies, and how to ensure that the Direction for reforms draft Mining Law results in a more secure licensing and investment process and less administrative burden for the The new Mining Law ­ currently in draft ­ reflects the Government. Government's desire to move away from negotiating different contracts with each investor and provides a In the December stakeholder meeting, participants framework for a law-based regulatory regime for all but identified the following issues as paramount: the largest projects. It also emphasizes attracting and · Strengthening the security of tenure ­ the right to keeping companies that will be able to adhere to the mine any resource found during exploration needs highest international technical, environmental and social to be clearly articulated; standards. As such, the proposed law raises the bar for companies because they must demonstrate up front that · Reducing the time Government takes to approve they have the capability to meet the required standards. mining license applications; Companies will also have to submit a work plan that · Enhancing the role that small domestic companies reflects planned investment, and this will be reviewed play in the mining sector; annually to ensure commitments are met. Such a licensing · Setting application and surface rental fees which are system responds to the Government's wish to eliminate appropriate for attracting exploration; unqualified companies which have entered the sector with · Taxing mining at the same level provided by the the hope of selling their license or finding a joint venture general taxation regime; partner with `deep pockets'. · Defining clearly the requirements for land use fees, The new draft Mining Law proposes the following: compensation and resettlement; · Clearly determining the responsibilities that national · Streamlined licensing for mining investments; and provincial authorities have with regard to mining · Establishment of a Mining Registrar with a "front project regulation; counter" for receiving applications, providing · Ensuring exploration licenses provide for clear and compliance information and disseminating reasonable environmental management and social information about the mining sector; development duties; · Use of objective criteria in making decisions · Setting clear priorities concerning land use (for about whether or not to grant applications, and example, for agriculture, mining, and traditional land written justifications based on these criteria when applications are rejected; 2 · Establishment of an Inter-Ministerial and Provincial and the capital city. Importantly, these mining sector Cooperation Committee on Mining to avoid national activities have provided revenue for the government and and provincial authorities duplicating each others' generated jobs for people living in the surrounding areas. efforts and to ensure that disputes are resolved when These activities contribute to the overall socio-economic different national and provincial agencies disagree; development of the country. The increasing importance of · Establishment of a Steering Committee on Large the mining sector to the development of the Lao economy Mines that will serve as the governing body for has prompted the government to pay special attention projects of such size or importance that the company to the revision of the 1997 Mining Law and the existing could propose a comprehensive agreement covering legal framework of negotiation of MEPA exploration and both exploration and mining rights as a single production contracts. agreement; As part of the process of revising the legal framework, · Establishment of an Artisanal Mining Committee to the government has welcomed input from a wide variety bolster small-scale mining development and deal of sources, including the private sector, diplomatic with health, safety, environmental and underground/ community, international organizations, representatives informal issues often prevalent in this segment; from government agencies, local authorities and · Development of model licensing agreements that international experts. These inputs have identified many minimize the number and scope of negotiable complex issues that require further consideration and terms. deliberation by the Government. We anticipate that further dialogue will be needed during the drafting process to The draft Mining Law also sets out requirements for strengthen the understanding and appreciation of the feasibility studies. A feasibility study must demonstrate complex issues involved in mining. This consultation that the company seeking to launch a mine has carried process is critical to achieving an international-standard out the necessary technical, environmental and social legal framework for mining that will allow Lao PDR to be assessments. Also, the company must demonstrate in the destination of choice for large, high-quality exploration its mining license application that its employees have and mining companies, which in turn will allow the country sufficienttechnical,environmentalandsocialdevelopment to realize the development benefits that a robust mining skills to develop and operate a mine, and that it has the sector can provide. necessary funding to underwrite and commence the project. If a company fulfills these requirements, the new H.E. Somboun Rasasombath, Vice-Minister, Ministry draft Mining Law stipulates that a mining license must of Energy and Mines be granted. Other provisions require adequate planning for all the stages of a mine's life, including closure and Industry Viewpoint: rehabilitation of the natural environment. A sound and stable mining investment regime is critical Conclusion for the industry. Companies face hardships and increased risk when seeking to undertake exploration and mining in The Government's decision to revise the Mining Law Lao PDR from factors that include a lack of infrastructure, demonstrates its desire to raise the sector's importance large amounts of unexploded ordinance in some and to attract high quality international and regional areas and changing and evolving laws. Also, mining is companies that follow sound international practice. While inherently exceptionally high risk and although many the current regulatory regime has resulted in a moratorium exploration projects are started, these projects must often in the most active exploration commodity, there is a be abandoned because resources are not found in large clear commitment to resolving issues that stand in the enough quantity to make them worth developing. Because way of establishing a modern mining regulatory regime. of the high risks and costs associated with bringing remote Significantly, the Government recognizes that the views mineral resource projects to production, companies must of the private sector and other relevant stakeholders are carefully screen where they do business and seek to critical in developing a modern regulatory regime for the operate in countries that can guarantee a stable, long mining sector. This regime should provide the guidance term environment for its operations. Because the risks necessary for both the Government's administrative and are so high, it is even more important that the government regulatory mechanisms, and for decision making that provides the transparent regulatory environment that many provides sufficient guarantees to investors that their international companies require prior to investment. Since investment is secure and administered rationally, in accord there has been uncertainty regarding the application of the with international norms. 1997 Mining Law, the government's decision to revise this law is a welcome step for companies seeking to evaluate Government Viewpoint: the investment climate in the Lao PDR mining sector. Many domestic and foreign investors are interested in When evaluating a country's investment potential, a mineral exploration, mining and processing in the Lao company looks for a legal framework that includes: PDR. Commodity prices have increased dramatically as international demand has grown for mineral products. · Security of tenure ­ Can the investment be taken There are a total of 112 companies operating in the sector away or stalled for reasons beyond the company's at various stages for 22 types of minerals in 16 provinces control? What guarantees are in the law that ensures 3 this won't happen? What processes does the country companies are willing to pay taxes and royalties, and have to make sure that the investment is not unfairly provide for enhanced environmental protection and lost to someone else? Does the government have increased commitments to social development as long a history of arbitrarily imposing terms on companies as the investment climate provides them with long-term that impact project economics? stability and gives them the ability to determine project · Stable fiscal system ­ Is there a fiscal system in economics based upon the international markets. place that can be predicted for the entire length of the life of a mining project to determine whether A country's determination to make mining a pillar of its a project is economic should the company find a industrialeconomyandtorealizethedevelopmentbenefits deposit? that mining can offer (while safeguarding the environment and communities) must be followed by integrating sound · Size of area ­ Are sufficient areas offered for international norms into its legal regime. Lao PDR has exploration that will allow for fair reconnaissance, taken the first and most important step towards becoming prospecting and exploration? Will adequate access a favorable destination for exploration and mining to areas for mine related activities be granted? investment by recognizing that its legal regime needs to be · Environmental and social obligations ­ Are the revised. An international standard Mining Law has been environmental and social development commitments drafted with the assistance of the World Bank and IFC and adequately described so a project's economic the government is committed to a thorough consultation viability can be ascertained up front? Or will the process with key stakeholders, in particular the private obligations change over time affecting whether the sector. These steps are very encouraging and provide the project continues to be profitable? basis for optimism that the Lao PDR mining sector, if it · Government understanding of the mining industry continues along this path, will be able to contribute to the ­ Does the government understand international government's goal of graduating from the status of least economics and project economics sufficiently such developed countries by 2020. thatitwillnotimposerequirementsthatwilljeopardize the project's viability or level of profitability? Can Craig Andrews, Senior Mining Advisor, World Bank the government guarantee that all the resources necessary to develop a project are available? International Law Viewpoint: The industry welcomes the government's decision to Lao PDR is at an exciting and challenging crossroads in revise its Mining Law and appreciates the opportunity its mining sector. With the government's decision to revise to provide input into the drafting process through the its 1997 Mining Law and create a comprehensive statutory stakeholder meetings organized so far by the Ministry of regulatory regime, it is possible to obtain significant Energy and Mines. advantage for the country by attracting additional investment into the sector. The government can create Robert Allen, General Manager, Country Affairs, Phu this advantage by developing a "win-win" regulatory Bia Mining Co. regime that serves two purposes: 1) ensuring that the country will realize the significant benefits of investment International Mining Viewpoint: from mining activities in order to achieve solid economic and social development; and 2) providing the international Today, international mining companies have a choice mining industry with a stable, transparent environment in of countries in which to invest high-risk exploration and which to work. Understanding that both goals are part of mining dollars. Companies evaluate many factors, not a successful reform process will be vital for formulating just geologic potential, to determine whether one country and enforcing new legislation. versus another will provide a more stable and favorable climate for a profitable mining project that can last up to 50 Change in any regulatory regime can be difficult especially years. In searching for a country in which to invest, one of in a transitional economy, which is taking steps toward the most important criteria is the legal regime under which market economy reforms in the hope of attracting greater a company will operate. History has shown many times international investment. In Lao PDR preliminary signs of that countries with modern, competitive, transparent, and success are already evident. The government has opened open-market mining regulatory regimes will attract high- its drafting process to include the views from international quality international companies. Unfortunately, many organizations, the private sector and other stakeholders countries, especially transitional markets, that are just to better understand the myriad of issues it needs to opening their sectors to international investors, often do not address. The government's efforts to date, its commitment understand that a solid legal framework is required, which to reform, and its resolve to improve the socio-economic allows investors to easily ascertain obligations (fiscal, development of the country through investment in sectors environmental, social and others) over the entire life of a like mining should be highly commended. potential project. This knowledge will strongly influence a company's decision whether or not to invest. International Jennifer Cook Clark, J.D., LL.M., International and Comparative Law Specialist Business issues · Publisher: LNCCI Business Center · KM 5, Ban Phonphanao, Vientiane · Tel: 856-21-412579 · Fax: 856-21-452580 Bulletin · Reviewed by: Mr. Khunthavong Dalavong, LNCCI Secretary General · Layout and printed by: V.V. Design and Publishing · E-mail: vv_dap@yahoo.com, 500 copies · License No. 177/C by Ministry of Information and Culture, dated 21/02/05