Report No. 72061-LA Lao PDR Trade and Transport Facilitation Assessment Poverty Reduction and Economic Management Sector Department East Asia and Pacific Region April 2014 Abbreviations and Acronyms 3PL Third Party Logistics Provider ACP Africa, Caribbean and Pacific ADB Asian Development Bank AFAFGT ASEAN Framework Agreement for the Facilitation of Goods in Transit AFD Agence Francaise de Développement AFTA ASEAN Free Trade Area ALGI Association of Lao Garment Industries ASEAN Association of Southeast Asian Nations ASYCUDA Automated SYstem for CUstoms DAta B2C Business to Customer CAD Cash Against Delivery CAS Country Assistance Strategy CBTA Greater Mekong Sub-Region Cross Border Transit Agreement C&F Cost and Freight CF Clearing and Forwarding CM (or FOB1) Contact Manufacturer CMT Cut, Make, Trim CO Certificate of Origin DoA Department of Agriculture DTIS Diagnostic Trade Integration Study DWT Deadweight tons EBA Everything-but-Arms Initiative EDI Electronic Data Interchange ERP Enterprise Resource Platform EU European Union EWEC East West Economic Corridor FAO Food and Agriculture Organization of the United Nations FAQ Fair Average Quality FCA Free Carrier FCL Full Container Load FDI Foreign Direct Investment FEU Forty Foot Equivalent Unit FIATA Fédération Internationale des Associations de Transitaires et Assimilés (International Federation of Freight Forwarders Associations) FOB Free on Board GOL Government of Lao PDR GDP Gross Domestic Product GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GMO Genetically Modified Organism GMS Greater Mekong Sub-Region 2 Trade and Transport Facilitation Assessment GPS Global Positioning System GSC Garment Service Center GSP Generalized System of Preferences ICA Investment Climate Assessment ICD Inland Container Deport ICT Information Communications Technology IPM Integrated Pest Management IT Information Technology ITC International Trade Centre JETRO Japan External Trade Organization JICA Japan International Cooperation Agency L/C Letter of Credit LCA Lao PDR Coffee Association LCL Less than Container Load LIFFA Lao PDR International Freight Forwarders Association LNCCI Lao PDR National Chamber of Commerce and Industry LPI Logistics Performance Indicators MAF Ministry of Agriculture and Forestry MOIC Ministry Of Industry and Commerce NGO Non-Governmental Organization NSCEI National Steering Committee for Economic Integration NSEC North South Economic Corridor NVOCC Non-Vessel Operating Common Carriers ODM (or FOB3) Original Design Manufacturer OEA Original Equipment Assembler OEM (or FOB2) Original Equipment Manufacturer SAFRC Southern Agricultural and Forestry Center SEZ Special Economic Zone SOCB State-Owned Commercial Bank SRT State Railway of Thailand TEU Twenty Foot Equivalent Unit TF Trade Finance TRS Time Release Study TT Telegraphic Transfer TTFA Trade and Transport Facilitation Assessment VAT Value Added Tax VF Vendor Factory WFP World Food Program WTO World Trade Organization Trade and Transport Facilitation Assessment 3 Acknowledgements This report was prepared by a World Bank team led by The report has greatly benefited from the many inter- Richard Record (Senior Economist), with assistance actions with stakeholders in Lao PDR, from two pri- from Konesawang Nghardsaysone (Trade Economist) vate sector consultative workshops held in Vientiane and Liviu Sitrbat (Consultant). Charles Kunaka (Senior and in Pakse in December 2011, and a dissemination Trade Specialist) and Daniel Saslavsky (Consultant) workshop on the draft report in October 2012. The prepared the corridor performance analysis under active participation in the process by many staff from Part 1 of the TTFA. John Arnold (Consultant) and the Ministry of Industry and Commerce (Department Christian Ksoll (Consultant) prepared the supply of Planning and Cooperation, Department of Im- chain analyses under Part 2 of the TTFA. Primary ports and Exports, Department of Trade Promotion data collection was carried out by Emerging Mar- and Product Development and Economic Research kets Consulting (Laos) Ltd. Ratchada Anantavrasilpa Institute for Trade), by sharing views and feedback (Financial Sector Specialist) provided contributions on helped to shape the final document. We also thank all trade finance. Key inputs on trade logistics were also of those who provided comments on earlier drafts of provided by Prachit Sayavong (President of Lao PDR the study, including peer reviewers Clayton Kerswell International Freight Forwarders Association). Re- (Senior Trade Facilitation Specialist) and Duc Minh search assistance from Quentin Dumouilla (Research- Pham (Senior Economist). er), editing by Rena Whiteman (Consultant) and administrative assistance from Phet Udom Mainolath This research was made possible by resources pro- (Program Assistant) is gratefully acknowledged. Over- vided through the Lao PDR Trade Development Facil- all guidance was provided by Mathew Verghis (Sector ity, a multi donor trust fund financed by Australia, the Manager) and Keiko Miwa (Country Manager). European Union, Germany, Ireland and the United States of America, and administered by the World Bank. The findings and interpretations expressed here are those of the authors and do not necessar- ily reflect the views of the World Bank, its Executive Directors, or the countries they represent. 4 Trade and Transport Facilitation Assessment Table of Contents Executive summary ............................................................................................................................................................................................................ 6 1 Introduction ......................................................................................................................................................................................................... 11 2 Core logistics services ................................................................................................................................................................................. 14 2.1 Trade ............................................................................................................................................................................................................................. 15 2.2 Overall logistics performance in Lao PDR ....................................................................................................................................... 16 2.3 Regional institutional arrangements on trade facilitation and logistics ............................................................... 18 3 Supply chain analyses ................................................................................................................................................................................ 30 3.1 Methodology ......................................................................................................................................................................................................... 32 3.2 Coffee supply chain .......................................................................................................................................................................................... 35 3.3 Garments supply chain .................................................................................................................................................................................. 46 3.4 Fruit and vegetable supply chain ......................................................................................................................................................... 56 4 Trade finance ....................................................................................................................................................................................................... 65 5 Corridor performance analyses ........................................................................................................................................................ 68 5.1 Vientiane – Bangkok corridor .................................................................................................................................................................. 72 5.2 Savannakhet – Bangkok corridor .......................................................................................................................................................... 76 5.3 Pakse – Bangkok corridor ............................................................................................................................................................................ 79 5.4 Comparative assessment of corridor performance ............................................................................................................... 81 6 Conclusions for improving corridor and supply chain performance in Lao PDR ............................. 86 6.1 Regulations ............................................................................................................................................................................................................. 87 6.2 Infrastructure ......................................................................................................................................................................................................... 88 6.3 Logistics services ............................................................................................................................................................................................... 88 6.4 Supply chains ......................................................................................................................................................................................................... 91 References .............................................................................................................................................................................................................. 93 Trade and Transport Facilitation Assessment 5 Executive summary Trade 1. In Lao PDR, the value of trade has risen ning of containers that results in a high cost equilib- rapidly over the last decade with both imports rium for cargo that is shipped to or from Laos. This and exports increasing by average annual rate differs from, for example, domestic cargo shipped to of 24 percent. The value of merchandise trade ac- and from bordering areas of Thailand where cargo is counts for about 60 percent of GDP, having increased rarely containerized and shippers are more able to from 10 percent two decades ago. Most of the trade secure backhauls. There is also the additional cost for is with its immediate neighbors. Thailand has ac- consolidation of shipments, customs clearance and counted for about 60 percent of merchandise trade the transfer of some of the exports between vehicles for the last decade (Figure 3) while China’s portion at the Thai-Lao border. Nevertheless, the premium has risen from 5 percent to 21 percent. Currently the associated with moving goods across the border is principal commodities traded are bulk commodities small relative to the total cost of transport along the (copper and other ores) and electricity with relatively export supply chain. simple logistics that generate little employment. In addition to these commodities, the other major ex- 4. The combination of improvements in ports are wood products, apparel, coffee and other transport, border clearance procedures and sup- agro products. These diversified tradable sectors ply chain management have reduced the delivery have increased in value over the last decade, but their times to and from the gateway ports to accept- share of total exports (excluding the three bulk com- able levels, given the distances involved. Exports modities) have declined over the last period from 42 can be containerized at the point of production, percent to 32 percent for wood products and from cleared, delivered in transit to the port and loaded on 44 percent to 29 percent for apparel and footwear. the vessel in as little as three days while imports can On the other hand the share of coffee increased from be unloaded from the vessel, cleared and delivered 4 percent to 7 percent. Other agricultural exports to the importer’s warehouse in as little as four days. increased their share from 3 percent to 21 percent. Logistics Services 2. Although Lao PDR is a landlocked coun- 5. The development of services in the logis- try, it has very good connectivity to both its prin- tics sector in Lao PDR has been constrained by lim- cipal trading partners, Thailand and China, and to ited volume of trade. Individual consignments are overseas markets and suppliers via the interna- typically small making consolidation an imperative tional gateways in Thailand. Connectivity has im- to reduce costs. The main service providers are small proved dramatically over the last decade through im- enterprises that make limited use of modern informa- provements in both transport and trade facilitation. tion technology. Government restrictions combined Road and port infrastructure has been improved and with the size of the market have discouraged inter- capacity expanded. The competitiveness of the road national logistics service providers from participating transport services has increased. Border clearance in the Lao market. In order to manage international procedures have been rationalized and simplified. shipments, importers and exporters are dependent on the logistics sectors of neighboring countries, es- 3. The costs for transporting cargo has pecially Thailand. These countries provide not only declined significantly due to greater competi- line-haul land transport but also freight forwarding, tion among Thai transporters, but remains high consolidation and other third party services. They in comparison with similar developing countries also act as intermediaries importing goods that are due to the distance to the ports and the large pro- subsequently sold to Lao importers and purchasing portion of empty backhauls. The main determinant Lao exports that are consolidated and re-exported. of high costs is the high proportion of empty run- These intermediaries also add value to the traded goods. 6 Trade and Transport Facilitation Assessment Trucking owned companies or large foreign buyers, the for- 6. Since there is no significant rail or water warder is normally appointed by the foreign shipper/ transport services, road transport moves almost consignee or their designated international forwarder. all of Lao PDR’s international traffic. The principal routes are those connecting Vientiane, Savannakhet 10. Although there are no restrictions on who and Pakse with Bangkok and Laem Chabang seaports can act as a freight forwarder, less than 25 domes- in Thailand. The transit times are reasonable with a tic firms are registered with the Lao International truck completing a one-way trip in a day. Border Freight Forwarders and only a few international crossing times are typically about one hour and the firms are present in the country. The latter have a only significant delay occurs when inbound trucks limited role and must be represented through a joint arrive at night after the border has closed. venture or local agency. The demand for the services of freight forwarders is low because a significant por- 7. Containerized cargo is transported either tion of the shippers and consignee do not outsource in standardized containers that are stuffed/ activities such as storage, consolidation and inven- destuffed at the origin/destination in Vientiane, tory management. Savannakhet and Pakse or as loose cargo that is stuffed/destuffed primarily in Laem Chabang sea- 11. Thai freight forwarders provide most of port. Since cross-border movements of trucks are no the forwarding services for the movement to/ longer restricted, Thai trucking firms provide most of from the ports since they can offer economies of the transport services. These are larger, better organ- scale, a broader range of services and more sophisti- ized firms that enjoy economies of scale from operat- cated ICT systems. They also arrange a portion of the ing in Thailand. More importantly, over 95 percent of overseas movements through relationships with, or the length of the routes connecting the seaports and are part of, global companies. the origins/destinations in Lao PDR is within Thailand so that the trucks can carry domestic cargo on the Customs and clearing agents return trip. In contrast, Lao trucking companies are 12. Modernization of Lao PDR customs has small with older equipment and serve primarily short been underway for a number of years and sig- distance domestic movements. nificant progress has been made in strengthening the organization and improving procedures. The 8. Despite the obvious advantage of introduction of the AYSCUDA system together with using Thai trucking for the port-door movement, electronic filing of documents has reduced the time Lao trucks continue to serve the domestic move- for clearance. The quality of the facilities at border ments to/from the border where the boxes are crossings has also approved. The most modern is at transshipped to/from Thai trucks. This increases Savannakhet, which has both a single stop service the total transport costs but not enough to offset the and dynamic axle load scale. The level of informal advantage of the availability of local transport. The payments and special relationships between brokers cost for transport of containers remains high because and customs officials has been reduced. At present of the large percentage of empty containers moving there are no professional requirements for becoming from the port for loading or returning to the port after a customs agent other than a business license and unloading. The problem of empty container move- registering with customs to connect to the electronic ments is a common challenge for origins/destina- declaration system. tions located far from a port because of the shipping line logistics. 13. Procedures at the border typically take about an hour. The documentation for clearing Forwarding cargo is prepared by the importer or his authorized 9. Most international shipments utilize sep- agent. Most imports can be cleared at the border or arate freight forwarders for the land and overseas the factory in the case of large consignees. However, movements. The former are selected by either the a significant proportion of dutiable imports require a consignee or shipper but for trade involving foreign- longer time for clearance and are transferred to the Trade and Transport Facilitation Assessment 7 Thanaleng bonded warehouses. For these cargoes, perform the milling. The latter trade relies on a mix of an average of 1-2 days is required to prepare the small and large farms where the large farms mill their documents with an additional day for customs clear- own production and that of outgrowers. The export- ance procedures. However goods requiring technical ers purchase the milled coffee and provide additional certificates or import licenses, can require up to five processing before selling it to international brokers, days to complete the documentation. working primarily through local buying agents. Most of the trade is handled by 10 large exporters, but Finance the largest handles only a few hundred containers a 14. Trade finance is a critical factor in the years. design of supply chains for both imports and exports. The three important components are access 17. The challenge is to convert this trade from to foreign exchange, financial credit and guarantees. a commodity sold to brokers into a product sold Availability to foreign exchange and financial credit is to retailers. This requires: (i) formalizing the relation- not a significant constraint Most of the foreign trade ship between producers and millers to ensure a reli- involves foreign enterprises with access to interna- able supply; (ii) introducing national standards, test- tional capital markets. Domestic enterprises can ob- ing facilities and traceability systems to supplement tain foreign exchange through the commercial banks the development of private brands; (iii) extending and authorized foreign exchange dealers. There the role of exporters to include performing or con- are no restrictions on opening foreign exchange tracting roasting and packaging; and, (iv) restructur- accounts. ing the supply chains to sell directly to retailers and a small but increasing amount of business-to-consum- 15. Financial credit is important not only er sales. This transition has already begun through because it increases the available working capital the initiative of some of the coffee plantations but and thus the volume of activity but also because government support will be required to expand this it allows extension of the cash-to-cash cycle, business model to a majority of the production. thereby allowing greater the participation in global value chains and reducing the need for financial in- Garments termediaries in the supply chains. Both domestic and 18. The production of garments is an impor- foreign banks offer financial credit. Although the va- tant source of exports and employment, but, the riety of instruments is limited, so is the demand. For exports account for less than 0.1 percent of global imports firms can obtain loans although the collateral trade and only about 2 percent that of Vietnam requirements are relatively high. For exports, firms and 9 percent that of Thailand. The garments are can discount the buyer’s letter of credit by up to 80 made primarily from imported cotton and cotton percent of face value. blends with most of the textile and accessories origi- nating in Thailand and East Asia. The garments are Selected exports primarily men’s clothing of low to medium value. The factories provide cut-make-trim services under con- Coffee tract to brand manufacturers or as vendor factories 16. Although coffee is a major export and owned by Thai or other regional manufacturers. Both output has more than doubled in the last decade, the sourcing of inputs and the sale of the products it accounts for only about ¼ percent of global are managed by the foreign manufacturers/buyers. trade in coffee. In terms of value, Lao PDR’s exports Most of the factories are small, meaning less than 500 are about 4 percent that of Vietnam. The exports employees, handling relatively small orders. A few have traditionally been an exporter of dry processed large factories handle large orders and account for a Robusta but the proportion of the more valuable wet significant portion of total employment. processed Arabica has increased to where it now ac- counts for a third of the volume. The former trade re- lies primarily on small farms with production aggre- gated by village collectors and then wholesalers who 8 Trade and Transport Facilitation Assessment 19. The principal challenge faced by the Opportunities for improving industry is to reduce the order cycle time and to trade logistics increase value added. Because any reduction in the 21. There are several opportunities for delivery times from the factories to the Thai seaports reducing the time and cost for shipping exports will be small relative to the total order cycle, the prin- and imports between the origins and destinations cipal option is to alter the sourcing of inputs. This within Lao PDR and the international gateways, would require development of clusters to encour- but these are unlikely to exceed 20 percent, which age local production of inputs, in-bond storage and corresponds to less than 2 percent of total shipment finishing of textiles. time and 5 percent or less of total transport cost. Fruits and vegetables 22. The most important opportunity for 20. The production of fruits and vegetables reducing cost is to decrease the percentage of for export is in its early stages of development empty backhauls for container shipments. The but offers significant opportunities for genera- techniques used to accomplish this include trans- tion of both income and employment. The current loading to domestic containers,2 investment in sys- trade includes both basic cross-border trade in fresh tems and storage for reassigning empty containers, produce, and the export of specialty fruits and veg- the development of new services for consolidation of etables for overseas markets.1 Production is based less than container load shipments, and greater use on a mix of small and medium sized farms supplying of Thai trucks for direct movement to and from the packinghouses that perform basic cleaning and sort- international gateway or Thai origin/destination. ing. A significant portion of the cross-border trade is with Thailand where the produce is distributed in 23. The principal recommended method for local markets or supplied to food processors. Cross- reducing the problem of empty backhaul of con- border shipments are made using open trucks while tainers is to introduce transloading at the interna- overseas shipments are containerized. At present, the tional seaport. In other countries this is commonly growth in this trade is limited by the capacity and or- performed for import cargo, both full container loads ganization of the production. As it expands, the chal- and less-than-container loads, where the volume of lenges will be to: (i) develop an effective outgrowers imports exceeds exports and/or the shipping lines scheme to provide a regular supply; (ii) introduce cold require a large bond for inland movement of ocean chains for shipment to urban markets in neighboring containers and/or apply a large demurrage charge. countries; (iii) perform additional processing to allow The challenge is to provide efficient and secure for direct shipment to overseas retailers; and, (iv) in- transfer between the units. It is also necessary that troduce more sophisticated testing, certification and customs permit the transfer from a sealed container traceability services. This would require the develop- to a sealed van or domestic container with little or ment of production clusters to capture economies no intervention. The principal advantage is that the of scale and scope in both inbound and outbound ocean container is returned immediately to the ship- supply chains. ping line while the van or domestic container is used to transport domestic cargo on the return trip. The introduction of this method will require legal and regulatory changes in Thailand, and closer institu- tional cooperation between Thai Customs and logis- tics providers serving the Lao market. It may also re- quire intervention from the Lao authorities, given the limited incentives for a change in operating practices away from the current model. 1 Because of limitations on volume, there are few options for becoming a supplier of out-of-season fruits and vegetables. 2 Transloading involves the transfer of goods between an ocean container and either a domestic container or closed van of similar dimen- sions. Trade and Transport Facilitation Assessment 9 24. Ongoing efforts to simplify and automate 26. The increase in value of agricultural and clearance procedures including electronic data manufactured exports will require a change in the interchange across borders, among government structure of the supply chains to implement one agencies and between government agencies and or more of the following strategies: (i) simplify sup- logistics service providers will allow for better ply chain structures to reduce transactions and pro- monitoring of shipments but have relatively lit- vide more direct interaction between producers and tle impact on clearance times at the border, since retailers; (ii) increase the quality of exports through the average crossing time is currently less than two sourcing of inputs, traceability and quality control; (iii) hours.3 However, this does not imply that further differentiate products and distribute them in smaller improvements are not required. It is important that volumes to higher end markets; and, (iv) extend value current efforts continue in order to improve enforce- addition activities upstream through preparation of ment and ensure effective regulation as the volume inputs and downstream through additional process- as the value of trade increases and international ing and customization of products. standards become more complex. Border manage- ment procedures will become more complex as ad- 27. The reconfiguration of existing supply ditional certifications are required for export of spe- chains and the development of new ones is the cific products, especially food, and to specific trading responsibility of the private sector, both exporters partners. There is also expected to be a higher level of and logistics service providers. However, the pub- scrutiny of imports as informal payments are replaced lic sector can support these efforts through efforts by proper enforcement. Also, as trade shifts towards to improve and enforce the standards for quality of smaller shipments of higher value goods, both im- both products and logistics services. This is especially ports and exports, then the number of transactions important for agricultural products that are perisha- will increase as well as the incentives for misrepre- ble, e.g. fresh vegetables, or have a national identity, sentation. The major improvement will result from e.g. Lao coffee. reorganizing the operations at Thanaleng to reduce the dwell time and improve the range and quality of 28. The government plays an essential role services offered, including by private logistics service in simplifying transactions and improving col- providers. Previous efforts to accomplish this have laboration among logistics services providers failed largely because of problems with management through the development of data communication of the facility. networks and services. In addition to improving the coverage and bandwidth of data communication, the 25. Assuming that the size of Lao enterprises government can also develop websites to facilitate involved in production of exports and distribu- trade and provide a framework to support electronic tion of imports remains relatively small, the prin- transactions, primarily between businesses but also cipal challenge will be to redesign their supply for business to consumer sales. The latter are of in- chains to more efficiently and effectively handle creasing importance in reducing order times for in- small shipments. This will be part of a gradual shift puts, selling differentiated products, and reducing from volume to value in Lao exports. For transport, the added cost for shipping smaller consignments. this requires more efficient consolidation of exports and deconsolidation of imports for less than con- 29. Finally, government regulations related tainer load shipments. The former requires locating to trade finance affect management of cash-flow consolidation facilities at a point where there is suf- for supply chain participants. They affect not ficient traffic to allow frequent dispatch of contain- only the ability to expand trade volume of increase ers to major destinations. The latter requires the co- the quality of both inputs and products but also location of deconsolidation facilities and distribution the need for intermediaries to reduce cash-to-cash centers within the country to optimize the efficiency cycles. Among these are controls on access to foreign and security of containerized shipments. exchange, transfer of funds, and terms of payment for international shipments as well as provisions for financing production and guaranteeing payment for exports. 3 This does not imply that efforts to introduce ASYCUDA and develop an effective risk management system should not continue as these will be important both to improve enforcement of trade regulations and to accommodate significant increases in the volume of trade. 10 Trade and Transport Facilitation Assessment Introduction 1 Introduction 1. This report examines the trade logistics of 3. However, an equally important consid- Lao PDR. A Trade and Transport Facilitation Assess- eration is the small volume of trade. There are sig- ment was performed using a standardized toolkit and nificant economies of scale in logistics. As the size of methodology developed by the World Bank to evalu- shipments is reduced not only does the unit cost for ate the quality of the logistics services4. Since the un- logistics increase but the sophistication of the ser- derlying objective is to improve the competitiveness vices in terms of the transactions and information of the country’s exports, the assessment focused on flows increases. A similar increase occurs as the unit the services used by these trades and the corridors value of exports increase. As a result Lao PDR is faced used by these services. The assessment gave specific with the challenge of improving the quality of its lo- attention to two constraints on trade, the location of gistics services in a way that increases the value of its the country and the size of the trade (Table 1) exports while moderating the increase in costs for the improved logistics services. Table 1: Indicators: Size and Distance 4. The study is organized in three interrelat- Category Units Asia Decile ed parts: assessing the performance of the logis- Population 6.7 million 6th tics sector, the international trade corridors link- Vientiane 750 ing Lao PDR to trade gateways in Thailand; and Savannakhet 120 thousand the supply chains used for distribution of exports. Pakse 87 The logistics services involve collaboration between GDP 9.48 9th Lao and Thai suppliers and include the transport, storage, clearing and forwarding services. The trade Exports 2.27 USD billion 9th corridors provide physical connections for the move- Imports 2.47 10th ment of goods but, more importantly, they provide a Laem Chabang ~650 kilometer series of services that allow the goods to move along the corridor while the supply chains combine the ser- vices associated with movement of goods through 2. Lao PDR is the only landlocked country in the trade corridor with other activities that directly Southeast Asia. The conventional view is that it per- affect the value of these goods. forms relatively poorly in logistics by virtue of being landlocked. Due to its geographical location, it has 5. The increase in competitiveness of global traditionally had higher transport and logistics costs trade over the past decade can be attributed to compared to some of its more immediate neighbors. changes to the way supply chains are organized. However, there have been significant reductions. This Three potential benefits from reorganization of the study aims to (a) explore in detail the performance, activities involved in delivering inputs and final prod- constraints and options for possible improvement ucts from origin to destination. These include short- to Lao PDR’s regional and global trade logistics; and ening order cycles and improving inventory manage- (b) carry out detailed analysis of selected specific ment to reduce the risk of shortages and excess stock, supply chains of importance to the economy. This as well as sourcing and intermediate processing of paper presents the findings of the analytical work to inputs, customization of finished products, and selec- understand the factors behind Lao’s high trade costs tion of distribution channels for the finished products. and the possible measures that can be taken in indi- The supply chain performs three major functions. In vidual supply chains to lower the costs and improve addition the handling of the physical goods there competitiveness. 4 World Bank (2010) Trade and Transport Facilitation Assessment – A Practical Toolkit for Country Implementation, International Trade Department, Washington, DC: The World Bank. 12 Trade and Transport Facilitation Assessment is the exchange of information between the supply processing activities. The design of the supply chain chain participants to coordinate their activities and determines the value of the delivered goods. The meet any regulatory requirements and the execution value can be increased by restructuring the supply of transactions associated with the change in own- chains to take advantage of improvements in the ership of goods as they move through the supply trade corridor or improvements in other activities chain and the procurement of logistics services and (Figure 1). Figure 1: Trade competitiveness framework Trade Competitiveness ion from Im eg lue . pro Int Va g, rat v on eC rsi ssin d ati de /T/ fic Di roce Ad R ve P Demand for Improvement Supply Chains Trade Corridor Restructuring Improvements Benefits of Improvements Supplier Intermediate Forward Integration Logistics Regulatory Networks and Processing/ and Diversification of Services and Services and Backward Integration Customization Distribution Channels Infrastructure Infrastructure 6. This report is presented in four sections. teristics of the supply chains used for selected trades The first part examines the foreign trade of Lao PDR, and the implications for restructuring to support the opportunities for growth and the logistics servic- growth in the export trade. The final section presents es in the movement of imports and exports between a series of recommendations for improving the com- the country and its major gateways. The second petitiveness of the exports through improvements in evaluated the performance of the corridors connect- the structure of the supply chains, the logistics ser- ing the major origins/destinations in the country and vices used by these supply chains and the corridors the principal seaport used for international trade. The used by these supply chains. third analyses the structure and performance charac- Trade and Transport Facilitation Assessment 13 Core logistics services 14 Trade and Transport Facilitation Assessment 2 Core logistics services 2.1 Trade 7. In Lao PDR, the value of trade has risen 8. If bulk commodities are excluded, the rapidly over the last decade with both imports principal exports are wood products, apparel and exports increasing by an average annual rate and footwear, and coffee (Figure 4). During the last of 24 percent (Figure 2). Currently the value of mer- decade their shares of exports (exclusive of the first chandise trade accounts for about 60 percent of GDP, three) declined from 42 percent to 32 percent for having increased from 10 percent two decades ago wood products and from 44 percent to 29 percent for (Figure 3). Most of the trade is with its immediate apparel and footwear but increased from 4 percent neighbors, especially Thailand, which has accounted to 7 percent for coffee. Other agricultural exports for about 60 percent of merchandise trade for the last increased their share from 3 percent to 21 percent. decade (Figure 4). During the same period, China’s portion has risen from 5 percent to 21 percent. The Figure 4: Percentage Trade By Partner nature of the exports has changed during this period with trade in electricity, copper and other ores in- cluding gold and silicon rising from 2 percent of total value to 64 percent. Figure 2: Value of Trade 2001-2012 Figure 5: Principal Non-Bulk Exports Figure 3: Merchandise Trade as a % of GDP 9. The volume of international freight is relatively low, approximately 2 million tons per year. Most of this is commodities that are shipped in bulk, e.g. minerals, grains, fertilizer, stone. The volume of container traffic is estimated to be between 30-40 thousand loaded TEU. In addition, there is a huge im- balance between import and export containerized cargo volumes. Trade and Transport Facilitation Assessment 15 10. The volume of containerized import car- 12. Non-container movements have less of a go is more than double the volumes of exports problem because they can carry domestic cargoes on in terms of weight. As a result, there is a significant the lightly loaded leg or engage in triangular routes amount of empty backhauls for containers, but the with two loaded legs. Since most of the journey takes volume is much larger than can be explained by the place in Thailand, the trucks can take advantage of trade imbalance. There is also a significant amount of the larger market for their services. empty containers delivered from the Thai seaports for loading in Lao PDR. The additional empty con- 13. Export volumes from Lao PDR tend to be tainer movements are due to differences in box con- small. An analysis of customs data suggests as many figuration and the control of containers owned by the as 70 percent of consignments are less than 700 kg shipping lines. The most important is the mismatch in (Figure 6). As a result about 60 percent of export con- box size. Most of the inbound containers are 20-foot tainers are LCL. Much of the consolidation occurs at boxes controlled by lines serving the Asian region the point of production but some of the cargo is con- while most of the outbound boxes are 40-foot box- solidated by third parties located in Thailand. es controlled by lines serving Europe. There is also a mismatch in the use of reefer containers primarily for 2.2 Overall logistics imports and oversize boxes primarily for exports. performance in Lao PDR 14. Presently, evidence suggests that Lao 11. A major contributor to logistics costs in PDR’s poor logistics performance is primarily due Lao PDR is the movement of empty containers. to a combination of domestic and regional fac- Shipping lines own a large pool of containers and tors. Lao PDR has seen gradual improvements in then lease additional boxes as required. The lines do the performance of its logistics based on 2007, 2010 not share their own boxes with other shipping lines and 2012 data (Figures 7-8) from the Logistics Perfor- and generally manage the allocation of their boxes mance Index (LPI). While it compares favorably with according to trade routes. In view of trade imbalances other landlocked low-income countries, it remains and of the higher container rates they impose on the behind regional competitors (Figure 9-10). Improve- inbound trip for transpacific pendulum routes, ship ments have been greatest in measures relating to owners often assign boxes to specific trades. For ex- customs, infrastructure and quality of logistics ser- ample, they will reposition containers back to Asian vices but performance declined in the international export markets instead of waiting for the availability shipping and timeliness dimensions of the LPI. The of an export load. As a result, for low volume markets costs for international shipments reports in the Trad- such as Lao PDR the shipping lines have policies to ing Across Borders component of the Doing Business minimize the time boxes stay in such countries. Survey (Table 2) indicate that Lao PDR’s costs are at least double those of most other countries in South East Asia. Improvements are necessary in order to Figure 6: Distribution of Lao PDR export compete against dynamic regional supply chains that consignment sizes (2006-10) are common across the South East Asia region. Source: Own estimates from Lao PDR customs data 16 Trade and Transport Facilitation Assessment Figure 7: Lao PDR LPI 2007-2012 Figure 8: LPI Country Comparison 2012 Figure 9: International LPI 2012 score Figure 10: LPI 2012 Score for customs clearance Table 2: While the time and number of documents necessary to import and export in Lao PDR is not excessive, average shipping costs are higher than for regional competitors Documents Time to Cost to Documents Time to Cost to to export export export to import import import (number) (days) (US$ per (number) (days) (US$ per container) container) Malaysia 5 11 435 6 8 420 Singapore 4 5 456 4 4 439 Thailand 5 14 585 5 13 750 Vietnam 6 21 610 8 21 600 Cambodia 9 22 755 10 26 900 Lao PDR 10 26 2,140 10 26 2,125 East Asia & Pacific 6 21 923 7 22 958 Source: Doing Business 2012, World Bank Trade and Transport Facilitation Assessment 17 2.3 Regional institutional arrangements on trade facilitation and logistics 15. As a landlocked country, Lao PDR has to - West corridor which is a 1,450-kilometer highway cooperate with neighboring countries to access linking southern Lao PDR with Thailand, central Viet- seaport gateways for its overseas trade. The main nam, and Myanmar. Gunn (2007) argues that though regional mechanisms that have a large influence on the corridor is almost fully built it has not attracted Lao’s regional connectivity are GMS and ASEAN. In that much traffic because of various other constraints fact, there are two main regional agreements that Lao including poor infrastructure in parts, red tape, and PDR is party to that have significant impacts on the other obstacles. Lord (2010) looked into the impact efficiency of regional corridor operations. These are of the GMS East West Economic Corridor (EWEC) on the GMS Cross Border Transit Agreement of 1999 and living standards in the Lao PDR province of Savan- the ASEAN Framework Agreement on the Facilitation nakhet. He found that the central districts of Savan- of Goods in Transit of 1998. nakhet have benefited more from the transport infra- structure of the EWEC than the surrounding districts. 2.3.1 Greater Mekong Sub-region Secondly, he also found that infrastructure develop- 16. There is a National Transport Facilitation ment has been an effective way of directly impacting Committee, operating under the GMS Program, on household well-being and indirectly contributing which is chaired by the Ministry of Public Works to human endowments of those households by en- and Transport, with some overlapping functions hancing their consumption of education and health with the National Trade Facilitation Secretariat. The services. Nevertheless, the results also indicate that major associations in the country including LIFFA and infrastructural developments have not been allo- LNCCI are members of the committee which has the cated among districts in the province in a way that following as priorities: a) negotiation of traffic rights could have produced a more equitable distribution in road transport, b) simplification of border proce- of their effects on living standards. The implication dures, and c) development of multimodal transport. is that infrastructural investment needs to better tar- They also consider capacity building as a priority. get low-income rural areas in the peripheral districts There are presently no educational programs in the to reduce the growing inequality among districts in country that focus on logistics, something that is Savannakhet. regarded as a major constraint to sustainable reforms. 18. Given its landlocked position, it is per- 17. In general, GMS has provided the regional haps not surprising that Lao PDR has concluded context for recent measures to improve Lao PDR’s several bilateral agreements with all its immedi- logistics performance, particularly in terms of ate neighbors, mostly under the GMS umbrella infrastructure development. These developments (Table 3). The major bilateral legal instruments that have been conceived as regional economic corridors, Lao PDR is party to and which affect the performance of which the most relevant one to Lao PDR is the East of the regional trade corridors include: Table 3: Lao PDR’s major transport and transit agreements Instrument Year of ratification, accession, agreement Bilateral agreements on road transport with Thailand 1999 Bilateral agreements on road transport with China 1993 Bilateral agreements on road transport with Cambodia 1999 Bilateral agreements on road transport with Vietnam 1993 Greater Mekong Sub-Region Cross Border Transit Agreement (CBTA) 1999 Subsidiary agreement specifying road transport arrangements with Thailand 2001 GMS Customs Transit Guarantee System (allows Thailand and Vietnam to transit across Lao PDR 2009 without transshipment) 18 Trade and Transport Facilitation Assessment 19. The CBTA has great potential but imple- requirements that road vehicles will have to meet to mentation has been slow. The CBTA was originally a be eligible for cross-border traffic, exchange of com- trilateral agreement between Lao PDR, Thailand, and mercial traffic rights and infrastructure, including Vietnam signed on 26 November 1999 in Vientiane. road and bridge design standards, road signs, and Since then, Cambodia, China and Myanmar have also signals. The CBTA has 20 annexes and protocols that joined. It is a comprehensive multilateral instrument detail provisions in these areas (Table 4). The CBTA that covers several aspects of cross-border transport applies to selected routes mutually agreed between facilitation, including single-stop and single-window states with designated points of entry and exit. How- customs inspection systems, cross-border movement ever, not all countries have ratified all the Annexes of persons (i.e., visas for persons engaged in transport and Protocols, preventing the full implementation of operations), transit traffic regimes, including exemp- the agreement. Rather, implementation has largely tions from physical customs inspection, bond depos- been driven by bilateral agreements between the it, escort, and agriculture and veterinary inspection, parties. Table 4: Thailand - status of ratification of CBTA annexes Annex Title Status Annex 1 Carriage of Dangerous Goods In a process of enactment for ratification Annex 2 Registration of Vehicles in International Traffic Ratified Annex 3 Carriage of Perishable Goods Ratified Annex 4 Facilitation of Frontier-crossing Formalities In a process of enactment for ratification Annex 5 Cross-border Movement of People Parts 1-4: Ratified while Part 5 In a process of enactment for ratification Annex 6 Transit and Inland Clearance Customs Regime In the process of the establishment of guarantee organization Annex 7 Road Traffic Regulation and Signage Pending ratification Annex 8 Temporary Importation of Motor Vehicles In the process of the establishment of guarantee organization Annex 9 Criteria for Licensing of Transport Operators In a process of enactment for ratification Annex 10 Conditions of Transport Pending enactment of the domestic law Annex 11 Road and Bridge Design and Construction Standards Ratified and Specifications Annex 12 Border Crossing and Transit Facilities and Services Ratified Annex 13a Multimodal Carrier Liability Regime Ratified Annex 13b Criteria for Licensing of Multimodal Transport Ratified Operators for Cross-border Transport Operations Annex 14 Container Customs Regime In the process of incorporation relative to a guarantor Annex 15 Commodity Classifications Systems Ratified Annex 16 Criteria for Driving Licenses Ratified Protocol 1 Designation of Corridors Routes and Points of Entry and Exit Border Crossings Ratified Protocol 2 Charges Concerning Transit Traffic Ratified Protocol 3 Frequency and Capacity of Services and Issuance of Pending enactment of the domestic law Quotas and Permits Trade and Transport Facilitation Assessment 19 20. In particular, Thailand has not ratified mits, technical requirements of vehicles, mutual rec- some key annexes of the CBTA thereby hamper- ognition of inspection certificates, mutual recogni- ing some of the intended benefits. Ratification of tion of driving licenses, and motor vehicle third-party some of its provisions could allow more seamless insurance. However, the ASEAN ideals are yet to be movement of cargo across borders without the need fully realized though the target year for the liberaliza- to transship at the borders. Taking the lead to provide tion of international road freight transport services is a predictable regulatory regime would benefit Thai 2015. companies in particular that would be seeking to exploit the low labor costs in neighboring countries 23. The AFAFGT framework on trade facilita- such as Lao PDR. tion offers great potential for Lao PDR. It recogniz- es that logistics performance for the ASEAN member 21. The bilateral agreements have had a countries can be improved through measures to facil- greater impact on service provision than the mul- itate the fast movement of goods carried by road and tilateral ones, possibly because the multilateral rail transport in particular. It recognizes also that the agreements provide the framework for the bilat- benefits of improved infrastructure across South East eral agreements between the states. For instance, Asia will remain unrealized unless the regulatory en- based on the 1999 agreement between Lao PDR and vironment is modernized to remove regulatory bot- Thailand there has been on paper the elimination of tlenecks in particular. One of the main bottlenecks is the requirement for transshipment at Nong Khai or in the granting of transit and traffic rights. Common Mukdahan, allowing certified trucks from each coun- practices at most border posts involve the transload- try to deliver and pick up cargo on either side of the ing of cargo from a vehicle registered in one country border. In theory, the relaxation based on the 2001 to another and for the transit procedure to be initi- subsidiary agreement covered both inbound and ated at each land border crossing. A study by ALMEC outbound flows, and allows Lao PDR trucks to access cited by IBF International Consulting (2008) estimates Thai markets. It was intended to reduce damage and that this increases the cost of transport by US$ 100- theft of cargo that occurs during the transshipment; 300 per container on top of transit fees, which add eliminate the need for customs checks for properly another US$ 150 to 200. Perhaps not surprisingly, sealed cargo; and reduce unofficial payments. The there is little transit traffic across several countries, agreement with Thailand is automatically renewed and especially across Cambodia. Lao PDR however, is each year unless there is an objection from either one of the exceptions as it carries an increasing vol- country. ume of transit traffic between Thailand and Vietnam. This is a significant barrier that suppresses intra-re- 2.3.2 ASEAN gional trade. However, implementation of the AFAF- 22. The ASEAN Framework Agreement for the GT framework has been very slow. Rather, countries Facilitation of Goods in Transit is one of two com- seem to rely more on the GMS framework. peting proposals for an integrated transit regime in South East Asia. Cambodia together with Lao 24. Two of the major constraints to cross bor- PDR, Thailand, and Viet Nam are parties to the ASEAN der movement of trucks in South East Asia are the agreement whose objective is to facilitate the trans- difference in axle load limits and third party liabil- portation of goods in transit; simplify and harmonize ity insurance. The lack of integration in these two ar- transport, trade and customs regulations require- eas contributes to the cost and inconvenience of op- ments; and establish an effective, efficient, integrated erating trucks across borders in the region. This is the and harmonized transit transport system in ASEAN. case between Lao PDR and Thailand where limits of The ASEAN Framework Agreement for the Facilitation the former are lower than in the latter (Table 5). While of Goods in Transit (AFAFGT) of 1998 sets out a pack- the GMS says with respect to weights and axle loads age of several measures pertaining to regulation of that vehicles shall comply with the technical stand- frontier facilities (designation frontier posts), harmo- ards of the different countries, ASEAN has come up nization and simplification of customs procedures, with some limits to facilitate cross border operations. traffic, transit transport services, road transport per- More generally, the countries are working towards 20 Trade and Transport Facilitation Assessment standardization, starting with the limit for a single 9 tons, the same as in Thailand and Vietnam. Still, Lao axle. For example, ADB (2008) found that on some PDR roads are designed to the lower limits and there routes, notably RH9, there has been standardization is concern that the raised limit will contribute to road already where all the countries, including Lao PDR, infrastructure damage. have raised their limit for single axles to 11 tons from Table 5: Vehicle axle load limits in Lao PDR and Thailand Truck type Axle load limit in kg ASEAN limits5 Thailand Lao PDR Truck with 2 axles (4 wheels) 9,500 9,100 Truck with 2 axles (6 wheels) 15,000 NA Truck with 3 axles 25,000 21,000 21,000 Truck with 4 axles (12 wheels) 30,000 21,000 25,000 Semi-trailer with 3 axles 45,000 37,500 Semi-trailer with 4 axles 50,500 37,500 32,000 Truck and drawbar trailer with 4 axles 35,000 37,500 Truck and drawbar trailer with 5 axles 47,000 37,500 36,000 Truck and drawbar trailer with 6 axles 53,500 37,500 Source: WFP (2008) and own estimates 2.3.3 Customs and border management spections. They were also excessively reliant on the 25. One of the areas where Lao PDR has made manual processing of paper-based documentation, significant progress in trade facilitation is in cus- characterized by excessive face to face interaction toms and border management modernization. between traders and government officials, and were Over the past five years Lao PDR has implemented hampered by a lack of uniformity in treatment across significant reforms to improve the trade environment the country. In addition, the institutional capacity of in the country. While some measures were driven by customs and other key government agencies to ap- internal forces, others were initiated to meet com- ply internationally accepted approaches to modem mitments at the regional level, mostly ASEAN, and border management was relatively weak. Traders, at the global level, especially accession to the World regardless of their volumes, transaction history, com- Trade Organization (WTO). Prior to the reforms there pliance record and corporate governance arrange- were up to sixteen6 other local and central govern- ments were often subject to essentially the same ment agencies involved in the process in 2006, now excessive controls and little incentive existed for customs has the principal responsibility for the pro- traders to strive to improve compliance. cessing and clearance of goods. In general, the pro- cessing and clearance of import, export and transit 26. Starting in 2008, Lao PDR has received goods in Lao PDR were relatively inefficient and time support from the World Bank and other agen- consuming and presented a significant obstacle to cies to implement customs and border manage- trade. The regulatory regime and clearance processes ment reforms. Development partner support has were administratively complex and heavily depend- sought to improve the efficiency and effectiveness ent on inefficient and resource intensive physical in- of customs administration by simplifying customs 5 ASEAN Protocol 4 Annex F, which sets out limits for different types of vehicles. 6 Including Immigration Police, Customs, Commerce, Food and Drug, Quarantine, Treasury, Health, Insurance, Drug Control, Post, Tourism, Forestry, Tax, Foreign Affairs, Communications and Transport who were all present at the Friendship Bridge border check point in Vientiane in 2006. Trade and Transport Facilitation Assessment 21 procedures, eliminating duplication and redundancy, goods are subject to approval for “technical certifica- reducing transactions costs and time to clear goods, tion” reasons. These are products under the control of and increasing transparency and accountability. Au- MOIC, Ministry of Agriculture and Forestry, the Min- tomation is being progressively introduced through istry of Public Health and the Ministry of Information the introduction of the ASYCUDA World declaration and Culture. Prohibited goods are those that are con- processing system. Complementary reforms have sidered harmful to the national economy, public or- also taken place in other areas leading to a reduction der, national security, and cultural traditions. Around in the number of agencies that are physically pre- one third of all imports are subject to an additional sent at the border. A Trade Portal was also recently certificate, licensing or permit requirement by other launched, providing the trading community with easy government agencies, and of these the majority are access to valuable information to ensure compliance import licenses required by the Ministry of Industry with trade regulations. Taken together the various ini- and Commerce. tiatives have resulted in a modern, rationalized and automated border management environment; espe- 2.3.4 Clearing and forwarding cially at the Vientiane customs check points (Friend- 29. Lao PDR has a small freight forward- ship Bridge I and Thanaleng Warehouse) where ASY- ing industry. The national association has some 24 CUDA World is already fully operational. members, including international companies. Most firms provide both clearing and forwarding servic- 27. Lao PDR customs has commenced prepar- es. Generally, large international LSPs are not active atory work towards introducing a National Single in the domestic market because volumes are small Window. There are now only three agencies physi- and government regulations require that they form cally present at the border checkpoints: customs, joint ventures with domestic firms or use a domestic immigration and quarantine. Efforts have also been firm as an agency. Lao PDR shippers and importers made to reduce the number of documents required rarely get directly involved in arranging the interna- for types of goods other than those specified in the tional sea shipments. This is typically handled either list of controlled and prohibited goods. This should by international or Thailand based agents. The costs lead to even more efficient customs and border man- that Lao PDR shippers or importers face directly are agement performance. This derives from a realization those for the overland movement between points in that while the number of agencies physically at the Lao PDR and the Thai ports of Laem Chabang, Lat Kra- border has reduced, complying with their regulatory bang or Bangkok. requirements still imposes a heavy administrative burden on traders. It is expected that once imple- 30. The capacity of the majority of Lao PDR’s mented the National Single Window system will allow clearing and forwarding firms is quite low. The two traders to submit all import, export and transit infor- largest companies handle on average about 150 con- mation required by regulatory agencies via a single tainers per month, but smaller firms typically handle electronic gateway instead of submitting essentially 30 containers or less. The larger firms provide ware- the same information numerous times to different housing, forwarding and customs clearance services government entities, some that are automated and and some also provide transport. Most of the busi- others that still rely heavily on paper. ness for the small players comes from handling gov- ernment and project cargo. These firms typically have 28. More generally, the Lao PDR Government an arrangement or joint venture with a Thai company has taken a number of steps to ease import licens- that helps with the transit operations in Thailand, as ing procedures. Importers are now only required well as arrangements for shipping cargo to overseas to declare their imports at border checkpoints. Im- markets. ports are categorized into three broad groups: gen- eral, controlled, and prohibited goods. The import of 31. Lao PDR shippers have well established general goods does not require any approval from trade relationships with counterpart forwarding MOIC and/or line ministries; importers only need to and trucking firms in Thailand which re-enforces clear goods at the customs checkpoints. Controlled Thailand’s roles as the main gateway for Lao PDR 22 Trade and Transport Facilitation Assessment trade. For instance, even though the cost of shipping 35. The larger Lao PDR forwarders provide a container from Vientiane to the Shanghai via Viet- consolidation services. A few have the capability to nam is approximately $200 cheaper, firms still prefer provide packing/labeling, inventory management, to do so through Thailand. and other value-added services, but there is little de- mand for these services in the local market. For man- 32. The challenges posed by small volumes ufactured goods, these services are performed either in Lao PDR have long been recognized. Only a few in the factory rather than being outsourced or at the logistics service providers (LSPs) able to provide both other end of the supply chain closer to the market. domestic and international third party logistics (3PL). For agricultural products, most of the 3PLs providing These are either part of international forwarding processing, packaging and other services are located companies, participate in global consortia, or have in Thailand. Most of the demand for warehousing direct relations with foreign CF agents. So far only the comes from traders and wholesalers who have their large domestic players (Lao PDR Freight Forwarder own facilities. There is little additional demand since and Societé Mixte de Transport) have developed re- both manufacturers and agricultural processors keep lationships with international, mainly Thai, logistics their inventories to a minimum. The freight forward- companies. The others small companies mostly offer ing companies make minimal use of ICT systems warehousing and either trucking or clearing. (other than e-mail) to manage their shipments and services including inventory. Despite Government 33. Typically, overseas buyers nominate the issuing of a number of regulations to support the shipping line and freight forwarders who the movement of goods, there are still numerous proce- exporter has to work with. An earlier study (Arnold dures that have not been completed due to the lack – 2003) pointed to the small volumes and seasonal of common application of ICT networks and the coor- nature of traffic flows as a major factor affecting the dinating mechanism. availability, cost and quality of logistics services. Equally important is the role of overseas buyers in se- 36. Customs clearing agents in Lao PDR usu- lecting LSPs and the comparative advantage enjoyed ally charge a flat fee per declaration for clearing by Thai LSPs. Since the production of most exports is cargo. For imported inputs the typical charges for controlled by foreign investors and sold on an ex-fac- clearing a 20-foot container are $100-150, whereas tory or FOB (Bangkok) basis, it is the foreign buyer or for exports the costs are less, about $120-130. Since the parent company that organizes the international most customs brokers charge per declaration, they transport. The buyers may also specify the packing do not make a distinction between 20 and 40-foot sequence for the container. A local clearing and for- containers. The resulting cost to clear cargo is rough- warding agent usually organizes the land transport ly double that in Vietnam but the major components and clearance at the Lao PDR border. Most Lao PDR are informal fees, according to clearance agents. The exports are sold free on board in Bangkok and ex- costs of clearing cargo are directly passed on to the ports go through lengthy processes in Bangkok. Lao customer. PDR producers are responsible for the movement to the port. 37. Agents maintain that informal fees account for a large share of their fees. While this 34. Import cargo passes through the Lat Kra- is difficult to verify, the argument is made that the bang inland container depot (ICD) near Bangkok. efficiency of the clearance process depends on rela- Goods remain there typically for 2-3 days while wait- tionships between agents and customs officials. As ing for documents from the Lao PDR Embassy in a result, the outcomes for two different agents pro- Bangkok. Thai customs inspect all cargo including cessing similar documents could be different. It is ex- transit cargo. A number of containers are de-stuffed pected that the subjectivity and lack of transparency at the warehouse, also contributing to the limited in the processes will be reduced once the various au- number of container movements inland to Lao PDR. tomation initiatives such as ASYCUDA World and the Single Window, described below are implemented. Trade and Transport Facilitation Assessment 23 2.3.5 Trucking services 39. There was a dramatic increase in number of 38. Thai and Lao truck operators are able to Thai transporters operating across the border fol- compete for the haulage of external trade as part lowing the 2004 elimination of restriction on who of a 1999 agreement that eliminated the requirement could participate under this agreement. This lead for transshipment at Nong Khai or Mukdahan, allow- to a dramatic increase in supply of transport (Figure ing certified trucks from each country to deliver and 11).7 International transport operations licenses are pick up cargo on either side of the border. When com- issued to firms for 5 years8. In 2011, 111 of these firms bined with a 2001 subsidiary agreement that covers had official authorization to enter into Lao PDR; 9,10 both inbound and outbound flows, this allows Lao even though there is some evidence that the market PDR trucks to access Thai markets. It was intended to is dominated by a few Thai firms. The increase in avail- reduce damage and theft of cargo that occurs during ability of road permits had an effect on prices, where the transshipment; eliminate the need for customs some estimates put the reduction in transport prices checks for properly sealed cargo; and reduce unoffi- at 20 percent. cial payments. Figure 11: Number of transport firms with licenses to operate between Thailand and Lao PDR Source: TTFA surveys 40. The trucking industry in Thailand is much also offer a wide range of additional services includ- larger, more sophisticated, modern and efficient ing consolidation, multimodal transport and differ- than in Lao PDR. Most of the global transporters, e.g. ent levels of service in terms of speed and reliability. TNT and FedEx, have a presence in Thailand. Several The large Thai operators have fleets in excess of 500 Thai transporters also offer regional services. There trucks and many companies supplement their fleet are a large number of bonded operators that special- by hiring in individual operators. ize in transport to Lao PDR. Thai transport companies 7 Narong Pomlaktong, Rattana Jongwilaiwan, Prakai Theerawattanakul and Rapee Pholpanich. Road Transport Policy in Thailand. The Im- pacts and Benefits of Structural Reforms in Transport, Energy and Telecommunications Sectors. APEC, January 2011. pp. 279. 8 Royal Government of Thailand, http://www.nongkhaitransport.go.th/new/index.php?option=com_content&view=article&id=76&Item id=62; Royal Government of Thailand Land Transport Act. http://www.thailaw.com/thailaw3_2.pdf 9 Cargo Unit, Department of Land Transport, Royal Government of Thailand. 10 After a Thai firm is issued a license to enter into Lao PDR, it must then register each of its trucks that it plans to use to enter Lao PDR. 24 Trade and Transport Facilitation Assessment 41. The high efficiency of the Thai trucking of the movements of cargo between the border with sector is reflected in the large number of truck Thailand and the domestic origin or destination. This trips per month. For example, long-haul operators portion can add as much as 20 percent to the costs will make 2-3 trips per truck per week while short-haul for the total land movement. operators make two or more trips per day. As a result, the average truck travels about 100,000-130,000 km 44. Other reasons that Lao PDR operators per year. This is sufficient to justify the use of newer appear not to be interested in providing cross trucks with the major expense being for depreciation. border services include: (i) their trucks do not meet The operating costs vary. Fuel accounts for roughly Thai safety standards; (ii) the vehicles are driven on 30-35 percent of operating costs and 5-15 percent for different sides of the road; and, (iii) differences in lan- drivers. The cost for maintenance and tires exceeds guage expose Lao PDR drivers to harassment. These the cost for drivers. The majority of the freight carried factors are less of an impediment for Thai truckers by the larger trucking companies is based on long- because of the short distances travelled in Laos. On term contracts that are competitively bid with prices the other hand, cargo insurance discourages both adjusted for changes in fuel prices while the smaller Thai and Lao trucks from crossing the border. South- companies continue to rely primarily on individual east Asia does not have a functioning regional third shipments. Terms of payment for trucking services party liability insurance scheme so insurance com- vary. Smaller customers pay on average within one panies do not cover cargo beyond their national bor- week while larger companies with longer-term con- ders. Lao PDR importers and exporters must indepen- tracts pay 30 days after transport services are pro- dently arrange for insurance when Thai trucks cross vided. For new customers an advance payment is the border. For Lao PDR coffee exporters, insurance required. for Thai trucks costs 150,000 Kip per truck per ship- ment. Trucks are covered for up to one week and 42. Backhaul cargoes are difficult to locate for insurance is taken out from an agent at the border. several reasons. The difficulty in locating backhaul Apparently it is easier for Thai insurers to provide in- cargoes for goods shipped through the Thai ports is surance for trucks entering Lao, or at least have alli- attributable not only to the imbalance in trade and ances with Lao PDR insurance companies to facilitate problems matching loads with containers but also coverage across borders than vice versa. constraints on the time available to find a return load. Per Diem rates are charged after a designated period 45. Most of the trucking services in Lao PDR with the transporter liable for payment up to the time involve independent operators and small trucks. the container is returned to the port. Because of the The organized trucking sector consists of small fleets small volumes, the shipping lines have not estab- of trucks transporting project cargo and the projec- lished storage yards in Lao PDR where the boxes can tion of large manufacturers, e.g. Lao PDR beer. Be- be returned and from which they can be dispatched cause of the predominance of short haul traffic, the to exporters for loading backhaul cargo. primary concern of Lao PDR trucking firms is con- trolling operating costs rather than expanding their 43. Due to the above constraints and higher market share (Figure 12). The trucks are older and load factors that Thai achieve by carrying domes- most are fully depreciated. The cost for new or used tic cargo on the backhaul leg, Lao PDR trucks are vehicles is considered the greatest problem because at a competitive disadvantage for both import and the cost must be amortized over a small number of export cargoes. Despite these advantages and the kilometers. The fuel costs are a problem because of proximity to the Thai border of the major centers high consumption due to the age of the engines, for export production in Lao PDR, (less than 20 km.) the short distances travelled and the low operating recent studies suggest that Lao PDR forwarders and speeds. transporters continue to handle a significant portion Trade and Transport Facilitation Assessment 25 Figure 12: Severity of obstacles faced by Lao PDR trucking Firms (1-5 with 5 most severe) Source: TTFA surveys 2.3.6 Rail Services 46. Lao PDR has only a short stretch of rail- 47. The Thai rail system has great potential to way that connects it to the Thai network. However, carry higher volumes of goods traffic. The rail net- traffic volumes moved by rail are negligible, even in work includes about 4200 km of meter gauge track. Thailand. While Thailand has a well-developed pri- It consists primarily of main lines that radiate from mary and secondary highway network and efficient Bangkok into northern, northeastern, eastern, and road transport services, there has been no compara- southern corridors (Figure 14). The network serves 42 ble effort to develop the railway. As a result rails share of the 77 provinces. The network can serve standard of the freight traffic has continued to decline from 9 ISO containers. Super high cube non-ISO containers percent in 2000 to 6 percent by the mid-2000s to ap- can pass through most of the network. A portion of proximately 2 percent currently (Thailand Office of the network has been strengthened to allow maxi- Transport and Traffic Policy and Planning, 2006). The mum axle loads of 20 tons but the condition of moist volume of container traffic is nominal as shown in Fig- of the track is poor. A third of the sleepers are wood- ure 13. The average domestic cost of container move- en and less than a third of the rails having been re- ment in Thailand is $1,000. The rail provides low cost placed in the last 30 years. The signal and interlocking passenger transport using relatively old rolling stock system is obsolete. There are also a large number of and subsidized fares. Revenues cover only about accidents. Between 2007 and 2009, there were an 80 percent of operating costs with annual losses in average of 107 derailments per year. excess of $300 million. 26 Trade and Transport Facilitation Assessment Figure 13: Rail Freight by Commodity Source: THAILAND: Supporting Railway Sector Reform, TA 8078-THA, ADB, March 2013 Figure 14: SRT Railway Lines BURMA LAOS Chiang Mai Lampang M ek Nong on Udon g Sawan Khai Khalok Thani Northern Phitsanulok Line Northeastern Khon Kaen Nakhon Line Ubon Sawan Ratchathani Nam Suphan Nakhon Surin Tok Buri Ratchasima BANGKOK Eastern Line Aranyaprathet Si Racha Laem Chabang Sattahip CAMBODIA Source: Wikipedia Trade and Transport Facilitation Assessment 27 48. The SRT lacks modern rolling stock and 51. A potentially more significant rail option what is does have is in poor condition. Only about is the proposed China-Thailand railway, which has two-thirds of its diesel locomotive fleet is operational. the potential to improve competitiveness, but the The rolling stock includes special wagons for carry- overall costs of financing the project are enor- ing cement, petroleum and the other major cargoes. mous. There are plans for the construction of a high- These are bogied wagons with maximum length of speed railway line from Kunming in China across Lao but about one third is more than 40 years old and PDR to Thailand. The plan was proposed in 2009 but another third more than 25 years old. has been delayed by contractual problems, by con- cerns over the likely local impact of the development 49. Lao PDR has only a very short railway link and debt that would be incurred by Lao PDR should connecting to Thailand. This is a meter-gauge track the project proceed. If developed, the line would connecting Thanaleng across the Mekong River to place Lao PDR at the center of the regional network Nong Khai. The extension was opened in 2009 for pas- and leverage the country’s central location in the re- senger service. The extension was conceived in the gion, turning conventional logic on its head. Lao PDR early 2000s partly to increase the volume of bilateral would be perceived as a country being landlinked trade between Lao PDR and Thailand, but has never rather than landlocked. Perhaps not surprisingly, been used for freight transport. It would appear also public and private sector stakeholders in Lao PDR are that freight volumes on the link are low and rail is not interested in understanding the potential impact of that competitive when compared to road transport. its development on Lao PDR’s regional connectivity. AFD of France has been conducting feasibility studies Interest in particular lies in the line’s potential to posi- for a 9km extension from Thanaleng to Vientiane. This tion Lao PDR at the center rather than the periphery could have provide an all-rail service between Vienti- of an integrated regional railway network. However, ane and the major transshipment ports of Thailand, the estimated US$ 6.7 billion cost of the scheme, giv- Malaysia and Singapore but again there appears to en the challenging terrain, suggests the project may have been no demand. in fact be non-viable. 50. The State Railway of Thailand is one of the 2.3.7 National Coordination transporters registered to carry transit cargo to/ 52. Effective coordination of national agen- from Lao PDR, however in practice there are no cies and private sector service providers is funda- freight services. The hub for its container transport mental to modern logistics. Traditionally, Lao PDR operations is the ICD located in Lat Krabang approxi- has lacked an effective coordination mechanism to mately 117km from Laem Chabang port and 30 km address trade facilitation constraints in an effective from Bangkok. It handles about ¼ of containers that manner. The authorities have within the past few pass through Laem Chabang port. The nearest rail- years established a National Transport Facilitation head to Vientiane that handles containers is in Nong Committee, and – more recently – taken steps to also Khai about 535 km from Lat Krabang and 624km by establish a National Trade Facilitation Secretariat. The rail from Bangkok. The volume of traffic generated in establishment of a National Trade Facilitation Sec- Nong Khai is relatively small and there is no freight retariat under the National Steering Committee for generated in Thanaleng. Nevertheless, an intermodal Economic Integration (NSCEI) which is chaired by the facility has been proposed to provide consolidation Deputy Prime Minister, and co-chaired by the Minis- and distribution for containerized cargo on a 9-hec- ter of Industry and Commerce is an important step tare site located near Nong Khai (Natha). Udon Thani in this direction. Experience from other countries, in- is the closest railhead to Vientiane that has a signifi- cluding Thailand, suggests such committees, with the cant volume of freight traffic. It is about 75 km closer right level of leadership can be strategic in optimiz- to Lat Krabang but there are no regular container ser- ing the development plans of the various entities that vices between the two. play a role in logistics infrastructure and service pro- vision. The National Trade Facilitation Secretariat, as the national coordinating body for trade facilitation, is charged with managing implementation of the 28 Trade and Transport Facilitation Assessment new National Trade Facilitation Strategy and Action traffic in Laem Chabang port, which is about 117 km Plan recently approved by the government in 2011. from the ICD. It is linked to the port by both highway The strategy may provide an opportunity to define an and rail. The latter was recently increased to a dou- explicit corridor focused approach. ble track. The ICD handles approximately 25 percent of the containers unloaded in Laem Chabang port 2.3.8 Inland Container Depot (ICD) (Table 6) and 23 percent of the containers delivered 53. Lao PDR does not have an Inland Contain- to the port. er Deport and the only ICD operating in Thailand is Lat Krabang. It was built to serve the container Table 6: Laem Chabang Traffic 2011-2012 (mn. TEU) 2011 2012 Laden MTY Total Laden MTY Total Inbound 1.53 1.28 2.81 1.82 1.06 2.88 Outbound 2.92 - 2.92 3.05 - 3.05 Total 4.45 1.28 5.73 4.87 1.06 5.93 54. The number of import boxes received at in the rail share for imports from 2011 to 2012 due the ICD increased slightly from 2011 to 2012 while largely to the delays in loading containers on to the the number of export boxes sent from the ICD rail wagons in Laem Chabang Port. At the same time, declined as shown in Table 7. The proportion of these there was an in share of exports was a result of the containers transported by rail between the port and increase in frequency of trains. the ICD is about 28 percent. There was a decrease Table 7: Traffic Volume and Mode Share for Lat Krabang (TEU) TEU Using Lat Krabang ICD Rail Mode Share 2011 2012 Incr. / Decr. 2011 2012 Import 695,875 706,611 +1.5 percent 25 23 Export 741,441 694,102 -6.4 percent 29 35 Total 1,437,316 1,400,713 -2.5 percent 27 29 55. Currently, 28-32 trips are scheduled daily be extended from Laem Chabang station to the port in each direction between the ICD at Lat Krabang thus creating a bottleneck. Furthermore, a shortage station and the Laem Chabang station. The trains of locomotives and bad condition of the available have 34 wagons with a capacity of 68 TEU. The sched- locomotives in causes delays and cancellations of uled travel time is 3 hours implying an average speed train schedule. There is a plan to add 10 locomotives of about 40 km. However, the double track has yet to and 300 chasses to the fleet. Trade and Transport Facilitation Assessment 29 Supply chain analyses 30 Trade and Transport Facilitation Assessment 3 Supply chain analyses 56. This section extends the previous analysis 57. The primary objective of performing this of logistics services and corridor performance by assessment was to identify initiatives to improve examining the performance of three export sup- export competitiveness through improvements ply chains, coffee, garments, and fresh and pro- in logistics, and, in particular, to inform the gov- cessed vegetables, that utilize the corridor and ernment’s trade and integration strategy11, and the logistics services. The analysis utilizes the Phase 2 World Bank’s next phase of trade related assistance to Trade and Transport Facilitation Assessment devel- Lao PDR (development policy and investment lend- oped by the World Bank. This assesses the perfor- ing). The core strategies considered for improving mance of specific supply chains and quality of the export competitiveness are: (i) increased efficiency to logistics services used in these supply chains. It com- reduce the delivered cost for existing trades; and, (ii) bines background research and interviews with sup- introduction of value addition activities to diversify ply chain participants to identify current constraints the products and increase the average value of the on supply chain performance that limit export com- goods being exported. petitiveness as well as opportunities for improving the quality of logistics service and the structure of the supply chains to increase competitiveness. Figure 15: Linking inbound and outbound flows in supply chain organization 58. The analysis assessed how enterprises —— Flexibility and transparency of these supply can reorganize their supply chains both the in- chains; and, bound supply of inputs and the outbound supply —— Transactions used to link the supply chain ac- of goods (Figure 15). The performance was evalu- tivities and to transfer risk among the partici- ated based on four key areas: pants. —— Time, cost and reliability of end-to-end move- ments; —— Uncertainties associated with individual activi- ties in the supply chain; 11 A new Diagnostic Trade Integration Study has recently been prepared by the Ministry of Industry and Commerce as an update to the 2006 DTIS. Trade and Transport Facilitation Assessment 31 3.1 Methodology 59. The assessment was conducted in four structure of the survey instruments. The instruments steps over a six-month period. The first step was a and interview techniques were pretested with a firm review of the issues facing the logistics industry and not included in the sample. Although the members identification of commodity-specific trades to be sur- of the team were fluent in English, the questionnaires veyed. Trades were selected based on their size and were translated to ensure consistency in the inter- contribution to the country’s trade, both now and in views. the future. These were: 62. The third step involved fieldwork, which —— Coffee – Lao PDR’s largest cash crop and ag- was conducted in two stages. Two trades were sur- ricultural export with potential for increase in veyed in each phase. The interviewers were sent out both volume and product value; in pairs in order to ensure a broad understanding of —— Garments – the largest manufacturing export the firm’s activities and to improve interview dynam- and major source of employment in the coun- ics. Four interviews were conducted with each firm try with potential for increase in volume; and, responsible for organizing the supply chains. The first —— Fruits and Vegetables (both fresh and pro- meeting was with the general manager to introduce cessed) – a promising area of growth in the study team, review the approach and discuss agricultural export but involving significant the firm’s business model. The second meeting was logistics challenges. with the company’s logistics manager to discuss the organization of supply chains. The third meeting was 60. Firms were selected for interviews based on with the head of finance to examine the cash flows size12, markets served, supply chain structure, and and finance associated with the firm’s trade activities. accessibility.13 For each trade, firms were selected to The final meeting was a recap with the general man- include different categories of products. ager to discuss strategies for enhancing the efficiency of operations and improving trade competitiveness. 61. The second step involved the preparation Where required, additional interviews were held with and pre-testing of survey instruments, selection the firm’s principal suppliers and buyers. Between the and mobilization of the survey team, and arrange- two phases, meetings were held to discuss prelimi- ment of field logistics. The instruments were pre- nary findings, finalize field notes and prepare essays pared using modified formats provided in the TTFA to document their findings. The interviews with ser- manual. These were modified to reflect the situation vice providers were conducted in parallel with the in the country as well as specific objectives of the as- interviews with the firms. sessment. The principal adjustment was give greater emphasis to interviews with the firms that organize 63. For the final step, the survey results were the supply chains and less to the firms that provide analyzed. This included preparing for each trade: the logistics services used in the supply chains. The team selected to interview these firms were chosen —— A summary of the responses of the firms to according to their familiarity with the commodity- structured questions; specific trades as well as with trade logistics. A smaller —— Essays describing problems and possible team of experts was recruited to interview providers initiatives for improving performance; of transport and freight forwarding/customs clear- —— Flowcharts for the supply chains of some of ance and trade finance services. The teams partici- the firms; and, pated in a three-day training course that covered the —— Cash flows for some of the firms. analysis of different aspects of trade logistics and the 12 Larger firms were chosen since smaller firms usually face additional hurdles because of their size rather than external factors 13 The firms selected had to be willing to participate in multiple interviews 32 Trade and Transport Facilitation Assessment 64. The survey findings were combined characteristics of the logistics services used in these with earlier efforts to map out the characteris- supply chains. Based on the results, policy recom- tics of each trade including their business models, mendations were developed for both the private and inbound and outbound supply chain configurations, public sector including public-private initiatives. Pre- extent of control over supply chains, cash-to-cash cy- liminary findings were presented at industry-work- cle and financing. Reference was also made to earlier shops followed by a more detailed discussion with studies concerning the availability and performance the associations representing each of the trades. Figure 16: Measures to improve chain performance 65. The identification of various initiatives ncreased coordination among supply chain 1. I began with the trade objectives and current participants; constraints as shown in Figure 16. Different op- ntegration of supply chain components and 2. I tions for improving supply chains performance were elimination of intermediaries; then considered. Some of the initiatives considered 3. Introduction of value-addition logistics in the included: supply chains; mprovements in quality of logistics services; 4. I ncreased use of ITC; 5. I mprovement in performance of trade corri- 6. I dors and production clusters; and, Trade and Transport Facilitation Assessment 33 66. Several initiatives were considered. The 69. For each of the trades there is a mix of types of initiatives that support these opportunities business models being applied and a gradual included: evolution towards those providing more value- addition. The assessment addresses the organiza- 1. Technical assistance; tion of both inbound and outbound supply chains. 2. Standards and contractual relationships; Specifically it considers the extent of control of the 3. Regulatory reform; organizing principle over the activities within the 4. Financial instruments tailored to specific supply chains. This will usually increase as the busi- requirements; ness model evolves in order to: 5. IT platforms; and, 6. Investments in infrastructure. —— Insure a more regular reliable flow of goods through the supply chain; 3.1.1 Key concepts —— Improve the quality of the inputs; and, 67. The analysis of the trades is organized —— Select distribution channels for specific mar- around two key concepts. The trade itself is defined kets. as an inbound supply chain linking the production of raw materials with the processing of these mate- 70. The span of control has two dimensions: rials and an outbound supply chain linking process- (i) how far the involvement extends upstream in the ing with the delivery of finished products to foreign activities of inbound supply chains and downstream markets. The activities in these chains were limited in the activities of the outbound supply chains; and, to those controlled by actors in the country. For this (ii) the mechanism used to control these activities. purpose, the entities responsible for organizing the The mechanisms range from direct investment and supply chains (the organizing principals) were iden- operational control to restructuring the transactions tified. In most cases, these entities were involved in and exchange of information. The latter includes: the transformation of the inputs. The activities of the organizing principal were categorized according to —— Simplifying the transactions. their business model and span of control over both —— Improving enforcement of contracts, and. inbound and outbound logistics. —— Providing more flexible financial terms to en- sure reasonable distribution of the benefits 68. The two key concepts are the business among the participants in the supply chains. model and the span of control. The business model refers to the transformation performed on the inputs and the characteristics of the outputs produced. The span of control refers to their involvement in the ac- tivities of the inbound and outbound supply chains. Separate business models were used for manufac- tured goods and agricultural products. For the manu- factured goods, the standard delineation is based on value addition not only in physical terms but also through design and marketing. For agricultural prod- ucts, value-added includes processing, packaging, and branding. 34 Trade and Transport Facilitation Assessment 3.2 Coffee supply chain 3.2.1 Production and trade 71. Coffee is the largest agricultural export 72. The area in Lao PDR used for coffee plant- from Lao PDR. Coffee production has increased ing has expanded by 160 percent over the last two since the mid 1980s as a result of the continued ex- decades, covering an area in 2010 estimated by FAO pansion in the area planted as well as through in- to be 45,000 hectares. While data on total production creasing yields (Figure 17). For the last two decades, of Lao PDR coffee is not available,15 it is assumed to the estimated output grew at an average annual rate be 20-22 thousand tons based on export data. This is of 11.7 percent. Despite this growth, Lao PDR remains much less than estimated by FAO because: a small producer in terms of the world market with an output equal to only about 4 percent of that for —— Not all of the area originally planted in coffee is Vietnam. The level of exports in recent years has been still used for this purpose; and, about 18 thousand tons although an increase to 24 —— About ¼ of this land is not producing because thousand tons was reported for 201114 (Figure 18). Of the coffee plants have not reached maturity the approximately 50 coffee exporters, Lao PDR ranks and the plants on some of the land have lost in the middle just behind Thailand and is comparable productivity due to age. to Rwanda and Burundi. 73. Coffee is grown on the Bolaven Plateau, Figure 17: Lao PDR coffee production which provides conditions that give Lao PDR cof- fee its unique flavor16. Approximately 80-85 percent is produced in the Champasak Province and most of the remainder in the neighboring provinces of Sara- van, Sekong, and Attapeu. It is in these provinces that most of the future expansion in coffee production is expected to take place once roads and other infra- structure have been developed. Figure 18: Lao PDR coffee exports Source: FAOSTAT 14 The trade figures are taken from ITC statistics based on data provided by importers (mirror data). 15 FAO imputes a value from sample data on yields and an inventory of land planted in coffee which produces a number that is double the amount exported 16 Volcanic soil at an altitude of 1300 meters with good drainage and moderate temperatures. Trade and Transport Facilitation Assessment 35 74. Lao PDR produces primarily Robusta caused by changes in international prices. Increas- because of its resilience against diseases17. How- ing prices not only encourage greater production but ever, the increasing price differential between Ara- have also led to the establishment of new plantations bica and Robusta (Figure 19) and higher revenue and the entry of foreign-owned trading companies per hectare has induced farmers in Lao PDR to plant to compete with local exporters. The 5-7 year period Arabica. This transition has been facilitated by using coffee plants require to reach maturity causes lags in intercropping in order to avoid a lull in output dur- the changes in price, whereas yields respond more ing the five years before the plants are mature. As a rapidly to changes in price. The most rapid growth result, Arabica’s share of total coffee production has occurred in the second half of the 1990s in response risen from 1 percent in the 1990s to its current level to the run-up in prices during the first half of the dec- of 35 percent. ade. The decline in prices during the second half of the 1990s caused a decline in production in the first 75. Coffee remains Lao PDR’s number one ag- half of the next decade that continued until 2002 ricultural export product with a value in 2010 of when prices recovered. This recovery had two im- about US$ 40 million. The value of coffee exported pacts: first, it led to a sharp increase in yields; second, from Lao PDR has increased three-fold over the last it encouraged foreign investment leading to a rapid two decades due to increased production and rising growth in the area harvested in the second half of the prices. However, there were significant fluctuations decade. Figure 19: International green bean prices Source: ICO 76. The principal market for Lao PDR coffee is the EU, which accounts for about 2/3 of the total export value. Another 19 per cent is sold to Thai and Japanese traders. Although the reported exports to Vietnam are relatively low, the amount actually cross- ing the border is thought to be as high as 30 percent of total production. 17 Lao PDR coffee economy, p. 5 36 Trade and Transport Facilitation Assessment 77. Based on mirror data there are differenc- is reported by Lao PDR customs because the trade is es in the coffee export volumes reported by Lao informal. Importing countries also report very little PDR customs and by destination countries (Figure since the beans are shipped together with Vietnam- 20). The first set of data reports the destination of the ese beans and reported as originating in Vietnam. buyer, which is an international trader, while the lat- Overall, the quantity in tons reported by importers ter data reports the final destination, which is gener- is 10 percent greater than that reported by Customs ally the roaster. Although the top three destinations suggesting additional leakages. It is likely that the to- are the same in both sets of data, Germany, Belgium tal amount shipped out of Lao PDR is about 20 million and Poland, the order is different. Similarly the ship- tons. The destination of the exports varies significant- ments to Thailand reported by Lao PDR customs are ly from year to year as shown in Figure 21. This is done much larger than those reported by Thai customs to a lack of regular supply contracts and is consistent since most of the beans are re-exported. A different with spot market trading of a commodity. situation arises with shipments to Vietnam. Very little Figure 20: Destination of Lao PDR coffee exports in 2010 Source: Lao PDR Customs data Source: UN Comtrade Figure 21: Destination of coffee exports Trade and Transport Facilitation Assessment 37 3.2.2 Industry structure 78. The Lao PDR coffee industry includes a processing before selling to wholesalers. The whole- number of participants starting at the farm level, salers act as district level aggregators and provide ad- as shown in Table 8. The overall performance of the ditional processing. Some export the coffee beans di- coffee supply chain depends on the relations and rectly but most sell to exporters who store the beans level of integration of the activities of different play- before selling them to international traders. A few of ers. The growers include smaller holders with 1-3 hec- the exporters perform additional processing and sell tares under cultivation, large farms with 4-10 hectares packaged, ground and instant coffee. Different pro- and six plantations with more than 100 hectares. The cessing methods are used for Robusta and Arabica growers perform varying amounts of post-harvest coffee as outlined below. Table 8: Participants in coffee supply chain Agent Type of agent Individual farmers Producer Farmers’ group Private investors Middlemen Village buyers Wholesalers Wholesaler-exporters Exporters Large wholesaler-exporter-roaster Planter-exporters Importers International Coffee Traders 79. Robusta coffee is dry processed and the 80. Arabica coffee is processed almost exclu- beans are sold as unwashed. The cherries are dried sively using wet processing (Table 9). Most farmers by the farmers on platforms, often on open ground. sell the cherries directly to wholesalers for process- Around half of the farmers sell the dried-cherries di- ing although in some cases they sell parchment pro- rectly to exporters whereas the others use modified duced using manual pulpers and plastic buckets for rice hullers, to produce beans that are sold unsorted. washing. Table 9: Processing of coffee Process Product Yield Wet processing of Arabica Sorting cherries by floating First quality red cherries 97 percent Mechanical pulping Parchment with mucilage 55 percent Fermenting or mechanical removal of mucilage Parchment 83 percent Washing Parchment 100 percent Drying on racks Dried parchment 50 percent Hulling and polishing Green beans Sorting and grading Sorted green beans Dry processing of Robusta Sorting and cleaning Cherries Dry on platforms or with mechanical dryers Dried cherries Hulling and polishing Green beans Sorting and grading Sorted green beans 38 Trade and Transport Facilitation Assessment 81. Due to the small size of the farms, vil- drying areas to re-dry coffee beans if necessary. Some lage buyers act as middlemen purchasing Arabica of the larger exporters also have mechanical dryers. and Robusta cherries at the farm gate and selling The coffee is cleaned and sorted manually to reduce unsorted beans to wholesalers. They operate either the percentage of defective beans. Relatively few as collectors for specific exporters or as independent exporters have equipment to accurately sore by size, traders selling to the highest bidder. Many have dry- density and color. The exporters sell the green beans ing areas and hulling equipment for dry processing of to the international coffee traders, many of whom Robusta and equipment for wet processing of Arabica have representatives in Pakse. cherries. Village buyers and larger farmers deliver the cherries and beans to the wholesaler’s warehouse. In 84. Over the last decade, a new system has some cases, the wholesalers use their own truck for emerged which bypasses the wholesaler. In the collection. traditional system, processing begins when the exporter receives an order from the buyer. The 82. The wholesalers are traders in agricul- exporter then contacts the wholesaler who notifies tural products that specialize in coffee. They oper- the village buyer who purchases cherries from the ate at the district level buying the output from 30-50 farmers. Under the new system, exporters construct villages. Some buy only unsorted green beans while their own warehouses and coffee processing units others also purchase dried cherries and parchment near production areas and collect direct from farm- and process them in their warehouses. These whole- ers and collectors. In some cases, they also grow the salers typically handle from several hundred to sev- coffee. The increase in exports of Arabica with the eral thousand tons per year. requirement for wet processing and better control on quality has encouraged this trend. The alternative 83. Exporters purchase the green beans from paths through which coffee moves from the farm to farmers’ groups, large coffee farmers and whole- the international buyers are shown in Figure 22. salers and usually provide transport to their warehouse. The exporter’s warehouses have cement Figure 22: Coffee supply chains Natural Robusta Washed Arabica Individual Farmers Farmers Individual Farmers Private 40% DC, 60% GB Groups 50% C, 50% P Plantations 80% 20% 50% 50% Village Buyers Village Buyers Collectors Collectors Wholesalers Wholesalers Wet Method Hulling Robusta Arabica Exporters Exporters Cleaning, Cleaning, Sorting Sorting Grading Grading C - Cherries Importers P - Parchment DC - Dried Cherries GB - Unsorted Green Trade and Transport Facilitation Assessment 39 85. A small number of exporters dominate b. Wholesaler-exporters operate as wholesalers the Lao PDR coffee market. The ten largest compa- buying and processing fresh and dried Ro- nies are part of the Lao PDR Coffee Association (LCA), busta cherries and Arabica cherries and parch- a group established by Government that all coffee ment. This model requires a network of village exporters must join. They account for 70-75 percent buyers to make spot purchases from the farms. of exports and one exporter accounts for a majority Sales to foreign buyers are on a spot basis. of this. These companies dominate the buying of cof- c. Suppliers obtain a regular supply of cherries fee at every stage in the chain - fresh cherries, dried through contracts with large farms and farm- parchment and milled green beans. er groups and through the operation of their own coffee plantations. They also use spot 86. Improvements in information available purchases to supplement the regular supply. to farmers as well as excess demand over supply Sales to foreign buyers are primarily contracts help to offset the impact of market concentration for multiple shipments, although a portion in- among buyers. Improvements in farmers’ access to volve spot purchases. markets through mobile phones for checking prices d. Plantation owners process their cherries and and use of trucks and motorbikes for delivering the sell the beans to the foreign buyers directly crop to different traders have offset the impact of this under contacts for multiple shipments. This high market concentration. The greater transparency model has the additional feature that the own- in the transactions has resulted in the farmers obtain- er can produce branded and unbranded prod- ing 70-80 percent of world price for Robusta versus ucts for distribution direct to retail outlets. 57 percent a decade earlier. Competition has also in- creased with the entry of large foreign-owned firms 88. The first and second models account for a that operate plantations, process the cherries and majority of the exports since an estimated 15,000 export the beans. Two plantations are US-based but households plant 1-3 hectares and produce about the other five are from the region (India, China, Sin- 80 percent of the coffee beans. The largest exporter gapore, Vietnam, and Thailand). All were established in Lao PDR has adopted the second model. The for- in the last six years. They are still relatively small but eign-owned firms are introducing both the third and have plans to expand their plantings to a thousand fourth models. Some of the local plantations have hectares or more. Most have modern processing facil- also applied the fourth model and produce branded ities and access to various international distribution products. networks. 89. The strategies for inventory manage- 3.2.3 Business models ment differ depending on the business model. The 87. Exporters are responsible for organiz- advantage of the first model and, to an extent, the ing the coffee trade. Exporters have extended their second is that inventories are kept to a minimum, activities upstream by adopting new main business which reduces the required working capital. In con- models. In addition, the traditional traders have trast, the third and fourth models require a large assumed responsibility for the functions formerly inventory to fulfill contracts for multiple shipments. performed by the wholesalers. The four business Their advantage is that they create opportunities for models that are prevalent in the Lao coffee sector can improving the quality of the coffee by controlling all be summarized as follows: parts of the inbound supply chain. a. Traditional traders buy green beans, provide 90. The exporters sell to international cof- additional drying and polishing, bag and store fee traders primarily in Europe. Most of the major the beans and sell them to foreign buyers in international traders have buying agents in Pakse response to individual spot purchases. This to arrange the purchases. Some of the foreign firms model requires a network of wholesalers and operating in Lao PDR are affiliated with international village buyers as described above. traders. 40 Trade and Transport Facilitation Assessment 3.2.4 Value proposition 91. While Lao PDR coffee is of relatively high 94. The inbound supply chain begins with quality, the techniques for post harvest process- the harvesting of the cherries and concludes with ing are poor and there is minimal sorting and the delivery of the green beans to the exporter, grading throughout the supply chain. Lao PDR however, the exporter is increasingly involved in the does not have any national standards for grading cof- production of the beans. The harvesting of cherries fee and the quality control certificate issued by the occurs during November and December for Arabica government does not have international validity. and from February through March for Robusta. For Attempts by exporters to introduce standards have Robusta, the production of dried cherries using solar been limited. Some exporters, especially the foreign drying requires 3-4 weeks. The time for hulling, addi- firms, have invested in equipment for separating cof- tional drying and polishing requires a few days to a fee beans based on quality differences but most rely few weeks depending on the amount and method of on manual sorting of coffee beans and export them drying. For Arabica, the time for wet processing is two as mixed quality beans (FAQ- Fair Average Quality). As to three weeks with solar drying but can be reduced a result, the price is discounted from the international to a week with mechanical dryers. The exporter then price. Figures from 2005 indicated a discount in the puts the green beans in 70 kg bags and stores them price of Robusta of about 15 percent relative to Grade in his warehouse for up to one year. 3 Robusta from Vietnam.18 95. The outbound supply chain for coffee 92. The newer business models seek not only beans begins with the processing of the docu- to improve the quality of the exported beans, but ments for shipping and ends with the transfer also to develop a consistent and unique product that of the cargo to the buyer’s representative. Upon commands a premium relative to the international receiving an order, the exporter prepares the ship- commodity price. ping documents, which takes about three days. The exporter then loads the bagged beans into contain- 3.2.5 Supply chain structure and ers at the warehouse, transports the coffee to the performance border and clears the cargo. At the border, the con- 93. An illustration of the coffee supply chain tainer is transshipped to a Thai truck for movement to from the farm to the port of loading is shown in Lat Krabang or Bangkok port where it is delivered to Figure 23. The participants involved in the traditional the nominated forwarder or shipping line. The move- system are shown on the right side of the chart. The ment from the warehouse to the port takes 2-3 days. modern systems reduce the number of participants as indicated by the shaded boxes. The points in the 96. Transactions for the inbound supply supply chain where orders are initiated are shown on chain are less formal than transactions for the out- the left. These include: bound supply chain. For the inbound supply chain, —— Traditional spot purchases in which the order the transactions are based on verbal agreements initiates the collection and processing of the between farmers, village collectors and wholesalers. cherries; Most involve cash payments at the time of receipt of —— Purchase orders as part of a contract for mul- the goods. For the outbound supply chain, there is tiple shipments which initiate additional pro- a formal contract. The beans are shipped under FCA cessing of cherries to supplement the beans in or FOB terms depending on who takes receipt of the inventory; and, beans. The payment for the beans is done in stages —— Purchase orders for retail products, which with an advance payment made at the time the order initiates processing of the beans stored in the is placed and a subsequent payment on CAD terms.19 warehouse. Both payments are made through TTs. 18 Anthony Marsh, et al 19 The importer submits a price quotation and a letter of request through its bank, which then contacts the exporter’s bank with a request for the shipping documents (commercial invoice, packing list, phytosanitary certificate, bill of lading and C/O). Once the correct docu- ments are received by the importer’s bank, the payment is transferred to the exporter’s bank. Trade and Transport Facilitation Assessment 41 Figure 23: Coffee supply chain and participants Receive orders for Harvesting cherries Farmer spot purchases Farmgate purchases Village Buyer Sorting cherries Transport Dry and wet processing Wholesaler Receive P.O. for Sorting and grading beans beans Polishing and storing beans Transport Receive P.O. for coffee products Additional Processing Storage of Products Exporter Prepare export documentation Containerize Transport to border and clear cargo Transship and transport to port of loading Broker or International Buyer International Shipment 97. In the traditional system of small farms 98. The modern system provides a more for- and middlemen, the scale of purchases is deter- mal relationship between the farmers and the mined by the available working capital. Export- buyers of their cherries or parchment. In some ers usually receive advances from the buyers and cases, this is accompanied with advances for the pur- have access to loans from the commercial banks. chase of inputs and micro-credit to cover expenses The wholesalers receive advances from the exporters during the harvest season. and also have access to the loans from the commer- cial banks. The village buyers rely solely on advances from the wholesalers since they do not have access to loans. The farmers have access to credit from the purchaser of their cherries or parchment but most of this is short-term and expensive. 42 Trade and Transport Facilitation Assessment 3.2.6 Performance of firms surveyed 99. For this survey, four of the larger coffee seas shipments are arranged by forwarders selected exporters were selected. Three of the four produce by the foreign buyers. The documents required to Arabica. Two operate plantations, one domestic and export coffee include a certificate of origin, SPS and one foreign owned. They handle volumes between technical certificates, and customs declarations. Ob- 12 and 80 thousand tons. One company purchas- taining these does not create significant delays but es parchment through contracts with the farmers does introduce uncertainty in the delivery schedule. groups. Another obtains parchment from individual farms, village buyers and their own plantation. The 103. The containers used to transport coffee third company produces green beans from its planta- are delivered empty from Bangkok port to the tion and uses these to produce retail products. The warehouses in the Bolaven plateau then loaded last company is a smaller trader. and returned to Bangkok port. The cost including transport, clearance and loading at the port is ap- 100. The cherries and parchment are delivered proximately 45,000 Baht per container (US$ 1,500). by the farmers and village buyers who are paid At current prices, this amounts to 1.5 percent of the cash on delivery based on the prevailing spot price of Arabica green beans and 3.8 percent of the price. The larger firms receive deliveries of 10-25 tons price of Robusta green beans. The buyer pays the of cherries or parchment from the wholesalers and ocean shipping costs. For the EU, costs amount to farmers’ groups, whereas the smaller trader receives about US$ 2,000 per TEU. This is exclusive of cargo a shipment as small as two tons from the village buy- insurance, which is provided by the buyer or the ers. transport company. 101. Nearly all sales are to foreign traders 104. Payments for exports are made through although one plantation sells to retailers and TT at the time the goods are loaded onto the ves- roasters. The typical time from confirmation of order sel. Some firms require letters of credit from their to delivery to the loading port is 60-90 days. This in- buyers but this applies primarily to orders from new cludes the storage time for the green beans following buyers. The transactions are made using telephone, processing. The period is longer for one of the plan- fax or e-mail. All of the firms have a line of credit tations, about 180 days because orders are accepted with a domestic bank except for the foreign-owned prior to harvest and cover multiple shipments. The plantations, which have access to working capital small trader delivers the coffee in less than a month. through their parent companies. Some wholesalers Order fulfillment is not a significant problem al- and exporters with contracts to buy cherries at pre- though one of the firms indicated that about 5 per- vailing prices use the forward market to hedge their cent of the shipments were delayed due to problems contracts. with processing and lack of space at the warehouses. 105. Two firms indicated that their competitive 102. All firms export bagged green beans in strategy was based on the quality and uniqueness containers, with typical shipment sizes ranging from of their product while the other two based it on 2-12 TEU (a TEU holds about 19 tons). Three of the their costs. In order to grow their revenues, all are four firms load the container at the factory. Current trying to improve their supply of inputs. The princi- values per TEU are about US$ 40,000 for Robusta and pal sources of financial risk are shortages of working about US$ 100,000 for Arabica. Three of the four firms capital and price fluctuations. arrange their own domestic transport while over- Trade and Transport Facilitation Assessment 43 3.2.7 Objectives and strategies 106. The coffee industry represents a relative- b. Second, improve the quality and yield of cof- ly small portion of the country’s trade and GDP, fee produced from smallholdings. This re- but is the major agricultural export in terms of quires a change in the role of the exporters value and generates a significant amount of rural from a trader of a low value commodity to the employment. There are three dimensions to the organizer of production that meets or exceeds potential for growth in the Lao PDR coffee industry: an agreed standard. This implies a more direct relationship between the exporters and grow- a. Volume produced – expand the area in the ers, a more efficient system for collection of Bolaven Plateau allocated for the cultivation the coffee and a more effective allocation of of coffee; improve yields and extend plant life responsibility for the postharvest processing. through improved agricultural practices and extension; 109. Much of the current cost of production is b. Value of the coffee – improve management of a result of an inefficient system of production, col- the processing including sorting, grading and lection and processing. It is therefore important to quality control; and, restructure the supply chains to increase efficiency c. Value addition - introduce specialty coffees of these activities. By achieving economies of scale and coffee blends; additional processing and in processing and improving the quality of the out- distribution of coffee products. put, the returns to the farmers should increase. Since this will support the growth in production, it will also 107. Each of these is being pursued and signif- increase rural employment. icant improvements are expected in the short to medium term. While there is potential for substan- 110. An efficient system for the collection of tial expansion of production, the primary objective fresh and dried cherries requires a simple system of this expansion should be to increase the employ- of aggregation backed by a contractual mecha- ment and earnings for the rural population. nism that allows coordination of the collection activity from the farm. This requires a combination 108. The challenge is to employ a strategy that of: will increase growth while achieving the objective mentioned above. This suggests a two-part strat- —— A contractual agreement that provides ad- egy: vance payment to the farmers for inputs and a market price for their output; a. First, improve the quality and consequently —— Partnerships with local leaders to facilitate the the value of the coffee exported complement- transactions between individual farmers and ed by some value addition. This effort would the processors; and, be led by the foreign-owned plantations, —— Investments in collection points and vehicles which have the capital to develop large-scale to move inputs efficiently from remote villages plantings,20 the equipment to ensure the qual- to processing facilities. ity of the coffee beans, the management to provide a continuous supply of coffee to reg- 111. Moving to a more efficient collection sys- ular customers and the scale and marketing tem involves a variety of complementary steps. experience to promote specialty blends and It requires a change in farming practices as part of branded products. a multi-year effort to build trust between the par- ticipants. It requires an ability to work with farmers groups, village leadership, and other organizational structures. This implies capacity for designing and managing logistics networks. 20 Estimated to cost $10,000 per hectare 44 Trade and Transport Facilitation Assessment 112. Even with the expansion in area, yields 114. Complementing these trends is the and productive life of plants, Lao PDR will remain restructuring of the inbound supply chain spe- a small producer in the international market and cifically with regards to sourcing and processing relative to its neighbors. In order to advance be- cherries. Sourcing needs to shift from the farm to the yond the status of supplier of unsorted beans used village or farmer’s group and from spot purchases to as a low cost input to blended coffee, the size of the contracted production. Processing, drying and sort- processors/exporters must be large enough to pro- ing of the coffee beans needs modern equipment to vide effective quality control and to offer a reliable improve the quality of sorted beans. This requires in- supply of consistent quality to regular customers. At vestment at a sufficient scale to achieve economies the same time, the exporters must also develop new of scale and implies a reduction in the amount of pro- distribution channels that will provide higher prices cessing done at the village level21. It also requires im- for smaller shipments, unique varieties, specialty proved systems for collection of fresh cherries since brands and personalized service. These channels processing must begin within roughly 12 hours of include specialty roasters and high-end food retailers harvest. Finally, it improvements in quality control and food service chains. measures and better integration of these controls and certification procedures into the supply chain 3.2.8 Implementation from sorting cherries upon arrival and sorting and 113. Several trends will help the trade grow in grading beans at the conclusion of processing. These volume, product value and value addition; how- changes can be supported by government through ever these trends should be supported by private loans and other forms of support, but must first be and public actors. The current trends towards larger incorporated into a general strategy to transform the farms and plantations, better processing technol- business model from trading of poorly processed ogy, higher yields and more Arabica will enable the beans to supplying of quality products to regional trade to grow in volume, product value and value and international markets. addition. Similarly, the trend towards combining the roles of wholesaler and exporter and efforts to have 115. As part of this strategy, government the exporter purchase directly from village level or- and exporters/processors could establish a set ganizations thus bypassing the village buyers will of standards for grading the beans sold by the support improvements in the quality of the coffee exporters. Participation would be on a voluntary beans as well as increasing the return to farmers. Fi- basis but would be accompanied by formal certifi- nally, the increase in information available to farm- cation. This would be part of a longer-term effort to ers on spot prices has increased their earnings and differentiate and brand Lao PDR coffee similar to the brought greater transparency to the market. These approach originally used by Jamaica’s Coffee Indus- trends are expected to continue in response to mar- try Board to develop and maintain the brand Blue ket pressures, but should be formally recognized by Mountain coffee. The Board monitored and licensed the industry in developing a long-term vision and various aspects of the coffee industry including nurs- by government through complementary policy. This eries, farms, processors and exporters. It owned the support might include a requirement that the firms “Jamaica Blue Mountain” and “Jamaica High Mountain involved in exporting should also have processing Supreme” trademarks and performed sample tests to capacity. protect the integrity of the brand. Since Lao PDR has a much larger export (Jamaica exports only 1500 tons of beans per year), the role of such a board would be more of leadership than licensing. 21 This refers primarily to wet processing of Arabica. Dry processing of Robusta can be done with the solar drying at the village level but with better controls on quality and hygiene Trade and Transport Facilitation Assessment 45 116. The government should also work with 3.3 Garments supply chain the private sector in developing a joint training program for small holders. This effort would com- 3.3.1 Trade bine the research and extension programs devel- 120. The Lao PDR garment industry started oped by the government with the private sector’s production in the early 1990s and since then management capabilities and knowledge of what exports have increased steadily reaching US$ 242 skills are needed. The Southern Agricultural and For- million in 2010 despite a sharp decline in 2009 estry Center (SAFRC) located on the Bolaven Plateau due to the financial and European debt crisis (Fig- could serve as the center for this effort while continu- ure 24). The recovery in 2010 can be attributed in part ing to test new hybrid coffee plants that could be in- to a relaxation of the rules of origin requirement for troduced. The delivery of this training could then be Lao PDR exports to the EU22. Growth in exports con- combined with efforts to establish farmers’ groups tinued in 2011 despite a shortage of raw materials as and introduce production contract. a result of the flooding in Thailand. 117. Efforts to support investment in new pro- 121. Lao PDR garments account for a miniscule cessing equipment should be complemented by share of global trade and this share has declined the introduction of new financial instruments by over the past decade despite a temporary peak in commercial banks to support the working capi- 2010 (Figure 25). Exports are less than 7 percent of tal requirements of both farmers and processors. the amount exported by Cambodia and less than 2 These might include: percent of Vietnam’s exports. —— Lending to smallholders at concessionary 122. The contribution of the garment trade to rates backed by guarantees from exporters; Lao PDR GDP has declined as a result of efforts to —— Loans to cover the cost of inventory guaran- diversify the Lao PDR economy and the natural re- teed by warehousing receipts; and, source boom that began in 2005. Trade in garments —— Access to future trading to hedge risk in price as a share of exports has decreased from almost 40 adjustable contracts used for contract farm- percent in 2004 to 14 percent in 2010 due to the rela- ing. tively slow growth in garment exports and the very rapid growth in the hydro and mining exports. 118. The government should also work with the industry in completing the land use plan for 123. The principal competitors in the gar- the Bolaven Plateau that includes areas for the ment trade are neighboring countries, Cambodia, expansion of coffee cultivation. The plan would Thailand, Vietnam and China, as well as India and indicate how the government plans to issue con- Bangladesh. However, in the case of Thailand there is cessions and the opportunities available to foreign a more symbiotic relationship as many of the foreign owned firms. investors in local garment factories are from Thailand. Lao PDR has a competitive advantage in wages but 119. The development of new distribution falls short in productivity and scale.23 The increase in channels requires market research and increased wages in China has caused some migration of pro- use of new contractual arrangements including duction to Lao PDR in recent years, but this involved B2C transactions. The government can assist this small-scale factories producing more labor-intensive effort through facilitation of international financial products, e.g. men’s suits. The advantage in wages is transactions and financial support for the market likely to diminish due to a growing labor shortage, a research. significant constraint limiting the ability of the Lao PDR garment producers to compete for the larger orders and the migration of workers to Thailand where wages are significantly higher. 22 Under the new EBA rules, fabric and yarn can be sourced from EU, ASEAN, SAARC, and ACP. 23 For example, a study conducted by the National Statistics Center in 2006 found that the hourly wage in Lao PDR was considerably lower than in China (US$ 0.12 vs. US$ 0.68) 46 Trade and Transport Facilitation Assessment Figure 24: Garment exports Figure 25: Share of world garment trade Source: ALGI Source: UN Comtrade (mirror data) 124. The most important destinations for gar- 12 percent cost advantage compared to neighboring ments are Germany, UK, USA, France, and the Thailand and Vietnam, partially offset other cost Netherlands (Figure 26). The EU is the most impor- disadvantages. However, the small size of Lao PDR tant destination due primarily to duty-free access garment producers limits their ability to compete for to the EU market under the “Everything But Arms” the larger orders in the US market. Agreement. This initiative is estimated to provide a Figure 26: Destinations for garments in 2010 Figure 27: Major Suppliers of Yarn and Fabric in 2010 Source: UN Comtrade (mirror data) Source: UN Comtrade (mirror data) Trade and Transport Facilitation Assessment 47 125. There are no domestic producers of fab- 3.3.2 Industrial organization rics, threads, accessories or trim that are suitable 127. The participants in the garment sector as inputs for the production of export garments. include companies producing for export and a As a result, the local inputs are limited to packaging growing number of subcontractors, a majority materials. The imported fabric is predominantly cot- of both being foreign-owned. Currently, there are ton and cotton blends, although the proportion of about 59 exporting garment companies comple- synthetic fabric is increasing (Figure 28). The majority mented by 57 sub-contractors. The number of export- of fabric and yarn comes from Thailand as shown in ing companies has remained relatively steady over Figure 27. The dominant role of Thailand in the sup- the last decade while the number of sub-contractors ply of inputs is due to three factors: the proximity of has grown significantly (Table 10). All but two of the Thai textile factories, Thai traders re-exporting fabric factories produce for export. According to the 2006 to Lao PDR factories, and most important, the large survey of the garment industry about half of the enter- number of factories that are owned and operated prises are foreign-owned and another 30 percent are by Thai companies. Malaysia is the second largest joint ventures. The five basic types of garment facto- supplier providing primarily blends of cotton and ries provide different levels of value as summarized in synthetic material. Table 11. 126. For vendor factories, the principal sup- 128. A 2011 survey of 89 factories classified pliers are large textile manufacturers with strong them by size according to employment: smaller linkages to the parent company. In some cases, the firms tend to be locally owned subcontractors supplier may be part of the company that owns the while larger firms are primarily foreign-owned garment factory. Contract manufacturers usually pur- exporters.24 Fifty-three percent of firms have less chase from suppliers approved by the buyer or from than 100 employees, accounting for about 8 percent smaller manufacturers in the region. of the workforce. Most of these are locally owned and operate as subcontractors. Another 30 percent have Figure 28: Material imported from ASEAN between 100 and 499 employees and account for 43 percent of the workforce. These firms are almost equally divided between foreign owned and joint ventures and most export directly rather than oper- ating as subcontractors. The largest factories, those with more than 500 employees, represent only 10 percent of the firms but 49 percent of the labor force. They are mostly foreign owned. About half of the for- eign owners are from Thailand, another 20 percent from Japan and 10 percent from Australia. Source: www.sourceasean.com Table 10: Lao PDR garment enterprises Year Export Companies Sub-Contractors 1998 58 10 2000 53 26 2005 58 55 2010 59 57 Source: ALGI 24 Lao PDR Garment Sector Survey prepared by the World Bank. 48 Trade and Transport Facilitation Assessment Table 11: Characteristics of Different Business Models Type Description Activities in addition to CMT Vendor factory One of a group of factories operated by a single company that produces for itself and/or under contract Contract manufacturer A factory that produces under contact to a buyer Sourcing of some inputs that supplies inputs and distributes the outputs OEM A factory that produces garments under contract Sourcing of some inputs and distribution to with a brand manufacturer and distributes the outlets products ODM A factory that designs and produces garments for Design, sourcing of inputs, distribution to buyer’s sale under buyers label outlets OBM A factory that designs and produces garments for Design, sourcing of inputs, distribution to sale under own label retailers 129. A substantial majority of exports are pro- 3.3.3 Business models duced in foreign-owned vendor factories. These 132. The majority of garment factories in Lao operate as one of several regional plants managed PDR are contract manufacturers that provide lit- by a single company. The owner operates multiple fa- tle value addition. They are owned by investors from cilities in order to reduce production risk and to take Thailand, China, Japan and Taiwan. The foreign buyers advantage of preferential trade agreements. These provide most of the designs and fabric specifications factories generally employ 1,000-2,500 workers with and quality control. The factories do the cutting, sew- an annual output of 2-6 million pieces. ing, trimming, labeling and packaging for shipment direct to retail outlets and warehouses. According to 130. Although subcontracting activities have a World Bank Enterprise Survey, the workers account been increasing, there are limitations to future for 68 percent of the value added in garment produc- growth, due to difficulties in managing quality con- tion. trol, coordinating deliveries, and complying with so- cial audits. About 2/3 of the large firms participate 133. About 80 percent of the foreign-owned in an international social compliance certification firms are vendor factories, that focus on produc- scheme, but very few of the medium-sized firms and tion of branded products. The parent company or none of the small firms participate. corporate group operates as an Original Equipment Manufacturer (OEMs) and controls all of the client 131. The garment industry remains the largest relationships, trade finance, and marketing. It distrib- source of employment in the manufacturing sec- utes the buyers’ orders among the factories accord- tor. Most of the workers in the factories are skilled ing to available capacity, unit cost for production, or semi-skilled equipment operators. The total em- and skill level. It arranges delivery of the inputs to ployment is between 22,000 and 27,000 workers, ap- the factory according to the buyers’ specifications. proximately 4 percent of the formal workforce.25 More The parent company may also select the fabric or than half of the garment workers are from rural ar- provide a design, in which case the factory provides eas where poverty rates remain high. Recruiting and pre-production samples for the buyer’s approval. For training workers is the major challenge facing the shipment of exports, the factory arranges domestic industry since annual turnover for firms is as high as transport and the parent company or buyer nomi- 50 percent-60 percent. The continual requirement to nate a forwarder to arrange the international move- replace experienced workers with new hires results in ment. The factory acting alone has few opportunities low productivity relative to Lao PDR’s major competi- to attract new orders or identify markets into which it tors. could expand. 25 This does not include about 250 thousand laborers from Lao PDR that work in Thailand where the minimum wage is more than double that of Lao PDR. The Thai government has recently promised to hike the minimum wage to 300 baht (10 dollars) a day, compared with a monthly wage of 500,000 kip (US$ 62.50) in Lao PDR garment factories. Trade and Transport Facilitation Assessment 49 134. The remaining foreign-owned companies ers (ODMs) and provide their own designs. However, are primarily joint venture companies operating these are generally small-scale operations that pro- in Lao PDR as independent contract manufactur- duce accessories with the designs prepared by NGOs ers based on the OEM model. There are two types of and other social enterprises. OEM factories. About 75-80 percent are partly owned by buying houses in Thailand, Hong Kong and Singa- 137. The buyers of the exports from the ven- pore. The rest have strong contractual relationships dor factories are largely brand marketers ranging with buying houses in Japan and Taiwan. The prod- from retail brands to fashion basics. Buyers of the uct lines for this type of OEM are mostly work wear OEMs exports are regional brokers and smaller retail and suits for which the buying houses have their own chains. The buyers from the ODMs include the local retailing channels. garment factories and small international wholesal- ers and retailers. 135. Vendor factories have the advantage of scale, as they are part of a larger production 138. The span of control of the factories is lim- network. This provides them with better access to ited as shown in Table 12. The foreign-owned ven- suppliers and global markets as well as to low-cost dor factories (VF) have the least participation in their international finance borrowed against the parent inbound and outbound supply chains while ODM fac- company’s balance sheet. In contrast, contract man- tories have the greatest. The ODMs and many of the ufacturers serve fewer markets and have difficulties OEMs are responsible for managing the relationship obtaining inputs of consistent quality at a competi- with buyers, trade finance, input sourcing, and mar- tive price. Furthermore, they lack access to low-cost keting of their services. In addition, they have much finance making it difficult for them to evolve from a greater involvement in developing new products, CMT/Assembly business model to an OEM. attracting new buyers and identifying new distribu- tion channels than the vendor factories. 136. The majority of locally owned factories are small and either sell to the domestic market or sub-contract to larger producers. A few of the joint ventures operate as Original Design Manufactur- Table 12: Responsibility of participants in the garments supply chain VF OEM Receive and confirm orders HQ F Interact with buyers HQ F Design HQ/B B Control strategies for expansion and diversification HQ F Organize trade finance HQ F International inbound logistics HQ/S S Clear and deliver inputs F F Transport and clear products F F International outbound logistics F/B B Manage labor F F Insure quality HQ/B F/B Clear and inspect F F Package F F S=Supplier, B=Buyer, HQ=Parent company headquarters, F=Factory 50 Trade and Transport Facilitation Assessment 3.3.4 Value proposition 140. Most factories compete through lower 139. Lao PDR exports a mix of basic apparel, labor costs. As a result, manufacturers focus on the retail fashion and fashion basics. These are low- production of low-value garments or medium-value to-medium value garments and include trousers, garments with a large labor component. Accordingly, shorts, shirts, jackets, dresses, swimwear, and general there has been a gradual decline in the average value sportswear. The majority are men’s apparel. In addi- per piece as shown in Figure 30. However, Lao PDR is tion, a small amount of higher value niche products constrained in competing in this market because the such as uniforms and baby garments are exported. A relatively small size of the factories limits the size of significant portion of the exports is made from cotton the orders that they can accept. or cotton blends. The garments are divided equally between knitted and woven garments (Figure 29). 3.3.5 Supply chain structure and performance Figure 29: Proportion of knitted exports 141. The inbound and outbound supply chains for the Lao PDR garment factories are relatively simple with inputs delivered by the domestic and international suppliers and outputs distributed by the buyers or their nominated forwarders. The in- puts are procured once a fixed order is received. They are delivered to the factory warehouse and placed in storage only long enough to assemble all the inputs for a production run. The outputs are shipped as soon as they are produced with weekly shipments from the time the initial output is available up to the time the order is completed. The products are shipped to the broker’s warehouse, the retailer’s distribution center Source: UN Comtrade or directly to the retail outlets. 142. Inputs are transported in different ways Figure 30: Average garment price depending on their geographical origins but are mostly sourced by truck from Thailand. Inputs sourced in Thailand and Malaysia are delivered by road as full truckloads whereas inputs from China or elsewhere are shipped by sea in containers. The lat- ter are unloaded in the Thai ports and transported by road to Vientiane. The suppliers arrange most of the shipments on C&F terms. The trip from the port to the factory requires 2 days. There are about 1400 truck- loads of inputs arriving to Vientiane each year with an average value of about US$ 35,000 per truckload. Source: ALGI Trade and Transport Facilitation Assessment 51 143. For exports, the garments are transport- 146. The cost for the logistics is high for several ed by road to the Thai ports. Most, about 1800 FEU reasons: primarily because of the distance to the per year, are loaded in containers at the factory. The port, the practice of transferring cargo between Lao rest are transported as loose cargo using 10-14 wheel PDR and Thai trucks and the difficulty in finding back- trucks and consolidated into 40-foot containers at a haul cargo for container movements. Nevertheless, warehouse near the Thai ports. The terms of shipment the cost for transporting inputs and exports exclusive are either FOB or FCA with most of the international of international shipping is estimated to add only movement arranged by the nominated forwarder. US$0.07-0.08 per piece or less than 3 percent of the The average value of an FEU is about US$ 110,000. export price. Nearly all cargo is shipped by ocean; only 1-2 percent of is shipped by air or air-sea. These are smaller ship- 3.3.6 Supply chain structure and ments, usually less than one ton and use air transport performance to compensate for delayed shipments. 147. For this assessment, three vendor fac- tories and two OEMs were interviewed; all used 144. Although there have been significant imported textiles and accessories supplied by improvements in transit times and costs for the parent company or arranged by the buyer. imported inputs and exported products, Lao PDR Although multiple suppliers for both textiles and remains at a disadvantage relative to its competi- accessories are used, there are still difficulties with tors. Since most of the inputs are from nearby, the late deliveries and consistency of quality. The finished disadvantage is less significant for the inbound logis- products are shipped to the United States, EU, Japan, tics than the outbound shipments. Also, the disad- and Australia where they are sold either to brand vantage is greater for trade in fashion basics and less manufacturers or retail chains. Two of the vendor fac- for basic apparel since the former is more time sen- tories operate with a pre-planned production sched- sitive. This may have contributed to the downward ule and long order cycles. The other three produce trend in the value of the garments exported from Lao for individual orders providing an order cycle of 30- PDR. 90 days from order confirmation to initial shipment. Delays occur in only about 1 percent of the shipments 145. On average, the total order cycle is a 2-4 and penalties for late shipments are rare. of months so that a few days transit time does not represent a serious constraint. The typical time for a 148. The factories do not have significant production run is one month. A similar period is usu- problems with customs. Inputs are imported ally required for delivery of those inputs on the criti- duty-free under temporary admission, no certificates cal path. It is difficult to obtain faster delivery times or are required and no tests are performed. The same favorable pricing from suppliers given the size of the applies to exports where there are few delays associ- orders. Order cycles of 3-4 months (from order con- ated with preparing documents or clearing cargo for firmation to delivery to the point of loading) are ac- shipment. ceptable In the low-medium value market. Therefore, transit times that include a few days for road trans- 149. The typical size shipment is 1-4 TEU and port plus a few days in port do not represent a seri- delivery times are typically 30 days. Most exports ous constraint. However, when added to the marginal are shipped as FCL and loaded into containers at the time for a feeder vessel to transship the container at factory. While there is a general perception that the a regional hub, they account for 12-16 percent of the cost for road transport is too high, the rates of US$ total order cycle (from confirmed order to delivery at 600-1000 per truck do not appear unreasonable destination). given the distance to Bangkok, the cost of a customs bond and limited opportunities for backhaul cargo. 52 Trade and Transport Facilitation Assessment 150. The OEMs have limited access to trade garments. At the same time, the benefits of existing finance because of a lack of sophistication in the trade agreements are declining so it will be necessary Lao PDR banking system. Letters of credit (L/Cs) are to develop new markets. perceived as too costly to be used in the purchase of inputs especially because of collateral requirements. 154. Efforts to improve labor productivity are Where possible the firms develop trust-based rela- limited in part because of high levels of turno- tionships with suppliers and rely on open account ver26. A combination of increases in wages and pro- transfers otherwise they pay on receipt of shipment ductivity are required to stabilize the labor force and using a TT. Since factoring of cash receivables or dis- ensure opportunities for future expansion. The Asso- counting of the importer’s L/C is difficult, most OEMs ciation of the Lao PDR Garment Industries has estab- use a line of credit with interest rates of 8-10 percent. lished a Garment Service Centre (GSC) that address- es this problem by training supervisors in time and 151. Payment schemes differ between vendor work-studies, line balancing and basic management factories and OEMs. For vendor factories, all pay- skills and machine operators and new entrants in the ments are handled by the parent company. Whereas operation of different sewing machines. This collec- for the OEMs, the foreign buyer pays with a TT when tive effort is necessary because factories are unwilling the goods are received or with a 30-60 day sight draft to make significant investments in in-house training when the goods are shipped. The typical cash-to- given the high level of staff turnover. The challenge cash cycle is 90-150 days. The principal financial risk is to complement this with efforts to adjust the is foreign exchange, since the available financial in- compensation and terms of employment to reduce struments are denominated in US$ while a majority turnover. of the trade is in Euro, Baht and Yuan. 3.3.8 Objective and strategies 3.3.7 Additional findings 155. Although the garment industry faces a 152. Strategies for increasing revenue differ number of challenges and accounts for a dimin- between vendor factories and OEMs. Since the ishing share of total exports, it is a very important vendor factories have a high level of utilization, their source of employment in Laos PDR. The primary principal strategy for increasing revenues is to add ca- contribution of the garment industry to the Lao PDR pacity. For OEMs, their strategy is to move into niches economy is employment for unskilled and semi- where that value added is greater (baby garments or skilled labor; therefore, it is important to continue to garments with embroidery). grow this sector of the economy. This suggests that the trade-related objective for the sector should be 153. Two areas of importance for the garment to increase volume but not necessarily value or val- industry are the extension of trade agreements ue addition. Lao PDR has considerable potential for and increases in labor productivity. The industry increasing labor productivity through training and has attracted foreign investment because of the com- investment in equipment, which would allow it to bination of low cost labor and favorable access to the compete for the production of higher value products. European market as well as to suppliers in China and However, the employment objective can best be Thailand. The bilateral trade agreement with the US achieved by focusing on labor-intensive production also appears to have stimulated trade, however oth- and improving the broader investment climate. er opportunities are limited. Accession to the World Trade Organization (WTO) is not expected to improve 156. The garment industry faces several limi- access to new export markets. The AFTA tariff reduc- tations on expanding its garment exports. The tions will make it easier to import inputs but are not strategy for growth must recognize these limitations expected to stimulate regional demand for Lao PDR while at the same time creating new opportunities. 26 See World Bank (2012) Lao PDR: Labour Standards and Productivity in the Garments Export Sector – A Survey of Managers and Workers for a fuller discussion on issues surrounding turnover rates in the Lao industry. Trade and Transport Facilitation Assessment 53 Given the size and proximity of its competitors there connectivity, however, the size of the facilities and is little opportunity for competing for large orders scale of related services will be greater for the vendor but there is scope for providing better service for factories. For the domestic OEMs and subcontrac- smaller orders. Given the lack of raw materials and tors, there is a need to improve access to local trade the size of the industry there are limited opportuni- finance. ties for moving beyond contract manufacturing. Giv- en its location relative to its markets, the industry is at 3.3.9 Implementation a competitive disadvantage in competing in markets 160. The development objective, need to that have short order cycles. However, it can improve attract foreign investment, focus on contract its performance in production of garments for the 3-4 manufacturing and importance of increasing month order cycle and develop a capability for 45-60 labor skill and productivity should be incorpo- day replenishment. This will require improvements rated into a sector vision prepared jointly by the in: (i) performance of the trade corridor linking Vienti- government and private sector. This should lead to ane with Thailand’s gateways; (ii) trade facilitation for a market study that identifies. consolidated loads; and, (iii) storage of inputs under a duty free regime. incentives to attract investors, such as: —— Manufacturers in neighboring countries pro- 157. The current situation, in which growth ducing for brand marketers that are looking to is driven primarily by foreign investment mainly expand production, from investors in the region, is expected to con- —— Large buying agents looking to contract pro- tinue for the foreseeable future. These investments duction, will be directed at both vendor factories and OEMs. —— Local entrepreneurs who want to produce Both require improvements in worker productivity higher value products for niche markets, and skills but for different reasons. The vendor facto- ries need this to compete with other factories owned and potential niche markets such as: by the parent company in terms of skills and efficien- —— Medium value products that have a predict- cy. The OEMs need this to compete in market niches able demand and limited price fluctuations, in terms of product quality and cost. —— Buyers that can be better served by a small factory offering flexibility and robust supply 158. An essential component of the strategy chains, and, for growth is improvements in supply chain per- —— Suppliers and markets with reasonable levels formance. The vendor factories are already integrat- of connectivity. ed into the supply chains of their parent companies but lack the flexibility that would allow them to be 161. This vision would serve as the basis for a more actively involved in their supply chains. The coherent strategy that addresses the issues relat- OEMs require closer coordination with suppliers and ed to scale, supply chain performance and access buyers to reduce order cycles and accommodate an to resources. The strategy would include efforts by increasing diversity of products, markets and distri- government acting alone and in collaboration with bution chains. In both cases, there is need for greater the private sector. Since the vendor factories already use of IT systems for connectivity with suppliers, buy- benefit from the scale and experience of their parent ers, logistics service providers and regulatory authori- companies, the strategy would focus on providing ties. sites that would be attractive to future investors. For the other factories, the emphasis would be on im- 159. Specific improvements are required by proving the inbound and outbound logistics. Since vendor factories and OEMs and by domestic OEMs Lao’s garment industry is composed of relatively and subcontractors. In order to develop new facili- small factories, the strategy would be to provide a ties and expand existing facilities, both vendor facto- cluster for logistics services that serve these factories ries and foreign-owned OEMs require sites with easy in order to achieve economies of scale. access to labor, reliable utilities and trade corridor 54 Trade and Transport Facilitation Assessment 162. The primary component of the strategy land and Vietnam on the movement of goods should be the development of a zone to serve in transit, and, the garment cluster around Vientiane. This zone —— Dramatic increases in the number of firms would allow for the concentration of logistics ser- competing for transport of Lao PDR goods. vices including forwarding, consolidation, and cargo clearance. It would provide a single window access to However, further improvements are required if Lao customs and other regulatory agencies and would be PDR is to have the same level of connectivity as located close to the border to expedite cross-border garment producers in Thailand. movements. 166. This hub concept could be replicated in 163. This zone could serve as a dry port or other parts of the country, e.g. Savannakhet.27 The ICD, however, current volumes are insufficient to challenge is that these other locations must provide attract shipping lines or railway service provid- not only the utilities, connectivity to markets and ers or to justify a significant investment in infra- large labor pool but also sufficient amenities to attract structure. However, it could provide a location for managers and supervisory staff. The failure of many the consolidation of shipments of apparel and de- countries to develop a successful zone program can consolidation of deliveries of inputs by offering duty be attributed to a lack of collaboration between gov- free storage for to suppliers and wholesalers for stor- ernment and the private sector in developing a value ing inputs and for factories that are have a significant proposition that is attractive to the target investors. amount of re-orders and stock replenishments. The Some of the information required for an assessment zone would not replace Thanaleng or the consoli- of a proposed zone development is shown in the box dation warehouses in Thailand but would provide a below. more efficient gateway for the garment industry. The zone could also be used to create a production clus- 167. Another area in which the government ter for foreign and domestic suppliers. and private sector can collaborate is in upgrad- ing labor skills and introducing a compensation 164. In order to accommodate future invest- scheme that will reduce the rate of labor turnover. ments in garment factories, the zone would be This will occur naturally as the bidding for scarce la- located so as to provide access to a large labor bor raises wages, however, a standard approach to- pool and provide reliable utilities. It would pro- wards compensation could reduce poaching and en- vide space for domestic enterprises that are expand- courage worker loyalty during this transition period. ing their activities as subcontractors to the larger garment factories. 168. In order to improve productivity and increase labor skills, the Association of Lao PDR 165. The hub should be directly connected Garment Industries (ALGI) has introduced a gen- to the corridor linking Vientiane and the Thai eral training program for new machine operators ports. This corridor has been continuously upgraded and higher-level training for specialized skills. through improvements in border procedures and However, these are standardized curriculum. Addi- transit arrangements including: tional modules would have to be developed to meet specific needs of the industry. These should be devel- —— Reduction and simplification of tariffs, oped by the manufacturers who would then provide —— Adoption of the WTO procedure for valuation personnel to do the training. The government could of imports, complement this with: —— Introduction of ASYCUDA to automate the customs procedures, —— Investments in facilities and training equip- —— Evolution of bilateral agreements with Thai- ment; 27 Plans are already underway for developing a zone near Savannakhet. A hub would be more appropriate unless there is substantial demand for investment in new factories Trade and Transport Facilitation Assessment 55 —— A guarantee scheme for fee-based training in Figure 31: Destination of exports of fresh fruits which the trainee is expected to remain with and vegetables in 2009 an employer for a fixed period in lieu of a fee; and, —— Funding for short-term courses focused on im- proving management skills in inventory and supply chain management, quality control and social accountability.28 3.4 Fruit and vegetable supply chain 3.4.1 Production and trade Fruits and vegetables have seen rapid growth in production for exports, albeit from a very low base, but the potential for future expansion is significant. Fruits and vegetables are grown primarily for local Source: UN Comtrade (mirror data) consumption and for sale in the domestic market. A relatively small proportion of the farms produce fruits and vegetables as cash crops. However, since 2000, 169. In 2010, the value of exports of fresh veg- there has been a rapid increase in the export of veg- etables and fresh and dried fruit was about US$9 etables and legumes. As of 2009, vegetables were million, such exports being mostly destined for planted in about 150 thousand hectares versus about Thailand and China. The largest commodity, cab- 40 thousand hectares for fruits. Common leafy vege- bage, accounted for about half of this amount. Other tables include cauliflower, cabbage lettuce, kale, bok major exports were bananas, about $2 million, and choy, mustard, coriander, leaf onion, water spinach, cassava, about $1.8 million. According to Lao PDR and celery. Fruit vegetables include cucumber, yard Customs data, about 70 percent of these exports were long bean, tomato, watermelon, squash, and pump- destined for Thailand, 23 percent for Vietnam and 6 kin while fruits include bananas. the trade in fruits and percent for China. However, a significant amount of vegetables remains a negligible in terms of the value exports to Thailand were re-exported and a signifi- Lao PDR trade. However, the exports exceeded 150 cant portion of the exports to China went unreported thousand tons in 2009 most of which was shipped to as indicated by data from the importing countries. neighboring countries (Table 13, Figure 31). 170. The value of exports of processed fruits and vegetables is smaller than for fresh produce, such exports being mostly destined for Thailand. Table 13: Export of fruits and vegetables in 2009 Most of the processing of Lao PDR fruits and vegeta- bles is undertaken in Thailand which provides greater Crops type Tons Destination scale of production, more efficient processing and Water melon 114,780 China, Vietnam better market access. In 2010, the value of the exports Cassava 17,427 China of canned fruits and vegetables was about US$ 3.4 Cabbage 13,369 Thailand million of which fruits accounted for approximately 60 percent. In addition, there were about US$ 0.72 Pumpkin 2,535 Thailand million in exports of dried fruit. Some 90 percent Chinese cabbage 138 Thailand of the processed food exports were destined for Sweet potatoes 2,021 Vietnam Thailand. Source: DoA/MAF,GOL, 2009, IPM 2011 28 The latter is particularly relevant as Nike and Adidas have cancelled contracts because of concerns about labor standards 56 Trade and Transport Facilitation Assessment 3.4.2 Structure of the industry and 173. Thailand has a low number of large facto- demand ries with export strategies or higher value added 171. In Lao PDR, the production of fresh and schemes. While there are about 10,000 food and bev- processed fruits and vegetables for export is small erage processing factories in Thailand, only about 12 and fragmented and mainly provides inputs for percent are medium to large factories that produce Thailand’s food industry. The majority of the pro- for export or supply higher-valued products to the duction comes from individual farms with less than domestic markets. Of these, about 20 percent are 5 hectares. Packinghouses and processing plants cold storage plants and only about 7½ percent pro- are also relatively small with weekly output ranging duce canned fruits and vegetables. These factories from less than one ton to a few TEU. The structure purchase most of the fresh fruits and vegetables ex- of Lao PDR’s export trade in the production of fresh ported from Lao PDR. They include factories owned processed fruits and vegetables is determined by its by leading multinational producers such as CP and neighbors. For the medium term, it will continue to Betagro (Thai), Dole, Kraft and Procter and Gamble function as a supplier to Thailand’s food industry and (U.S.), Nestle (Switzerland), Royal Friesland Foods food retail sector. (Netherlands), Unilever Group (Anglo-Dutch), Gram- piam (UK) and Ajinomoto (Japan). 172. Thailand’s food processing industry has expanded rapidly over the past two decades. Its 174. Lao PDR also sells fresh fruit and vegeta- production methods and production machinery bles to importers who sell the produce directly to meet international quality standards and more than the Thai food retail sector. This sector has experi- 50 percent of its production is sold abroad. As a re- enced the same consolidation as has occurred in Eu- sult, Thailand is now a leading exporter of ready-to- rope and the US with large retail chains capturing a eat foods, and processed fruits and vegetables. In majority of the market share. Multinational retailers 2011, it exported about US$ 2.1 billion (Figure 32) of have dominated Thailand’s modern food retail mar- fresh fruits and vegetables and an equal amount of ket since their aggressive store expansion in 2000- processed fruits and vegetables29. 2002, especially in the hypermarket segment. The majority of these investments have come from the Figure 32: Thai exports of fruits and vegetables leading international retail chains such as UK-based Tesco with its Tesco Lotus stores, Big C Supercenter of Casino Guichard-Perrachon SA of France, Carrefour of France, and Netherlands-based Makro (Table 14). 175. This market concentration has affected the selection of suppliers. Whereas small and me- dium size retailers obtain their supplies from large distributors and branded food companies such as Nestle, the large retailers source their supplies direct- ly from the processors. In order to do this, sophisti- cated logistics systems have been developed which meet strict requirements in terms of quality, quantity, reliability/order fulfillment, and time of delivery. The stricter requirements are necessary because fresh produce is usually a store product not a branded Source: UN Comtrade 2012 product. Therefore, consumers consider quality and 29 http://www.thaitradeusa.com/home/?page_id=823 Trade and Transport Facilitation Assessment 57 freshness, year-round availability, and packaging and Table 15: Processing Activities presentation when selecting a store. Since these re- Packing House Processing Plant tailers must comply with regulations concerning food Sorting Sorting safety, pesticide requirements and corporate social responsibility norms, they pass on these standards to Grading Grading their suppliers. Treatment Washing Treatment Packaging Drying Table 14: Modern Grocery Distribution in Thailand Labeling Freezing Distributor Ownership Outlets Type of store Storage Juicing Tops Thai 240 Supermarket Pickling Big C French/Thai 94 Compact store to Cooking hypermarket Canning Tesco Lotus UK 64 Hypermarket Preserving Makro Dutch 48 Supermarket Preparing (for ready to eat products Family Mart Japan 622 Compact Supermarket Foodland Thai 12 Compact Supermarket JUSCO Japan 2 Hypermarket 177. A similar distinction can be made between processing plants that are stand-alone operations 3.4.3 Business model with a network of suppliers and those that have 176. The enterprises responsible for organiz- an exclusive source of inputs. There is also a third ing the supply chains for the export of fruits and model in which the processing plants are production vegetables are generally the packinghouses for units of international branded food companies. fresh produce and the processing plants for pro- cessed food. The two types of firm perform different 178. The business models can also be distin- activities as shown in Table 15 but both are involved guished by their relationship with buyers. As Lao in the initial sorting, grading and treatment, and then PDR firms are small, Thai brokers are often relied on to later processing and packing. The different business complete the sale to the foreign buyer or Thai proces- models applied are associated with the extent of sors to produce the food products for sale to retailers integration of their inbound and outbound supply in the region. chains. Some of the packinghouses, most domestical- ly owned, are stand-alone operations that purchase 3.4.4 Suppliers and Buyers inputs from various suppliers. Whereas other pack- 179. Fruits and vegetables are obtained from inghouses, which are mostly foreign-owned, have an three sources: large farms, farmers’ groups and exclusive source of inputs, typically a plantation, and plantations. Collectors working under contract for complement this source with purchases from individ- the packing house/processing plant make purchases ual suppliers. at the farmgate. Purchases from farmers groups and plantations do not involve an intermediary. Tradition- ally these purchases have been spot market transac- tions, but increasingly they are based on a contract, either verbal or written that stipulates the price and may also specify the volume and quality. 58 Trade and Transport Facilitation Assessment 180. Exports of fresh and processed fruits and food service franchises has resulted in the elimina- vegetables are sold either to Thai intermediaries tion of intermediaries in the outbound supply chains or direct to foreign buyers. The former is more com- and forced distributors to specialize in specific food mon because volumes are relatively small, outbound products. In the case of Lao PDR, the packinghouses logistics account for a significant portion of the deliv- and processing plants are too small to sell directly to ered cost and developing and maintaining markets larger food chains or specialty wholesalers but some requires substantial resources. The Thai intermediar- serve regional niche markets. ies also have the option of selling into the domestic market as well as to the foreign importers. The foreign 3.4.6 Supply chain structure and importers are either distributors or retail chains. The performance former are wholesalers specializing in fruits, vegeta- 182. The basic structure of the suppliers, pro- bles or specific types of produce. The latter include cessors and export markets is shown in Figure 33 grocery retailers or food services. along with the mechanisms for linking them. The interactions between the suppliers and processors 3.4.5 Span of control are increasingly managed through formal arrange- 181. The extent of backwards integration is ments rather than through intermediaries. In con- determined by the contractual relationship with trast, the interactions between the processor and the the suppliers. The increasing specificity of orders retail market are managed by intermediaries or by in terms of quality and standards of fresh and pro- the processor’s foreign owner. This isolates the farm- cessed food has led to greater integration in the form ers and processors from their markets but reduces of contract farming and investments in plantations. their financial exposure and allows access to markets The growth of modern grocery distribution and in which they could not otherwise compete. Figure 33: Producers, processors, intermediaries and markets Farmers' Large Plantation Group Farm Distributors Neighboring Distributor Specialty Country Markets Exporter Packing Processing Foreign Thai Plant Plant Pro Thai i ce Tha rter sso p o r Thai Ex Fo od Processor od Se Fo ies d n rv an a ice s Br omp Grocery C Chains and Hypermarkets investment contract farming collection point collector Trade and Transport Facilitation Assessment 59 183. In recent years, most retailers have 3.4.7 Finance reduced the number of suppliers thereby increas- 186. Most of the financing for working capi- ing the size of orders and the demand for reliable tal involves advances from the importers to the delivery beyond what the Lao PDR processors can Packinghouses/ Processing plants. These are then provide. They have also raised the standards for qual- transferred to the collectors and farmers. Commercial ity and safety and uniformity above those that the loans are available for the larger firms but most of the Lao PDR processors are able to meet. Lao PDR proces- small firms rely on their own cash flow. sors have been able to circumvent these constraints through Thai intermediaries. Without their participa- 187. There are a number of difficulties with the tion, the Lao PDR processors would not only have to current configuration of the supply chains. For the invest in additional facilities and machinery but also inbound supply chains there are the usual problems increase their management and technical capacity. In of damage and deterioration, but more importantly, addition, they would incur higher logistics costs for there is a lack of consistency in quality and avail- delivering smaller shipments to a larger number of ability of crops delivered to the packinghouses and small buyers. processing plants. This problem has been overcome for exports of green beans, bananas and some pro- 184. Fruits and vegetables are transported cessed foods where the supplies are from plantations from the farm or collection point to the pack- or large farmers. For the other exports, it is left to the inghouse/processing plant in open trucks, an Thai intermediaries to sort and consolidate inputs for approach that has a number of drawbacks. This different suppliers. Unless the inbound supply chains method of transport results in losses due to exposure are improved, it will be difficult for Lao PDR to cap- and since smaller trucks, short distances and empty ture some of the value addition currently performed backhauls are involved, the cost per ton kilometer is in Thailand. Without an increase in scale and elimina- relatively high. Fresh produce is shipped primarily to tion of the transfer of cargo at the border, it will be neighboring countries by road in refrigerated vans. difficult to reduce land transport costs. A small amount is shipped to the Middle East by air. Processed fruits and vegetables are shipped by sea in 3.4.8 Survey findings temperature-controlled containers to East Asia. On 3.4.8.1 Fresh fruit and vegetables account of the density of the products, 20-foot con- 188. Three packinghouses with very differ- tainers are used, rather than 40-foot containers, ent supply chains were investigated in detail. All are foreign-owned and import seeds and other 185. For transport to the port, only one con- inputs either directly or through wholesale mar- tainer can be carried on a truck chassis since two kets in Thailand. One firm exports a mix of veg- fully loaded 20-foot containers would exceed etables, including green beans and okra, to Japan; the axle load limits: this entails higher costs. As a another ships organic vegetables to the Middle East, result, the container is charged at about US$ 1,600 and the third sells fresh cabbage to Thai traders. for the complete round trip truck movement. This includes movements in both Lao PDR and Thailand 189. The vegetables of the first firm are grown and the cross-border transfer. The additional costs on their own land based on fixed orders and deliv- for temporary storage, consolidation, clearance and ered in multiple shipments with an average con- port handling are about US$ 800. The total exceeds signment of 6 tons. These exports receive additional the cost for ocean freight. When combined with the processing, testing/certification and packaging after sea freight, the logistics cost is about US$ 0.30 per leaving Lao PDR, which significantly increases their kilogram. For processed fruits that do not require value. The formal transfer of ownership occurs at the refrigeration, the logistics is much lower both for border with Thailand and the goods are then sold C&F truck transport and for ocean freight. with the ocean shipment arranged by the Thai own- ers. The financial transactions are handled through the parent company, which provides monthly payments to cover operation cost. 60 Trade and Transport Facilitation Assessment 190. The second firm purchases the vegetables 194. All the firms anticipate increasing their through contracts with farmers and sells them on volume of shipments in the future. Their principal a shipment-by-shipment basis with consignments source of competitive advantage is product quality of 60-180 kg. Goods are sold FOB to foreign retailers and uniqueness as well as speed of delivery. who arrange air shipments. There is a 30 percent ad- vance payment approximately one week before the 3.4.8.2 Processed fruit and vegetables crops are purchased with the remaining 70 percent 195. Four processing plants were interviewed. paid when the buyer receives the produce. One cans sweet corn, another produces cornstarch and the remaining two produce jams and preserves. 191. The third firm uses collectors to purchase Their inputs are purchased from farmers groups, indi- cabbage from farmers and sells it by the truckload vidual farmers, collectors and wholesale markets. The directly to Thai traders at the border. Similar to the inputs are delivered by the producers, who receive first firm, these exports receive additional process- cash payments on delivery. Three of the firms have ing, testing/certification and packaging in Thailand, difficulties with availability and quality of inputs and which increases their value significantly. Payments are not able to take orders for multiple shipments are received once the cabbage is handed over, either with fixed quantities and fixed delivery dates. The in cash or by TTs. fourth firm has contracts with farmers’ groups and provides advance payments and transport for collec- 192. All three firms arrange domestic trans- tion. port using refrigerated containers/vans. They clear the cargo and obtain necessary documenta- 196. The firms have different consumption, tion e.g. the certificate of origin and phytosani- export and shipments patterns. The firms consume tary certificate. The order cycles range from a few from 150 to 2,000 tons of inputs per month with typi- weeks for the cabbage exports to six months for the cal deliveries varying from ½ to 100 tons. They export green beans where orders are taken prior to planting. from 100 to 1,500 tons per month in consignments The value of exports ranges from US$ 0.50 per kilo- that range from 3½ tons to 15 TEU. The frequency of gram for cabbage to US$ 16 per kilogram for high- shipments varies from 2 days to 2 weeks. The princi- end organic vegetables. There are no Letters of Credit pal markets are in neighboring countries and Europe. or other forms of structured financing used. The firms Exports to Europe are shipped in ocean containers. do not take out loans for working capital and instead The firms arrange for the domestic transport while rely on advances from the buyers as well as their own the buyers arrange the international movement. The cash flow. order cycles are relatively short, two weeks or less, for delivery to the border or loading port. 193. The logistics challenges are quite differ- ent for each firm. The principal difficulties are: 197. The exports are sold on a shipment-by- shipment basis except for one firm that has con- —— Firm 1: Delays when transferring cargo at the tracts for multiple shipments. The average value of border, lack of farms that can provide con- the shipments ranges from about US$ 1-3 per kilo- sistent quality and additional inspections re- gram. The terms of shipment are FOB or ex-works ba- quired for purchases from individual farms. sis, except for firms with smaller shipments in which —— Firm 2: Delays when transferring cargo at the case the terms are C&F. Payment is by TT from 7 to 45 border, losses in the transport from the farm days after shipment. to the packinghouse and long cash-to-cash cycles because the firm provides inputs to it farmers. —— Firm 3: A lack of lab facilities to obtain certifi- cations required by the Thai government and cash flow constraints. Trade and Transport Facilitation Assessment 61 198. The principal sources of risk include fluc- 203. It is possible to continue serving the tuation in foreign-exchange rates and physical domestic market and the border areas with small- damage or loss in transit. There are relatively few scale production of crops sold through trad- delayed shipments. The cash-to-cash cycle can be as ers and wholesale markets, but export markets short as 7 days for shipments to neighboring coun- require a more organized delivery system. In order tries or as long as four months for shipments of goods to meet this demand, packinghouses and processing involving contracting farming and overseas destina- plants must be able to ship at least 5 TEU per week. tions. The producers rely on both their own funds and This requires a minimum catchment area of 2,500 lines of credit to pay for the inputs. The latter have hectare30. In order to ensure a consistent quality and fixed interest rates ranging from 10 to 15 percent. quantity, processors would have to obtain the crops from either farmers’ groups or plantations. 199. The firms have plans to expand their exports but must first improve their supply of 204. A strategy for increasing the volume of inputs and diversify their markets. Their competi- exports would include: tive advantage is based on the quality and unique- ness of their products. —— Restructuring the inbound supply chains in order to improve both the yield and quality of 3.4.9 Objectives and strategies fruits and vegetables delivered to the packing- 200. Production, processing and trade in fruits houses and processing plants, and vegetables is unlikely to be a significant —— Reducing the number of suppliers by increas- contributor to the growth in trade or GDP in the ing purchases from plantations and farmers’ medium term. Therefore the objective of increasing groups, this activity should focus on rural economic develop- —— Strengthening the contractual relations be- ment and employment. This implies an increase in tween the suppliers and the packinghouses the amount and variety of crops produced which may and processing plants in order to ensure a reli- be complemented by an increase procession. able supply, —— Increasing use of cold storage and cold chains, 201. The core strategy for achieving increased —— Improving organization of transport and productivity in this sector requires an assessment —— Insuring faster transfers at the border. of the markets in which Lao PDR can compete. The current organization of production in the Bolaven 205. In order to improve the value of the Plateau is restricted to cross-border shipments and exports, Lao PDR will continue to depend on Thai some exports to niche markets in East Asia. Even with packinghouses and processing plants to provide a significant increase in production, Lao PDR will have for most of the value added to its crops in the difficulty competing in the fresh produce markets in short-to-medium term. While there will be addi- Europe or North. It can continue to compete in the tional foreign investment in Lao PDR packinghouses Middle East and East Asia but only in niche markets and processors, these will be limited in size and han- due to its capacity. Even competing in a niche mar- dle less than half the demand. Initially this strategy ket will become more difficult, as buyers seek to limit would be applied to the agricultural production in their suppliers to those that can provide regular ship- the Bolaven Plateau and then expanded to other ar- ments with consistent quality and in sufficient vol- eas with potential for exporting fruits and vegetables. umes to stock multiple retail outlets in a given area. 3.4.10 Implementation 202. Exports of processed fruits and vegeta- 206. The proposed strategy builds on a num- bles offer greater potential since the logistics are ber of trends. Such trends include increasing the not as challenging, but they require a branded number of large plantation and farmers’ groups, im- product. This implies operating as an OEM processor provements in contract farming arrangements and with sufficient capacity to meet year-round demand. foreign investment in processing plants. These trends 30 Assumes 8 tons/year per planted hectare, 16 tons per TEU, 20 percent of the land in catchment area is planted in fruits and vegetables 62 Trade and Transport Facilitation Assessment have supported the increase in the volume of fruit 209. Restructuring the inbound supply chains and vegetable exports while improving the quality will also require investments in logistics clusters and reliability of supply. and common-user cold storage facilities, but there are longer-term requirements for when 207. Restructuring of the collection of fruits the volume of exports is much greater especially and vegetables from the farm requires not only in terms of transparency and access to market investment in collection facilities and systems for information31. A more promising area is to improve reducing losses, e.g. cold chains, but also changes the transparency of the supply chains by improving in contracting for the growing, post-harvest pro- access to market information and facilitating trans- cessing, and transportation of fruits and vegeta- actions between supply chain participants. Market bles. Improvements will continue to be incremental, information on demand, prices and standards is es- but it is important to have a long-term vision and to sential for growers when deciding on what to pro- identify critical investments and changes in process. duce and whom to sell to, especially in the dynamic markets for horticultural goods. Since smaller grow- 208. Government involvement will be impor- ers often lack the resources and skills to access and tant for those activities that benefit the industry interpret this information, government can play an in general, rather than individual firms. How- important role in disseminating this information as ever, more needs to be done in the area of qual- well as information related to cultivation practices. ity control, certification and traceability if the fruits It can also provide information for packinghouses and vegetables are to be sold directly to foreign and processors regarding standards and certification markets. Improvements in quality and traceability requirements for different countries and markets. can be achieved through private sector initiatives. Multinational companies such as Dole have already 210. The availability of market information at introduced changes but dissemination to local and the farm level has increased significantly in recent regional firms remains a challenge. As a result, there years, but considerably more needs to be done. will continue to be a need for public sector oversight More is to be done indeed if Lao PDR farmers are to of the enforcement of quality and phytosanitary achieve the same level of access provided to farmers standards for both fresh and processed fruits and in Kenya, India and Uganda through the use of inter- vegetables. This will require that government contin- net and cell phone technology. Recent innovations ues to do some testing but equally important that it have focused on using these technologies to simplify should: financial transactions between farmers and the buy- ers of their crops. The use of cell phone-based pay- —— Harmonize domestic and international food ment systems for commercial transactions has made quality and safety standards; significant inroads in the Philippines, Kenya, South —— Provide financial support for accreditation Africa and elsewhere.32 Now these systems are being of food testing laboratories by international adapted to agricultural transactions, thereby reduc- agencies; and, ing the need for intermediaries and lowering trans- —— Encourage importing countries to set up of- action costs (see box below). These initiatives would fices for certification. provide direct benefits to both farmers and the operators of packinghouses and processing plants, It should also consider: but will require a coordinated effort by government —— Contract specialized international agencies to and the private sector. perform pre-shipment inspections; and, —— Establish zones for these crops, e.g. pesticide free, organic, and disease free production zones. 31 Collection points, distribution warehouse, specialized and dedicated refrigeration systems have yet to emerge in the subregion, 32 Beyond voice: New uses for mobile phones could launch another wave of development, Economist, Sep 24th 2009 Trade and Transport Facilitation Assessment 63 211. Efforts to diversify the markets for Lao 213. Other contributions by government to PDR exports of fresh and processed fruits and the development of this trade relate to basic vegetables have relied on Thai intermediaries improvements in transport and trade facilitation. and foreign owners of the packinghouses and The public sector has an important role in providing processing plants. Local processors continue to rely and maintaining basic infrastructure for transport, on regional trade fairs to develop brand recognition. communications and power for cultivation, harvest- Government can assist these efforts through techni- ing and processing of fruits and vegetables. For trans- cal assistance in the basics of packaging and presen- port, it is important to provide adequate capacity and tation. efficient movement on the major corridors serving the Bolaven Plateau. It is also important to consider 212. Granting of land concessions in the the role of these corridors in initiating new devel- Bolaven Plateau to agribusiness investors is an opments. At present, the only corridor serving the important mechanism for promoting export of exports from the Bolaven Plateau is the road through fruits and vegetables. As suggested earlier, the Pakse to Ubon Ratchathani. In the future, an alterna- catchment area for a packinghouse or processing tive corridor through Vietnam should be considered, plant should exceed 2,500 hectares with a significant however, this will require investments on both sides part being under the control of a single grower in of the border. order to ensure a regular supply of crops with consist- ent quality. The decision-making process for grant- 214. Although there have been significant ing these concessions should take into account not improvements in trade facilitation with reduction only suitability of the land for growing specific crops in documentation and simplification of border but also access between these areas and facilities for procedures, these have barely kept pace with the packing and processing. demand for greater efficiency. The time spent cross- ing the borders is generally only a few hours, how- ever the time required to obtain the phytosanitary Box 1: DrumNet Transaction Network certificate is 2 ½ to 5 days. The growing list of docu- ments and certificates required for exports of food DrumNet is a third party supply chain management company that facilitates the extension of credit to and the manage- products to different markets cannot be efficiently ment of transactions for small-scale farm producers in East- managed without the introduction of an ITC system ern Africa. It acts as a transaction broker using an integrated to expedite preparation and review of documents. marketing and payment system to establish a commercial The demand for secure movement especially for fresh network linking rural smallholder farmers, commercial banks, large-scale buyers of farm products, produce transporters, produce requires a seamless cross-border movement. field agents, and suppliers of farm inputs. Before farmers In the past, cumbersome procedures prevented this plant crops, DrumNet negotiates contractual arrangements trade from taking place. Today, they limit growth by between buyers and farmers, and at harvest time coordinates introducing delays and handling requirements that produce aggregation, grading, and transportation through agreements with local field agents and transporters. Imme- reduce the value of fruit and vegetable exports. diately following a successful transaction, data is entered into DrumNet systems, and a set of bank account transfers are trig- gered to pay the participating farmers, agents, and transac- tions. Through its field agents DrumNet further ensures that farmers cultivate in accordance with the requirements of the buyers. All payments from buyers pass through DrumNet ac- counts at the bank, thus enabling buyers to focus on their core business. Through Drum Net, commercial banks are able to avoid high transaction costs. For all participants, payments take place in a convenient timeframe, mostly in a cashless manner, increasing security and accuracy. Source: Southeast Asia Regional Conference On Agricultural Value Chain Financing 64 Trade and Transport Facilitation Assessment Trade finance Trade and Transport Facilitation Assessment 65 4 Trade finance 215. Although credit facilities have increased 216. The TF business in Lao PDR is basic and lately, financial services are still lagging in Lao limited for all banks, state-owned commercial PDR. Under the existing Commercial Bank Act banks (SOCB) and non-SOCB. The principal inter- (December 2006), all registered commercial banks in est is in loans to cover working capital with an aver- Lao PDR can provide trade finance (TF) related busi- age tenor of 90 days. The principal demand for these ness in both local and foreign currency. The credit loans comes for the garment, agricultural, petroleum facility of commercial banks has gradually increased and automotive sectors. its share of GDP from 7.5 percent in 2006 to 19 per- cent in 2010. While total credit has increased at the 217. Other financial services are also being same pace as GDP growth, the banking sector con- provided though. The banks also execute letters of tributes a small percentage to the national economy credit (L/C), sight and 90-days, pre-shipment finance, compared to other countries. (Figure 34). Still, most Trust receipts, other guarantees and foreign ex- Lao PDR customers require just basic banking busi- change remittances. The volume of trade finance has ness with simple conditions. This is partly due to lim- remained stable even as the economy has doubled. ited financial education. In addition, banks lack an In Lao PDR on average, only two L/Cs are issued per efficient financial infrastructure such as an effective day but for an average amount of USD 250,000. The legal system, an interbank market, a bond market and banks provide foreign exchange services, but do not a well-organized national payment system. Although provide forward, future or derivative-related transac- a recent regulatory review has facilitated customer- tions. related banking business transactions, there is still some room for improvement in the structural and 218. Both foreign-owned companies and regulatory framework of the banking industry espe- local companies do not resort a lot to trade finance cially in the area of risk management, internal control for structural reasons. The low demand for trade and supervision. finance is explained by the fact that most of the export transactions involve foreign-owned compa- Figure 34: GDP vs. commercial bank holdings nies that obtain trade finance through the interna- tional market based on the credit of the parent com- pany. Also, local companies involved in long-term relationships with suppliers and buyers prefer to trade on account to minimize the need for a costly and time-consuming financial intermediation. For trades that involve short-term relationships, L/Cs with or without third party confirmation are used to reduce counterparty risk. 219. The largest SOCB dominates the market for trade finance and has the largest TF depart- ment in the country. It is able to issue L/C’s directly with correspondent banks in major exporting coun- tries. However, it does not offer back-to-back or do- mestic L/Cs. The bank discounts L/Cs for 70-80 per- cent of face value, in the range of US$ 0.1 million in the garment industry to US$ 10 million for invest- ment projects. Customers may also establish lines of credit for which land or buildings can be offered as Note: CB = Commercial Banks, TF = Trade Finance Business collateral. The bank charges a risk-based interest rate. Source: World Bank Database, Bank of Lao, Audited Financial State- ment of SOCBs and World Bank staff estimates. 66 Trade and Transport Facilitation Assessment 220. The SOCBs lack in-house training capac- ity in trade finance instruments and must rely on the training facilities of other agencies. For exam- ple, the largest SOCB relies on training facilities of its overseas correspondent banks. Another is setting up a trade finance section with the assistance of the Lao PDR central bank (Bank of Lao PDR). 221. The foreign banks in Lao PDR are capable of providing trade finance services to their Lao PDR customers but there are several limits both on the supply and demand sides. For instance, de- mand is limited indeed due to the staff’s limited famil- iarity with the products, their high cost and collateral requirements and the limited branch network. As a result, their customers prefer inward/outward remit- tances rather than the costly L/Cs. In addition, weak legal enforcement in the case of default discourages lending. For example, banks are unable to continue charging interest in the event of default and taking possession of forfeited land may take several years. Therefore, foreign-related banks reduce their risk by raising collateral requirements and requiring full cash guarantees (one bank requires 110 percent cash guarantee on L/C application for customers without a credit line. On the other hand, multinational com- panies can obtain credit from foreign banks if their parent company provides full overseas guarantees. Trade and Transport Facilitation Assessment 67 Corridor performance analyses 68 Trade and Transport Facilitation Assessment 5 Corridor performance analyses 222. There are three principal trade routes Figure 35: Principle Lao PDR trade corridors that connect Lao PDR to neighboring countries assessed and seaport gateways for overseas trade. The effi- ciency of these core corridors is therefore fundamen- tal to the competitiveness of Lao PDR’s supply chains and trade in general. The three main trade corridors are: a. The main trade route linking Vientiane and Bangkok in Thailand. Bangkok has daily feeder shipping services to Singapore and also regu- lar services to the other hub ports in the re- gion. The route is 650km long, which makes Bangkok the nearest port to Vientiane, com- pared to 1,060 km to Da Nang in Vietnam. Two other major routes also link Lao PDR to ports in Thailand, these are the Dansavang – Savan- nakhet – Bangkok corridor (part of the EWEC under GMS) and the Pakse – Bangkok corridor; b. The second major route is the North-South Economic Corridor defined and developed as Source: Authors a regional project under the GMS initiative. The corridor provides links to both China in 223. The Thai corridors are the most important the North and Thailand to the southwest. It of- for Lao PDR. Some shippers transport more than fers possibilities to use road or river transport. 95 percent of their cargo through Bangkok and the A railway is now also under planning which remainder through Vietnam (EMC, 2011). The routes will increase the connectivity options; and through Vietnam tend to be more expensive and rela- c. The third major route is the East-West Eco- tively less efficient compared to those through Thai- nomic Corridor, also developed under the land. GMS initiative. It is the most developed cor- ridor of the corridors in GMS and it connects 224. The existence of a few trade corridors Thailand, Lao PDR and Vietnam. Across Lao helps logistics performance by concentrating PDR the corridor connects the southern parts the small volumes that are generated into larger of the country to ports in both Thailand and flows on a few trade routes (Figure 36 and 37). The Vietnam. It also serves as an important transit logistics sector is one that has significant economies route between these countries. The latter two of scale as greater volumes can be carried on larger ve- corridors intersect at Tak and Phitsanulok in hicles (trucks, rail, shipping) at decreasing unit costs. Thailand (Figures 35). A corridor focus can also play another important role in serving as a spatial framework for cooperation between the public and private sectors to better realize broader social and economic benefits. Though there is no explicit corridor development strategy for Lao PDR, the country already benefits from a concen- tration of traffic on only a few routes through Thai- land. Trade facilitation initiatives can therefore be framed around the performance of the main trade corridors that connect key economic centers in the country to its main trading partners. Trade and Transport Facilitation Assessment 69 Figure 36: Import volumes through major customs checkpoints (tonnages)33 Source: Own estimates, data from Lao PDR customs 33 Assumes 8 tons/year per planted hectare, 16 tons per TEU, 20 percent of the land in catchment area is planted in fruits and vegetables 70 Trade and Transport Facilitation Assessment Figure 37: Import volumes through major customs checkpoints (percentage of total) Source: Own estimates, data from Lao PDR customs Trade and Transport Facilitation Assessment 71 225. A performance assessment was conduc- —— Prices tion for the three major corridor linking Lao PDR o Delivery to destination to Thailand and through Thai ports to overseas o Cost associated with each activity and markets. The three corridors that were analyzed component of the transit operation. between them carry more than two thirds of Lao PDR’s international trade traffic (Vientiane-Bangkok; 226. The Vientiane – Bangkok corridor is clear- Savannakhet-Bangkok; and Pakse-Bangkok). The as- ly the most important in terms of volume of traf- sessment focused on the following key indicators: fic. It handles some 800,000 tons of import cargo, fol- —— Traffic flows lowed by the Savannakhet corridor with just less than o Transit volumes half that volume and the Pakse – Bangkok corridor o Border crossing volumes at the main border with about a quarter of the volumes (Table 16). Some crossing points studies e.g. Thailand Ministry of Transport (2006) esti- —— Time performance mate the long term volume of traffic on the corridor o Inland transport between major economic to be as high as 60 percent of Lao PDR’s trade traffic. centers along a corridor The corridor is even more important in terms of value o Transit time within countries of trade passing through it. Bangkok is of course an o Border crossing times important node in itself as it is Lao PDR’s single larg- o Delays at control and check points est trading partner. The corridor therefore handles both bilateral trade as well as Lao PDR overseas trade traffic. Table 16: Containerized cargo volumes, distances and costs for major trade corridors for Lao PDR Corridor Trade volume Distance Travel time Cost (US$) (tonnage) ( percent of total) (km) (hrs) per container Vientiane - Bangkok 800,000 40 620 12 1,200 Savannakhet - Bangkok 395,000 19 645 12 1,100 Pakse - Bangkok 190,000 9 750 13 1,300 5.1 Vientiane – Bangkok 228. Border processes are therefore poten- corridor tially the most significant impediment to uninter- rupted flow of traffic through the corridor. Of Lao 227. The Vientiane – Bangkok corridor is the PDR’s twenty-seven border crossing points the Than- most important corridor for Lao PDR as it handles aleng – Nong Khai border post is by far the most im- the most volumes of merchandise trade, both in portant (Figure 38) as it is the gateway for the capital terms of volume and value. It is comprised of a road city, Vientiane. It handles a wide variety of consumer linking Vientiane to Bangkok and Laem Chabang goods, manufacturing inputs, and construction ma- ports. The Vientiane – Bangkok corridor road stretch- terial that are imported into Lao PDR, as well as gar- es over some 620 km and is in good condition. Travel ment exports and a significant portion of mineral time approximates 12 hours. A recent survey con- exports. ducted for the World Bank found that current prac- tice is for trucks to travel from Bangkok overnight, 229. The actual clearance process and infra- arriving at the border in the morning (EMC 2011). This structure at the border varies between the Lao allows clearance of Lao PDR bound cargo to start as PDR and Thai sides of the other. This is not unex- soon as the border opens. pected as the controls in Thailand are mostly to do with export clearance or processing of goods in transit whereas in Lao PDR it is about clearance for domestic consumption. 72 Trade and Transport Facilitation Assessment Figure 38: Border clearance process at Nong Khai – Thanaleng (Source: Authors, based on EMC (2011)) Trade and Transport Facilitation Assessment 73 —— Thai clearance process: The Thai border is de- 231. The Lao PDR clearance process takes signed with two main areas, a primary cus- place at two locations. Once across the Lao PDR- toms office at Nong Khai some 4km from the Thai Friendship Bridge from Thailand, the Lao PDR border and a customs checkpoint at the actual clearance process starts at the customs checkpoint at border. Thai customs and border management the bridge and continues at the customs warehouse services are automated, and in general there is at Thanaleng, some 4km from the border. Inbound pre-arrival clearance of documents. Thai cus- goods obtain initial approval at the customs office at toms use a risk management system such that the Friendship Bridge, which is then followed by other only a small proportion of goods are subject to clearance procedures at the Thanaleng warehouse. physical examination. The process in Thailand differentiates between goods that emanate 232. The Thanaleng Warehouse is a major from Thailand and are exported to Lao PDR transshipment point for goods entering Lao PDR. and those goods that are in transit through The warehouse covers some six hectares for storage, Thai seaports and territory on their way to Lao segmented for particular types of goods (such as cars, PDR. Due to automation, both processes are consumer products, textiles inputs for garments). The generally reported by shippers to be fast and warehouse is state-owned at present, though in the efficient. past it was privately held. Approximately 70-80 per- —— Thai exports to Lao PDR: Trucks carrying nor- cent of the goods are unloaded at the warehouse mal export goods originating from Thailand and the containers stripped. The goods are ultimately stop at the customs house at Nong Khai for loaded onto Lao PDR trucks and shipped further into inspection. The process takes only a few min- Lao PDR. The reasons for unloading are the demur- utes unless goods are selected for a physical rage penalties shippers incur for keeping Thai trucks examination. Once the clearance is completed in Lao PDR. It is therefore cheaper to release the truck the truck then proceeds to the border for final while the goods are going through the customs inspection and clearance. clearing process. However, the warehouse serves also —— Transit cargo: In-transit goods proceed past as a consolidation point for some exports, though as the Nong Khai customs office directly to the noted above not so much for garment exports. border where document processing takes place. Data would already have been submit- 233. Generally, time performance for imports ted and transferred from Bangkok to the cus- is longer than for exports as is the case in other toms house at the border, via the customs IT regions. For exports, the procedures at the border system. Once a truck arrives, brokers pick up are relatively straightforward and consistent. Manu- the original carrier report from the truck driver factured goods and many of the agricultural prod- and submit it together with the pre-cleared ucts are loaded into a container at the origin and documents. Occasionally, Thai customs may transported directly to the Thai ports with a stop at check any seals on the truck after which the Lat Krabang or Bangkok port for transfer to the nomi- truck is then released. Generally, a survey nated forwarder or shipping line. The transit time av- that was carried out as part of the assessment erages 15 hours but depends on traffic congestion found that the transit clearance process takes and border clearance time. At the border, the cargo approximately 15 minutes. is cleared and transshipped to a Thai truck. Otherwise the procedures include preparation of normal com- 230. In general, the clearance process at Nong mercial documents, on site physical examination, and Khai is smooth and efficient, with an electronic obtaining the certificate of origin required by import- system facilitating clearance of both in-transit ing countries that provide preferential tariffs under and export goods. The Thai customs department Generalized System of Preferences (GSP). in Nong Khai is perceived by traders to be open and customer-friendly. Furthermore, none of the export- ed goods sampled under the survey were unloaded for inspection. 74 Trade and Transport Facilitation Assessment 234. Export procedures have been simplified export procedures, which include preparation of nor- significantly, especially for manufactured goods mal commercial documents (Table 17), and on site such as garment, toys and electronic products. On physical examinations. average it takes about 2 days to complete all required Table 17: Documentation for exports Exporter Bank Customs office Customs checkpoint Request letter Certify settlement of Physical examination Examine documents payment through banks Invoice Examination report Release goods Packing List Approve export Declaration form D13 Inventory accounts for imported raw materials under duty suspension regime Material used in production process Copy of Customs Declaration Form D52 235. Clearance times for dutiable imports are customs clearance procedures and remove goods a couple of days long but may be longer if techni- from customs controlled areas. However, if imported cal certificates or an import license is required. On goods are subject to technical certificates or import average it takes about 1-2 days for an importer to pre- licenses, it takes about 1-5 days to obtain certificates/ pare all documentation required for normal dutiable permits or a license from each of the relevant sectoral goods not requiring an import license or technical agencies. certificates (Table 18). It then takes 1 day to complete Table 18: Documentation for imports Importer Bank Customs checkpoint Request letter Certify settlement of Clearance procedures payment through banks Invoice Payment of duties and taxes Packing List Payment of fees warehouse service Import-Export License Enterprise registration certificate Annual import plan 236. Limited border opening hours can cause receive permission to enter the warehouse, where delays. Although official working hours are 8:00am- the official documents check and inspection occurs. 4:00pm, actual operations are reported by the private For tax-exempt goods, a broker travels between the sector to usually start late around 9:00 am and to halt Friendship Bridge Customs Department and the for one hour for lunch. If documents are submitted Thanaleng Warehouse Customs Department, while after 4:00 pm, brokers typically pay overtime fees the goods remain at the border. Customs utilizes a risk and, potentially, informal fees. management program developed based on profiles determined by regional offices based on local infor- 237. The Lao PDR clearance process distin- mation. For instance, customs has already introduced guishes between goods liable to pay duties and a green lane for known traders to expedite clearance taxes, and those that are exempt. Taxable goods while the rate of inspection is about 10 percent. are first cleared at the Friendship Bridge in order to Trade and Transport Facilitation Assessment 75 238. The actual clearance process was until 5.2 Savannakhet – Bangkok recently paper-based though customs have corridor recently introduced the ASYCUDA World system. 241. The Savannakhet – Bangkok corridor Stakeholders expect that automation of the process forms part of the GMS East-West Economic Cor- will reduce clearance times as the new automated ridor linking Thailand, Lao PDR and Vietnam. The customs system becomes fully operational. Still, Bangkok – Savannakhet portion is some 645 km long, clearance times are generally low by standards of largely in Thailand. The routes forming the corridor, other landlocked countries. Surveys of inbound car- AH1, 2, 202, 219, 2045, 232, 2044, 12, and 212 are all go in mid 2011 (EMC 2011) observed clearance times in good condition. The average trip length is 12 hours of less than 5 hours, which is a drastic reduction from and most truck movements are overnight, arriving at the Time Release Study (TRS) of 2009 which found the border in the morning or early afternoon. that cargo clearance times were around 77 hours at Thanaleng. 242. The corridor handles transit, import and export trade for Lao PDR. Currently, the trade flows 239. However, further efficiency gains are pos- are dominated by Lao PDR exports, mainly copper. sible at Thanaleng. Field surveys suggest there is Imports are dominated by construction machinery, unequal treatment of shippers, with some seemingly oil, and metal products as well as inputs for the min- getting preferential treatment. There are two possible ing industry. The corridor also handles transit traffic explanations for this, firstly relationships between of- between Thailand and Vietnam, though overland ficers and some brokers and the payment of informal trade flows between the two are still small. It is im- fees could expedite processing. Customs clearance portant to recognize that the overland transit route at Thanaleng is reported by the private sector to be through Savannakhet faces competition from the all facilitated by personal relationships between brokers sea route between Vietnamese and Thai ports, which and customs officials throughout. As a result, unequal is often slower but cheaper. treatment has led some private sector firms to praise customs, and others to criticize customs for favorit- 243. Lao PDR is currently developing its first ism and irregular practices. Some freight forwarders Economic Zone near Savannakhet on the border have reported that they have no problem dealing with Thailand. This zone has been in planning since with customs. Other freight forwarders have said that the construction of the 2nd Friendship Bridge was treatment is not equal, and that their goods “take up first proposed. The Zone is designed to have both a to four times as long to clear”. free trade area and an export-processing zone. The initial component, a commercial and industrial park, 240. Payments of informal fees to facilitate and was developed by a private investor and opened at expedite clearance are reportedly in the range of the end of 2011. However, the value proposition that 5,000 Kip to 100,000 Kip, depending on the par- would attract industry to this location remains un- ticular task during the import process. In addition, clear. private sector players suspect other informal fees were paid at higher levels to accelerate the clearance 244. Similar to the Vientiane – Bangkok corri- process, although this was not reported. Generally, dor, there are no major hurdles en-route leaving there appears to be a positive correlation between the border crossing as the likely physical barrier the amount of informal fees that brokers have to pay to seamless movement. Much like at the Nong Khai- to clear goods, and the number of customs officials a Thanaleng crossing, the Mukdahan-Savannakhet broker must interact with. border crossing is a juxtaposed border post separat- ed by the Mekong River. The Thai and Lao PDR sides are connected by the Friendship Bridge II. Both the Lao PDR and Thai sides of the border are modern, well run and the clearance processes generally smooth. It typically takes about 15 minutes to clear exports through the checkpoint. 76 Trade and Transport Facilitation Assessment Figure 39: Border description at Mukdahan/Savannakhet Thailand: Mukdahan Laos: Savannakhet —— Streamlined process with electronic processing —— Clearance is quicker than at other Lao PDR crossings and —— Short clearance times infrastructure is modern —— Goods are separated into exports (goods emanating from —— Single-stop system works well Thailand and “in-transit”, passing through Thailand on —— Relationship-based customs clearance process between their way to Lao) brokers and officials —— Procedures differ slightly between these two types of —— Trucks are often “let go” before clearance process ends, goods which represents a risk for smuggling activities and tax avoidance Source: EMC (2011) 245. Thai clearance process: similar to the designed in two locations with the customs office Vientiane – Bangkok corridor, the Thai process 4 km from the border where final checks and clear- distinguishes between bilateral trade between ances are issued. However, since 2012 all functions the two countries and transit traffic passing are now integrated with modern equipment, includ- through Thailand (Figure 39). However, both pro- ing a scanner and a weigh station for trucks, both of cesses rely on electronic pre-arrival clearance, which which are utilized during the clearance process. Both minimizes processing time once trucks get to the transit goods passing through Thailand and Thai border. Previously the Thai border at Mukdahan was exports are cleared at the Mukdahan Customs House. Figure 40: Mukdahan normal goods clearance process Phase 1: Phase 2: Phase 3: Truck arrives at Documents are Customs border processed inspection Details: Details: Details: -- Broker meets truck at the bor- -- Electronic pre-clearance al- -- Goods are only checked if they der to process paperwork lows for rapid processing of are ‘red channel goods’ documents at border -- Truck is released -- Special border pass to enter Lao PDR is acquired by driver Source: EMC (2011) Trade and Transport Facilitation Assessment 77 246. In general, the clearance process is from the moment a truck arrives to a release speedy at Mukdahan facilitated by a small net- order being issued (EMC 2011). The clearance pro- work of clearing agents, forwarders and trucking cess at Savannakhet is summarized in Figure 41. companies (Figure 40). Clearance brokers on the Similar to Thanaleng, the speed of the clearance pro- Thai side collaborate with partner companies in Lao cess depends in part on relationships between bro- PDR, and there is good cross-border communication. kers and government officials. Brokers representing The only holdups at times occur at the scanner when large freight forwarding companies or shippers in queues of trucks may form. When dealing with transit particular reportedly have well established relation- shipments, customs brokers may accompany trucks ships. As a result, it is possible for release orders for to the border and vice versa to submit original docu- transit trucks in particular, to be issued before a truck ments and facilitate the checking of seals. All trucks has arrived at the border. Generally, the personal re- are checked to see if seals are intact before they are lationships between customs, shipping and forward- allowed to pass through the border. ing companies ultimately facilitate the ease of doing business for brokers who work for the large firms. On- 247. Lao PDR clearance process: the Lao PDR the-ground relationships are further strengthened by border crossing point at Savannakhet has the the requirement for declarants to appear in person most modern and well-equipped infrastructure of before officers, even where other means of manag- the major Lao PDR border facilities. The clearance ing the clearance process are feasible (EMC, 2011). processes take place in a centralized facility, which However, some brokers consider these procedures houses all operations. The existing customs infra- as ‘customary in Lao PDR culture even when informal structure and the access roads are relatively new. The payments are made to border officials. border has a large customs warehouse and weigh station for trucks. There are cranes for transshipments 249. One major complaint from private sector of goods on site34. The Savannakhet border post is a stakeholders is the limited hours of operations primary transshipment point on the East-West Corri- at the Mukdahan – Savannakhet border. The lim- dor for goods passing through Lao PDR on their way ited hours at times prevent trucks from making it all to Vietnam and vice versa. Truck operators or their the way across Lao PDR to the Vietnamese border agents pay fees for such transshipment. before closing time, thus delaying shipments by sev- eral hours. The local chamber of commerce is planning 248. The clearance process at Savannakhet to lobby the provincial and national government to is streamlined, with a single-stop system in use. extend the border hours. It typically takes about 1.5 hours to clear goods Figure 41: Border clearance process at Savannakhet Phase 1 Phase 2 Phase 3 Phase 4 Truck arrives Documents are Customs Final customs check processed inspection and truck release Details: Details: Details: Details: -- All documents, includ- -- Described Above -- Customs chief at border -- Submit approval to Cus- ing carrier report, can Informal fees: Yes, it assigns 2 staff members toms office on the way be faxed, so clearance is reported between to inspect unloaded out of lot often begins before 20,000-100,000 kip per cargo -- Truck is released truck arrives signature -- Project-exempt goods Informal fees: None -- Weigh station currently are rarely inspected but reported not active signatures are needed Informal fees: None -- An on-site inspection is reported conducted and signa- tures for normal goods Informal fees: Yes 34 One large freight forwarding company uses its own crane and yard for transshipments. 78 Trade and Transport Facilitation Assessment 5.3 Pakse – Bangkok corridor 250. The Pakse – Bangkok corridor handles between Pakse and Bangkok, approximately 700 km a significant amount of Lao PDR agricultural inside Thailand and the rest between the border and exports, especially coffee as well as imports of the town of Pakse. It takes approximately 13 hours consumer goods. The border within this corridor driving time to the border, and most trucks travel by Chong Mek (Thailand) - Vang Tao (Lao) is a major night to arrive at the Lao PDR border in the morning. gateway for Lao PDR agricultural exports, which pass through Thailand to foreign markets. Unlike the Nong 251. There is a significant contrast between Khai-Thanaleng border crossing and the Mukdahan- the quality of infrastructure on the Thai and the Savannakhet crossing, which are connected to Thai- Lao PDR side of the border with better facilities land via bridges, the Chong Mek-Vang Tao crossing and roads on the Thai side compared to Lao PDR. is a land border. Given the agricultural nature of the Of the three corridors assessed, Vang Tao has the least regional economy there are huge variations in traf- developed facilities. The road to Pakse is also not in fic volumes on the corridor. However, generally traf- very good condition. The clearance processes on fic flows are more balanced compared to the other either side of the border are summarized below two corridors. The corridor itself is some 750 km long (Figure 42). Figure 42: Border dynamics at Chong Mek/Vang Tao Thailand: Chong Mek Laos: Vang Tao —— Customs clearance is extremely efficient, aided by —— Infrastructure is basic and fragmented the electronic system —— High informal fees were reported and no single- —— The border crossing is undergoing a significant in- stop system frastructure upgrade —— SPS lab is poorly equipped, despite this border be- —— Currently, clearance for in-transit goods takes place ing a critical juncture for exports and imports of ag- at customs house in Pious (40 km from Chong Meek) riculture products and livestock —— By Nov. 2011, all goods entering Lao PDR will clear at —— Inefficient customs processes and meetings cause the Customs House at the border delays 252. Thai clearance process: the clearance pro- infrastructure at Chong Mek, including a warehous- cess in Thailand is at two locations, 40km apart. ing facility and expanding the truck parking lot at the There is a customs office in Piboun (40 km from border for exports and imports. Once the construc- the Cheng Mek border) that issues an initial clear- tion is complete (expected late 2011), Thai customs ance for goods in transit. Normal export clearance is will shift its operations totally to the border, including done at the customs office at the Chong Mek border transit clearance. It will therefore be possible to have itself (Figure 43). The practice is therefore similar to all export and in-transit procedures take place at the the procedure on the Savannakhet – Bangkok corri- border. dor. However, Thailand is presently developing new Trade and Transport Facilitation Assessment 79 Figure 43: Export process in Chong Mek Phase 1: Phase 2: Truck arrives Initial check at Piboun Phase 3: Phase 4: to Piboun (40 km from Chong Mek) Customs inspection Clearance at border -- Broker receives -- Customs depart- -- Customs department -- Documents are documents from ment checks original checks seal submitted to Cus- trucker documents* documents to see if toms Department at with trucker they match with pre- Chong Meek border cleared documents for final stamp -- Temporary immigra- tion card is issued to driver 253. As a result of electronic clearance, export 255. The clearance process at Vang Tao is goods are quickly processed and cleared directly generally longer than at other Lao PDR border at the border in Chong Mek. Thai customs use a risk crossing points. The process (Figure 44) is gener- management system and in most instances goods ally longer than at other border posts and is often are quickly released without any delays. accompanied by the requirement to pay informal fees. Clearing agents report making payments of up 254. Lao PDR clearance process: the Vang Tao to US$ 62.50 in informal fees to clear normal goods border post has relatively poor infrastructure that meet weight requirements. The lack of an elec- compared to other Lao PDR major border posts.35 tronic clearance system in Pakse leads to a long chain The border facilities include a warehouse, weigh of informal payments. While the total cost is not very station, and quarantine and sanitary facilities. The high, brokers are subject to the whims of officialdom. border is linked to Pakse by a paved but narrow and Like in Savannakhet, brokers in Pakse do not con- seemingly dangerous road. The road is approximately sider informal payments to be ‘required’, though they 40 kilometers long. There is a mobile anti-smuggling choose to make them. The survey found that most office along the road between Vang Tao and Pakse, informal payments at this border crossing occur at where one additional stop must be made, as part of the weigh station. When containers weigh more than the clearance process. There are additional weigh 25 tons, forwarders feel they have to pay 5,000 baht stations along the route. or higher. Informal payments were also expected at every step of the clearance procedure, in amounts ranging from 10,000 to 100,000 Kip, depending on the broker and the signature needed. 35 Given the poor state of facilities at Vang Tao there is private sector interest in developing logistics infrastructure at the border post. A proposal has been made to develop an ICD with customs clearance and storage infrastructure. 80 Trade and Transport Facilitation Assessment Figure 44: Clearance process in Vang Tao Phase 2 Phase 3 Phase 4 Phase 1 Documents Customs Final customs check Truck arrives are processed inspection and truck release -- Truck is weighed at -- Description above -- Normal goods are un- -- Submit approval to station and enters loaded (project goods Customs office on the warehouse lot remain on truck) way out of lot -- All documents includ- -- Customs chief at -- Truck is released ing carrier report can border Assigns 2 staff be faxed, so in reality members to inspect clearance often begins cargo before truck arrives -- Staff first checks the approved documenta- tion, then an on-site inspection 5.4 Comparative assessment of corridor performance Cost Performance 256. Lao PDR benefits from lower deep sea below (Table 19). These incorporate the basic dis- shipping routes available through Thai ports. This counts but not the larger discounts available to large is particularly significant when freight rates drop as foreign importers. The rates are also for basic servic- they did in 2009 as a result of the global financial cri- es. These will vary for shipping lines offering faster sis. Examples of current rates for typical shipments or more reliable services as well as for those offering from Bangkok to typical destinations are shown slower, less reliable services. Table 19: Typical sea and air freight rates from Bangkok Mode To Unit Currency Current Range Rotterdam FEU US$ 3,650 Antwerp 2,450 Ocean from Bangkok Rotterdam TEU USS 1.850 Antwerp 1,450 U.S. East Coast FEU USS 3,700 Yokohama FEU US$ 1,350 Shanghai FEU US$ 1,450 Air (Vientiane) New York Kg US$ 4.30 Singapore Kg US$ 2.30 Source: Authors estimates from various sources Trade and Transport Facilitation Assessment 81 257. Tight integration between the Lao PDR 258. Corridor performance analysis typically and Thai logistics systems and traffic allows Lao provides measures based on price, transit time PDR to overcome the limitations associated with and reliability from a shipper’s viewpoint, where its smaller volumes. Lao PDR traffic is able to pig- a shipper is an importer or exporter. The price is gyback on the higher volumes and greater frequency the amount the shipper pays to deliver his shipment of services associated with Thailand’s trade. In addi- from its origin to its destination through each link tion, international buyers also tend to negotiate rates and node in the transport/logistics chain, including for shipments from Lao PDR which also drives down both formal and informal payments. The cost perfor- prices, especially for exports. As a result, Lao PDR mances of the three main corridors are shown below. shippers face mostly overland logistics costs. Table 20: Lao PDR major trade corridors - cost per ton/km Corridor Distance (km) Travel time (hrs) Cost ($) Cost US cents/tkm Vientiane - Bangkok 620 12 1200 13 Savannakhet - Bangkok 645 12 1100 11 Pakse - Bangkok 750 13 1300 12 Source: Own estimates 259. The prices are higher than faced in other 261. The time performance for the clearance of landlocked regions. This is a reflection of scale is- cargo at the main border posts of Lao PDR is gen- sues discussed above as well as significant volume erally fast. At land borders the clearance time aver- of empty movement of containers due to time limits ages 2 hours with most cargo cleared within 3 hours imposed by shipping lines, as described below. if there is no road congestion and at most half a day for most cargo. The average time for clearing imports Time performance through the international air gateway is 2 hours with 260. The trade corridors between Lao PDR and most cargoes cleared in 1-3 hours. The clearance time Thailand perform well in terms of time. Transit at seaports in Thailand is greater averaging about times between Bangkok and Vientiane are the mini- two days with most cargo cleared within 5 days. Most mum possible, except when vehicles arrive when the of the variance in times is associated with the type of border crossing points are closed. In this case clear- commodities and the diligence of the shipper in pre- ance is performed the following morning and typi- paring the documentation (Figure 45). Overland tran- cally takes less than one hour for exports and three sit times are as indicated above, averaging 12 hours hours for imports. in most cases. Total transit time from the factory to North Europe is 22-26 days while for Japan it is only 14-18 days. 82 Trade and Transport Facilitation Assessment Figure 45: Lao PDR border posts clearance times for different categories of goods Source: Own estimates, data from Lao PDR customs 262. Yet, the corridor assessments reflect the both directions, logistics systems are closely integrat- state of flux border management systems are in, ed with manufacturing: synchronized movement of with efficient processes at some locations and a inputs, production, and export; and (ii) other shippers combination of manual and automated processes who most probably face higher costs. at others. The degree of transparency of clearance procedures is still limited and clearing times continue 264. The second pressure is from the strict to depend on relationships between customs bro- container return limits again imposed by ship- kers and individual customs officials. Customs bro- ping lines. Shipping lines serving Lao PDR impose kers with relationships do not need to complete all container deposits, which can range from 30,000 to documents and procedures in order to clear goods. 100,000 baht per container. Trucking companies in For others these processes are quite time consuming. Bangkok (which are largely responsible for bringing It is expected that the limited transparency will be re- goods into and out of Lao PDR) do not negotiate di- duced, with the introduction of the ASYCUDA World rectly with shipping lines (which own the containers and Single Window systems, which will allow for the and set container detention policies) with respect electronic filing of documents. to the procurement of containers; rather, it is the re- sponsibility of the exporter to strike a deal with the 263. There are various pressures on the system respective shipping line and to set the container de- that help minimize time taken in Lao PDR corridor tention policy with that line. Exporters negotiate with performance. The first is due to shipping line sched- shipping line agents in the country of loading, with ules, which require exports to be available at the respect to how many days the container will be given port by specific deadlines. The issue is therefore how to the trucking company to take goods from the Thai exporters are able to meet the tight timeframes im- port to Lao PDR, and back. Thai trucking companies posed by the shipping lines. As a result, some export- take control of the container at the port of discharge ers call for a container when the shipment is ready, (Bangkok Port, Laem Chabang) after they pay the con- and are able to achieve a 48-hour turn-round time for tainer deposit to the shipping line agent in Thailand. Bangkok – Vientiane - Bangkok. However, there are Deposits are usually paid on the day of the container two scenarios: (i) regular shippers who have devel- arrival or the day after arrival and returned when the oped well organized systems, and have shipments in container is returned. Trade and Transport Facilitation Assessment 83 265. Both the loading and unloading of goods Reliability from the container is the responsibility of the 267. Though Lao PDR has low average clearing exporter and importer, respectively. However, times, the variance of such times is still significant. trucking companies are responsible for damage to Lao PDR has made significant progress in trade facili- containers and must return containers to shipping tation, reducing the cost, time and uncertainty asso- lines within a fixed time period (usually 3-5 days for ciated with clearing cargo at the border especially for a round trip to Lao PDR). While the responsibilities of the major exports and their imported inputs. While the trucking companies are not outlined in a formal average clearing times are acceptable uncertainties contract, they risk losing a portion of their initial de- remain. Officials are not always available, corrections posit if they fail to meet their obligations. The conse- of errors in documents are time consuming and co- quences of returning damaged containers or return- ordination between customs and other border agen- ing containers after the due date is a stiff fine. For cies is lacking. In addition, many documents are still damaged containers, for instance, firms pay US$ 75 processed manually, procedures for trade licensing and up. In other cases, trucking firms must pay con- are cumbersome, officials at the border lack proper tainer cleaning costs (approximately US$ 17), which supervision, and the infrastructure is inadequate are detracted from their original deposit. Thai truck- at many crossings. However the magnitude of the ing companies have complained that they do not variance is clearance times is not as high as in other have sufficient leverage (or legal recourse) to argue developing countries. with the shipping lines over these additional fees. 268. Clearance times are generally reliable 266. Containers from third countries that pass except at Thanaleng. Part of the corridor assess- through Thailand on their way to Lao PDR must do ments data was collected on the variance of bor- so directly. Thai law does not allow transshipment der clearance times (Table 21, Figure 46). While the to occur on Thai territory for in-transit goods to Lao sample sizes were small, some general patterns were PDR. By contrast, goods that emanate from Thailand discernible, namely that reliability was greater at Sa- can be transshipped at Thai border crossings without vannakhet and Vang Tao and relatively poor at Thana- any special licenses or permits before entering Lao, leng. This is consistent with the findings of the more though this rarely occurred during the survey obser- statistically representative Time Release Study that vations. was carried out in 2009. Figure 46: Lao PDR major border posts - distribution of clearance times Source: Own estimates, data from Lao PDR Customs 84 Trade and Transport Facilitation Assessment 269. The clearance times at Thanaleng are sub- stantially greater than for the other crossings due Box 2: Bonded Warehouses to a combination of inefficiency and the use of Bonded warehouses can be designed to handle various types the facility for temporary storage. The time is not of goods including those that are containerized, bulk, or need affected by the status of the cargo, i.e. dutiable, non- refrigeration. They can also be used to coordinate transport dutiable. and other logistics services, including document processing. The various functions in bonded warehouses have to be car- ried out under authority of customs. The only bonded ware- Table 21: Processing time for different crossings house in Lao PDR is located in Thanaleng Currently a privately (days) operated bonded warehouse is not allowed Checkpoint Arrival to Submission to A dry port is an ICD that is granted under law the right to act as Removal Approval an origin and destination for maritime cargo. In other words, the Marine Bill of Lading can have the dry port and as the port Mean Std Dev Mean Std Dev of loading or unloading and the Shipping line is liable for the Natuey 0.95 1.63 0.59 1.61 loss of the cargo under the International Convention for the Thanaleng 1.69 3.19 0.79 2.13 Unification of Certain Rules of Law relating to Bills of Lading signed at Brussels on 25 August 1924 as amended by the Friendship Bridge II 0.21 0.49 0.14 0.45 Protocol signed at Brussels on 23 February 1968 (“the Hague- Densavan 0.33 0.33 0.14 0.22 Visby Rules”). Vang Tao 0.51 2.25 0.17 0.51 Presently dry ports are not defined under any law or regula- tion in Lao PDR. However, government though the Depart- ment of Transport is revising the Land Transport Law in order Source: Time Release Study, Lao PDR, 2009 to include all provisions for dry ports. Other agencies that have to be involved are Department of Customs, Ministry of Finance; Department of Immigration, Ministry of Public Secu- 270. The principal delays occur where there is rity; Department of Quarantine, Ministry of Agriculture and the need to obtain approvals from other govern- Forestry; Lao PDR National Chamber of Commerce and Indus- try; and the private sector especially the Lao PDR International ment agencies (Table 22). Freight Forwarders Association (LIFFA). These are the agencies whose close involvement will be critical to the success of any Table 22: Time for other government agency shared logistics platform or facility. approvals Some of the important factors to consider are the following: Agency Mean Std Dev a. Having necessary institutional, legal and regulatory arrangements in place. These may include a bilateral Industry and Commerce 2.13 3.79 agreement with Thailand, as well as agreements cov- Public Health 0.70 1.76 ering customs and border management cooperation / neighboring countries; Planning and Investment 5.84 11.68 b. Introducing integrated IT systems, between agencies both in the same country and between countries. Typically, such a system could be designed as a single Source: Time Release Study, Lao PDR, 2009 window system, similar to the ASEAN Single Widow initiative; c. Location should have easy access with minimal con- 271. Ongoing customs automation and intro- gestion - location at a railhead, or junction of major duction of a single window system in Lao PDR offer roads is recommended; and, an opportunity to reduce border clearance times d. Availability of space including for future logistic ac- tivities - the facility should be furnished with neces- as well as improve reliability and predictability of sary handling, storage, stacking, control equipment the processes. The systems when fully operational as well as offices and other ancillary facilities will address the two main contributors to weak reli- ability: i) subjectivity in the clearance process due to face to face meetings between declarants and offi- cialdom; and ii) the need to submit documents to dif- ferent offices. ASYCUDA World when fully operational will address the first while the Single Window system will make it possible to submit documents at once to all relevant agencies. Trade and Transport Facilitation Assessment 85 Conclusions for improving corridor and supply chain performance in Lao PDR 86 Trade and Transport Facilitation Assessment 6 Conclusions for improving corridor and supply chain performance in Lao PDR 272. The corridor performance assessment which are located outside of the country. Most of and supply chain analysis pointed to two funda- the improvements in capacity and productivity have mental challenges for trade logistics in Lao PDR: been introduced by neighboring countries with the small volumes and an imbalance in traffic flows. exception of the East-West Corridor. The third refers These problems are not unique to Lao PDR. They to basic logistics services, e.g. transport, storage, occur in many relatively small economies, especially clearing and forwarding much of which is provided those that are landlocked or have long distances by neighboring countries. Efforts to improve domes- between ports and centers of production/consump- tic services are limited by the size of the market and tion. Addressing these challenges requires a com- the type of exports. The fourth category refers to bination of improvements in logistics services and both the inbound supply chains for inputs to produc- coordination of traffic flows to consolidate move- tion and outbound supply chains for the shipment of ments and capture economies of scale. Significant exports. Efforts to improve performance have gener- advances in trade facilitation have eliminated most of ally focused on reducing costs rather than increasing the constraints associated with being landlocked but value, which is consistent with the overall strategy for in the process generated greater interdependence export competitiveness. between Lao PDR and its neighbors. Collaboration with its neighbors offers Lao PDR access to: 276. The following recommendations assume a gradual shift in the competitive strategy from —— new markets and distribution channels; volume to value. Because of limitations on produc- —— logistics services with much greater scope and tion due to availability of labor with the requisite scale; and, skills and land suitable for cultivation, the growth in —— regional suppliers of a broad range of inputs exports will increasingly focus on value rather than used in the production of exports. volume. Since higher value goods usually require better quality logistics services and more special- 273. The challenge is to ensure access to these ized supply chains, the recommendations focus on benefits through inter-governmental collaboration. improving the time and reliability of the logistics ser- While GMS and ASEAN have created frameworks for vices and the variety and integration of supply chains. collaboration, it is necessary to deepen this collabora- tion through bilateral initiatives. 6.1 Regulations 274. Opportunities for increasing export com- 277. There has been sufficient progress in petitiveness through transport and trade facilita- reforming and modernizing customs procedures tion can be grouped into four categories: and in reducing restrictions on the cross-border movement of vehicles that the borders are no 1. Regulations and regulatory processes; longer considered to be a major impediment 2. Infrastructure investments and productivity; to trade. However, this does not imply that further 3. Logistics services and facilities; and, improvements are not required. It is important that 4. Supply chain architecture. current efforts continue in order to improve enforce- ment and ensure effective regulation as the volume 275. The first category concerns improvements in as the value of trade increases and international efficiency that can be achieved by simplifying regula- standards become more complex. Border manage- tions and regulatory procedures affecting both trade ment procedures will become more complex as ad- and transport. Much of the effort so far has focused ditional certifications are required for export of spe- on improving border crossing procedures. The sec- cific products, especially food, and to specific trading ond refers to the trade corridors, a large portion of partners. There is also expected to be a higher level of Trade and Transport Facilitation Assessment 87 scrutiny of imports as informal payments are replaced payments, while prevalent, do not appear to be sig- by proper enforcement. Also, as trade shifts towards nificant component of the cost of transport. The cost smaller shipments of higher value goods, both im- for road transport is higher than in Thailand but the ports and exports, then the number of transactions premium is due primarily to the small volume of traf- will increase as well as the incentives for misrepresen- fic and the imbalances between export and import tation. If the current clearance times are to continue traffic volumes. to decrease, then coordination between government agencies, automation of document entry and pro- 281. The infrastructure along the three corri- cessing, integration of ICT systems and sophistication dors is well developed including the port of Laem of risk management must be increased significantly. Chabang, the ICD at Lat Krabang, the highways pro- viding access to Lao PDR and the border crossing 278. Regulation of transport activities, such as facilities at Vientiane and Savannakhet. However, ad- axle load limits, annual inspections and licensing ditional improvements are needed for the crossing of vehicle operators are set according to domestic at Pakse (Vang Tao-Chong Mek) to allow unhindered requirements, but coordination with neighboring movement of agricultural products, especially per- countries will become important for encouraging ishables. This will require not only the introduction of regional competition and unhindered movement facilities that speed the processing but also the co-lo- across borders. cation of facilities for inspection and testing without breaking the cold chain. 279. Improvements in government processes and transparency must be complemented by an 282. The capacity of the key corridors has improvement in the standards for logistics servic- increased and productivity of the infrastructure es provided by the private sector. The current prac- has steadily improved. This process is expected to tice of requiring only a business license to become a continue. The capacity and performance of the cor- clearance agent should be replaced by a profession ridors could increase significantly if unit container license issued by customs that requires specific skills train operations were introduced but these require and training and must be updated periodically. Simi- significant investments and changes in operation as lar standards should apply to those acting as freight discussed below. forwarders but these can be introduced through the trade association, e.g. LIFFA, which would certify that 283. Various proposals for facilities to be its members apply specific business practices. Many built in Lao PDR or near to its border that would countries also introduce financial requirements in the facilitate international and transit trade have form of a minimum volume of business and/or a per- been presented over the last decade. These formance bond, but given the small volume of traffic include road-based intramodal facilities and rail- any such requirements should be limited so as not to based intermodal facilities. Their function varies from discourage competition. logistics hubs to inland container depots (ICDs), from dry ports to trade-related zones. The problem is that 6.2 Infrastructure most of these proposals are conceptual and lack a strong business case. Furthermore, the only exam- 280. The trade corridors linking Lao PDR with ples of comparable facilities in neighboring countries Thai seaports and airports perform well in terms are intended to serve a much larger volume of traffic. of time and reliability. Transit times between Laem Chabang and Vientiane, Savannakhet and Pakse 6.3 Logistics services are predictable and trucks can complete a one-way trip in a day (travel time is typically 12 hours). Typi- 284. The logistics services offered by 3PLs in cal clearance times at the border are less than one Lao PDR are limited in scope and sophistication. hour for exports and about two hours for imports. This is attributable to the limited market for their The only significant delays occur when vehicles arrive services and opportunities for comparative advan- after the border crossing points are closed. As result, tage. Shippers and consignees in Lao PDR have ready the greatest concern is cost. In this regard, informal access to Thai 3PLs that can offer a full range of ser- 88 Trade and Transport Facilitation Assessment vices with the exception of cargo clearance. Further- of boxes assigned to specific routes and trades. In or- more, there is no restriction on cross-border invest- der to reassign a container delivering import cargo to ments and joint ventures that would allow domestic a specific export cargo, the two shipments must use 3PLs to offer a full range of services. Although global the same shipping line and size and type of container. 3PLs have a very limited presence in Lao PDR, they There must also be a short time between when the are active in the Thai market and offer services in col- container is unloaded and when the export cargo is laboration with local 3PLs in both Thailand and Lao available for loading and, the unloading and loading PDR. Given the level of competition and sophistica- operations must take place fairly close to each other. tion of the Thai logistics sector, the quality of logistics While it is relatively easy to setup a yard for storing services should not be a constraint to the growth of empty containers that can subsequently be used to Lao PDR’s export trade. load exports, there must be sufficient volume to en- sure that the dwell time for boxes is relatively short. 285. Improvements in the quality and scope There must also be an incentive for the shipping lines. of the services provided by domestic 3PLs can be This is currently not the case, since the shipping lines achieved through collaboration. Cross-border joint do not incur the additional cost for the empty back- ventures are the most direct but there is also poten- haul and are able to offer next-day delivery of empty tial for strengthening domestic enterprises. This can boxes to their clients. be done through training initiated through LIFFA, which is a member of FIATA. LIFFA has have access 288. While it is unlikely that the proportion to various standard curricula available to national lo- of empty container movements can be reduced gistics associations. It can also take advantage of the significantly, it is possible to reduce the number variety of courses offered in Bangkok including those of container movements through transloading. provided by TIFFA (Thailand International Freight For- This requires the development of a cross-docking warding Association) through its ITBS subsidiary. facility at Lat Krabang or preferably Laem Chabang, where the contents of the import containers can be 286. The areas in which improvement in logis- transferred directly to a domestic container of the tics services can have the greatest impact is stor- same size or a closed van of similar proportion and age and consolidation. As mentioned above, various then sealed for movement in transit to Lao PDR. After proposals have been put forward to develop facilities delivery the domestic container/closed van can be to provide these services. What has been lacking is a used to carry unitized or loose cargo to the port or coherent strategy for introducing these services to- to other destinations in the region. A similar arrange- gether with a well-defined set of trade-related objec- ment could be used for export cargo that would be tives. In the short term, logistics would contribute to transloaded to ocean containers at the port. In or- the growth in trade by reducing the time and cost der to introduce this system, customs must agree to for delivery of exported goods as well as imported the transfer of cargo from one sealed conveyance inputs for the production of these goods. In the me- to another. Something similar already takes place at dium term, logistics should contribute to the increase Nong Khai. It would also be necessary to obtain a site in value of the exports as well as the value added in within the port, contract for its operations and make the country. arrangements with the shipping lines for delivering the containers to the site. The road transport would 287. Since most of the imported inputs and be arranged in manner similar to that for contain- exported goods are shipped in containers, the ers, but the transporters would provide the domestic focus should be on improving the efficiency of containers or closed vans. container logistics. The problems to be addressed are reducing the amount of empty container move- 289. The efficient transport of small shipments ments and increasing the utilization of container in containers requires consolidation of shipments capacity for LCL shipments. The problem of empty according to their destination and type of con- containers is due to both the trade imbalance and the tainer required. This service is provided by shipping way in which shipping lines manage the box inven- lines at container freight stations located in the port tory. Demurrage charges reflect the opportunity cost or by 3PLs at warehouses located near the port or Trade and Transport Facilitation Assessment 89 the source of the exports. The latter not only provide has been considerable discussion regarding the consolidation services but also arrange for deconsoli- requirement for various services related to storage dation and delivery at the other end of the journey. and consolidation, there has been no market study They may also may also provide transport. While the to determine the size and characteristics of de- consolidation of cargo reduces the unit cost of trans- mand. Similarly there have been various proposals port (per volume or weight), it also increases the tran- for addressing the empty backhaul problem but no sit time and predictability of delivery times. In order analysis of the different causes of empty container to be effective, there must be sufficient cargo to fill movements and the volumes involved and how the multiple containers each week for delivery to an over- proportion of empty movements can be reduced. A seas distribution hub. It is unclear if this applies to third area in which there has been a lack of demand exports from Lao PDR since private freight forwarders analysis is the development of various type of zones. are currently prohibited from offering consolidation While much of the demand would be generated, services. there should also be diverted demand that can be evaluated to determine the size of the potential de- 290. LCL cargo from Lao PDR is currently con- mand and the advantages that the zone would have solidated at the Thai ports. Domestic forwarders to offer to capture this demand. Some of these stud- should be allowed to participate in this activity by ies could be undertaken by the government but most consolidating LTL cargo and transporting it in bond require a joint effort since it is the private sector that to the Thai ports for consolidation. At the same time, would be the eventual users. the governments of Thailand and Lao PDR should collaborate to ensure competition in the provision of 293. In the medium term, improvements in consolidation services at the ports. An earlier collabo- logistics would complement the export of high- ration greatly increased competition among compa- er value goods. This requires the ability to handle nies providing road transport to/from the ports and smaller shipments, to provide services with different contestability through cross-border movement of combinations of availability, cost, service time and trucks. reliability, and to serve a wider range of markets and distribution channels. These would be supported 291. The logistics services available for by improvements in ICT services and better train- imports are limited to transport, clearing and ing of personnel. These improvements will be intro- storage. Imports to Vientiane that are not cleared at duced by the private sector both within Lao PDR and the border are processed in Thanaleng, at a facility through collaboration with its neighbors. They would which is operated by a state enterprise. Over the last also complement restructuring of the supply chains decade, the efficiency of the facility has improved de- for the different exports as discussed below. spite the lack of competition from the private sector. However, the scope and quality of services are lim- 294. The other change in the medium term will ited. In order to introduce a broader range of logis- be the improvement in logistics services would be tics services, e.g. inventory management, distribution the introduction of unit train container services and value added services, it is necessary to introduce within the region. So far the only container unit private sector 3PLs. This will require an end to the ex- train service provided by SRT is the shuttle opera- clusive arrangement and the development of a facil- tion between Laem Chabang port and the ICD at Lat ity that can accommodate multiple service providers. Krabang. The possibility of a unit train service for Lao It also requires an end to restrictions on third party PDR operating out of the railhead at Nong Khai has bonded warehousing. The government can continue been discussed but in its current state, the SRT lacks to regulate this activity through bonding require- both the physical and managerial assets required to ments and facility standards, as long as these do not sustain such an operation. The extension of this ser- prevent participation by qualified 3PLs. vice to Vientiane has also been discussed but without a detailed analysis of the difficulties in implementa- 292. The government should collaborate with the private sector in performing studies concern- ing demand for common services. Although there 90 Trade and Transport Facilitation Assessment tion and the financial viability. Among the basic ques- ing the volume of exports with some improvement tions that have yet to be addressed are in quality. The modifications would improve the end- —— What is the expected volume of container traf- to-end performance of these chains in terms of time, fic (loaded and empty) and the modal share cost and reliability thereby increasing the value of the for rail? product to the buyers. They would reduce not only —— Would the train deliver boxes to the port or to the order cycle but also the cash-to-cash cycle. Also Lat Krabang? they would also improve quality control and trace- —— What would be the quality of service in terms ability to meet the requirements of the buyers. of service frequency and transit times and how would this affect modal share? 298. Government would contribute to these —— Who would invest in the container handling modifications through improvements in trade equipment and rolling stock? facilitation and testing and certification. The for- —— Who would manage the train service and the mer is important for efficient clearance of imported intermodal terminal? inputs for higher value products and for exports of smaller shipments with differentiated products. The 295. Once a unit train service is operating, latter should be integrated into the supply as part of then an ICD can be established in Nong Khai or the quality control activities. Thanaleng. Initially this would be a simple inter- modal operation. However, as the volume of traffic 299. In the medium term, the private sector increases it would be possible to introduce the leg- would restructure their supply chains to increase islation to allow the ICD to operate as a dry port. It the unit value of the exports and the propor- would also be possible to expand the site and create tion of value-addition performed in Lao PDR. a logistics hub that provides storage, consolidation, The inbound supply chains would be restructured and value added services. It is difficult to plan this to increase local sourcing of inputs and the quality development given the uncertainties associated with of these inputs. The outbound supply chains would SRT’s financial and operational problems. However, it be diversified to provide greater variety in perfor- unlikely that the terminal would be located in Thana- mance, utilize more distribution channels, handle a leng given the traffic volumes and the relatively small wider range of products and shipment sizes and offer benefit in terms of cost for the road transport to the special handling capabilities. origin/destination in Lao PDR. 300. Government would support these efforts 296. The potential for establishing unit train through allocation of land for production including operations will be much greater if the planned designated production clusters and development of rail link from Kunming to Bangkok via Vientiane is complementary transport infrastructure and national established. However, the majority of the traffic IT trade portals. It would also participate with the pri- would be transiting Lao PDR and the unit trains would vate sector in the marketing studies and provision of not stop in Vientiane. Nevertheless, the container common technical services to support the diversifica- traffic generated in Vientiane should be sufficient to tion to new markets and distribution channels. justify a daily movement south to Laem Chabang and possibly one north to Kunming. Nevertheless, there 301. In the short term, the growth in coffee are serious doubts as to the financial viability of such exports, will be primarily though improvements a rail route. in the structure of inbound supply chains. Pro- duction will increase as additional land is planted, 6.4 Supply chains coffee plants are renewed, and cultivation practices improve. There will also be an increase in value as 297. In the short term, the private sector could the share of higher value Arabica and wet process- modify their supply chains, both inbound and out- ing increases. Larger enterprises, both plantations bound, to take advantage of improvements in the and farmers groups, will be established and collec- quality of the logistics services. These changes are tion procedures will be simplified. The government intended to achieve the short-term goal of increas- will contribute through its traditional role in land Trade and Transport Facilitation Assessment 91 allocation and agricultural extension services but can tion of textiles and other inputs to production of also support efforts to improve production through garments. The government would contribute to this outgrower schemes and other forms of contract effort through development of duty free zones to serve farming. existing demand and by allowing the establishment of third party bonded warehouses. 302. In the medium term, growth in coffee exports will result primarily from improvements 305. The growth in exports of fresh fruits and in the structure of outbound supply chains. There vegetables is expected to encompass increases in will be improvements in processing and an increase both volume and unit value. For produce shipped in the exports to higher value markets and through to neighboring countries, the restructuring of in- higher value distribution channels. This will require a bound supply chains will include establishment of shift from large shipments to international traders to large farms with outgrower schemes and the forma- small-medium sized shipments by individual enter- tion of grower’s associations to provide sufficient prises to specialized roasters and retailers. Govern- quantity and consistency of produce for distribution ment support in the areas of quality control and cer- to retail chains in neighboring countries. This will also tification will be important for establishing a national require an increase in the capacity of temperature- brand to support the brands developed by individual controlled transport in shipments as well as expedit- exporters. ed clearance procedures at the borders. For produce shipped overseas, the restructuring of the supply 303. The growth in garment exports will be chains will include foreign investment in large farms accomplished through foreign investment in new complemented by outgrower schemes together with production along with an increasing proportion faster and more reliable distribution channels using of domestic production. The expansion would both air and sea transport. Government support will include efforts to produce higher value goods, but in be critical for supporting the new arrangements be- the short term it is expected that the principal focus tween farms and processors on the inbound supply would be on expanding volume. Since foreign own- chains and for integrating certification and clearance ers manage most of the logistics, the government’s procedures into the outbound supply chains to sup- primary efforts would focus on creating a favorable port fast and reliable shipments. business enabling environment. Efforts to reduce the time and cost for the inbound and outbound move- 306. The growth in exports of processed fruits ments would continue through improvements in and vegetables will parallel those of exports of trade facilitation and reorganization of land transport fresh produce. There will be less demand for con- through transloading, consolidation, and collabora- sistency of produce and for specialized transport but tion with the shipping lines in reassigning inbound more demand for regular supply throughout the year. containers to export shipments. The development of the inbound supply chains will focus on obtaining sufficient volume of production to 304. In the medium term, the role of domes- fill regular orders from retailers. Government support tic producers could be enhanced through better would extend to enforcement of health and safety access to finance and adjustment in outbound regulations for the processing of fruits and vegeta- supply chains to focus on specialized markets. bles that meets international standards. Government At the same time, the role of local suppliers, both would also support the development of production domestic and foreign-owned, would be strength- clusters through provision of reliable utilities and ened through development of clusters with bonded uncongested access to supporting infrastructure. facilitations for production, finishing and distribu- 92 Trade and Transport Facilitation Assessment References ADB (2008) Lao PDR and Viet Nam: Greater Mekong Subregion: East–West Corridor Project, Asian Development Bank. 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