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Tobacco Industry Monitor

Southeast Asia Tobacco Control Alliance

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Lao Tobacco Limited (LTL)

Introduction

Lao PDR is a country of 6.6 million people, with a single-party socialist government. It is one of the poorest countries in the world, ranked at No. 139 in the United Nations Human Development Index in 2018.[1] About 34% of the population live on USD 1.25 a day and about 28% live below the poverty line. Lao PDR ratified the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) in September 2006. While Lao PDR is making progress in tobacco control however it faces challenges from the tobacco industry (TI).

Structure of the tobacco industry

Five years prior to the WHO FCTC ratification, in November 2001, a 25-year Investment License Agreement (ILA) was signed between the Committee for Investment and Cooperation (CIC) of Lao PDR, Coralma International and S3T Pte Ltd (a French asset management company). This contract established Lao Tobacco Limited (LTL) as a joint venture of the government with the TI. Since then, the Imperial Tobacco Group has taken over the shares of Coralma and S3T[2] (a Singaporean private company categorized as other holding companies and management consultancy services). LTL is currently the largest tobacco company in Lao PDR with a cigarette market share of 77.3%.[3] The ILA also grants LTL tax incentives (i.e. a tax holiday and low tax rates) to grow its business investment in the country. Although intended to boost foreign investment in Lao PDR, the longer-term impact on the economy and well-being in this developing country has been negative. The government has not only been losing tax revenues for the past 18 years, but also has to deal with the addiction, diseases, deaths, and healthcare costs of tobacco use. After LTL, Lao-China Hongta Good Luck Tobacco Co.Ltd. (100% owned by Chinese investors and formerly called Lao-Chinese Lucky Tobacco Company) has the second largest market share and enjoys incentives similar to the ILA, although it is not part of the contract.

LTL operates its own production chain, from leaf processing to cigarette manufacturing and sales and marketing. According to Euromonitor, the company has expanded its production capacity, between 2014 and 2016, as a result of the vertical integration (control the supply chain from manufacturing to end sales). The integration enables them to ensure low prices of their brand, A Deng, the most popular domestic brand in the country. Additionally, LTL receives ready raw tobacco supply locally, with low prices to maximize tobacco consumption demand in both rural and urban areas.

Although the domestic laws and tobacco control measures are enforced on all tobacco companies, the companies are not required to submit reports detailing their production volumes and values and other activities such as marketing and sales. Moreover, the government as a shareholder of LTL is not required to publicly disclose meetings/ interactions with the TI.

Lao Tobacco Ltd. and other tobacco companies’ interference in tobacco control measures

Article 5.3 guidelines in Recommendation 8 calls on Parties to treat State-owned tobacco industry in the same way as any other TI.[4] The LTL (with the 47% ownership of the State) can be seen as a State-owned enterprise – however, one that has benefitted both as a private company receiving benefits for being an investor, and also having easy access to policymakers by virtue of the government’s ownership. The Ministry of Industry and Commerce has their official seat in the board of LTL. In addition, the LTL hires retired senior government officials as advisors. Besides providing advice to the industry, former government officials enhance better relationship between the industry and the government, which helps facilitate the tobacco business in Lao PDR.

  1. Unfair Investment License Agreement (ILA) results in tax loss

The major disadvantages for the Lao Government resulting from the ILA is on tobacco tax policy as the agreement fixed the excise tax rate applicable to LTL for the initial 25-year period (from 2001-2026): 15% of the production cost if production cost is less than LAK 1,500 per pack of 20 units and 30% of the production cost if production cost is either equal to or more than LAK 1,500 per pack of 20 units. These rates enforced on LTL and Lao-Chinese Lucky Tobacco Company are much lower than the rate stipulated by law, resulting in cheap and very affordable cigarettes. Consequently, between 2001 and 2016, the smoking prevalence rate in Lao PDR increased from 25.5% in 2012 to 27.9% in 2015, while the total revenue loss between 2002 to 2017 due to the ILA was estimated at USD 144 million (Figure 1)

Figure 1: Tobacco Tax Revenue and Tobacco Tax Revenue Loss in Lao PDR[5]

 

  1. Participation and/or interference in policy development

In 2016, when the government issued the pictorial health warnings (PHWs) law on all tobacco products (top 75% front and back), the TI led by LTL sent a letter to the Ministry of Health requesting a reduction of PHWs size from 75% to 50%. The industry provided the excuse that “they had a large stockpile of printed packets” and were unable to print 75% PHWs on cigarette packs. Although the government did not accommodate the industry’s request, the PHW implementation was delayed by 180 days (6 months) – due to industry interference. In 2018, the Government issued a Decree by the Prime Minister to penalize companies that violate the law.[6]

Besides the interference in PHWs law, the industry also interfered with tobacco tax and tobacco control fund policies. The Amended Tax Law (No 05/NA, 20 December 2011) increased excise tax rate from 55% to 60%, and a special profit tax rate of 26% is applied to companies engaged in the manufacture, import and sale of tobacco. In 2016, the new Excise Tax law was passed and the excise taxes rate were 30% (2016- 2017); 45% (2018-2019) and 60% (2020 onwards) of factory price. Additionally, 2% of the company’s profit tax and LAK 200 specific health tax per pack should be dedicated to the Tobacco Control Fund. However, over the past 17 years, the industry, particularly LTL has not complied with the excise tax law and has not paid the 2% tax and LAK 200 per pack for tobacco control. No action has been taken against the company for non-payment. It has taken advantage of a poor country like Lao PDR by taking advantage of the low tax rate benefit as agreed in the ILA. Although the government does not officially allow or invite the TI to be part of decision-making process of public health policy, it is evident that the TI in Lao PDR is able to take control of public policy. They are not required to submit the report on tobacco production, manufacture, market share, marketing expenditures and revenues, or disclose or register TI entities, affiliated organizations, and individuals. Moreover, the government does not publicly disclose meetings/ interactions with the TI. While the MOH does not meet with TI, other ministries, such as the Ministry of Industry and Commerce (MOIC), have communications with them.

  1. Assistance provided to the government

The TI in Lao PDR often claims that raising the tobacco tax rates increase the illicit trade of tobacco products in the country. Therefore, they offer assistance to the government through anti-smuggling enforcement activities. Recently in 2018, the industry proposed to the government to enforce a minimum price policy to set the lower limit of cigarette price and specific tax increase from LAK 500 to LAK 600. The TI claimed that they are concerned about tobacco consumption among youth, saying raising the cigarette price and tax will help prevent youth from taking up smoking. While the proposal seems credible, it will not make any impact on reducing consumption, since it is a minimal increase that will not reduce cigarette affordability. Instead, the TI will gain more revenues compared to the government. The industry proposed the new policy, which was approved, through MOIC, although the Ministry of Health (MOH) was against it. In December 2018, the Minister of Health approved a code of conduct for health officials when interacting with the TI. This code prohibits direct and indirect support from tobacco industry such as presents, gifts, cash, study fund and corporate social responsibility activities.

Conclusion

Lao Tobacco Ltd. (LTL) under the Imperial Tobacco Group has successfully taken advantage of Lao PDR’s government under the ILA since 2001 to present. Being a joint venture company with the government, LTL is able to gain access to key government officials and intervene on issues to protect its business. Most government departments and ministries view the tobacco business as any other business that brings about economic growth to the country. The industry is able to influence and participate in decision-making processes at the highest level of government. Although the government led by MOH is obliged to implement the WHO FCTC, and domestic laws and regulations have been passed, the TI has been operating outside of the law’s purview since 2001. As a result, it damages the socio-economic situation of Lao PDR since the smoking prevalence rate is increasing while the government has lost about USD 144 million in revenues over the past decade.

*This article is excepted from Asian state-owned tobacco enterprises

[1] UNDP (2018). Global Human Development Indicators. Retrieved from http://hdr.undp.org/en/countries (Accessed on November 21, 2018)
[2] https://www.sgpbusiness.com/company/S3t-Pte-Ltd
[3] GlobalData, Cigarettes in Laos, 2019 p.12
[4] World Health Organization. Guidelines for implementation of Article 5.3 of the WHO Framework Convention on Tobacco Control; FCTC/COP3 (7) http://www.who.int/fctc/treaty_ instruments/Guidelines_Article_5_3_English.pdf?ua=1&ua=1
[5] https://seatca.org/dmdocuments/AsianStateOwnedTobaccoEnterprises_Report_web.pdf
[6] SEATCA (2018). Tobacco Industry Interference Index: ASEAN Report on Implementation of WHO Framework Convention on Tobacco Control Article 5.3