A new gold rush?

Is the interest for real? After all,there are plenty of factors that make Laos rather unattractive for doing business. For one,it is a tiny market. Even though its per capita income at around $900 is not significantly lower than India’s,the size of the entire economy is just $5.5 billion — Laos has just 6.5 million people,80 per cent of who work in agriculture,contributing 50 per cent to the GDP. Second,it is a landlocked country,uneconomical as a base to export goods to other markets.

But,somewhat counter-intuitively,Laos seems all set to be the next gold rush destination in South East Asia and Indian firms have little choice but to be interested. Why? Primarily because of the vast potential of its natural resources —- forests,water and minerals (gold,copper,bauxite,iron ore,other precious metals) —- all identified,but mostly unexploited.

China has already invested up to nearly $3 billion over the last decade,much of that in the last four years. In a pattern not dissimilar from its foray into Africa,these investments are entirely concentrated on natural resources,that is,forestry and minerals (and some hydropower).

India’s foray has been more limited,but now it seems at least some Indian firms are set to compete for the resources in this western frontier of the region,once called Indo-China. The need for Indian companies in the resources business to look at newer opportunities outside is urgent given the uncertainty over land acquisition and mining policy in India. And Laos,for all its drawbacks,is right in India’s neighbourhood.

At least one Indian business group made an early start. The Aditya Birla Group,also the single-largest foreign investor company in Laos,committed $350 million to a eucalyptus plantation-cum-pulp manufacturing factory in 2006. So far,the group has spent $21 million of that sum and set up a plantation of 10,000 hectares,which it eventually hopes to scale up to 250,000 hectares—-imagine how hard it would be to acquire that much forest land in India. The final goal of the Aditya Birla Group is to service its paper manufacturing business in India and South East Asia.

Interestingly,the Tata Group,always well-regarded for its strategic thinking,is trying to win a mining exploration licence for iron ore from the government of Laos. Sandipan Chakraborty,MD of Tata Steel Distribution and Processing Limited,in fact,headed the business delegation that accompanied President Patil. The Indian Chamber of Commerce in Laos also sees an opportunity for India in agriculture,for example,in growing pulses,which are in short supply in India.

Prospects for Indian firms look good. The communist government of Laos is favourably inclined to let foreign investment into natural resources. Off the record,officials admit that Indian presence is generally viewed as more benign than China’s,which tends not to create local employment choosing to import Chinese workers. At a more general policy level,the government liberalised land laws in 2009 allowing foreigners to own property after buying it from the government. That is a massive fillip to those interested in the natural resources business.

Of course,China has a head-start over India,not just in Laos but in much of Africa. Chinese businesses largely follow the foreign policy goals of their government. Indian businesses are not likely to follow government diktats and make their own decisions on where to invest. Ironically enough though,the policy uncertainty on natural resources created by the government of India may,in a perverse way,force Indian firms to join the gold rush in unexplored countries like Laos.

Cynics may argue that what’s good for India and China may not be good for Laos and that a “mineral curse” may lie ahead. But when you consider the limited options that tiny,landlocked Laos has,natural resource rents can play a crucial role. It can leverage its mineral resources to get more aid and financial assistance. Viewed objectively,there is something for everyone in the new gold rush.

dhiraj.nayyar@expressindia.com