Connecting with Laos

Connecting with Laos

As the opening of a rail link with China nears, promising new possibilities for economic development are emerging.

Landlocked but rich in natural resources and geographically diverse, Laos has a lot to offer. Significant investments from neighbours including China have helped the country achieve economic growth of 6-7% a year over the past decade. Yet, inadequate infrastructure and the absence of a skilled workforce are among the reasons Laos has yet to fulfil its potential.

But with the imminent opening of a 471-kilometre railway linking its capital Vientiane with the Chinese border at Boten, Laos is looking forward to changing its status from landlocked to land-linked and opening new economic horizons.

The high-profile rail line, the most expensive infrastructure project in the country's history, is expected to boost exports and attract investment as well as tourists once it is officially opened on Dec 2, which is Lao National Day, says a high-ranking official.

"One of the major policies of the government is to develop the country to be land-linked. And we have realised that it is difficult to achieve the target outlined by the government without the railway," said Soulivath Souvannachoumkham, director-general of the External Finance and Debt Management Department at the Ministry of Finance.

"We all know that one of the bottlenecks to the economic development of Laos is that we don't have sea transport, making it difficult for shipments between cities and districts, and for trade and economic development. Once the railway is completed, it will help reduce transport costs by about 50%," he told Asia Focus during a small group interview.

Construction of the rail line, he said, has progressed according to plan despite earlier concerns that it might be delayed because of the Covid-19 pandemic.

Laos has reported only 17,905 cases of Covid-19 with just 16 deaths since the pandemic began last year, thanks to strict lockdown and quarantine measures. So far, 2.6 million people or 36% of the population have received their first Covid jab while 1.9 million or 26% are fully vaccinated.

"So far, big projects in Laos haven't seen much impact from the Covid outbreak because the spread has mainly occurred among communities in urban areas, not so much at construction sites, so those projects have been able to continue," said Mr Soulivath.

The economic and trade impact of the railway is going to be substantial. The cost of shipments from Vientiane to Kunming in the southern Chinese province of Yunnan will be cut by 40-50% or US$30 per tonne, along with a 20-40% cost reduction on domestic routes, according to a World Bank report -- From landlocked to land-linked: unlocking the potential of Lao-China rail connectivity.

Exports from Laos to China were worth $1.7 billion in 2019 and could expand by about 20% per year, a report by UN Comtrade has said.

The governments of Laos and China have signed an agreement for China to import more goods from Laos, especially agricultural products such as corn, bananas, cassava and beans, beef and other products, by shipping to Yunnan, said Mr Soulivath.

The rail link will also attract more investments from China and other countries, mainly in agriculture, livestock and mining. China is by far the top source of foreign direct investment (FDI) in Laos, accounting for 87.7% of cumulative FDI flows into the country or $967.7 million as of the end of 2020. Investors from Thailand and Vietnam were second and third with shares of 4.9% and 2.5%, respectively.

More investments from China will be drawn to sites in Laos along the rail line, particularly in special economic zones (SEZs), for products to be manufactured in Laos and sent to China for export via the rail network that now stretches from China to Europe.

Thailand's leading industrial estate developer, Amata Corporation, has won approval from the Vientiane government to develop a large-scale SEZ in northern Laos, said Mr Soulivath.

A memorandum of understanding has been signed and preparations are under way to secure funding for the construction, which would follow land preparation, including infrastructure and utility development, he said.

Amata executives confirmed the interest in developing the SEZ in Laos when asked by Asia Focus; however, they declined to offer further details. The listed Thai developer has stated previously that it had secured between 20,000 and 30,000 rai to develop the estate in northern Laos bordering China. To be wholly invested by Amata, it aims to attract manufacturers from Asian countries, notably Japan.

The China-Laos railway will also increase the number of tourists, especially from China, as it will significantly reduce travel time. Prior to the pandemic, Laos was attracting between 800,000 and one million tourists a year from China, and the figure is projected to expand by 40-50% once international travel resumes, said Mr Soulivath.

Meanwhile, work is continuing on a 445-kilometre highway linking Vientiane with Boten on the border with China. The first 113km leg from Vientiane to Vang Vieng is now open while work on the second leg from Vang Vieng to Luang Prabang (137 km) is expected to be completed in three years. A highway to Vietnam in the south is also being studied with the assistance from the Japanese government, and construction could start in 2023.

According to Mr Soulivath, the economy of Laos managed to grow by 3.3% in 2020, outpacing forecasts by the World Bank, the Asian Development Bank and the International Monetary Fund, which saw the economy contracting or growing by less than 1% at best. This year, the country expects GDP growth in a range of 3.8% to 4%, or at least in line with that of 2020.

"Although the second wave of Covid, which started in April this year, has caused significant impacts on the economy, many economic activities have been able to continue including major infrastructure, mining and energy projects," he said.

The government budget deficit was 5.3% of GDP last year as the pandemic affected revenue collection. But that was still better than the original forecast of 6% because authorities tightly controlled expenses and postponed some non-essential investments. This year, the government aims to cap the deficit at no more than 3% of GDP as revenue collection might still not be back to pre-pandemic levels, said Mr Soulivath.

"The government has now shifted its focus to quality growth or the so-called green growth with natural resource protection and more effective use of those resources," says Soulivath Souvannachoumkham, director-general of the External Finance and Debt Management Department at the Ministry of Finance of Laos. SUPPLIED

POST-COVID RECOVERY

The World Bank now predicts the Lao economy to expand by 3.6% in 2021, although the forecast was trimmed from 4% projected in March.

"The Lao economy is on course for moderately improved growth in 2021, despite the second wave of Covid-19 denting the promising economic recovery made early in the year," the bank said in its latest Economic Monitor update released on Aug 20.

Agriculture and industry are driving much of the growth, with agricultural exports increasing, while electricity, mining and manufacturing exports have rebounded from the trade slowdown last year. In tourism, hospitality, transport and other services, however, lockdowns and the continued curbs on international travel mean that most firms are struggling, depriving the country of a major income source.

"Laos is doing well to contain the coronavirus and get vaccinations out across the population," said Alex Kremer, the new World Bank country manager.

"However, the risk of debt distress, a weak kip and low government revenues continue to limit the government's options for reviving the economy. Reforms that would boost private investment, tax payments and trade would help in this matter," he added.

To help the economy recover, Mr Soulivath said Laos aimed to manufacture more products, particularly agricultural goods, for import substitution. As well, small and medium enterprise (SME) development would be important to create a more sustainable future.

"In the past 10-20 years, Laos has relied heavily on natural resources for economic development -- for example, exports of coal, copper and exploration of other resources," he said.

"Although we achieved high economic growth of 7-8% a year in the past, that might not be sustained in the future. Thus, the government has now shifted its focus to quality growth or so-called green growth with natural resource protection and more effective use of those resources."

Besides, the government aims to diversify sources of growth with targeted sectors including services, industrial production and tourism.

"Energy is still our targeted sector with lots of potential, especially energy production for export to Thailand," said Mr Soulivath. "By focusing more on green projects, energy will remain the focus of the government to recover our economy."

Electricity is still the main export of Laos, worth $6.1 billion or about 30% of total export value in 2020. Generating capacity now totals 10,438 megawatts, 80% of it from hydropower.

Between 2016 and 2020, 53 power plants were developed with a combined installed capacity of 4,700 MW. Of the 86 plants now in operation, 73 are hydropower, eight solar, four biomass and one thermal plant.

Laos has an agreement to supply 9,000 MW to the Electricity Generating Authority of Thailand (Egat), of which 5,932 MW or around 65% are being delivered now, Mr Soulivath explained.

Between 2020 and 2025, several more power projects are in the pipeline, including 10 developed by EDL-Generation Public Co (EDL-Gen) which is 51% owned by the Lao government. Nine other plants will export electricity, two will supply Vietnam, and an additional 27 projects will be for domestic consumption.

"We project that these power projects would generate total revenue of about $1.7 billion to the government in the next five years," Mr Soulivath said.

Mining is also a major revenue generator, but no new licences have been granted for the last five years as the government conducted a review of licence terms and taxes for iron ore, gold, copper and coal projects, he explained.

After the review, taxes, royalties and other fees paid by mining companies will double or triple. For iron ore, for instance, the government will get a lump sum of $20-30 per tonne, up from about $10 in the past, said Mr Soulivath.

Currently, authorities are reviewing 10 proposals by investors from China, Vietnam and Laos, who have all paid deposits to the government. They will be asked to ensure their operations use natural resources in a more efficient way, he added.

"Now it takes two days to ship products from Vientiane to Kunming by road. That would be reduced to only about 15-16 hours by rail," says Suwit Ratanachinda, president of the Thai Logistics Service Providers Federation. SUPPLIED

ASEAN BENEFITS

Now that the Laos-China rail line is nearly completed, there is great anticipation about a link in the other direction, starting in Nong Khai province opposite Vientiane, and eventually running to the Laem Chabang deep-sea port on Thailand's Eastern Seaboard. Work in Thailand is behind schedule but once completed, the line will be a boon to shippers moving goods between Thailand and Laos, Thailand and China, and also with Malaysia as well as Singapore in the future.

"Besides the economic benefits for Laos, Asean as a whole will also get a boost as China has a policy to increase trade and transport links with Asean member states," Mr Soulivath said.

Suwit Ratanachinda, president of the Thai Logistics Service Providers Federation, said the initial plan is for the rail line to be extended from Vientiane to a dry port in Thanaleng, next to the Thai-Lao Friendship Bridge on the Lao side of the Mekong River. The port was developed with loans from Thailand's Neighbouring Countries Economic Development Cooperation Agency (Neda) and a 2,000-rai logistics zone is being constructed to serve growing demand for goods transport spurred by the Laos-China railway.

"The first phase of the 2,000-rai logistics zone is also set to operate on Dec 2," said Mr Suwit, who took part in the groundbreaking ceremony for the Laos-China rail link and has been monitoring the development of the route over the past five years.

Sitthi Logistic Lao Co Ltd, the Lao firm that developed and operates the port in Thanaleng, has also secured financing for the 2.8km link between Vientiane and Thanaleng, he added.

In the future, Mr Suwit said, the highway linking Laos with Vietnam would open the way for more cargo to be shipped via a port on the Vietnamese coast. The Vietnamese government has awarded a concession to Laos to develop the project.

"The medium-speed Laos-China rail link, with speeds up to 160km per hour, would cut shipping time of goods considerably. Now it takes two days to ship products from Vientiane to Kunming by road. That would be reduced to only about 15-16 hours by rail," he told Asia Focus in a telephone interview.

With the new corridor from Thailand, through Vientiane, to Kunming, the reduced shipping time would especially benefit exporters of Thai fruits, including durian, to China where demand is high. "At the moment, Thai fruits are transported by trucks on the R9, R3 and R2 roads. From December 2 onward, they would be shipped to Vientiane and then put on the railway to go to Kunming," said Mr Suwit.

As well, the Laos-China railway would provide Thai exporters with "new opportunities" to reach markets in central Asia such as Kazakhstan and Uzbekistan, and also to ship to Europe in the future.

"Now it takes 35-40 days for shipments to central Asian markets and with the rail link, shipping time could be cut to only 15 days," he said.

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