Laos’ Land-Linking Dreams – a Risky Bet?

Construction News Laos Myanmar Vietnam

Laos’ Land-Linking Dreams – a Risky Bet?

The Lao government aspires to gain centrality in the Greater Mekong Subregion via new infrastructure; but at what price?

By Fabio Figiaconi

06 September 2019

The Lao government is strongly pushing ahead with different projects to better connect the country to the main transport networks of the region and integrate it into global value chains. Laos’ landlocked position and natural topography has historically led to its isolation and been a serious obstacle for development. During the French period, the colonial authorities developed plans to “unblock” Laos’ economic potential by building a network of all-weather roads and railways to link it to Vietnam; however, those aspirations were never realized.

Similarly, in the last decade the Lao government has asserted the necessity to transform the country “from a landlocked to a land-linked one,” making this objective the cornerstone of its transportation policy and, more broadly, the guiding light for the nation’s economic development. Despite the significant GDP increase that Laos has witnessed in the last few years (with an average GDP growth of 7.7 percent on an annual basis), the Lao ruling party is persuaded that the connectivity improvement is one of the keys to trigger the country’s unexpressed growth potential. In line with this belief, the Lao leadership has recently given the green light to a series of mega-projects.

Among these, the “Laos-China Railway” takes the pride of place. The infrastructure, a 414 km high-speed rail link, will connect Yunnan Province in southern China with Vientiane, the Lao capital, and from there on with the already existing railways to Bangkok, Malaysia and Singapore. The total cost allegedly rises to $6 billion, financed 70 percent by the Chinese government in the framework of the Belt and Road Initiative, while the other 30 percent will be covered by the Lao government with the help of some Chinese banks. Due to the opacity that characterizes the two governments, however, the exact details of the financing agreement are not publicly known and we must reply on speculation. Currently, construction is proceeding ahead of schedule and is due to be completed by 2021. The “Laos-China Railway” represents the backbone infrastructure on which the Lao authorities plan to develop the country. According to different ministerial sources, once completed it will allow to cut transport costs for Lao products up to 40 percent, will create thousand of jobs and will have the potential to transform the country in a regional distribution hub.

Besides land links, the Lao leadership has been cooperating with China on internal and under-exploited waterways, especially in regard to the Mekong basin. At the end of 2014, Myanmar, Thailand and Laos approved the “Development Plan for International Navigation on the Lancang-Mekong River,” a Chinese-led project also elaborated under the auspices of the Belt and Road Initiative. Concretely, the plan consists of blasting large rocks and islets in the most perilous parts of the river (especially in the Thai sector) to allow the passage of 500-tonne ships. If completed, the project would create a 630 km direct aquatic route connecting Yunnan to Luang Prabang, the second biggest Lao city, strategically located in the north of the country.  To date, however, this project is apparently on hold after a campaign carried out by Thai citizens and environmental groups, which pushed the Thai government to withdraw its support.

Despite this setback, the Lao government’s support to the Mekong navigation project shows clearly its will to develop a multilayered strategy, not limiting the cooperation with China to just one transport sector, but exploiting every possible way to better connect the country not only with Beijing’s southernmost provinces, but also with the other countries in the Mekong Subregion.

In line with this vision, the Lao government is currently engaged also with Vietnam to pursue joint transportation projects. The two states enjoy a longstanding and deep cooperation in the political and economic sectors. In 2015, they decided to scale up their collaboration also in the realm of connectivity by signing a Memorandum of Understanding covering the 2016-2025 period. The main project on which the two governments have already agreed upon is the expansion of Vung Ang seaport, located in the Ha Tinh province in central Vietnam, financed for 60 percent by the Lao side (with the contribution of Lao private enterprises) and for the other part by the Vietnamese. According to the agreement, the Vung Ang port will constitute a key trade and logistic hub for Lao exports, providing the landlocked nation with a fundamental access to the sea.

In order to further reinforce the Vung Ang’s strategic importance and improve the commercial routes between their nations, the Lao and Vietnamese governments have also conceived to link the port with Vientiane via a 555 km railway. According to some estimates, the project would cost a total of $5 billion, with Laos expected to contribute for around $3.5 billion. In a meeting at the presidential level held this February in Vientiane, the two sides agreed to start seeking ways to finance the infrastructure, with some solutions already identified in funds from the state budgets, partnership with the private sector as well as loans form international partners. Additionally, Laos and Vietnam have also been holding talks to construct an expressway connecting the two capitals. The new road link is envisaged to be a six-lane 707 km-long highway, with an estimated cost of around $4.5 billion. Currently, the roads between the two states are for the most part in poor condition, slowing travel times and damaging commercial exchanges; according to some studies, the realization of the Vientiane-Hanoi expressway would be instrumental in bridging this gap, bringing economic benefits to many actors in the area.

Lastly, the Lao government is also willing to expand the number of the so called “friendship bridges” on the Mekong, linking the country with Myanmar and especially Thailand. At present, there are five completed bridges, with three more under discussion. The first of these constructions was opened in 1994 between Vientiane and the Thai province of Nong Khai thanks to a grant provided by the Australian government. The bridges have been extremely beneficial in boosting the trade between the involved nations (in 2018, Thailand accounted for 51.6 percent of the total Lao trade) and nowadays the vast majority of the goods exchanged between them transits through these passages. Also in the case of the new bridges’ construction Laos has been seeking financial help, in this case from Thailand.

Over the last few years, the Lao government has significantly accelerated work on infrastructure construction as a mean to sustain the country’s favorable economic growth momentum. Also, it has to be noted that this push is perfectly in accordance with the “Master Plan on ASEAN Connectivity 2025,” which puts a strong focus on the increase of public and private infrastructure investments in its member states.

On the other hand, however, many voices from the international community have labeled these plans as far too ambitious and way too burdensome for the country’s economic capability. From the data provided above, it is clear that the Lao authorities want to finance the new constructions largely by borrowing money from international partners and especially from China. The Belt and Road Initiative has made credit lines easily available. It is worth remembering, though, that in 2018 Laos GDP was just $18.1 billion, with public debt accounting for 63 percent of GDP. This situation could be potentially risky in the medium-long run. In a recent report from the International Monetary Fund, Laos’ debt distress rank increased from moderate to high. Moreover, the United Nations special rapporteur Philip Alston, after a visit in the country, warned Lao authorities over the risk of spending too much money on Chinese-backed mega-projects. The concrete danger that could arise from this context is the incapability to pay back the loans and fall into the so called “Chinese debt trap,” being forced to hand over to Beijing control of some important national assets, as already happened to some countries involved in the Belt and Road Initiative.

Against this grim perspective, Lao Prime Minister Thongloun Sisoulith constantly expresses  optimism about the country’s capacity to manage the debt and his support to the Belt and Road Initiative. In a recent intervention at the Nikkei’s Future of Asia conference in Tokyo, the prime minister defended the nation’s transport and connectivity policy stating that “if we don’t borrow, Laos, as a least-developed country, won’t develop further. He also declared that the government has “its own measures to manage the debt and ensure balance in the public debt sector” and suggested that “the observers who have concern for Laos in terms of debt repayment may not have enough or sufficient information on how the government assesses those projects.”

As it is possible to argue from this declaration and as observers have previously noted, what theLao government is doing is in all respects a bet on the fact that future revenues generated by the connectivity improvements will be enough to pay back the loans; in the field of economic history it is possible to pinpoint some examples of countries that followed this model successfully. If the gamble proves to be a failure, however, the government may face the concrete risk that China will further extend its influence in the country, demand more concessions in the diplomatic field and eventually succeed in establishing a form of more or less indirect control on Laos, a territory that, it is worth to remember, Beijing has lengthily regarded as “its backyard.”

All in all, it is undeniable is that the extremely poor conditions of the country’s transport infrastructures really call for investments in this sector; currently, Laos is ranked by the United Nations as a Least Developed Country and, if it wants to graduate from this status and try to catch up with other states in the region, bold policies and large public expenses are mandatory, as staying put is not a really viable alternative. What seems to be lacking in the Lao government’s vision, however, is that the connectivity plans are to be paired with significant improvements in the national productive base. Nowadays, public investments are deployed for the most part in some mega projects within very specific areas (beside transportation, the Lao government is investing heavily in hydropower), while the development of other economic sectors seem to be somewhat neglected. This could be detrimental in the long run, as without an efficient net of industries and businesses that could take advantage of the new roads to export their products abroad the new infrastructures risk to be beneficial not to Laos, but rather to its neighbors and especially to China, that could use them as a springboard to expand its economic presence throughout the region.

What the Lao government should implement is a truly comprehensive policy to guarantee balanced development across different economic sectors, diversify the economy, and ensure a sustainable future to the nation; in other words, the new infrastructure has to be conceived not as an end in themselves, but as a mean to support the Lao economy as a whole. If not, the new transport links risk to be just a group of useless paths, leading Laos to nowhere.

Fabio Figiaconi is a recent graduate from the Master in International Public Policy and Management at the University of Rotterdam. He also holds a Master degree in Contemporary History from the University of Milan. He recently did a traineeship in the political affairs section of the European Union’s Delegation to Laos and previously he worked at the Italian Chamber of Commerce in Vietnam.