Turning point

Laos is on track to becoming a key economic player in Southeast Asia, helped by growing investments from China

cover P1 LAOS

July 17-23, 2017
in Sydney

When it comes to foreign investment in Southeast Asia, landlocked Laos does not figure high on the list. However, this is starting to change as China plays a leading role in funding projects across the country that range from hydroelectric power to railways and property development.

A short drive from the center of the capital Vientiane, a new suburb is rising from the marshes around That Luang Lake. It is expected to become a showcase for Chinese investment.

In late 2012, Shanghai Wanfeng Group, a developer of shopping malls in China, started work on the 365-hectare, $5 billion project.

“Laos is a relatively poor country but it is abundant in natural resources,” Ganesan Kolandevelu, a consultant with accounting firm KPMG, told China Daily Asia Weekly.

“The property development near Vientiane is an example of China’s commitment to the development of Laos,” he said.

The That Luang Lake project is part of efforts to modernize Laos and draw more tourism and foreign investment to the country.

Apart from commercial and residential units, it will include public parks, a sports complex, a shopping mall, entertainment facilities, hotels, schools, a hospital, and conference and service centers. The entire project is expected to be completed within 15 years.

“China’s investments in Laos are largely strategic,” said Naoyuki Yoshino, dean of the Asian Development Bank Institute.

“Much of the economy is agriculture-based. What Laos needs is to upgrade its infrastructure, such as roads, railways and bridges, to get its agricultural exports out,” he said.

“The problem with infrastructure is that for investors it has a low return. But that has not deterred some investors, such as China.”

Last year, China overtook Vietnam to reclaim its position as the largest foreign investor in Laos, according to data from the Ministry of Planning and Investment in Laos.

China’s investment in 2016 was more than $1 billion, compared to just $88.9 million the previous year, according to Xinhua Finance.

Work has already started on the 414.3-km China-Laos railway at a cost of $5.8 billion. China will foot 70 percent of the cost while the Lao government will cover the rest.

In February, China’s Hebei Construction and Investment Group Co signed an agreement with the Ministry of Planning and Investment to build a hydropower plant in the southern Lao province of Sekong.

Since opening its economy to the outside world in the 1980s, Laos has recorded some of the world’s highest economic growth, generally ranging between 7 and 8 percent annually.

The Manila-based Asian Development Bank (ADB) in its report, Asian Development Outlook 2017: Transcending the Middle-Income Challenge, said much of the growth has been supported by the expansion of production and sales of electricity, a buoyant services sector, and construction of the cross-border railway project.

The ADB said GDP growth for Laos is forecast to reach 6.9 percent in 2017 and 7 percent next year, a slight increase from the 6.8 percent recorded in 2016.

“Despite fiscal constraints and weaker global demand for minerals in recent years, the Lao People’s Democratic Republic (PDR) economy remains one of the strong performers in the region, with an average growth above 7 percent for the last decade,” said Yasushi Negishi, country director of ADB’s Lao PDR Resident Mission.

The opening up of Laos has brought with it membership of the Association of Southeast Asian Nations (ASEAN) in 1997 and the World Trade Organization in 2013.

Despite its gains over the last 30 years, Laos has faced a hidden impediment to its growth — unexploded ordnance. The country still remains scarred by the 2 million tons of explosives dropped on it during the United States’ war with Vietnam.

Even now the government and aid agencies continue to clear bombs which have killed or injured more than 20,000 people since 1973.

“This has had a major impact on the country’s agricultural development,” said Keith Barney, a specialist on Laos with the Australian National University in Canberra.

Despite its mountainous territory, several highways have been constructed or significantly upgraded since the 1990s to improve trade with eastern Vietnam and China to the north.

Five international bridges now cross the Mekong River and provide land links between several Lao provinces, and Thailand and Myanmar.

In 2015, the government launched LaoSat-1, a $258 million China-built and funded communications satellite, to better connect the mountainous nation and surrounding regions.

Laos has achieved remarkable economic growth in recent years, according to Hidetoshi Nishimura, president of the Economic Research Institute for ASEAN and East Asia.

“With growing international division of labor, the country has gradually integrated with international global production networks,” he said in the foreword to a major study, The Lao PDR at the Crossroads: Industrial Development Strategies 2016-2030.

“This economic achievement is exemplified by improved living standards … as indicated by an increase in per capita income.”

He also noted Laos faces the problems of an “overdependence on the energy and mineral sectors” and “growing development gaps within the country”.

Laos is at a “turning point, where it can turn its weakness of being a ‘landlocked’ country into its strength, by becoming a ‘land-linked’ country in the Mekong region”, he said.

Motorists stop at a traffic light in Vientiane, Laos. Chinese investors are playing a big part in helping the country develop its infrastructure. Credit: AFP

As with several of its neighbors, Laos has a demographic advantage. Forty percent of its population is aged under 35, which drives consumption of communications and information services, such as mobile phones and their related broadband services.

Geography is another factor which is helping to transform Laos. Vientiane and 16 provinces each share borders with at least one neighboring country. As a result, most provinces are physically closer to cities or regions in nearby countries than to other major urban areas in Laos.

Reflecting a creeping internationalization of Laos’ economy, most urban cash transactions such as at retail outlets, hotels, taxis and restaurants are denominated in kip — the local currency — the Thai baht and the US dollar.

In the foreseeable future, the yuan will no doubt make itself more felt on Vientiane’s menus, hotel tariffs and other shopping lists.

With the regionally important Mekong River snaking its way through the country, there is a tendency for locals to regard water as the country’s biggest industry, and the government wants to keep it as “Laos water” with its related economic and security benefits.

But mining — largely copper and gold — remains a second-anchor resource for the economy along with forestry development.

However, the current dependence on natural resources remains a challenge — along with corruption and the lack of adequate infrastructure — despite the government’s continued enthusiasm for economic diversification.

By 2020, the government aims to achieve “middle-income country status” boosted by its young, affordable and increasingly well-educated labor force.

A recent report by the International Monetary Fund, however, said there is a risk of Laos facing external debt distress.

It warned that a large and sudden depreciation of the exchange rate could put “debt dynamics” on an unsustainable path.

“Although revenues from large resource projects are expected to mitigate risks over the long term, there is an urgent need to recalibrate fiscal policy to rebuild fiscal buffers, adopt clear guidelines for the issuance of sovereign debt and guarantees to help contain and monitor contingent liabilities,” the report said.

In terms of the overall economy, the immediate policy issues extend to the development of a national electricity grid, expanding the trade and investment relationship to beyond its immediate neighbors, mobilizing manpower, managing a current account trade deficit of $2.26 billion in 2015 — much of it due to trade with neighboring China and Thailand — and a transition from tariffs to taxes.

While agriculture, mining, manufacturing and service industries operate in a small domestic market, Laos is increasingly turning to international opportunities, especially since these industries cannot benefit from international trade in terms of returns and job creation.

A growing middle class, as well as significant increases in public servants’ wages, bolstered the retail and wholesale sectors in 2013, with civil service pay alone rising by 37 percent.

Retail sales, hotels, restaurants and transportation have benefited from the growing number of tourists. Major international hotel brands — such as Accor’s Sofitel, Novotel and Ibis — are gaining a foothold in Vientiane.

The sale of consumer goods has seen double-digit growth in Laos since 2013. And rapidly growing demand for packaged foods and other categories has encouraged modern retailers to expand.

Cities, primarily Vientiane, continue to see new commercial areas, shopping malls and supermarkets as Laos slowly emerges from its isolation.

In time, the country is expected to become a significant player in Southeast Asia.

Embracing the tourist influx As a landlocked Southeast Asian nation, Laos sees the benefits of promoting its heritage to boost economic development

July 17-23, 2017
By KARL WILSON in Sydney

Laos has rarely featured high on travelers’ lists of Southeast Asian destinations to visit. But the tourism landscape is starting to change as more hotels spring up in Vientiane, the capital, and the government pushes to promote the country and its cultural heritage.

“Laos sees its fair share of backpackers but they don’t spend money,” Ganesan Kolandevelu, a consultant with KPMG, told China Daily Asia Weekly.

He said Vientiane is seeing a flurry of activity with new hotels being built to cater for the influx of foreign visitors to the landlocked nation.

“Laos has seen a steady increase in its foreign tourism numbers in recent years,” said Kolandevelu.

Retail sales, hotels, restaurants and transportation benefit from the tourist arrivals, which add to the country’s economy.

Major international hotel brands such as Accor’s Sofitel, Novotel and Ibis all now have a presence in Vientiane.

From 2010 to 2015, total international arrivals to Laos grew from 2.51 million to 4.68 million, almost doubling in size, according to data from the Tourism Development Department of the Ministry of Information, Culture and Tourism.

Last year, despite hosting the Association of Southeast Asian Nations’ (ASEAN) summit and the visit of then United States president Barack Obama — the first US leader to visit the country — tourism numbers dropped slightly to 4.23 million.

Tourism injected more than $724 million into the economy in 2016, slightly down on the previous year’s $725 million, according to government data.

The Lao government said the decline in visitor numbers was mainly due to fewer arrivals from Thailand and Vietnam, the main sources of foreign visitors to the country. Tourists from Thailand dropped remarkably, by more than 400,000, and arrivals from Vietnam fell by 100,000.

The fall in figures was partly because Thai authorities have been promoting domestic tours vigorously, encouraging people there to travel within Thailand through promotional incentives.

Foreign tourist arrivals to Laos in previous years were also boosted by a large number of Vietnamese workers who entered on tourist visas.

laos numbers

After governments in the 10-nation ASEAN tightened measures to regulate foreign workers at the end of 2015, it is believed that Vietnamese workers were more reluctant to enter Laos, further contributing to the drop in numbers.

However, Chinese arrivals into Laos, from January to September 2016, rose 4 percent to 400,000. China topped the list of tourist arrivals the previous year at 511,436.

The Lao government has earmarked 2018 as the year for tourism by promoting the country’s cultural heritage and natural beauty.

New flights and the opening up of Vientiane and the northern town of Luang Prabang to low-cost carriers have also helped attract visitors.

Luang Prabang is the country’s top tourist destination, with 83 percent of visitors spending time in the ancient capital, followed by Vientiane.

According to UNESCO, Luang Prabang is an “outstanding” example of the fusion of traditional architecture and Lao urban structures with those built by the European colonial authorities in the 19th and 20th centuries.

“Its unique, remarkably well-preserved townscape illustrates a key stage in the blending of these two distinct cultural traditions,” UNESCO said.

Tourism is one sector which has seen rapid growth in ASEAN and is a key growth area for the bloc.

Laos is already recognized among the world’s best destinations by the European Council on Tourism and Trade for “preserving its culture and history, and … raising the quality of its tourism services by developing the concept of community-based tourism”.

At the end of 2015, the ASEAN Economic Community launched a program to boost tourism within the bloc.

In its Economic Outlook for Southeast Asia, China and India 2017 publication, the Organisation for Economic Co-operation and Development (OECD) said: “Many initiatives have been taken at the regional level to boost the tourism sector.”

According to the OECD, these included the agreement on visa exemptions among member states for ease of movement within ASEAN, and the ASEAN Single Aviation Market to liberalize air travel between member states.

“ASEAN countries, including Laos, should use this opportunity to further enhance their tourism sectors, and to attract more tourists from the local region,” the OECD said.

The Royal Palace National Museum in Luang Prabang. The ancient capital is the top tourist destination in Laos. Credit: Norbert Scanella / Only World / Only France

In February, Laos in collaboration with Thailand, Vietnam and China signed a memorandum of understanding to include the development of sustainable tourism integration across 11 provinces in the upper Mekong Basin.

Under the agreement, the provinces will coordinate cross-border facilities on tourism advertising and tourism infrastructure development.

This includes tourism route connectivity, human resource development and integration facilitation for international tourists, according to a report in The Laotian Times.

The Laos provinces include Bokeo, Luang Namtha, Oudomxay, Phongsaly, Luang Prabang and Xayaboury; in China, the prefecture of Xishuangbanna; in Vietnam, Sonla and Dien Bien Phu; and the Thai provinces of Chiang Rai and Chiang Mai.

In January, the Lao Department of Civil Aviation said its priority is to encourage more international flights into the country.

The first Chinese carrier to venture into Laos was China Eastern Airlines, which has since been joined by Sichuan Airlines and Hainan Airlines.

Airlines from Vietnam, Thailand, South Korea, Singapore and Malaysia also operate direct services to the country. But civil aviation authorities want to see international carriers service more cities in Laos such as Luang Prabang.

“Up until 2015, traffic rights were difficult to obtain, particularly to Luang Prabang, where there was a virtual ban on low-cost airlines. However, 2016 saw a change in policy and low-cost airlines opened services from neighboring countries,” according to a report in the Vientiane Times.

Foreign airlines have access to three locations in Laos — Champasak, Luang Prabang and Vientiane, the paper said.

Water of life enriches Laos Cooperation with Chinese companies is helping the landlocked nation make the most of its tremendous hydropower resources

July 17-23, 2017
By KARL WILSON in Sydney

The Southeast Asian nation of Laos may be poor, landlocked and primarily agricultural, but one thing it does have is water, courtesy of the mighty Mekong River.

Known in China as the Lancang, the Mekong snakes its way through Laos’ valleys and ravines, and this water has become the mainstay of the Lao economy, building its reputation as the ‘battery of Southeast Asia’.

With dams built along the length of the river and its tributaries, hydropower contributes roughly 30 percent of the country’s export earnings.

Analysts say Laos is among the richest countries in the region in terms of hydropower resources. Companies from China and Thailand have been largely responsible for dam construction and infrastructure.

The Organisation for Economic Co-operation and Development (OECD) in its recent Economic Outlook for Southeast Asia, China and India 2017 said hydropower has now become the most abundant energy resource in Laos and it makes a “significant contribution to the country’s economy”.

Over 99 percent of total electricity generation in Laos is contributed by hydropower, while other energy sources such as solar energy and diesel account for negligible shares, according to the OECD.

“There is a lot of potential for the further development of hydropower, which offers affordable and reliable access to electricity,” the OECD said. “Moreover, it is a renewable source of energy, and a driver of green growth.”

Recognizing this, the Lao government plans to expand development of the sector. The country could potentially generate around 26,000 megawatts of hydropower, according to the government. It estimates Laos will generate 10,000 MW of hydropower by 2020 and 20,000 by 2030.

“Although large hydropower projects account for a significant share of the country’s electricity exports, small projects with a capacity of 15 MW or less also have an important role to play in contributing to the Lao economy,” the OECD said.

Small projects have the potential to make a greater contribution to rural development, employment and access to electricity.

“With no major industry to speak of, Laos can afford to export much of what it produces,” Venkatachalam Anbumozhi, a senior energy economist with the Economic Research Institute for ASEAN and East Asia (ERIA), told China Daily Asia Weekly.

“With a population of around 7 million and a subsistence-based agricultural economy, Laos has a low demand for electricity.

“Therefore, exporting energy generated from hydropower and earning foreign exchange has been an important economic and trade development policy of the government,” he said.

With 42 hydropower plants currently operational, and installed capacity at 6,391 MW, the Lao government expects to increase this significantly over the next three years.

At least 12 new plants with installed capacity of 468.45 MW will be completed by the end of this year and the government hopes to have a further 40 plants coming on stream by 2020.

Whether they are all on stream by then remains to be seen, but the government has set itself an ambitious target to have at least 90 hydropower plants fully operational by 2020 with a combined installed capacity of almost 14,000 MW.

Much of the power produced in Laos is exported to neighboring countries — with 14 transmission lines connecting Thailand, two to Vietnam, one to southern China, two to Cambodia and one to Myanmar.

“The hydropower sector is expanding rapidly in Laos,” said Andrew Pickford, director of the Perth USAsia Centre’s Indo-Pacific Energy Security Program. “Based on simple economics, one would expect them to serve nearby markets, especially where conventional fuels are becoming more expensive.”

Hydropower is now seen as a cost-effective energy-supply option in Laos, said the London-based International Hydropower Association (IHA) in its 2016 Hydropower Status Report.

Before Laos opened the power sector to foreign investment in 1993 there were only four operational hydropower stations, totalling 206 MW of installed capacity.

Since then, the country has experienced a rapid growth in installed hydropower capacity, bringing more than 3.5 gigawatts online during the past 20 years, according to the IHA.

Growth in the Laotian hydropower sector has been driven by demand for electricity exports to neighboring Thailand, Vietnam and southern China.

“Laos currently exports an estimated two-thirds of its hydropower,” according to the IHA. “Revenues from power exports make a significant contribution to economic growth and poverty alleviation in the country.”

In 1993, Laos and Thailand signed their first memorandum of understanding (MOU), which outlined a plan for Laos to supply 1,500 MW of power to Thailand.

“This MOU has since been extended several times in response to rising demand in Thailand,” the IHA said.

The most recent power purchase plan states that Laos will supply some 7,000 MW of electricity to Thailand by 2020. Laos has also entered into similar bilateral agreements with both Vietnam (5,000 MW) and Cambodia (200 MW).

“Under these agreements, approved independent power producer (IPP) projects that export energy are required to reserve a minimum of 10 percent of their total installed capacity for domestic markets,” the IHA said.

Investment from neighboring countries has contributed to a significant increase in the country’s electrification rate over the last 20 years.

The Laotian electrification rate increased from 15 percent in 1995 to close to 90 percent in 2015, and the remaining unserved areas are remote and difficult to reach, according to the IHA.

In February, Hebei Construction and Investment Group Co (HCIG) signed an agreement with the Lao Ministry of Planning and Investment on the development of a hydropower plant in the country’s southern Sekong province.

Khamlien Pholsena, Lao deputy minister of planning and investment, and Wang Jinsheng, vice-general manager of HCIG and chairman of Construction and Investment International Co, jointly signed the agreement, according to a report by Xinhua at the time.

Speaking at the ceremony, Wang said his company will follow the requests put forward by the Lao government and strictly fulfill its obligations to finish construction of the plant soon for the prosperity of Laos and the improvement of local residents’ lives.

Construction and Investment International Co is a wholly owned subsidiary of HCIG, which is an entity of Hebei’s State-owned Assets Supervision and Administration Commission.

On July 21, 2015, Construction and Investment International Co and the Lao Ministry of Planning and Investment signed an MOU on the hydropower plant project on Huai La-Nge River in Kaleum District, Sekong province, some 530 km southeast of the Lao capital Vientiane.

“China has been a significant investor in the hydropower sector in Laos,” ERIA’s Anbumozhi said. He said China is heavily invested in two dams currently and is planning for another four.

China has helped the government with a low interest loan of $87 billion to help it develop the hydropower sector, Anbumozhi said.

“At low interest rates it should help Laos achieve some economic independence through electricity supply deals with its neighbors.”

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