Laos’s ambitious HSR projects-

Laos has set in motion ambitious plans for high speed rail (HSR) development over the past year. With the development of around 640 km of high speed lines under way, Laos aims to promote and enhance its macroeconomic linkages with China and other Southeast Asian regions. The current rail network of only 3.5 km, running from the outskirts of the capital to the Thai border, provides little economic benefit for the country. Thus, the expansion of the rail network in the country has the potential to dramatically change the economic and social fortunes of the country.

HSR projects coming on track

Laos–Vietnam HSR: The year 2012 was an important one for Laos in the field of HSR development. In November 2012, it signed the contract for its first HSR project, the Laos–Vietnam HSR: Giant Consolidated Limited, a Malaysian company, was awarded the contract to develop a 220 km track from Savannakhet to Lao Bao, near the Vietnam border. Savannakhet province is located in the East–West Corridor that links Thailand, Laos, and Vietnam, via the Lao–Thai Friendship Bridge across the Mekong river, and Road No. 9, which stretches from Laos to Vietnam. The north–south arterial route on Road No. 13, which runs through Laos from China to Cambodia, also passes through Savannakhet.

New Zealand financial institute Rich BancoBerhad will be providing a loan for this $5 billion project. Work on the project is likely to be completed by 2017. The speed limit of the trains will be 120 kmph.

Laos–China HSR: Earlier, in October 2012, the National Assembly of the Lao People’s Democratic Republic approved the long-awaited $7 billion Laos–China HSR project. The HSR line will connect the Lao capital Vientiane to the country’s Luang Namtha province along the border with China. The network will be further extended to a line from Kunming, the capital of China’s Yunnan province.

To construct the Laos–China HSR, a 50 metre wide section of land will be cleared along the length of the railway on either side and then fenced off for security reasons. At tunnels, however, the width of the land cleared will extend to 100 metres, while parcels of land measuring 3,000 metres by 250 metres will be allocated for development at major train stations. Initially, passenger trains were planned to run at a speed of up to 200 kmph, but the Lao government subsequently decided to reduce this rate to 160 kmph for safety reasons, partly due to the hilly terrain.

Although Laos and China had planned to undertake the railway project that would connect Vientiane to the Laos–China border in Luang Namtha province, the Chinese construction company withdrew in 2012 amidst concerns over the profitability of the project. However, the Lao Parliament gave the go-ahead for the project in October 2012, assuming sole ownership of the project. The Exim Bank of China will provide a loan to cover the costs of construction. The negotiations over the precise details related to funding and a start date for the project are still ongoing. According to reports, the Laos–China HSR project is not expected to generate profit for a long time. The project is likely to achieve break-even point in 38 years.

A win–win endeavour for the Asian region

The Laos HSR projects are among the first of several major infrastructure projects aimed at converting the country from being “landlocked” to “land-linked”. With trains set to move at 120–160 kmph, the HSR projects could offer the country access to vital trade and tourism opportunities within the expanding Chinese and ASEAN Economic Community (AEC) markets.

Several experts have noted that the Laos–China project will benefit China more than Laos at the beginning, as the majority of the rail link construction and rolling stock manufacturing will be awarded to Chinese companies. However, once completed, the project will offer significant benefits to Laos. Being a landlocked country that lacks proper rail infrastructure, Laos has been facing high logistical costs, thus making the country far less competitive than it could be. In the World Bank’s 2013 Ease of Doing Business Index, Laos ranked 163rd out of 185 countries, partly due to its inadequate infrastructure and cross-border trading difficulties that had hindered business transactions.

Considering that Laos has just been granted full World Trade Organization membership (in February 2013) and the AEC is about to take effect in 2015, the development of the HSR projects is a timely move. For the government, an advanced rail network would be instrumental in ensuring that the country benefits from regional integration.

Bumpy prospects?

At present, the projects are clouded with risks. A few multilateral agencies have “raised their eyebrows” with regard to the financial viability of the projects. According to a World Bank estimate, the loan amount for the Laos–China project constitutes over half of Laos’s GDP ($8.3 billion in 2011). Further, the loan by China’s Exim Bank is structured as a sovereign loan guarantee, which reportedly includes not only revenues from the project and all project assets, but also royalties from Chinese mining operations. Though Laos’s macroeconomic policies have remained sound, low reserve coverage and rapid credit growth amidst high lending rates have emerged as sources of vulnerability. All these factors are expected to have a major impact on the government’s ability to repay the loan.

Moreover, the rail link is ultimately expected to connect Laos to Bangkok and further to the Bay of Bengal in Myanmar. Thus, it could expand China’s already substantial trade with Southeast Asia and enable it to bypass the Strait of Malacca, thus giving China access to resources in the Middle East and Africa as well. The cynics thus believe that the real benefits of the projects would go to China and Thailand; Laos would just be a transit point.

To conclude, Laos is betting big on the Laos–China HSR for the country’s socio-economic development. Together with the HSR through Thailand, these projects hold the promise of successful  economic integration with China and other countries in Southeast Asia. Should this come about, it would herald a new era of economic and social prosperity for the people of Laos. However, one would have to wait for quite a few years before the benefits of these projects become visible.