The Lao People’s Democratic Republic (Lao PDR) is growing fast, with gross domestic product (GDP) growth rates of 7 to 8 per cent in the past decade. The growth is being driven by the hydropower and mining sectors, increasing foreign investment and the adoption of market-driven reforms. In February 2013, the country officially became a full member of the World Trade Organization.

Despite the remarkable growth, Lao PDR is far from matching the economic status and strength of other economies in the region. While heavy reliance on the natural resources sector has acted as an engine of growth, it has not created much growth and employment opportunities. Lao PDR remains the third least developed country in the region measured in terms of per capita income (after Myanmar and Cambodia); its per capita income was $1,547.7 in 2013, compared with $10,420.5 in Malaysia, $3,459.8 in Indonesia and $5,678.7 in Thailand.

Much is needed to promote economic diversification from non-resource sectors. Creation of a more competitive, business-enabling environment to reduce uncertainty and the cost of doing business is crucial. Development of infrastructure is required along with its strong economic growth and rapid urbanisation to ensure sustainable growth and improve welfare.

Infrastructure bottlenecks

Overall, the transportation system of the country has improved but has not kept pace with demand. In the five years 2008-12, while the road network increased at a compound annual growth rate (CAGR) of 2.5 per cent, freight shipment by land increased at a CAGR of 6 per cent. The existing network is also susceptible to natural disasters such as landslides and flooding, with over 40 per cent of rural areas having no access to all-weather roads. Further, only 6,496 km (around 15 per cent of the total 43,604 km)  of roads are paved (as of 2012), which restricts the flow of trade and the ability to transport products to markets.

Lao PDR is also less developed in terms of the adoption of information and communications technology (ICT) with fixed broadband penetration levels being as low as 0.13 per cent. The country also has low internet user penetration rates, as well as low adoption of broadband services, mainly due to low smartphone adoption rates and high data charges.

About 25 per cent of Lao households have no access to electricity. Further, those that do have access are mostly concentrated in urban areas and the supply is erratic. Lao PDR is the only country in Southeast Asia that has no refinery and imports all of its oil demand.

Its transportation sector is equally underdeveloped. As for airports, the utilisation of the country’s biggest airport, the Wattay International Airport (WIA), which serves the capital city of Vientiane, has been increasing. Due to capacity constraints, the WIA is already facing challenges such as difficulty in increasing the number of flights during peak travel times, and inadequate office space that limits the number of new airlines. The only rail system that the country has is a 3.5 km link over the Mekong river between Vientiane and Thailand’s Nong Khai.

Expansion blueprint

The Lao PDR government is aware of the infrastructure deficit. In 2009, it launched the ambitious Seventh Five Year National Socio-Economic Development Plan [NSEDP] (2011-15). The plan aimed to ensure a GDP growth rate of at least 8 per cent annually and GDP per capita growth rate of at least $1,700 by 2014-15, and to reduce the budget deficit to less than 5 per cent of the GDP. In order to ensure a GDP growth rate of 8 per cent during 2011-15, it was estimated that a total investment of 127 trillion kip or 32 per cent of the GDP would be required.

With regard to transport, the NSEDP calls for the construction and/or expansion of road networks linking subregions, towns and cities, and rural areas and villages. It also aims to develop its air transport sector, aiming for a sectoral growth rate of 8 to 10 per cent per annum. The other targets are to provide piped drinking water to around 60 per cent of the urban population and to expand the telecom network to cover 90 per cent of villages nationwide. Further, an optic fibre cable network of around 17,192 km will be built, and telephone connectivity will be expanded through cellphones and landlines to reach 80 per cent of the population.

So far, infrastructure projects in the country have been executed through funding from the government and multilateral organisations. According to the NSEDP, the government aims to mobilise more resources from the private sector.

Some of the key projects under the plan are the construction of a railway line from Vientiane to Borten International Border Gate (421 km), road and airport development projects including upgrading National Road (NH) No. 15B connecting Saravan province with Vietnam, construction of 35 hydropower projects including the Xe Khamane 3, Nam Guam 5, Nam Guam 3, Theun Hine Bune Phase II hydropower projects, and construction of the national transmission line.

Most federal government ministries and agencies also recognise the urgency to add  infrastructure capacity. Based on the Ministry of Energy and Mines’, Renewable Energy Strategy Development Plan (2011-25), the target is to increase the use of renewable energy to 30 per cent of national demand by 2025 (biofuel production to account for 10 per cent). Similarly, a blueprint for urban transport for Vientiane pegs the targeted share of public transport in 2025 at 40 per cent.

Hydropower is the major source of electricity in Lao PDR. So far, hydropower projects with a total capacity of 3,000 MW have been developed in the country. According to Southeast Asia Infrastructure Research, hydropower projects aggregating over 3,600 MW of capacity are at various stages of implementation, most of which are being implemented by Chinese companies. The hydro-rich country is also looking at setting up coal-, lignite- and gas-based capacities. Lao PDR is constructing the 1,878 MW Hongsa thermal power plant, its first lignite-based project. The move towards fossil fuel-based thermal power generation aims to mitigate seasonal uncertainties and address ecological/safety concerns associated with hydropower that have been highlighted through public protests.

“In the energy sector, sustainability makes or breaks the life of a project. There is a strong business case for investing in project sustainability up-front. When projects adhere to improved environmental and social performance standards, business performance and growth will be on the rise, points out Kate Lazarus, Advisory Services, IFC Lao PDR.

Transport is another priority area. Several road improvement projects are under way with multilateral funding. In the airport sector, the WIA is expanding both the domestic and international passenger terminals to handle about 1,000 passengers per hour by 2018. The plan calls for substantial improvements in transport services to increase the annual volume of air transportation by 8 to 10 per cent and the annual number of flights by 4.5 to 6.5 per cent. Besides, two new international airports are also under development. Work at the Attapeu international airport and Houaphanh International Airport is being undertaken by Vietnam-based Hoang Anh Gia Lai Group.

Issues and the way forward

Even though Lao is becoming a destination of choice, developers face a number of challenges in setting up infrastructure facilities. Issues related to project planning and execution, social and environmental concerns are slowing down the pace of project execution.

The Lao-China high speed rail project faces difficulties because of the huge investment and the low potential returns involved in the project. A few multilateral agencies have questioned the financial viability of the project. The proposed 1,260 MW Xayaburi dam project in northern Lao PDR has faced resistance because of concerns regarding its effect on acquatic life and its potential effect on people living downstream who depend on the river for their livelihood.

The World Bank Group report “Doing Business 2015: Going Beyond Efficiency”, ranks Lao PDR in the ease of doing business  148th, an improvement over the country’s ranking at 155 in the 2014 report.  Firms in Lao PDR still suffer from high costs of doing business that include the cost of dealing with cumbersome regulations and licensing requirements and the lack of regulatory predictability, with many regulations not consistently enforced.

Agreeing to this, Phongsavanh Phomkong, Head of Office, IFC Lao PDR point out, “While efforts have been made to improve the investment climate in Lao PDR, the costs of doing business remains high as compared to comparator countries at similar levels of development. Significant aspects of the current investment climate remain characterised by a lack of transparency and predictability for investors,”.

Transparency International’s Corruption Perceptions Index (CPI), 2014, indicates that apart from Singapore, Brunei and Malaysia, corruption remains an endemic problem in all other Southeast Asian countries. Cambodia, Myanmar and Lao PDR are perceived to be among the most corrupt nations with a score of less than 30.

It is important that reforms are put in place for private investors to continue business in the country. In this regard, several institutions are working towards formulation of new laws. Highlighting the role of IFC, Phomkong says, “IFC has supported the government of Lao PDR with a number of them including: the Investment Promotion Law, which brought a better level playing field across domestic and foreign investors; the Enterprise Law that also made it easier to register a new business; and the General Tax Law, which has simplified tax regulations for small and medium businesses. And we are supporting the revision to the Value-Added Tax law to better align with international best practices. These are a few of the policies and reforms that will help attract the right investors to Lao PDR.”

Additionally, the country needs to promote economic diversification from non-resource sectors. A key to encouraging private investment (foreign and domestic) in non-resource sectors will be to create a more competitive, business-enabling environment by developing consistent and transparent laws and regulations.

Once the government takes steps to address these challenges, Lao PDR would surely become one of the strongly preferred destinations in the region.