COVID-19 has caused disruptions in global trade and commerce. As a result, the leaders of the Association of Southeast Asian Nations (ASEAN) countries have focused on investments into shorter trade routes. Those leaders decided that enhanced trade has become much more important to them. Trade linkages among the ASEAN countries have strengthened in the past two years. Those linkages now account for 65% of ASEAN's total trade, while 22% is focused on China. Lao PDR finds itself in the position of being the key country to link land trade routes across Northern Southeast Asia. Thus, they could benefit substantially from becoming a ‘land-linked’ country. Lao PDR's important development gains during the past decade have a strong linkage with its integration and connectivity to the countries in the region. Lao PDR stretches about 1,700km from north to south but is only about 100km-wide at its narrowest width. It is bordered by Myanmar and China to the northwest, Vietnam to the east, Cambodia to the southeast and Thailand to the west and southwest.
Lao PDR is a member of the Association of Southeast Asian Nations (ASEAN) Economic Community, and its growth has been primarily reliant on natural resources as well as regional integration with ASEAN and China. Continued expansion of trade, tourism, and transport services have led to robust economic growth in the country despite it being landlocked. The outgoing and the new Lao PDR government have pledged economic corridor development as a high priority to help the country boost economic development even further. They could do so by integrating Lao PDR into global and regional supply chains and attracting more foreign direct investment (FDI) -- which would help generate employment in the country.
In 2016, ASEAN countries adopted the Master Plan on ASEAN Connectivity 2025 (MPAC 2025) aiming to achieve a seamlessly and comprehensively connected and integrated ASEAN that will promote competitiveness, inclusiveness, and a greater sense of community. In 2019, ASEAN has developed an "Initial Pipeline of ASEAN Infrastructure Projects" across the transport, energy, and ICT sectors to support ASEAN's objectives of improving access and increasing connectivity in and among the member states . ASEAN country members also signed in the past ASEAN Trade in Goods Agreement (ATIGA), aiming to achieving free flow of goods in the region resulting to less trade barriers and deeper economic linkages among Member States, lower business costs, increased trade, and a larger market and economies of scale for businesses. Strengthening regional integration among member countries will require addressing key infrastructure gaps to improve regional connectivity as well as cross-border trade related barriers.
Lao PDR’s National Road No. 2 (NR2), which is one of the prioritised investments under MPAC 2025, has the potential to fill a major connectivity gap to support regional integration. With a total length of 295km, NR2 consists of NR2-West (145km) connecting with the Thai border at Huai Kone via NR4A and NR2-East (150km) connecting with the Vietnamese border at Tay Trang, Dien Bien Phu province. As a major road corridor, it crosses the new Lao-China rail corridor in Muang Xai creating the potential for multimodal transport connectivity for both north-south and east-west routes connecting Laos, Vietnam, Thailand, Myanmar and China. As part of the ASEAN Highway No.13, NR2 is one of the few remaining sections of the Asian Highway Network (AHN) which still falls below the minimum ASEAN Highway Standards.
The pre-feasibility study of NR2 conducted by ASEAN in 2019 indicates that there has been an increase in heavy trucks from neighbouring countries over the recent years. Damage from floods, natural climate and terrain issues have also accelerated the deterioration of the road over time. The decline in the road conditions has adversely impacted the livelihoods of the local population who are living along the road corridor. Development of NR2 provides linkages to Thailand, Vietnam and China, which can help achieve Lao PDR’s aspiration to become a land-linked country through development of economic corridors.
Vietnam, Lao PDR, and Thailand have been interested to develop the regional connectivity in the North. In September 2015, Lao PDR and Vietnam signed the Memorandum of Understanding on Strategy for Cooperation on Transport Sector Development between the two countries for the period from 2016-2025 and vision up to 2030. The MoU includes the need for improvement of road connectivity with ASEAN standards between Lao PDR and seaports in Vietnam and improvement of cross-border facilitation. In 2014, Vietnam financed the improvement of a 67km section of NR2 E next to the border to Vietnam. Likewise, Thailand has also financed the improvement of 40km of a section of NR2 to the border to Thailand in 2017. Since then, Thailand’s Department of Highways has been improving road sections of the National Highway 101 in Nan Province, which connects to Lao’s NR2 at Huai Kon border crossing point. The 2021 Provincial Government Action Plan for Nan Province also includes the preparation activities for improving cross-border trade and competitiveness through Huai Kon cross-border facility upgrades, capacity building for cross-border traders and businesses, and facilitation of cross-border dialogues.
Lao PDR has enacted a multimodal transport law in 2013 and the national logistics development plan in 2015, which includes the creation of Inland Container Depots (ICDs) and dry ports. The national logistics development plan includes nine locations for international logistics parks and dry ports. Three dry ports have been committed by the Government: Savanakhet dry port (in operation since 2016); Thanalaeng Dry Port (expected operation in 2022); and Pakse Dry Port (expected operation in 2022). However, there are capacity gaps in implementing the plan so that Lao PDR can be an active partner in the regional collaboration. Implementation of the logistics development plan still needs to develop the legal framework, regulations, and guidelines. Investors from Thailand, Vietnam, and China have already shown interest. But the implementation of the logistics development plan must ensure a level playing field to attract the potential investors, who will bring in specialised expertise to Lao PDR.
In addition to improving regional connectivity, providing efficient transit arrangements and cross-border flows is necessary to support regional integration. Current border clearance procedures in Lao PDR are still bottlenecks in supply chains links. The use of ICT systems do remain limited, especially among border agencies, many of which still rely on paper-based clearance processes. Effective and efficient use of risk management processes to encourage compliance and enforce non-compliance are lacking; instead, there continues to be a high rate of physical inspections by Customs and other border agencies in border clearance. Implementing an effective and efficient compliance management through the use of risk management, optimal use of existing and future ICT facilities, non-intrusive inspection on rail freight and increased transparency in information (and information sharing) will enable faster border clearance in all modes of transport and intermodal trans-shipment.
In 2020, the national government approved a new law on customs providing new provisions in border management, transit regime, a warehousing system as well as risk management, and these provisions are related to rail freights and multimodal transport. In implementing this new law, the Lao Customs Department outlines priority reforms in developing several secondary legislations and regulations that are urgently needed to facilitate trade through more efficient border management as well as to support the operation of rail freights and transit (international and national).
With the strategic geographic location of Lao PDR, improvements of major regional corridors and cross-border trade procedures are expected to have significant regional spill over benefits.
To benefit from potential private sector efficiencies and financing, the Government is keen to explore Private Capital Mobilisation (PCM) options for the project. These could include mobilisation of private sector contractor financing for road improvement under Output- and Performance-Based Road Contracts and/or development of private sector financing solutions for logistics development such as dry ports and consolidation/market places, using Public-Private Partnership (PPP) models or private sector co-financing structures.
Lao PDR is exposed to high disaster risks, particularly floods, storms, and droughts, which are expected to be exacerbated by the impacts of climate change. Mainstreaming disaster and climate resilience into the transport sector is critical to mitigating the impacts of future disasters on infrastructure and reducing recovery expenditures. Transport infrastructures are vulnerable to natural disasters due to a combination of low resilience, poor design and construction quality, lack of adequate maintenance, and technical designs that have not accounted for increased disaster and climate variability.
In 2019, the reported road traffic crash deaths in Lao PDR were 1,020, or approximately 2.4% of total deaths. The Global Status Report on Road Safety (WHO 2018) reported 1120 road crash deaths, which was 16.6 fatalities/100,000 persons in Lao PDR and rising. Road crashes in Lao PDR are the number one cause of death for 5-14-year-olds, the number two cause of death for 15-49-year-olds, and the number one cause of disability for the entire population. The number of fatalities and serious injuries are continuing to increase. Through the Lao PDR National Road Safety Strategy 2030, the Government of Lao PDR is expressing a commitment to address the road safety issues, and its vision is to eliminate fatalities and serious injuries on Lao roads. A 2030 target of a 50% reduction in fatalities and serious injuries has been set.
In a large project, the citizen engagement is often confined to informal consultations with affected communities during the planning stage, focusing mainly on land acquisition issues and not much in the design and planning of project activities.
Preserving road asset and maximising its life cycle through proper maintenance will ensure the efficiency and sustainability of the investment. The Government has treated maintenance as a priority, reflecting it in the sector strategy and is keen to address this with the Road Fund. The road maintenance strategy aims to optimise the asset life cycle through proper maintenance practices and by considering the flood and landslide risks. Improvement of economic activities from the corridor will indirectly contribute to the Road Fund, which in turn supports the sustainability and efficiency agenda.
The project’s sponsors have announced that the primary objective is to improve regional transport, logistics connectivity, and cross-border trade in selected economic corridors in Northern Lao PDR that connect with neighbouring countries.
The two primary goals of this project are improved regional connectivity and improved cross-border trade. To boost regional connectivity, targets include lowering travel time along the selected sections of the NR2 corridor, an updated Transport Sector Strategy taken in account of multimodal transport and regional connectivity and delivering improved all-season road access to remote areas.
To boost cross-border trade, targets include an average export time reduction at selected Laos-Vietnam and Laos-Thailand border checkpoints and dthe development and operation of sanitary and phytosanitary standards for rhe export of agriculture products.
The project aims to improve the domestic and regional road network connectivity and logistics facilities, with associated policy reforms for increased economic activities along selected transport corridors in Northern Lao PDR. Starting with the improvement of domestic connectivity in Lao PDR, trade facilitation, border crossing control management with Vietnam and Thailand, and agriculture productivity, the project helps to attract more investment, boost more cross-border trade, and generate more employment in the northern part of Lao PDR.
Regional and domestic connectivity improvement
This component improves connectivity in northern Lao PDR. The aim is to provide safe, efficient, climate resilient and reliable infrastructure, for both international transit routes and for domestic connectivity through four modalities.
There has to be an improvement for the condition, safety and climate resilience of selected sections of NR2 corridor to meet the ASEAN Highway Class III standards, including widening of the road from 6-8m (6m of carriageway and 1m of shoulders for each side). There also has to be an improvement of climate resilience and safety of selected local roads in project provinces. And border crossing facilities at Pang Hok in Phongsaly (bordering the Dien Bien Phu, Vietnam) and Muang Ngeun in Xayabouly (bordering the Nan Province, Thailand) need to be improved. The border crossings will be improved through upgrades to the existing facilities and the provision of equipment for the digitisation of cross-border business processes. There also needs to be work carried out to improve the design and supervision of the road and cross-border facilities.
Logistics and dry port development
This supports the operations of cross-border trade and logistic development through the development of potential dry ports, market-places, trucking terminals, consolidation locations, technical studies, environmental and social studies, and transaction support to leverage private sector financing. Public sector financing may include provision of the critical public utilities.
There needs to be a strengthening of the institutional and operational capacity of Customs, Immigration and Quarantines (CIQ). This will focus on managing and operating border facilities, harmonising customs and trade faciltiation regulations, developing Customs-bonded warehouse management guidelines, border clearance procedures and border crossing manuals, and modernising business processes. It can be achieved through streamlining the procedures and the use of ICT equipment such as computers, X-ray scanners, passport readers and back-up electrical generators. The work could be carried out at Pang Hok and Muangneun checkpoints to ensure business continuity and increase efficiency in cross-border trade.