Situated within one of the world’s top 10 biodiversity ecoregions, the Southeast Asian country of Laos is of enormous ecological importance. It is home to unique species found nowhere else on earth like the Annamite striped rabbit, and globally important habitats like the rainforests of the Annamite mountains. This biodiversity is also vital to Laos’ economic wellbeing, particularly the Mekong River, whose freshwater fishery –the world’s second most prolific– provides employment to 60 million people.
Something else that Laos has been utilising the Mekong and other rivers for is hydropower, with 73 power stations in operation and over 300 proposed or at some stage of planning or construction. Hydropower is Laos’ biggest energy generator (followed by coal), and energy exports make up 12% of its GDP, with much of this energy being sold to neighbouring Thailand.
However, heavy investment in infrastructure projects –paid for in large part through foreign lending– have left Laos in serious debt, which is projected to rise to about US$1.3 billion annually from 2022-2026. This, among other factors, left the economy very vulnerable to the dual shocks of COVID-19 and Russia’s invasion of Ukraine. Now, in the wake of these, the government is looking to expand hydropower as a means of debt relief, economic growth and providing a sustainable domestic energy supply.
The Case Against Hydropower
Unfortunately, the environmental and social risks of such a move would likely outweigh the benefits in practice. While the construction of hydropower dams would provide temporary employment opportunities, the completed dams would flood land behind them, destroying communities, farmland and fisheries. Downriver, water flows and nutrient transfer would be restricted and disrupted, reducing agricultural yields and water quality. Crucially, fish migration routes would also be blocked, greatly reducing the fish populations that wildlife and people need to survive.
The economic case for expanding hydropower isn’t much stronger, in large part for environmental reasons. As climate change worsens droughts and reduces water flow, it will also reduce the amount of energy (and therefore returns) generated by hydropower dams. Equally, dams and their energy output could also be compromised by extreme flooding. The resulting energy deficits would force more spending on electricity imports, adding to the already significant cost of building dams. Moreover, hydropower currently accounts for just 2% of government revenue.
Ironically, soon there may not even be much of a market for Laotian hydropower exports. In Thailand, government enthusiasm for purchasing hydropower energy has been dampened by growing public awareness of its drawbacks. Instead, they are looking to expand other renewable energies like solar. Meanwhile, ESG concerns about hydropower may reduce demand from other markets like Singapore.
All of this makes hydropower an unreliable means of debt relief at best, and a threat to the environmental and financial security of Laos’ people at worst.
Alternative, Eco-friendly Income
The key to shock-proofing economies –vital in an age of extreme climate events– is to find diverse, stable means of income without increasing debt or damaging the environment. Fortunately, with the opening of the Lao-China Railway and post-COVID resumption of international travel, Laos is well poised to capitalise on more stable, cost efficient and environmentally friendly sources of revenue in the form of sustainable tourism and agriculture.
Agriculture
Agriculture is already a lucrative industry in Laos, employing 60% of its population and accounting for 5.7% of its GDP as of 2022. Investing in this sector represents a significant economic opportunity. According to our projections, if agricultural exports were to increase by just 0.25 percentage points annually (due to improved enabling conditions), it would generate US$9,753 million in revenue by 2027, up from US$7,274 million if exports remain at 2022 levels.
In the short term, the best ways to achieve this are to increase the volume of goods being sold to existing markets –like bananas, cassava and coffee– and to secure new markets for them. The Lao-China Railway presents a great opportunity for both, improving access to China and Thailand, and potentially to markets beyond Asia like the European Union. The latter represents a particularly advantageous market, as coffee exports to the bloc are worth an estimated US$43 million in annual untapped export potential.
Longer term, agricultural revenue could be increased by improving the quality and market value of produce. Investing in Laos’ currently limited food processing sector would allow the country to sell more domestically processed food at higher prices than raw produce. Alternatively, exporting products not easily found outside of Laos –like sticky rice– to foreign markets could allow them to be sold at a higher price.
While there is the danger of more intensive agriculture degrading the environment, there are ways of alleviating this risk. For example, growing different crops in mixed plots, which are more profitable and less damaging to soil than monocultures. Agroforestry could also help to restore degraded land to forests, potentially giving produce grown in this way a market premium.
Tourism
Prior to the COVID-19 pandemic, tourism accounted for 5.2% of Laos’ GDP and over 300,000 jobs, with international visitors spending US$974 million in total in 2019. With Laos re-opening in May 2022, tourist arrivals are expected to sharply recover by 53% annually, reaching 3.2 million by 2025. Laos has plenty of natural attractions from rainforests to waterfalls to caves, and if managed properly, eco-tourism could be a valuable source of revenue for conserving these.
However, to fully capitalise on this potential, Laos must first improve the enabling environment for tourism. At present, deforestation, wildlife hunting and destructive infrastructure projects are threatening and degrading natural attractions, causing many eco-tourism ventures to underperform financially. For instance, rivers promoted for kayaking are being dried up by hydropower dams – yet another reason not to invest in them.
Additionally, a major caveat here is that most international visitors come from Thailand and Vietnam and have a low tourist expenditure per arrival (TE/A) –on average, US$200 per person– due to short visit durations. Greater investment is therefore needed to upgrade, expand and diversity tourism services and infrastructure to make Laos more attractive for longer stays by tourists from elsewhere in the world.
If such investments are made, and Laos’ natural attractions are sufficiently conserved, Seneca projects that TE/A could rise by 130% above 2022 levels by 2027, creating US$5,056 million in revenue by then. If not, TE/A could drop by 75% and generate just US$3,454 million by 2027.
Hydropower Alternatives
Another problem with hydropower is that when river levels are lower during the dry season, it doesn’t generate enough energy to meet demands, forcing the government to spend US$80–100 million in annual electricity imports to make up the deficit. Some of this need could be lessened by domestically producing energy from solar or gas produced from agricultural waste like rice husk.
Such energy sources are already used in rural areas unconnected to the national electrical grid, but could be used on a much wider scale. Laos has an estimated 14,376 km² of land suitable for solar installation and could potentially generate as much as 731,417 GWh/year in solar energy. Meanwhile, rice husk could generate generate 371 GWh/year. Deployed at sufficient scale, these two energy sources could even substitute some planned hydropower projects.
However, Laos’ state energy company, Électricité du Laos, currently lacks the financial resources to distribute solar and rice husk energy on a large scale. Therefore, a feed-in tariff scheme is needed to direct greater private sector investment into this. Moreover, the national electrical grid also needs upgrading to better support a widespread solar and biomass energy rollout.
Don’t sell Laos down the River
Tempting though hydropower revenue may seem in a time of global economic stress, it is unlikely to be a silver bullet to Laos’ financial and energy difficulties. By contrast, it is more likely to be a net loss due to a low revenue-to-expense ratio, and could make the Laotian economy, environment and electrical grid more vulnerable to climate-related shocks.
Instead, Laos should invest in the currently under-utilised sectors of tourism and agriculture, through which it could create a much stabler economy without the environmental degradation that hydropower would cause. In the case of sustainable tourism and agroforestry, generating revenue from these sectors could even be a powerful incentive to protect and actively restore nature too.
Author: Thomas Gomersall, Seneca Impact Advisors
For more information, please contact info@senecaimpact.earth
