As South Korea seeks to diversify trade, it is offering the Laotian economy a “hand up.” But a top-down development model, social and environmental impacts, and weak regulations put Korean investors and local communities at risk.
Massive flooding made headlines in Laos this July as a tide of mud swallowed villages. When the Xe Pian-Xe Nam Noy dam in Laos collapsed, two South Korean companies involved in the construction of the dam project suddenly faced tough questions. But the public scrutiny and the search for accountability soon faded from the front page.
While the scale of the disaster was exceptional, the issues behind it are in fact characteristic of foreign direct investment (FDI) in Laos.
As South Korea seeks to deepen economic ties with Laos, weak regulations and the social and environmental risks involved threaten both local communities in Laos and Korean investors.
Seoul has its sights set on Laos as part of an attempt to diversify its trade and pivot away from China and other major powers. But as with most FDI in Laos, South Korean investments target the mining and energy sectors. To bring in foreign capital, the landlocked country is forced to increase its already enormous reliance on damaging, risky industries.
The Xe Nam Noy collapse shows common pitfalls and risks of top-down development
The Xe Nam Noy dam collapse released more than five billion cubic meters of water and displaced thousands of people, destroying the homes of at least 6,000 local residents. Groups across the Mekong called for corporate accountability and stricter regulations of megaprojects. The Lao Minister of Energy and Mines Khammany Inthirath suggested that “substandard construction” was the cause of the dam collapse.
The social and environmental aspects of the Xe Nam Noy project made it a risky prospect from the beginning – just like most investments in Laos’ energy and mining sectors. Since 2013, local communities near the dam site had voiced concerns that the project was too big and the risks of flooding and destruction of livelihoods could never be adequately mitigated.
To build the Xe Nam Noy hydropower project, SK Engineering & Construction (SK E&C), Korea Western Power, Lao Holding State Enterprise and Thailand’s Ratchaburi Electricity Generating Holding PCL partnered to form the Xe Pian Xe-Namnoy Power Company. The dam was estimated to cost over US$1 billion and would have generated a modest 410 MW per year, when fully operational.
But rather than bringing that power to communities in rural Laos, the developers of the dam planned to export over 90% of the electricity to Thailand (the project was set to be fully operational by 2019).
Laos and its investors still hang it all on mining and energy
The model of Xe Nam Noy is characteristic of most foreign direct investment (FDI) deals in Laos – in both the risks to investors and the development priorities it reflects.
Currently, about 80% of Laos’ FDI comes from the mining and hydropower sectors, tying the country’s economy to damaging extractive industries and hydropower megaprojects that displace thousands and threaten local food sources.
Despite the foreign capital brought in by energy and mining, 75% of Laotians work in agriculture. This begs the question – will they reap the benefits of the wave of foreign investment like that from Korea?
As of 2017, Seoul’s investment in Laos totalled around US$800 million, making South Korea the fourth-largest investor in Laos, after China, Thailand and Japan. Almost all of the trade between the two is subject to little-to-no tariffs as it falls under the ASEAN-Korea Trade in Goods Agreement, enacted in 2007.
Korean investors are also moving in to seize opportunities surrounding the US$6 billion Singapore-Kunming Rail Network, though the project threatens the land rights of at least 4,000 local residents and pushes Laos’ public debt towards 65% of its GDP.
China has brought in 30,000 workers and built residential work camps, far from Lao urban areas, to support the construction, meaning that while many Lao communities are uprooted by the project, they will not directly benefit from the employment opportunities the project has created.
South Korea is perfectly positioned to support sustainable development in Laos
Projects by SK E&C and Korea Western Power in Laos are part of a much larger plan coming out of Seoul – Korea’s new Southern Policy. This is a shift to diversify Seoul’s trade and strengthen diplomatic ties with ASEAN and other nations, reducing Korea’s reliance on China, Japan, the US and Russia.
At present, the Southern Policy means more of the same for Laos. Though regulations are still lacking and safeguards against social and environmental abuses are few, there are still over 70 hydropower dams planned, built or under construction in Laos.
Korean investors don’t seem too worried about these risks – Korea Western Power is working with Thai corporation CEWA to build another large hydropower project in Laos’ southern province of Champassak, at an estimated cost of US$1.6 billion. Another Korean firm, Korea Water Resources Corporation, is set to build a hydropower project in Salavan province.
By investing in the energy sector without helping to improve regulations and address social and environmental impacts, South Korean businesses are exposed to a huge amount of risk.
It is in international investors best interests to work with the Lao government and local Lao communities to prevent these disasters. No one is better positioned to do so at the moment than South Korean firms.
South Korea also has domestic mechanisms to support equitable economic change in Laos. Much of Korea’s investment in Laos is funnelled through its Official Development Assistance program, especially financing for the construction of megaprojects.
This program became a target in the wake of the Xe Nam Noy collapse, as civil society in South Korea pushed for the Korean government to put tighter regulations on businesses involved in FDI.
If South Korea can reform ODA regulations to improve sustainability and work with local Lao communities to set the economic agenda, they might set a model for other countries’ FDI in Laos.
Continued investment without further regulation will result in a house of cards
Laos knows its over-reliance on energy and mining is a problem. When Laos joined the World Trade Organization in 2013, it committed to “liberalizing” ten domestic industries – from construction to telecommunications – notably excluding mining and energy. But South Korean and other international investors need to work with local communities in Laos to make sure this development addresses their needs and priorities.
SK E&C discovered instabilities in the dam 24 hours before the collapse and alerted Lao authorities. But local communities in the area were raising concerns about the project five years before it collapsed.
After the disaster, SK Group, the parent company of SK E&C, donated over US$10 million to the Lao government to help with recovery efforts, as well as providing 200 personnel to help coordinate the relief. Korea Western Power donated US$1 million to the provincial government.
Rather than continuing to increase their investments, regardless of weak regulations and social and environmental impacts, the South Korean government and corporations might use their influence to build stronger rules around FDI that will reduce risks for local communities and investors. Not only will this protect local interests, but it will also reduce spending in the wake of unforeseen accidents and disasters.
Without strong regulations to enforce corporate accountability, South Korean investors are placing their bets on industries and projects that do not have the regulatory weight to support the ambitions of the projects.
If left unchecked, these investments will build up, creating a house of cards jutting out of the Laotian landscape that could come crashing down at any moment.