CDB provides $215 million buyer’s credit loan for Vientiane Power Grid Modernization Project

CDB provides $215 million buyer’s credit loan for Vientiane Power Grid Modernization Project On November 13, 2017, China Development and the Government of Laos signed a $215 million buyer’s credit loan agreement for the Vientiane Power Grid Modernization Project.

However, it is known that the borrower was to use the proceeds of the loan to finance 90% of the cost of a $239 million commercial (EPC) contract between Huazhong Power International Economic and Trade Co., Ltd. — a subsidiary of China Electric Power Technology Equipment Co., Ltd. — and Electricite du Laos (EDL), which was signed in December 2015.

EDL is considered to be the project owner.

The purpose of the project is to reconstruct the 115 kV Donekoy substation (ສະ​ຖາ​ນີ​ໄຟ​ຟ້າ​ດອນກອຍ), the 115 kV Sokpaluang substation (ສະຖານີໄຟຟ້າໂສກປ່າຫລວງ), and the transmission line works (a 40 km 230kV line and a 50 km 500kV line) between the two substations in the capital city of Vientiane.

Huazhong Power International Economic and Trade Co., Ltd. is the EPC contractor responsible for implementation. Project implementation commenced on April 19, 2019.

The project is still under implementation; but on July 24, 2021, the first station of the Laos substation was put online. The expected completion date of the project is April 2022.

There are some indications that the CDB loan for the Vientiane Power Grid Modernization Project may have financially underperformed vis-a-vis the original expectations of the lender.

Laos’ gross foreign exchange reserves were dangerously low between 2019 and 2021, hovering between 1.4 and 2.3 months of import cover, and total public and publicly-guaranteed (PPG) debt increased from 68 percent of GDP ($12.5 billion) in 2019 to 88 percent in 2021 of GDP (or $14.5 billion).

According to a report published by the World Bank in April 2022, ‘[t]he energy sector, mostly represented by Électricité du Laos (EDL), accounted for over 30 percent of total PPG debt in 2021. […] EDL’s debt service obligations [were] still unsustainable [at the time], with future debt service accounting for about two fifths of EDL’s total operating revenue.’ The Laotian authorities sought and secured debt service payment deferrals from their Chinese creditors in 2020 and 2021; according to the World Bank, ‘[d]ebt service deferrals granted by major lenders in 2020-2021 amounted around 3.6 percent of GDP in 2021’ and ’[a]s a result, actual debt service payments are estimated to have declined to 48 percent of total revenues in 2021, compared to 65 percent in the 2021 [Government of Laos] plan.’ The country’s central bank (Bank of the Lao P.D.R) also made a $300 million drawdown under its currency swap agreement with the People’s Bank of China (PBOC) in June 2020 — when its gross reserves stood at only 1.5 months of import cover and credit rating agencies warned of a high default probability.

Then, in 2021, the short-term emergency loan from the PBOC was ‘rolled over’ for another year.

Around the same time, a Chinese state-owned enterprise purchased a major public infrastructure asset in Laos—a large part of the country’s electricity transmission grid—from EDL as part of an apparent debt-for-equity swap.

China Southern Power Grid Co. and EDL established a joint venture known as Électricité du Laos Transmission Company Limited (EDLT) in September 2020.

China Southern Power Grid Co. purchased a 90% ownership stake in EDLT in exchange for a $600 million fee (equity infusion).

Then, in March 2021, EDLT signed a 25-year concession agreement, which made it responsible for management of the country’s high-voltage transmission network above 230 kilovolts.

Independent observers suggested at the time that EDL would likely use the $600 million upfront payment from China Southern Power Grid Co. to service its outstanding debts to Chinese creditors, although this has not been independently confirmed.

According to the World Bank’s International Debt Statistics, the Government of Laos was responsible for making average annual debt service payments to Chinese creditors worth $232 million between 2019 and 2019 and average annual debt service payments to Chinese creditors worth $60 million between 2020 and 2021 (a substantially lower figure due to payment deferrals); however, it expected to make average annual debt service payments to Chinese creditors worth nearly $678 million over the next seven years (2022-2028).