China Eximbank provides $292.6 million preferential buyer's credit for 130MW Nam Khan 2 Hydropower Project

Project narrative

On October 13, 2006, the Chinese Government and the Government of Laos signed a Memorandum of Understanding (MOU) regarding the Nam Khan 2 & 3 hydropower plants. Then, on March 19, 2010, China Eximbank and the Government of Laos signed a $292.6 million preferential buyer’s credit (PBC) agreement for the 130MW Nam Khan 2 Hydropower Project. The PBC carried the following borrowing terms: a maturity of 20 years, an estimated grace period of 7.2533 years, and an 2% interest rate. The proceeds of the PBC were to be used by the borrower to finance approximately 95% of the cost of a $308.5 million commercial (EPC) contract that Sinohydro Corporation Ltd. and Électricité du Laos (EDL) signed in August 2009. This project involved the construction of two 65MW hydropower stations — capable of generating 558 GWh of electricity per year — on the Khan River and a 115kV power transmission line that runs from Xieng Khouang to Luang Prabang city. The electricity generated by the two hydropower stations was to be transmitted to a substation in Xiengngeun district in order to ultimately supply power to the country’s northern provinces and the capital city of Vientiane. The project’s large reservoir was also to be developed as a major tourism site in order to improve the living conditions of people in the area. Sinohydro Corporation Ltd. was the EPC contractor responsible for implementation. Construction began on March 26, 2011, and an impoundment ceremony took place on April 18, 2015. The project was ultimately completed on November 28, 2015. There are multiple indications that the China Eximbank loan for this project may have financially underperformed vis-a-vis the original expectations of the lender. In 2020, the Laotian authorities urgently sought debt relief from China Eximbank. At that time, the gross reserves of the Bank of Laos stood at only 1.5 months of import cover and credit rating agencies warned of a high default probability. In 2020, China Eximbank agreed to reprofile multiple loan agreements that it had previously signed with the Government of Laos (as captured via Record ID#96464). These debt service payment deferrals lasted for approximately 4 years (2020 and 2023) and provided approximately $1.892 billion of cash flow relief ($1.422 billion in deferred principal payments and $470 million in deferred interest payments). Deferred principal and interest repayments in 2020 were worth $202 million. Deferred principal and interest payments were worth $426 million in 2021. Deferred principal and interest payments were worth $594 million in 2022. Deferred principal and interest payments were worth $670 million in 2023. Additionally, 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.’ In September 2020, 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). 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.