China Eximbank provides $377 million buyer's credit loan for 500KV Salavan–Sekong II Electricity Transmission Line Project

On May 3, 2016, China Eximbank and the Ministry of Finance of Laos signed a $377 million buyer’s credit loan agreement for the 500KV Salavan–Sekong II Electricity Transmission Line Project. The proceeds of the loan were to be used by the borrower to finance a commercial (EPC) contract (worth more than $400 million) between Électricité du Laos (EDL) — the state corporation of Laos that owns and operates the country's electricity generation, electricity transmission and electricity distribution assets — and China National Heavy Machinery Corporation (CHMC), which was signed on January 22, 2014. The project involved the construction of a 72 km, 500kV high voltage power transmission line from Salavan to Sekong, the construction of two 500kV transformer substations, the construction of control rooms, the installation of transmission towers, and the installation of safety systems. CHMC was the EPC contractor responsible for implementation. However, Pinggao Group Co., Ltd. (平高集团有限公司) — a subsidiary of the State Grid Corporation of China — was also involved in implementation (most likely as a subcontractor). According to a report published by the China Securities Regulatory Commission, the project commenced during the first half of 2018. The project was completed and the transmission lines and substations were put into operation on March 16, 2020. There are some indications that the China Eximbank loan for the 500KV Salavan–Sekong II Electricity Transmission Line 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).

Additional details

1. This project is also known as the 500KV Saravan–Sekong (Ban Vangxang) Transmission Line Project, the Laos Saravan-Xekong 500 kV Power Transmission and Transformation Project, and the 500KV Salavan–Xékong II Electricity Transmission Line Project. 2. The Chinese project title is 老挝沙拉湾-色贡500KV输变电线路项目 or 贡南部项目.

Number of official sources

10

Number of total sources

21