China Eximbank provide $45.6 million preferential buyer's credit for 23MW Xeset 3 Hydropower Project

Project narrative

In 2014, China Eximbank and Électricité du Laos (EDL) — the state corporation of Laos that owns and operates the country's electricity generation, electricity transmission and electricity distribution assets — signed a $45.657 million preferential buyer's credit (PBC) agreement for the 23MW Xeset 3 Hydropower Project. The PBC’s estimated borrowing terms included a 23.0095-year maturity, a 6.2144-year grace period, and a 2% interest rate. The borrower was expected to use the proceeds of the PBC to finance approximately 90% of the $50.73 million cost of a commercial (EPC) contract between EDL and NORINCO International Co., Ltd. In order to secure repayment of the loan, the borrower (EDL) was responsible for depositing revenues into an escrow account. The purpose of the project was to construct a 23MW hydropower plant on the Xeset river between Saravan and Champassak provinces, about 750 kilometers from Vientiane. The exact locational coordinates of the power plant are 15.342113°N 106.31115°E. Upon completion, the plant was designed to produce 80 million kilowatt hour (kWh) per year. The main components included an inter-basin water transfer system, a dam water retaining system, water diversion, and a power generation and transmission system. NORINCO International Co., Ltd. was the EPC contractor responsible for implementation. Construction officially began on January 18, 2014. The first power generating unit of the hydropower station successfully passed a 72 hour trial operation on July 28, 2016, after which point it started to generate electricity 5 months ahead of schedule. A project completion ceremony was held on or around January 9, 2017. The originally anticipated project completion date was January 17, 2017. 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.