China Eximbank provides loan for Sekong 2 Substation Transmission & Transformation Project

Project narrative

On September 8, 2016, China Eximbank and the Government of Laos signed a loan agreement for the Sekong 2 Substation Transmission & Transformation Project. The loan’s estimated borrowing terms included a 18.1764-year maturity, a 5.05-year grace period, and a 3.1298% interest rate.The proceeds of the loan were to be used by the borrower to at least partially finance a $317 million EPC contract between Electricite Du Laos and Pinggao Group Co Ltd (a subsidiary of State Grid Corporation of China), which was signed on December 17, 2015. The purpose of the project is to construct or expand seven 500kV/230kV and 230 kV/115 kV substations, including the Tonpheung transformer substation and the Huayxay substation. It also involves the construction of seven 230 kV and 115 kV transmission lines, including a 48-km transmission line from Huayxay to Tonpheung. Pinggao Group Co Ltd is the general (EPC) contractor responsible for implementation. However, PowerChina Hubei Engineering Co., Ltd and China Energy Engineering Group Guangdong Electric Power Design Institute Co., Ltd (GEDI) are also involved in project design and implementation. 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.