Exclusive: Takeover – Chinese company to operate Laos power grid despite default warnings

(Reuters) – The small, poor Southeast Asian country of Laos is on the verge of ceding majority control of its power grid to a Chinese company, as it struggles to avoid a potential default, said people with direct knowledge of the agreement.

FILE PHOTO: A farmer works in a paddy field under power lines near the Nam Theun 2 dam in Khammouane province, Laos. Photo taken October 28, 2013. REUTERS / Aubrey Belford / File Photo

The deal comes at a time when critics accuse Beijing of “debt trap diplomacy” to gain a strategic advantage in countries struggling to repay loans taken out under the Belt’s global infrastructure initiative. and the Route ”of President Xi Jinping.

China is Laos’ biggest creditor, and the deal will tie the landlocked, mountainous country of seven million people closer to its giant neighbor.

The power grid participation agreement was signed on Tuesday between the state-owned Electricité du Laos (EdL) and China Southern Power Grid Co., according to the state-run Chinese news agency Xinhua, which did not give details. the new property.

Three people familiar with the matter said he would hand majority control of the new Electricité du Laos Transmission Company Limited (EDLT) to the Chinese company.

Electricity exports are at the heart of Laos’ development plans.

“This will give Laos’ public network better negotiating power with countries in the region and start to make profits,” said one of those with first-hand knowledge of the discussions.

The Chinese Embassy in Laos has said on its website that Laos will mine the transmission assets. He did not give details of the shareholding but said that “Laos may also gradually repurchase shares during the transaction”.

Neither EdL nor China Southern responded to Reuters requests for comment on the deal. The Lao and Chinese governments also did not respond to requests for comment.

In a report from Vientiane, the capital of Laos, Xinhua quoted Lao Energy and Mines Minister Khammany Inthirath as a key project that would benefit from “advantages in terms of experience, technology and human resources. From Chinese society.

The new company will operate under the regulation of the government of Laos, Xinhua reported, but would benefit from “the financial strength and mature experiences of China Southern in the construction, operation and management of the power grid.”

After the deal, state-run Vientiane Times said EDLT would invest around $ 2 billion in local network and international connections in the future.

Laos has invested heavily in hydropower projects, many of which are funded by China, with the aim of becoming “the battery of Southeast Asia”. But these projects, along with a new Chinese high-speed railroad, are at the center of a debt tightening.

DEFAULT WARNING

The World Bank estimated in June that debt levels will reach up to 68% of GDP in 2020, up from 59% last year. Moody’s rating agency warned last month of “a high probability of default in the short term.”

While Laos has recorded just 22 cases of the coronavirus and no deaths, the outbreak has hit tourism and overseas remittances hard.

Laos’ debt service obligations in 2020 stand at around $ 1.2 billion with commercial bank loans and Thai bonds maturing in September and October, Moody’s said, but foreign exchange reserves n were only $ 864 million in June, according to the central bank.

Among the companies already suffering from late payments are Chinese companies behind hydropower projects that are not paying back as expected, people with knowledge of the China Southern deal said.

China was also considering postponing part of Laos’ total debt service payment, two people with direct information said. The Chinese government did not immediately respond to a question about the talks.

“Economically, Laos will depend more on China and it is inevitable,” said Toshiro Nishizawa, a Japanese professor who has advised the government of Laos on fiscal stability.

Laos could be eligible for assistance from the International Monetary Fund as part of its COVID-19 financial assistance and debt service relief response, which benefits 80 countries, two Western diplomats said.

But they said he made it clear that he preferred to try to find a solution with China, they said. An agreement with the IMF would require greater financial transparency.

Total Chinese investments in electricity, transportation, a border economic zone and other projects already total more than $ 10 billion, according to Xinhua citing figures from Laos. That’s more than double Thailand’s investment, the second largest.

A study published in 2019 by the Australia-based Lowy Institute put Laos’ debt to China at 45% of GDP.

Economic ties with Beijing have also strengthened political ties, with Laos being a reliable supporter of China’s position on issues such as the South China Sea within the Regional Association of South Asian Nations. East.

Laos was the first country to endorse Chinese leader Xi’s political message of “building a community of common destiny.”

“Giving China a major stake in the ‘Battery Plan for Southeast Asia’ puts Laos quickly on track to become a pseudo-province of China,” said Brian Eyler, director of the Stimson Center think tank Southeast Asia program in Washington.

Additional reports by Panu Wongcha-Um; Editing by Matthew Tostevin & Simon Cameron-Moore

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