$6 billion Laos-China railway on track to somewhere

A promotional poster for the 414-kilometer Laos-China railway project that promises to transform Laos from landlocked to land-linked

The US$6 billion Laos-China railway that starts operations on December 3 – following the 46th anniversary of the Lao People’s Democratic Republic on December 2 – is definitely a game-changer for the land-locked communist country of 7 million people, which has rarely enjoyed the regional spotlight.

The inauguration of the 422-kilometer rail link between Botan, on the Lao-Chinese border, to Vientiane, the Lao capital, promises to revise plans for greater infrastructure connectivity in mainland Southeast Asia while at the same time raising concerns about China’s growing economic clout in the region, especially in little Laos.

To China’s credit, the project was completed on schedule within its five-year time frame, and the railway – passing through 75 tunnels, over 77 bridges – is now a fait accompli.    

“Now the railway is here,” said Lattanamany Khounyvong, a former Deputy Minister of Public Works and the Transport Ministry, who worked on the project since serious discussions began in 2009.

“Even though Laos and China invested in this project, it is available for every country,” Lattanamany told a webinar organized by the Stock Exchange of Thailand (SET) enthusiastically titled Unlocking Business Opportunities of the GMS Rail Rink.

GMS stands for the Greater Mekong Subregion, which comprises the six nations that share the mighty Mekong River – southern China, Laos, Myanmar, Thailand, Cambodia and Vietnam.

“In the beginning, I didn’t believe that this project could be realized because Laos is a poor county and the cost of the project was very high,” Lattanamany acknowledged. 

That pessimism was shared by many.

Laos a least developed developing country

Laos remains one of the world’s least developed developing nations, with a high public debt which in 2020 reached $13.3 billion, or 72% of GDP, up from 67.3% in 2019, according to World Bank figures. The railway’s $6 billion price tag is equal to about one-third of Laos’ gross domestic product of $19.14 billion.   

But proponents of the project maintain that observers have exaggerated Laos’ debt commitment to the scheme, which can be blamed in part on the state secrecy that has shrouded the deal’s details and is typical of most contracts undertaken in Laos, where the communist party has ruled as the sole political party since 1975.   

“Many people are confused about the financial structure of the project,” said Rithikone Phoummasack, Chairman and CEO of the AIF Group – a Lao conglomerate with activities in finance, telecoms, energy and logistics. 

The structure is indeed complex, and part of the confusion is attributable to the various permutations the project has undergone since it was first conceived in 2001. Serious bilateral talks started in 2009, initiated by former Deputy Prime Minister Somsavat Lengsavad – then the only Mandarin speaker on the Lao Politburo – and China’s Railway Ministry, which was quickly expanding China’s high-speed train network at the time.

An MOU was signed in 2010.

But the original terms of the railway deal were far from ideal for Laos, including the granting of large chunks of land on both sides of the tracks and other concessions, which raised concerns and opposition from Laos’ usually quiescent populace. Thankfully, that deal was scrapped in 2011 by a corruption scandal at China’s Railway Ministry. 

The rail project was resurrected in 2015, again by Somsavat Lengsavad, and this time appeared to have benefitted from China’s Belt and Road Initiative (BRI), of which the Laos-China Railway is now an integral part. 

Under the new arrangement, the two sides established a joint venture comprising three Chinese state-owned enterprises – Boten-Vientiane Railway, Beijing Investment Company, Yunnan Investment and one Lao state enterprise, the Lao National Railway – with the Chinese side holding 70% and Laos 30%. 

Under the terms of the latest deal, signed in 2016, both sides had to commit 40% of the total $5.9 billion in cash (or $2.4 billion) to cover the initial construction costs, which put Laos’ commitment at $720 million, of which $250 million came from the national budget over the five-year construction period while the remaining $470 million was borrowed from the Export Import Bank of China at 2.3% interest with a 35-year maturity after a five-year grace period.

The 50-year deal

The project has been classified as a Build Operate and Transfer (BOT) scheme, due to be handed over to the Lao government after 50 years. 

“In the end, we have found that the project funding was mostly on the Chinese side, or almost 96% of the project was funded by China,” said Lattanamany. “We only funded 4% of the $5.9 billion project as our contribution was $250 million, so this is a good project for us.”

By “us” the former minister appeared to be referring to the Lao government. The Lao Railway Company still owes the Export Import Bank of China another $470 million.

But it is unclear whether this debt has been guaranteed by the Lao government. Some argue that the debts to Chinese banks are solely the responsibility of the joint venture company set up to carry out the project, which is a limited liability company.

“The entity that borrowed the money is the joint venture between the Lao and Chinese companies, and this is a limited liability company, so if the project fails it doesn’t mean that the Lao government has to pay $6 billion back to the Chinese government,” said AIF’s Rithikone, addressing the same SET seminar. 

“If the project fails the lenders just come and take over the project and manage the company or sell the project to whomever,” he said. “And after 50 years the assets have to be returned to Laos no matter if the debt has been paid off or not.” 

More worrisome for the railway is its commercial prospects. In the project’s initial feasibility study the return on investment was estimated at 3.9%, which is very low. It is unlikely the project would have ever materialized if Chinese President Xi Jinping had not taken up his trillion-dollar BRI gambit. 

“This is a special project that could only happen because of the BRI, because of the strong push by the Chinese government to expand the economic corridor to GMS and ASEAN,” Rithikone opined.

The railway project also aligned with Laos’ strategy to transform itself from a “land-locked to land-linked” country. 

In the bigger scheme of ASEAN’s strategy to promote infrastructure connectivity, the Thai government is looking like a regional laggard.

The Thai connection

Plans to build a Thai-China high-speed train from Bangkok to Nong Khai, the border town on the opposite bank of the Mekong from Lao capital Vientiane, have stalled, although a 3-kilometer track has reportedly been completed somewhere in the northeast.

Former Thai transport minister Arkhom Termpittagapaisith was known to be unenthusiastic about the scheme, and hesitant to take on the high-interest loans offered by Chinese banks to finance the project, so Thailand decided to proceed as a 100% Thai-owned project with technical assistance from China. 

In the meantime, Arkhom, the transport minister between 2015 and 2019, pushed for the expansion of Thailand’s dual-track railway network, which most economists deemed more commercially viable and beneficial for the economy.

Having a dual-track allows trains to travel up to 120 kilometers per hour, which is similar to the Laos-China Railway’s maximum speeds of 160 kph for passenger trains and 120 kph for freight. 

While the dual-track has been extended from Khon Kaen, in northeastern Thailand, all the way down to the Laem Chabang Deep Sea Port on the eastern seaboard, there is still a missing link between Khon Kaen and Nong Khai, and therefore with the Laos-China Railway. 

The current Thai government, which came to power in a 2019 election but still has Prayuth Chan-ocha as Prime Minister – the army general behind the 2014 coup – has been inexplicably slow about pushing through the dual-track extension to Nong Khai.

“The latest I heard was that it was delayed by another three to four years,” said Ruth Banomyong, assistant professor of logistics and transport at Thammasat University and a consultant on various rail projects in the region.

“Frankly speaking, ever since this new government came in all the master plans for the railways have been delayed,” he said.

Those delays will be highlighted on December 3 with the inauguration of the Laos-China Railway, which has already made Thailand’s lack of railway progress a source of ridicule.

“There was this cartoon in Matichon newspaper where you have Laos with the high-speed train and Bangkok with a guy in a tuk-tuk,” said Ruth. 

Private sector takes over

While the Thai government has failed to maximize opportunities from the Laos-China rail link, the private sector has been moving forward. Hong Kong-based Kerry Logistics, the largest logistics company in Thailand, has joined the Vientiane Logistics Park Co, Ltd in establishing a dry port in Vientiane called the Thanaleng Dry Port and Vientiane Logistics Park. 

The dry port is linked to Thailand’s one-meter gauge railway by a bridge crossing the Mekong River and has already reduced the cost of container freight from Vientiane to Laem Chabang Port, Vientiane-based businessmen say. 

“The big problem before was that we couldn’t book a container in Laos, and then send it to Laem Chabang,” said Peter Fodge, founder of the Burapha Group in Laos, but now only a minority shareholder. “We had to book a container in Laem Chabang, bring it to Laos, load it and send it back.” 

Meanwhile, the Burapha Forestry Plywood Mill, in Hin Hup, is looking into using the Laos-China Railway to open a new market for its plywood in China.

The railway is expected to cut domestic transportation costs by 30-40%, compared with trucks.

Oddly, the Thanaleng dry port is not near the terminal of the Laos-China Railway in Vientiane, which is about 20 kilometers away. 

That is just one of the many things that will need to be ironed out before the Laos-China Railway can maximize its commercial benefits. Other reforms needed are to the Lao Customs system and regulations that govern transit goods by rail.

“In Vientiane, the various warehouses will become bonded warehouses, but from a documentary perspective it is still import and export, which is not the same as transit,” noted Ruth. “For transit, you basically just need one document saying it is the transit of goods and they don’t touch it. Otherwise, you have to do the import process and the export process and it’s a documentary mess.”

One can expect to see Lao and Chinese companies playing a growing role in handling logistics connected to the railway.   

“A direct benefit that we have seen so far is the investment in warehouses and storage,” said one Vientiane-based economist working for a development bank. “We will see how it goes but the railway can be an opportunity for Laos to develop its capacity to handle large flows of goods from China to ASEAN, especially to Thailand,” he added.  

But Thailand stands to lose out in the expanded logistics traffic.

“All the goods you want to send to China you just send your truck to Vientiane and from there the Lao and Chinese are going to do the business themselves,” said Adisorn Singhsacha, CEO of Twin Pine Group. “They are not going to allow Thai trucks to drive up to the China border.”

The Thailand-based Twin Pine Group has been arranging sovereign and state enterprise bonds for Laos over the years, with the last one issued by EDL GEN (the national electricity generating enterprise) on the Thai market in September. Adisorn noted that Laos has never defaulted on a bond redemption to date, despite its rising debt burden, and if anything, the inauguration of the Laos-China Railway has boosted confidence in the country’s future.

“Over the past two-three years people were concerned about the railway,” Adisorn said. “Now it’s done, it’s starting and the economic benefits are going to be felt in 2022 and the full benefits in 2023.”    

$6 billion Laos-China railway on track to somewhere — Asia Times

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