Laos’ expensive bet on electricity could cloud its economic future — Radio Free Asia

Two years into the COVID-19 pandemic, Laos’ economic future looks precarious, bogged down by massive public debt and an economic strategy overly reliant on power generation.

The World Bank reported in August 2021 that Laos’ public debt had soared to US$13.3 billion, or 72% of its gross domestic product. Most of the debt was contracted by the energy sector, with the state-owned Electricité du Laos (EDL) accounting for 36%.

Laos has built dozens of hydroelectric dams on the Mekong and its tributaries and is building about 50 more as part of a plan to become the “Battery of Southeast Asia” and export electricity they produce to other countries in the region, mainly Thailand.

Additionally, Laos and China in December completed a $6 billion high-speed railway project linking Vientiane, the capital of Laos, to China’s Yunnan province. Although Laos only has a 30% stake in the project, it still needed to borrow heavily from China to finance what it had pledged to the project.

The World Bank said Laos owed a total of $1.3 billion in debt service each year until 2025 and estimated that servicing the annual bill would reach 52.5% of public sector revenue by 2021, which is considered high for low-income countries. He noted that Laos’ bonds far exceed its reserves, recommending focusing on “debt management in a more sustainable and transparent manner.”

Two international credit rating agencies in 2020, Moody’s and Fitch Ratings, downgraded Laos’ sovereign rating, meaning they believe the country has a high probability of default.

Fitch said in an August 2021 report that almost half of Laos’ external debt over the next few years must be paid to China. The two sides have previously worked together on the debt issue, with Laos seeking a debt suspension agreement and the People’s Bank of China swapping yuan with the Bank of Lao PDR in 2020 to help boost foreign exchange reserves. foreign, noted Fitch.

At a meeting of Laos’ National Assembly in October, the finance minister warned that interest payments would rise sharply over the next five years on public debt which stood at $13 billion in 2020 .

“The government will have to pay $414 million a year in interest alone, so we have to tighten our belts,” Finance Minister Bounchom Oubonpaseuth said.

Negotiating with China will be key to getting Laos out of its debt problems, and there are four possible options, said a foreign journalist and analyst who has covered Laos extensively, told RFA’s Lao Service under cover of a ‘anonymity.

“You can suspend…and give more time to pay the debt. They can cancel the debt. … They can ask Laos to settle for a currency exchange between the Bank of Laos and the People’s Bank of China. Or, China can lend money to Laos to pay the debt.

This map released by AFP shows the locations of hydropower projects in various stages of completion along the Mekong River.

Highly indebted EDL

Chanthaboun Soukaloun, managing director of Electricité du Laos, told the annual general meeting on February 11 that EDL has been losing money for years and racked up $5 billion in debt. The loss affects EDL’s ability to repay its loans, the Lao government news agency KPL reported.

“The government has been aware of the debt. Everyone and every department of the government should help pay off our debt, but we in the EDL have no money,” an EDL official told RFA on February 17, who requested the anonymity for security reasons.

“The government knows that EDL owes EGAT (Electricity Generating Authority of Thailand) a lot of money, and EDL has no money to pay them back,” he said.

Debt has risen sharply over the past decade as EDL borrowed large sums from foreign countries, particularly Thailand and China, to build dams, install power lines and invest in other related activities. to electricity.

But some dams have not been productive due to a lack of water, while other well-resourced dams produce electricity that no one buys.

The EDL has an obligation to buy the electricity produced by the dams at high prices but must resell it at lower prices to companies in Thailand and China.

Moreover, EDL only owns 10 of the 88 dams currently operational in Laos, while the rest are owned by foreign investors, who sell the electricity they produce to EDL at high prices.

Despite the excess electricity, electricity prices remain too high for many domestic customers to pay, which is why the company is losing money, the official said.

The electricity sector favors foreign investors, an official from the Ministry of Energy and Mines told RFA.

“Of course, they pay all the taxes and fees to the government, but the government has huge expenses, like paying compensation” to people displaced by hydroelectric projects, the energy official said.

Compensation for households, even entire villages displaced by dams and infrastructure projects, has been a source of friction for years. Many rural villagers have told RFA that the compensation offered is far less than the value of the property they are giving up and that they are exchanging fertile farmland for remote plots with poor soil.

For those who accept, the government sometimes struggles to pay compensation in a timely manner, with relocated families waiting years for payment in some cases.

In this March 2020 file photo, Electricity of Laos (EDL) employees work on a power line in Vientiane, Laos. Credit: citizen journalist

Another problem for EDL is that it anticipated rising electricity prices when it signed agreements to buy electricity from investors in the dam, with the aim of reselling it at a higher price to its buyers.

EDL is obligated to buy power from most dam projects for $0.06 per kilowatt-hour, but can currently only sell it for $0.04 to companies in China’s Yunnan province or $0.05 to companies in Thailand.

Many Lao citizens blame EDL’s problems on corruption, which has plagued the internal workings of Laos’ national and local governments for decades.

Berlin-based Transparency International’s Corruption Perceptions Index 2020 ranked Laos 134th out of 180 countries it assessed in the fight against corruption.

Prime Minister Phankham Viphavanh pledged to root out corruption, bribery, fraud and other malfeasance by state officials in a speech to the National Assembly of Laos in August, and in December, Laos intensified the campaign against corruption by expelling corrupt Lao People’s Revolution officials. Party, the only political party in the country.

Corruption is so rampant in Laos that many of its citizens suspect it is the reason EDL loses so much money.

“EDL must closely inspect and monitor its employees at all levels, ensuring that they do not abuse power and seek personal financial gain,” a Lao businessman told RFA. “Widespread corruption leads to financial leakage and massive debts.”

The EDL must be reorganized, a resident of the southern province of Champassak told RFA.

“EDL’s employees and management team run the business for their own benefit, not for the company or the state. Above all, actions for personal gain must be stopped,” the Champasak resident said.

A resident of the capital Vientiane denounced EDL’s lack of transparency.

“No financial report is published. There must be a lot of corruption. That’s why the company is so indebted,” he said.

Last year, an EDL affiliate asked several Thai companies for a longer grace period to repay their debt, due to the COVID-19 pandemic and rapid inflation.

Prime Minister Phankham Viphavanh told Laos’ National Assembly in November that the government was reforming several major state enterprises, including EDL, due to huge debt problems.

Translated by Samean Yun. Written in English by Eugene Whong.

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