Laos And China Come to Terms on Loan Interest Rate For Railway Project

Laos and China have reached an agreement on the interest rate for a U.S. $480 million loan to build the high-speed Lao-China railway, according to the Lao government official in charge of the multibillion-dollar project, although the figure has not been publicly disclosed.

“The Chinese offered us a loan with a three-percent interest rate, but we proposed that they reduce it,” Somsavat Lengsavad, the country’s deputy prime minister who oversees the Lao-China railway project, told the National Assembly on Dec. 11. “The rate, however, was not a barrier, and after we sent our delegation to negotiate, we finally reached an agreement on loan.”   

Somsavat did not mention what the agreed-upon interest rate was on the U.S. $480 million loan from China, which Laos will back with five of its potash mines.

“After calculation, we have determined that we will be able to pay it back because we have five potash mines, and if we excavate them and use the income from them, we will not have any problems repaying it within five years instead of 30 years,” he said.

Lao government officials previously expressed concern about the interest rate on the loan being too high compared to the rates of other loans that China has issued to Laos.

China has offered other loans to developing countries in the region with a two-percent interest rate for railway, civil engineering and infrastructure projects.

The loan amount had been set at U.S. $500 million to finance the U.S. $7 billion project, but was recently lowered to U.S. $480 million after the parties involved agreed to reduce the overall cost to U.S. $6.04 billion. Laos will not have to pay any principal on the 20-year loan during the first five years, according to a previous Lao media report. 

The railway forms part of a larger 3,000-kilometer regional rail link that will run from Kunming in southern China’s Yunnan province through Laos, Thailand and Malaysia to Singapore.

Laos held a groundbreaking ceremony for the project in the capital Vientiane on Saturday.

The rail line will transport both goods and passengers through the region and is expected to give the underdeveloped, landlocked nation a much-needed economic boost.

“The railway is a high-cost investment project. The investment return will be low because lessons learned from other projects show us that railway construction projects take 30 years to earn back the capital invested in them,” Somsavat said. “But it will result in high economic efficiency with an estimate of 32 percent economic growth,” he said, without elaborating.

The Lao government expects roughly 4 million Lao passengers a year to use the railway’s 420-kilometer (261-mile) route through the country at first, with the figure growing to 6.1 million passengers in the mid-term and 8.1 million passengers in the long term, Somsavat said.

“That is our expectation,” he said. “I think when we have the railway, more people will use it.”

In addition, a total of nearly 10 million passengers from China and five other Association of Southeast Asian Nations (ASEAN) countries are expected to use the railway annually, with that figure rising to 11.9 million passengers per year in the mid-term and 16.5 million in the long term, Somsavat said.

‘Makes no sense’

A Lao official in charge of economic affairs at the Ministry of Planning and Investment, who declined to be named, pointed out that Somsavat failed to mention the final interest rate the two sides agreed upon for the loan as well as the financial risks of the investment.

“It does not make sense to hear Mr. Somsavat say that although the return on the investment is low, it will result in high economic growth because he does not talk about the risk of financial crisis and high debt which will flood Laos after this project [has been completed],” he told RFA’s Lao Service.

The official noted other high-cost investments led by Somsavat, in which he gave too much away as collateral for project loans with little or no payoffs for ordinary Lao citizens.

In 2007, he approved a special economic zone in the Golden Triangle area of the northern province of Bokeo, which borders Myanmar and Thailand, giving investors 90-year land concessions.

But because Laos did not have the law on investment promotions, the move caused land grabs and failed to boost local employment, the official said.

Two years later, Somsavat borrowed money from China to build a stadium for the Southeast Asian Games, and backed the loan with 300 hectares of land in the That Luang Marsh wetlands area on the outskirts of Vientiane.

“These projects have not benefited the Lao people, so I do not think the Laos-China railway project will only result in more debt for the country,” the official said.

Transparency needed

Keith Barney, a lecturer at the Crawford School of Public Policy at Australia National University in Canberra and an expert on Laos, said officials not only must ensure that the broad financial arrangements, construction costs and public bidding on construction and service contracts for the project are transparent, but also must divulge the future operation costs of the railway.

“The Laos-China railway project would have a much better chance of effective implementation if there were more transparency and information sharing about best-practice approaches to developing this major infrastructure project,” he said.

Such transparency would include the completion and release of environmental and social impact assessments, as required under the country’s 2010 Decree on Environmental Impact Assessment, he added.

It also would mean the public release of studies used to estimate ridership and the shipment of commodity goods, the planned route, associated land acquisitions at the district and village level, and how compensation for acquired assets and land entitlements would be calculated, Barney said.

“By maintaining a very high level of transparency and clear channels of information with a concerned public, the Lao-China Railway project would be much more likely to provide more equitable benefits to the greatest range of Lao people,” he said.

The government has promised to pay appropriate compensation under a prime ministerial decree to those who will lose land and homes when the Laos-China railway is built, the Vientiane Times reported Monday.

The decree, issued in 2009, will be used as the basic reference along with an actual estimate of the property value, plus negotiations with those affected to calculate the amount of compensation, the report said.

The Lao parliament approved the high-speed railway project in 2012 amid hopes that it would lower the cost of exports and consumer goods while boosting investment in the poverty-stricken nation, but the project has faced numerous setbacks.

Reported by RFA’s Laos Service. Translated by Ounkeo Souksavanh. Written in English by Roseanne Gerin.