Languishing down the development table, land-locked Laos is investing heavily in a joint venture to build a rail link between its capital and the Chinese border. Peter Janssen reports.

Laos on track

China’s Belt and Road Initiative (BRI) is well under way in land-locked Laos, where construction of 414 kilometres of train track linking the China-Laos border to the Lao capital of Vientiane kicked off in December 2016 and is scheduled for completion in December 2021.

With 60% of the track comprising bridges and tunnels passing through Laos’ mountainous, river-rich northern terrain, speed on the single-track route will reach a maximum of only 160 kilometres per hour (kmph), deemed medium speed in today’s high-speed context, where trains can reach 250kmph to 300kmph. The project was slow in starting, requiring a 17-year gestation period that makes it much older than the Belt and Road concept.

Laos and China began discussions about a railway in 2001, culminating in a memorandum of understanding signed in April 2010 between the countries’ then-presidents. The first plans to launch a Laos-China Railway Project were stalled when Liu Chijun, China’s former minister of railways, was sacked on corruption charges in 2011. By 2015, talks were back on track for a deal, which was approved by the 10th Congress of the Lao People’s Revolutionary Party in early 2016. A ceremony marking the official start of construction was held on December 25, 2016 in Luang Prabang, Laos’s ancient royal capital, which will be one of the main stations on the new railway map.

Growth booster

Generally, once the Lao communist party’s politburo decide a project is worth staking their reputations on, they will go ahead without backtracking, and the Laos-China Railway project is in keeping with the party’s long-term policy of transforming Laos from a 'land-locked country to a land-linked country'. That objective happens to be in line with China’s BRI’s objectives for the region.

Laos overview

“When it comes to Laos, China has for many years had a strategy to use its railway system to drive into south-east Asia to bind these countries to China,” says James Stent, a US national who served 13 years on the boards of China Minsheng Bank and China Everbright Bank in Beijing and is the writer of China's Banking Transformation: the Untold Story. Mr Stent sees the BRI as evidence that China sees “a comprehensive network of trade, economic and financial relationships all over the Eurasian land mass as the best way of securing dominance in Asia”.

With only 6.8 million people in a country half the size of France, Laos has few industries and exports other than hydro-electricity, and few prospects for growth. It is ranked among the world’s least developed countries. The government is banking on investments in hydro-electricity, and on the Laos-China Railway, to lift the country’s development status, the rail project is by far the costliest infrastructure investment Laos has undertaken.

Debt risk

Development banks worry that the $6bn rail project will exacerbate Laos’ already precarious level of public debt, which reached 68% of gross domestic product (GDP) in 2016, increasing the debt distress from 'moderate' to 'high' in the recent World Bank/IMF Debt Sustainability Analysis. Laos’s budget deficit in 2017 was 4.8% of GDP, compared with 4.6% in 2016.

“There was some impact from the rail project because the government has to contribute $250m to the project over the next five years, or $50m a year from domestic revenues,” says one development bank economist. “This money will mainly pay for the compensation to affected people along the railway line.”

Under the Laos-China railway deal, the two governments have set up a 70/30 joint venture to finance the $5.95bn project. Each side needs to contribute 40% of their investment commitment in cash, which means that Laos (with 30% of the joint venture) needs to contribute $715m over the five-year construction period. Of this, $250m will come from the national budget. The remaining $465m will be borrowed from the Export-Import Bank of China at 2.3% interest with a five-year grace period and a 35-year maturity.

A worry hanging over the joint venture is: who will pick up the tab if the train does not make money? That may be more of a concern for Laos than for China. “It probably is not a commercially viable project in the timeframe of a Western bank,” says Mr Stent. "But once you add in what China’s objectives are, it makes sense for China.”


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