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Laotian deputy premier aims to firm up $7B project by June
VIENTIANE -- Laos is close to reaching a deal with Beijing to resuscitate long-delayed plans for a $7 billion rail link between Kunming and Vientiane. Eventually, the line could allow trains to run from China to Bangkok and on to Singapore.
In an interview with the Nikkei Asian Review, Somsavat Lengsavad, a Laotian deputy prime minister, said Laos hopes to reach an agreement with Beijing by June. The plan would then be presented to Laos' one-party National Assembly. Under the envisaged arrangement, Vientiane would provide $840 million in initial financing, with $1.26 billion coming from China.
The balance of just under $5 billion would be borrowed from the Export-Import Bank of China by a joint venture company established to build and operate the line, Somsavat said. The venture would eventually be transferred to Laotian ownership.
The proposed link to Kunming, the capital of China's Yunnan Province, has been dogged by delays and uncertainty since an initial agreement in April 2010 set a target completion date of 2015. A groundbreaking ceremony was planned for April 2011 but was postponed following the arrest on corruption charges of Lieu Zhijun, the Chinese railways minister. Laos considered going ahead unilaterally, with Chinese finance, but decided against it and the mountainous 421km double-track route remains undeveloped.
The latest talks could also fail if Beijing rejects the financial terms proposed by the Laotian government, or if the costs -- including interest payments -- rise too high. The $7 billion price tag amounts to more than 60% of Laos' gross domestic product, which was $11.24 billion in 2013, according to the World Bank. The Asian Development Bank has warned that the project could leave Laos overburdened with debt; many economists have suggested that the funds might be better spent on improving roads and other basic infrastructure.
The project received an unexpected fillip last year from neighboring Thailand. The ruling junta signed an estimated 350 billion baht ($10.8 billion at current rates) agreement with China to build a 734km link between the Thai city of Nong Khai, which lies on the Mekong River opposite Vientiane, and Map Ta Phut, a deep-sea port in Thailand's eastern seaboard industrial zone. A second phase would run to Bangkok, linking the Thai capital directly with Kunming via Vientiane. This could lead to the realization of a long-discussed connection between Kunming and Singapore, via Malaysia.
Laos, a landlocked country with challenging topography, has only 10,000km of paved roads and no railways -- apart from a 3.5km line over the Thai-Lao Friendship Bridge between Nong Khai and Vientiane. Somsavat, who has overseen the Kunming link project since its infancy, talked to NAR at length about the prospects for the stalled project.
Q: What is the current status of the Laos-China train project?
A: Due to the high cost of the project, with an initial estimate at $7 billion, the two sides assigned teams to seriously study the feasibility of the plan. The Chinese side did some studies on the possibility of providing $7 billion in loans to Laos and letting the Lao side build the rail itself, but this was worrisome because Laos has no previous experience in building a railroad. We answered that if China provided $7 billion, the Lao side is afraid we couldn't handle it.
In the end, we agreed we would jointly develop the railway in the form of a BOT (build, operate and transfer agreement). Even after agreeing on the BOT, we had to study the financial arrangement -- how much each side would contribute.
For instance, suppose 30% of the $7 billion is the initial capital used to start the project, and the remaining 70% has to be borrowed by the joint venture company. What percentage would the Lao side put in and what percentage the Chinese?
Q: So the 30% is the initial investment put down by both sides, and the remaining 70% would be borrowed by the joint venture?
A: Yes. The 30% is equal to $2.1 billion. Of this 30%, the Lao government and Chinese government would agree on how much each side would invest. Our technical teams came up with two options [for dividing the $2.1 billion initial investment]: 40/60 or 30/70. So if it is 40/60, the Lao side would need to invest $840 million, and if it is 30/70, it would be $630 million. And based on the studies done over the past two years by both sides, it was decided that 40/60 would be the most appropriate.
Q: You will need the approval of the National Assembly, right?
A: Yes. All big investment projects of over $500 million have to go through the National Assembly.
Q: When do you intend to present it to the assembly?
A: At present, the Lao government is proposing the 40/60 split to the Chinese government. If we can reach an agreement by June, then it will go to the National Assembly, which is in session then. And if we cannot reach an agreement by June, there is another National Assembly at the end of the year, so that is another chance.
Q: There will be a party congress early next year, and a general election for members of the National Assembly by mid-year. Do you want to push this project through before then?
A: I think if we cannot get approval this year, the party congress will reconfirm its commitment to this project because they [the party] have already agreed to it.
Q: The loan would still come from the China EximBank?
A: Yes. The China EximBank has not confirmed the rate, but the Laos side would like it to be as low as possible.
Q: Who are you dealing with in China?
A: The railway project has been assigned to China's Committee for Development and Reform, so it is no longer under the Transport Ministry. This is a good development, because the committee has decision-making powers over infrastructure projects.
Q: And who runs things on your side?
A: We have set up a committee to supervise this railway project, led by myself and comprising the governors of all the provinces that the rail will go through.
Q: Have you bought the land yet?
A: Not yet. After the surveys are completed we will have a list of the affected areas, and compensation will be granted by a prime minister decree.
Q: Many economists say this project is not justifiable, that Laos would be better off spending money on building roads.
A: For Laos, we are a landlocked country. We can only rely on roads, so the transport cost is very high. ... In our policy of turning Laos from a landlocked to a land-linked country, we believe the railroad will help us reach our objective.
Q: Unlike China, which wants a cargo link to the sea, Laos has little to export. Where is the value-added for Laos?
A: It will boost the Lao economy because many investors are now looking for a production base here. They say that if the country had a railway, it would help them reduce their transportation costs. So it would make us more attractive to investors.
We have also suggested to our Chinese counterpart that, based on our electricity production, we could use electricity to power the trains. This would mean saving foreign reserves, because less road transport will be used and Laos will not need to import fuel.
Q: If Thailand goes ahead with its rail projects, will that benefit you?
A: That is the best opportunity for this project. I am very happy with Thailand, because even though their governments change often, they always stick to the agreements they have made with the Lao government. The current Thai transport minister came here last year and discussed where the bridge over the Mekong River should be built for the railway, so that reconfirmed our cooperation.
Q: Laos has always been good at maintaining a balancing act between its immediate neighbors -- China, Vietnam and Thailand. You don't think that if this project goes ahead, it will throw you firmly into the China camp?
A: China invests all over the world, not just in Laos. Therefore, we cannot stop China from investing in this country. Laos is fortunate to have a border with China, which has provided us great benefits from the high growth in trade, tourism and investments.
Q: Aren't you worried about upsetting the balance, especially between China and Japan in the region?
A: Japan is the largest provider of ODA [overseas development aid] in Laos, while China is the largest provider of FDI [foreign direct investment]. In 2013, I went to Japan and invited Japanese companies to come to Laos, and since then we have seen an increase in the number of Japanese investors.
Q: But not in the railways?
A: Japan has not yet expressed any interest in the railways.
VIENTIANE -- Laos is close to reaching a deal with Beijing to resuscitate long-delayed plans for a $7 billion rail link between Kunming and Vientiane. Eventually, the line could allow trains to run from China to Bangkok and on to Singapore.
In an interview with the Nikkei Asian Review, Somsavat Lengsavad, a Laotian deputy prime minister, said Laos hopes to reach an agreement with Beijing by June. The plan would then be presented to Laos' one-party National Assembly. Under the envisaged arrangement, Vientiane would provide $840 million in initial financing, with $1.26 billion coming from China.
The balance of just under $5 billion would be borrowed from the Export-Import Bank of China by a joint venture company established to build and operate the line, Somsavat said. The venture would eventually be transferred to Laotian ownership.
The proposed link to Kunming, the capital of China's Yunnan Province, has been dogged by delays and uncertainty since an initial agreement in April 2010 set a target completion date of 2015. A groundbreaking ceremony was planned for April 2011 but was postponed following the arrest on corruption charges of Lieu Zhijun, the Chinese railways minister. Laos considered going ahead unilaterally, with Chinese finance, but decided against it and the mountainous 421km double-track route remains undeveloped.
The latest talks could also fail if Beijing rejects the financial terms proposed by the Laotian government, or if the costs -- including interest payments -- rise too high. The $7 billion price tag amounts to more than 60% of Laos' gross domestic product, which was $11.24 billion in 2013, according to the World Bank. The Asian Development Bank has warned that the project could leave Laos overburdened with debt; many economists have suggested that the funds might be better spent on improving roads and other basic infrastructure.
The project received an unexpected fillip last year from neighboring Thailand. The ruling junta signed an estimated 350 billion baht ($10.8 billion at current rates) agreement with China to build a 734km link between the Thai city of Nong Khai, which lies on the Mekong River opposite Vientiane, and Map Ta Phut, a deep-sea port in Thailand's eastern seaboard industrial zone. A second phase would run to Bangkok, linking the Thai capital directly with Kunming via Vientiane. This could lead to the realization of a long-discussed connection between Kunming and Singapore, via Malaysia.
Laos, a landlocked country with challenging topography, has only 10,000km of paved roads and no railways -- apart from a 3.5km line over the Thai-Lao Friendship Bridge between Nong Khai and Vientiane. Somsavat, who has overseen the Kunming link project since its infancy, talked to NAR at length about the prospects for the stalled project.
Q: What is the current status of the Laos-China train project?
A: Due to the high cost of the project, with an initial estimate at $7 billion, the two sides assigned teams to seriously study the feasibility of the plan. The Chinese side did some studies on the possibility of providing $7 billion in loans to Laos and letting the Lao side build the rail itself, but this was worrisome because Laos has no previous experience in building a railroad. We answered that if China provided $7 billion, the Lao side is afraid we couldn't handle it.
In the end, we agreed we would jointly develop the railway in the form of a BOT (build, operate and transfer agreement). Even after agreeing on the BOT, we had to study the financial arrangement -- how much each side would contribute.
For instance, suppose 30% of the $7 billion is the initial capital used to start the project, and the remaining 70% has to be borrowed by the joint venture company. What percentage would the Lao side put in and what percentage the Chinese?
Q: So the 30% is the initial investment put down by both sides, and the remaining 70% would be borrowed by the joint venture?
A: Yes. The 30% is equal to $2.1 billion. Of this 30%, the Lao government and Chinese government would agree on how much each side would invest. Our technical teams came up with two options [for dividing the $2.1 billion initial investment]: 40/60 or 30/70. So if it is 40/60, the Lao side would need to invest $840 million, and if it is 30/70, it would be $630 million. And based on the studies done over the past two years by both sides, it was decided that 40/60 would be the most appropriate.
Q: You will need the approval of the National Assembly, right?
A: Yes. All big investment projects of over $500 million have to go through the National Assembly.
Q: When do you intend to present it to the assembly?
A: At present, the Lao government is proposing the 40/60 split to the Chinese government. If we can reach an agreement by June, then it will go to the National Assembly, which is in session then. And if we cannot reach an agreement by June, there is another National Assembly at the end of the year, so that is another chance.
Q: There will be a party congress early next year, and a general election for members of the National Assembly by mid-year. Do you want to push this project through before then?
A: I think if we cannot get approval this year, the party congress will reconfirm its commitment to this project because they [the party] have already agreed to it.
Q: The loan would still come from the China EximBank?
A: Yes. The China EximBank has not confirmed the rate, but the Laos side would like it to be as low as possible.
Q: Who are you dealing with in China?
A: The railway project has been assigned to China's Committee for Development and Reform, so it is no longer under the Transport Ministry. This is a good development, because the committee has decision-making powers over infrastructure projects.
Q: And who runs things on your side?
A: We have set up a committee to supervise this railway project, led by myself and comprising the governors of all the provinces that the rail will go through.
Q: Have you bought the land yet?
A: Not yet. After the surveys are completed we will have a list of the affected areas, and compensation will be granted by a prime minister decree.
Q: Many economists say this project is not justifiable, that Laos would be better off spending money on building roads.
A: For Laos, we are a landlocked country. We can only rely on roads, so the transport cost is very high. ... In our policy of turning Laos from a landlocked to a land-linked country, we believe the railroad will help us reach our objective.
Q: Unlike China, which wants a cargo link to the sea, Laos has little to export. Where is the value-added for Laos?
A: It will boost the Lao economy because many investors are now looking for a production base here. They say that if the country had a railway, it would help them reduce their transportation costs. So it would make us more attractive to investors.
We have also suggested to our Chinese counterpart that, based on our electricity production, we could use electricity to power the trains. This would mean saving foreign reserves, because less road transport will be used and Laos will not need to import fuel.
Q: If Thailand goes ahead with its rail projects, will that benefit you?
A: That is the best opportunity for this project. I am very happy with Thailand, because even though their governments change often, they always stick to the agreements they have made with the Lao government. The current Thai transport minister came here last year and discussed where the bridge over the Mekong River should be built for the railway, so that reconfirmed our cooperation.
Q: Laos has always been good at maintaining a balancing act between its immediate neighbors -- China, Vietnam and Thailand. You don't think that if this project goes ahead, it will throw you firmly into the China camp?
A: China invests all over the world, not just in Laos. Therefore, we cannot stop China from investing in this country. Laos is fortunate to have a border with China, which has provided us great benefits from the high growth in trade, tourism and investments.
Q: Aren't you worried about upsetting the balance, especially between China and Japan in the region?
A: Japan is the largest provider of ODA [overseas development aid] in Laos, while China is the largest provider of FDI [foreign direct investment]. In 2013, I went to Japan and invited Japanese companies to come to Laos, and since then we have seen an increase in the number of Japanese investors.
Q: But not in the railways?
A: Japan has not yet expressed any interest in the railways.
