Vientiane will have to pay massive interest on Chinese loans for an ambitious rail project
Laos may have to pay a whopping U.S. $3 billion in interest payment for a U.S. $7 billion loan it will obtain from China to build an ambitious Laos-China high-speed railway project, according to an official of the Lao Ministry of Finance.
The interest fee of nearly half the principal sum could result in Laos having to divert its precious share of revenue from Chinese-owned gold and bauxite mining operations to repay the massive loan, the official said, speaking on condition of anonymity.
He calculated the interest payment to be around U.S. $3.33 billion, basing it on a two percent compounded interest rate to be imposed on the 30-year loan from Exim Bank of China.
At least nine legislators in one-party communist state Laos have expressed opposition to the project, concerned that the Chinese loans could saddle the resource-starved country with financial problems and tighten Beijing's grip on Laos, sources have said.
The Lao parliament gave the go-ahead for the estimated 420 kilometer (261 mile) rail project in October. Laos has decided to assume sole ownership of the project after a Chinese construction company pulled out of the venture.
The rail project will connect the Lao capital Vientiane to the country's Luang Namtha province along the border with China, with the network linked further to a line from Kunming, the capital of China's Yunnan province.
'Break-even point'
According to the finance ministry official, a study undertaken by China showed that it should take Laos 38 years to reach a "break-even point" for the project—a point when it can begin expecting to make money from the venture, provided there are no hitches.
The official said that since Laos must pay back the entire loan with interest within 30 years, it is very likely that it will have to use proceeds from the Chinese-owned Sepone gold mine and the Champassak bauxite mine, believed to be the largest in Asia, to make the repayments.
Laos and China are currently discussing the terms of the loan and officials say that the two sides still have a considerable number of issues to be addressed.
Laos has also inked an agreement to build a U.S.$5 billion railway connecting Thailand and Vietnam. A Malaysian company, Giant Consolidated Ltd., was in early November awarded a contract to construct and operate the 220 kilometer (140 mile) railway from Savannakhet, on Laos’s southwestern border with Thailand, to the Lao Bao border gate with Vietnam in the east.
Approval for the Laos-China rail project was made after the Lao National Assembly concluded that it is essential for "national development at a time when economic integration is viewed as the future of the region," the Vientiane Times reported last month.
The Chinese construction company had pulled out of the project "because they felt it would not be profitable enough," it said. "The railway is now set to go ahead without any other direct stakeholders."
More foreign investment
Lao Deputy Prime Minister Somsavat Lengsavad had said the project will attract more foreign investment and boost economic growth.
Considering the mountainous nature of northern Laos, the railway will require 76 tunnels and 154 bridges, including two bridges across the Mekong River, according to the Vientiane Times report.
The rail project will likely use more workers from China than those from Laos, an official from the Lao Labor Ministry said.
“That’s the way it’s going to be, as there’s not enough Lao labor. But details will have to be ironed out,” the official said.
He said that the exact number of workers needed for the project is not yet known, and that the building contractor has not been selected.
Before the project starts, according to the official, the government will have Lao workers trained to work with their Chinese counterparts.
“We already have a plan for training laborers and technicians right here in Laos,” he said.
