EXCLUSIVE-Taking power: Chinese firm to run Laos electric grid amid default warnings

Sept 4- The poor, small Southeast Asian country of Laos is set to cede majority control of its electric grid to a Chinese company, as it struggles to stave off a potential debt default, people with direct knowledge of the agreement said. “It will give the Laos state grid better bargaining power with regional countries and start to make a profit,” said one of the people…

(Adds PIX to slugline)

By Keith Zhai and Kay Johnson

Sept 4 (Reuters) – The poor, small Southeast Asian countryof Laos is set to cede majority control of its electric grid toa Chinese company, as it struggles to stave off a potential debtdefault, people with direct knowledge of the agreement said.

The deal comes at a time when critics accuse Beijing of”debt trap diplomacy” to gain strategic advantage in countriesstruggling to repay loans taken out under President Xi Jinping’sglobal “Belt and Road” infrastructure initiative.

China is Laos’s biggest creditor, and the deal will bind thelandlocked, mountainous country of seven million people closerto its giant neighbour.

The power grid shareholding deal was signed on Tuesdaybetween state-owned Electricite du Laos (EdL) and China SouthernPower Grid Co., according to Chinese state news agency Xinhua,which did not give details of the new ownership.

Three people with knowledge of the matter said it would givemajority control of the new Electricite du Laos TransmissionCompany Limited (EDLT) to the Chinese company.

Power exports are central to Laos’s development plans.

“It will give the Laos state grid better bargaining powerwith regional countries and start to make a profit,” said one ofthe people with direct knowledge of the discussions.

China’s embassy in Laos said on its website that Laos wouldoperate the transmission assets. It did not give shareholdingdetails but said “Laos can also gradually repurchase sharesduring the operation.”

Neither EdL nor China Southern responded to Reuters requestsfor comment on the deal. The Laos and Chinese governments didnot respond to requests for comment either.

Reporting from the Laos capital Vientiane, Xinhua quotedLaos energy and mines minister Khammany Inthirath as calling ita key project which would benefit from the Chinese company’s”advantages in experience, technology and human resources.”

The new company will operate under Laos governmentregulation, Xinhua reported, but would take advantage of ChinaSouthern’s “financial strength and mature experiences in powergrid construction, operation and management.”

The state-run Vientiane Times said after the deal that EDLTwould in future invest about $2 billion in the local grid andinternational connections.

Laos has spent heavily on hydroelectric schemes, manyfinanced by China, with the aim of becoming “The Battery ofSoutheast Asia”. But those projects, along with a new Chinesehigh speed railway, are at the centre of a debt crunch.

DEFAULT WARNING

The World Bank estimated in June that debt levels wouldreach up to 68 percent of GDP in 2020, from 59 percent lastyear. Rating agency Moody’s warned last month of “a materialprobability of default in the near term.”

While Laos has recorded only 22 coronavirus cases and nodeaths, the epidemic has hit tourism and overseas remittanceshard.

Laos debt service obligations in 2020 are around $1.2billion with loans from commercial banks and Thai bonds maturingin September and October, Moody’s said, but foreign reserveswere just $864 million in June, according to the central bank.

Among companies suffering delayed payments already are theChinese firms behind hydroelectric projects that were not payingback as expected, the people with knowledge of the ChinaSouthern agreement said.

China was also considering postponing part of Laos’ totaldebt service payments, two people with direct knowledge said.China’s government did not immediately respond to a question onthe discussions.

“Economically Laos is going to depend more on China and thisis inevitable,” said Toshiro Nishizawa, a Japanese professor whohas advised the Laos government on fiscal stability.

Laos could be eligible for help by the InternationalMonetary Fund under its COVID-19 Financial Assistance and DebtService Relief response, from which 80 countries are benefiting,two Western diplomats said.

But they said it had made clear it would rather try to finda solution with China, they said. An IMF deal would requiregreater financial transparency.

Total Chinese investment in power, transport, a bordereconomic zone and other projects already totals over $10billion, according to Xinhua citing figures from Laos. That ismore than double investment by Thailand, the next biggest.

A study published in 2019 by the Australia-based LowyInstitute put Laos debt to China at 45 percent of GDP.

The economic relationship with Beijing has also strengthenedpolitical ties, with Laos a reliable backer of China’s positionon matters such as the South China Sea in the regionalAssociation of Southeast Asian Nations.

Laos was the first country to endorse Chinese leader Xi’spolitical message of “building of community of common destiny”.

“Giving China a major stake in the ‘Battery of SoutheastAsia Plan’ puts Laos fast on the track of becoming apseudo-province of China,” said Brian Eyler, Southeast Asiaprogramme director of the Stimson Center think-tank inWashington.(Additional reporting by Panu Wongcha-Um; Editing by MatthewTostevin & Simon Cameron-Moore)

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