All that glitters: can Laos truly afford latest railway project?

Laos is on track to open a $5.9 billion railway between the Laotian capital of Vientiane and one of China’s commercial centres, Kunming. It is the largest public works project in Laos’ history, intended to provide a major boost to the economy of what is the only landlocked country in Southeast Asia.

It is highly questionable, however, whether or not the new railway will actually bring this hotly anticipated prosperity. For one thing, due to the ongoing coronavirus pandemic, the railway will be limited to freight transport at the outset—meaning that the “game-changing” impact of the rail link on Laos’s tourist industry will have to wait.

At the same time, the project has displaced thousands of people, who have often received little to no compensation. More than one thousand families live in villages along the railway line, and many have been evicted from their homes to make way for the new corridor. For those who have been allowed to remain on their land, damage to vital water and irrigation systems poses an urgent threat to livelihoods from Luang Namtha to Vientiane.

But there are even bigger problems facing the small nation of seven million people. Laos has a major stake in the $5.9 billion project, and much of this is covered by loans from Beijing. With a gross domestic product (GDP) of barely $19 billion and coronavirus still spreading within its borders, Laos now faces a high risk of “external debt distress.”

Worse still, this isn’t the first time that Laos has shouldered a heavy debt burden on the back of financing from China. Late last year, debt default concerns saw the government of Laos sign a 25-year concession agreement with a Chinese company to build and manage a significant portion of the Laos power grid. The political implications of the move are sure to be felt for generations to come.

Could Laos’ shiny new rail line, then, become a dangerous white elephant which mainly benefits Beijing? To answer this question, one need only look at a host of discouraging precedents from around the world.

Several of China’s ventures in Africa, for example, are turning increasingly sour. Tiny Djibouti, a geopolitical focal point in the Horn of Africa, rolled out the red carpet for Chinese investors several years ago; today, Beijing owns more than 70 percent of the country’s debt, and the bilateral relationship has been likened to a “slowly unravelling marriage” which risks Djibouti’s very autonomy.

In February 2018, the Djibouti government wrested control of the Doraleh Container Terminal from Emirati firm DP World. The firm had designed, built and operated the terminal following a concession awarded some twelve years earlier; by July 2018, a joint venture between Djibouti and Chinese state-owned firm China Merchants Port Holdings had unilaterally declared control of the site.

So far, it appears that only Chinese companies have profited from the change, with local employment all but stagnating in the face of inflows of Chinese migrant workers. Instead, authorities in Djibouti have suffered a number of courtroom losses over the port, with international tribunals repeatedly finding in DP World’s favour and ordering Djibouti to pay substantial compensation for apparently illegally expropriating the port terminal.

Djibouti’s debt to China, meanwhile, is so severe that concerns have surfaced that Djibouti might have to cough up the port entirely. In 2018, the IMF warned that Djibouti’s efforts to turn the country into a major logistics hub, the so-called “Singapore of Africa,” threatened the country with significant debt distress.

“Public and publicly guaranteed debt is expected to be around 104 per cent of GDP at end-2018,” the Fund cautioned, “to achieve debt sustainability, reforms need to ensure that the various projects implemented bring economic and social returns.”

A year later, an executive officer of a ship docked at the Doraleh terminal described the port as resembling other facilities where Chinese state-owned firms have a majority stake. The same cranes, the same silos: Beijing was well and truly setting up shop on the Red Sea.

Concerns over Djibouti sovereignty at the port are far from unreasonable. The Hambantota Port in Sri Lanka was made infamous after the Sri Lankan government was forced to lease the asset to Beijing for 99 years after struggling with debt repayments. Struggling to repay more than $8 billion in Chinese loans and investment, the majority share of the strategic southern port was handed over in a bid to raise just $1.2 billion.

Meanwhile, rumours have begun to emerge that Uganda may be on the brink of handing over its only international airport should it default on a $325 million loan from China. Between 2000 and 2017, Uganda reportedly took on 144 Chinese-financed projects, and sovereign debt to China now accounts for eight percent of Uganda’s GDP. Efforts by the Ugandan government to renegotiate loan terms earlier this year proved fruitless, effectively putting the Entebbe airport and other major assets out for the taking.

With the economic impact of the coronavirus pandemic continuing to squeeze governments across the world, it is difficult to imagine how Laos will be able to sustain its appetite for Chinese-funded infrastructure.

Photo credit: Jan Bockaert/Flickr