A new deal gives China control of Laos’ power grid as the country faces looming debt from hydropower dams and other development projects. But the arrangement risks turning “the battery of Southeast Asia” into “the battery of China.”
In early September, the Lao government signed a deal to give majority control of its electric grid over to a Chinese state-owned company amid mounting public debt as Beijing continues to expand its role in the country.
State-owned China Southern Power Grid Company signed a deal with the Lao government’s Electricite du Laos to gain majority control of a new company, Electricite du Laos Transmission Company Limited, that will manage the national electricity supply.
China is Laos’ largest source of financing and the Southeast Asian state plays a major role in Chinese President Xi Jinping’s global Belt and Road Initiative—the global infrastructure and development plan that is now a cornerstone of China’s foreign policy.
Power generation and sales are vital to the Lao government’s economic strategies as it seeks to turn Laos into “the Battery of Southeast Asia” through the construction of hydropower dams on the Mekong River and its tributaries. Around 10% of the country’s 400 planned and existing dams belong to Chinese firms, though the ownership of many planned dams is still unclear.
The new power management deal represents a major expansion of China’s role in Laos as it means Beijing-backed companies will both produce and purchase electricity in the country. With the majority of power generated in Laos slated for export, electricity is increasingly central to Vientiane’s foreign relations—the new arrangement gives China influence far beyond power lines and substations.
“Giving China a major stake in the ‘Battery of Southeast Asia Plan’ puts Laos fast on the track of becoming a pseudo-province of China,” said Brian Eyler, Southeast Asia programme director of the Stimson Center think-tank in Washington.
China’s stake in the Lao government’s public debt crisis
As a product of its foreign-backed infrastructure boom, Laos faces mounting debt pressure and the new power deal suggests that this debt has finally reached a tipping point. The World Bank estimated in June that the Lao government’s debt may reach 68% of GDP in 2020, or nearly US$13 billion, up from 59% in 2019. The government reportedly owes US$1.2 billion in payments this year but the central bank reported only $864 million in foreign reserves after the second quarter. According to the Financial Times, Electricite du Laos itself owes another $8 billion in debt on its own.
The Lao government has already delayed payments to some of the Chinese companies developing hydropower dams in the country, according to an anonymous source who spoke with Reuters. But China’s creditors are also reportedly considering allowing Laos to delay debt payments—a proposition that is no doubt heavily influencing any economic negotiations between the two.
Beijing is effectively offering to help with a debt crisis that it created. According to Lao government statistics from May, the Chinese government and Chinese firms have invested US$10 billion in 862 projects across Laos, making Beijing its largest investor. This represents a massive increase, as total Chinese investment in the country from 2000-2010 totalled US$2.9 billion.
Beyond electricity, China’s main development venture in Laos is a US$6 billion railway to connect Vientiane to the Chinese border. The project is primarily financed by a loan from the Export-Import Bank of China (60%), with the rest coming from a joint venture company in which Chinese state-owned enterprises have a 70% share.
Laos mortgages its future to fast track development schemes
A public debt crisis is particularly problematic for Laos as it undermines the government’s development plans. Laos is currently on the UN’s list of least-developed countries, as are Cambodia, Myanmar and East Timor. The country will graduate from the list if it can lower its economic vulnerability index—having already passed the gross national income benchmark of over US$1,230 per capita. The UN measures reflect development priorities that are highly political and prescriptive but they’ve shaped the Lao government’s agenda and offer helpful context for its decision making and justifications.
By allowing China Southern Power Grid to manage the country’s power grid, Laos may secure some temporary help with its public debt crisis. But signing away control of natural resources will cripple the country’s long term development, as rivers, forests and land represent some of Laos’ most important assets.
China’s track record on management of natural resources in the Mekong is already poor. Earlier this year, a US-government backed water research study showed how the 11 dams on China’s portion of the Mekong river trapped nearly all of the river’s flow while communities in Laos, Thailand, Cambodia and Vietnam experienced record-breaking drought in 2019. Key indicators such as flow into Cambodia’s Tonle Sap lake show that the same is likely occurring in 2020 as drought continues.
China’s management of resources on the Mekong suggests that the new power management deal is a major setback for sustainable development. Laos is primarily a rural country, with local communities relying on the land, the Mekong River and its tributaries for food and livelihoods.
While development that carries promises of increased income is important, the quality of life in much of Laos is already higher than in other countries with similar income levels. Outside the capital, as much as 80% of the population is involved in subsistence farming—livelihoods that sustain local communities but aren’t reflected in income statistics or GDP growth.
Communities that sustain themselves using the country’s natural resources are in some ways “rich” compared to those who have lost their land and rivers: lower classes in the world’s megacities or those saddled with debt, like the Lao government. Romanticizing subsistence lifestyles is useless at best and damaging at worst, but if Laos wants to achieve sustainable development, it must preserve control of its natural resources.